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Arancha González is a former Minister of Overseas Affairs of Spain.
There may be an American political axiom: “Don’t inform me what you worth. Present me your finances, and I’ll let you know what you worth.” The European Union has informed everybody it needs “strategic autonomy.” The months forward will present the world whether or not it’s critical.
Strategic autonomy means enhancing Europe’s potential to make its personal decisions, according to its pursuits and values, no matter what others do. It’s an affordable response to a world that has turn out to be much less pleasant to Europeans — a world through which Russia has troops on the Ukrainian border, China is placing the squeeze on Lithuania and the USA pulled out of Afghanistan leaving 1000’s of Europeans and their Afghan collaborators stranded.
However is Europe able to do what it takes to reinforce its room to maneuver? That’s removed from clear.
The apparent instance is protection expenditures. Within the EU, these amounted to 1.2 p.c of GDP in 2019, with solely Estonia and Greece getting near NATO’s spending goal of two p.c of GDP. These ranges of spending appear to point a Europe that’s snug with continued reliance on the U.S. safety umbrella.
Nonetheless, there’s one other space the place the EU is relying on others’ decisions as an alternative of its personal: the economic system.
For the reason that 2008 monetary disaster, the EU has turn out to be more and more economically reliant on the remainder of the world. Till the disaster, the eurozone’s account stability with the remainder of the world was impartial. Regardless of vital inside imbalances, the online worth of its exports was roughly equal to the worth of its imports.
However the response to the disaster, principally within the type of austerity measures, suppressed consumption and funding throughout a lot of the eurozone periphery. Economies like Spain, Italy and Eire went from commerce deficits to commerce surpluses. The euro might have been saved, however Europe now counts on exterior demand to drive development and job creation. Within the first quarter of 2021, the EU’s account surplus amounted to three.4 p.c of GDP. This dependency weakens Europe’s potential to behave by itself. A untimely return to austerity, as distinctive pandemic spending ends, would solely make the issue worse.
The continuing evaluation of EU fiscal guidelines supplies a key take a look at of whether or not it’s prepared for change. Right here, there are broadly two camps:
The primary needs to protect the established order. It maintains that the distinctive measures taken over the previous 12 months — the emergency suspension of EU fiscal guidelines permitting member international locations to supply extra assist to their economies and the joint issuance of debt to finance the €750 billion NextGenerationEU restoration fund — have been not more than a brief resolution for a brief disaster.
This camp want to see the Stability and Development Pact return in 2023 — bringing fiscal deficits underneath the stipulated 3 p.c of GDP ceiling and swiftly decreasing debt-to-GDP ranges in extra of 60 p.c — or face fiscal tightening by the European Fee’s extreme deficit process.
The second argues that the pandemic merely uncovered preexisting shortcomings, and that the EU’s fiscal framework needs to be reviewed and reformed to assist investments in decarbonization, expertise, infrastructure and protection. It needs to construct on the EU’s pandemic expertise with fiscal solidarity by mutual borrowing, in addition to transfer towards a well being union with joint vaccine purchases and analysis and growth spending.
This camp doesn’t essentially search a full renegotiation of the Stability and Development Pact, however it needs to exclude investments within the inexperienced and digital transitions from counting towards member international locations’ debt and deficit targets. And with EU authorities debt at 93 p.c of GDP – over 100% within the euro space — it doesn’t favor a pointy pivot from development to austerity, particularly if this comes at the price of productivity-enhancing investments in human and bodily capital.
These searching for strategic autonomy should hope the reformers prevail.
Germany and different core eurozone international locations’ reluctance to borrow cash and mutualize money owed hasn’t simply restricted potentialities for funding in digital and inexperienced infrastructure, it has additionally constrained the internationalization of the euro, since not like with U.S. treasury bonds, there are usually not monumental swimming pools of secure euro-denominated property for foreigners to carry.
The ensuing dominance of the greenback in international funds, and the resultant centrality of the U.S. monetary system, is a crucial cause why Brussels might achieve this little to safeguard European corporations threatened with U.S. sanctions over the Iran nuclear deal.
The brand new German coalition authorities appears extra keen to take a position, a minimum of at house. And if Europe can redefine its budgetary priorities and proceed on its path of home reforms, it has a chance to spice up future productiveness, sustainability and safety, whereas decreasing the Continent’s vulnerability to exterior financial shocks. Low borrowing prices and higher-than-expected social prices of carbon imply that these investments are seemingly cheaper than policymakers suppose. However they’ll require the EU to resolve what it values — and finances accordingly.
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