As last week’s fraught summit discussions on Ukraine underlined, the European Union faces daunting and costly challenges in the years ahead. The decision to open membership talks with Kyiv was both a welcome affirmation of continued solidarity and a recognition of the reality that Europe’s security is intertwined with Ukraine’s resistance to Vladimir Putin’s revanchist ambitions. But talks about a new £50bn aid package have had to be prolonged into the new year, following Viktor Orbán’s blocking tactics in Brussels.
Eventually, some kind of modern Marshall plan will be required to reconstruct a shattered country. That will be a very expensive business. Similarly, achieving the ambition of making Europe the first climate-neutral continent by 2050 will require a massive injection of public funds. The European Commission estimates that about €700bn a year will need to be invested to meet the EU’s green targets. That kind of fiscal firepower will be difficult to sustain after the EU’s Covid recovery fund dries up in 2026.
A just transition to a green economy will require major spending on retraining and skills. Digitisation of the EU economy, vital to future competitiveness, will be another major financial burden. And all these priorities must be addressed against a backdrop of flatlining growth, along with a cost of living crisis that is contributing to the rise of nationalist radical-right parties.
Such a severely testing context demands a bold economic strategy fit for the times, with a major role for public investment. Instead, the EU is set to return in 2024 to the tight national spending guidelines that were suspended in 2020 when the pandemic took hold. Talks will resume soon on reintroducing a modified version of fiscal rules that limit EU member states’ debt to 60% of GDP and their annual budget deficits to 3%.
This mistaken drive to go back to the austere principles of the status quo ante is being led by Germany’s finance minister, Christian Lindner. Ironically, Germany’s Social Democrat-led coalition government itself fell foul of a recent debt ruling by the country’s constitutional court, which vetoed the diversion of unspent funds borrowed during the pandemic into an off-budget climate emergency fund. But Mr Lindner, backed by other “frugal” member states, is nevertheless doubling down on his calls for a return to pan-European fiscal consolidation when a far more expansive approach is required.
The new version of fiscal rules being discussed may allow more flexibility in discussions over national debt and deficits. But as economies struggle for growth, the EU risks repeating the disastrous mistake of the early 2010s, when Brussels-mandated austerity following the crash made a bad situation significantly worse. One study, by the New Economics Foundation, has judged that reviving the 3% deficit limit would leave only four EU member states with the financial headroom to meet green targets consonant with the 1.5C global heating ceiling.
In coming up with groundbreaking schemes such as the Covid recovery fund, Brussels demonstrated the galvanising role of public finance in exceptional times. A deeply challenging future will require more, not less, of the same, and a recognition that state investment at a national level is fundamental to future prosperity. When it comes to security, the green transition and restoring growth, the coming years will be defining ones. Tackling them with the discredited economics of austerity would be a disastrous step in the wrong direction.
