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Resetting the EU’s business model after the watershed

Economic governance / DISCUSSION PAPER
Marco Buti , Marcello Messori

Date: 13/02/2023
The EU’s response to the COVID-19 pandemic raised hopes of an acceleration towards deeper economic and political integration. Most optimists saw Next Generation EU as a paradigm shift that would result in the establishment of a permanent central fiscal capacity. Such hopes were reinforced by the Russian aggression against Ukraine; if not now, when? While the EU displayed remarkable unity in sanctioning Russia, the hopes for another leap forward in integration have not yet materialised.

This Discussion Paper argues that the current crisis is more existential than the pandemic, as it questions Europe’s business model: an energy-intensive, mercantilist production setup is not sustainable going forward, for domestic and global reasons. It also argues that the EU’s reaction to the US Inflation Reduction Act may be a break: preserving the single market prohibits a go-it-alone policy constituted of exclusively national reactions.

Going forward, the authors believe there needs to be an effective centralised strategy based on three overarching considerations:

(i)  The EU needs a new industrial policy to reinforce value chains, close technology gaps with the US and China, and improve its economic model's competitive advantages;

(ii)  The implementation of this policy requires the EU's member states to be less risk averse and more open to common solutions;

(iii)  A necessary, though not sufficient, condition for a cooperative game is an effective implementation of the national Recovery and Resilience Plans that give access to the Recovery and Resilience Facility’s funds.

Achieving those goals is key to rebuilding political trust, reviving the ‘Next Generation EU spirit’, and mitigating the impact of the war in Ukraine on the European economy.

Read the full paper here.
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