Geopolitics is asserting itself as a key dimension of economic policy in the Euro Area. While people across Europe are aware of the deterioration in the security environment following the Russian invasion of Ukraine, they seem reluctant to fully draw the consequences in terms of defense expenditure as the economy is only gradually in the aftermath of unprecedented shocks and adverse demography and lagging digitisation weigh heavily on growth prospects.
Although security emergencies often produce a national reflex - prime ministers want to know which (national) telephone number to call in case of energy, communications or financial crisis - the increasing perception of a lack of agency on the part of European countries taken separately is possibly the most important reason to believe in progress in European integration, where it has long remained elusive, eg, capital markets union or common defence procurement, or where it builds on existing successes, eg, the digital euro.
The quest for security, and in particular economic security, should be conducted without losing sight of the trade-offs, especially for such an open economy well-served by a rule-based trading system as the EU. Deepening of the Single Market to decrease critical dependencies is a win-win solution but also increasing mutual dependence, eg, through reciprocal investment, is a de-risking solution worth pursuing.
Security in its different dimensions is likely to pose further demands on fiscal policy. While the recent reform of EU fiscal rules may be as close as it gets to the economists’ model, it bears heavy traces of political compromise, which in turns does not bode well for effective implementation. It has also left out of the picture the issue of a European fiscal capacity, where a repeat of the NGEU seems excluded. This underscores the importance of mobilising private capital, with public capital acting as a catalyst.
By Detlef Fechtner