The discussion underway on European economic governance reform is part of a substantially uncertain and volatile macro-financial picture. The principal risks include stagflation, financial fragmentation, competitiveness problems (in light of the American Inflation Reduction Act) and the twin (digital and sustainable) transitions.
With regard to stagflation, the return to a cautious fiscal approach must be coupled with supply side reforms; the ECB can have a constructive role in managing inflation (be it high or low) but not on its own, which would result in excessive costs to the entire economic system. Triggering a sort of “positive supply shock” would counteract the negative shock being produced by the current inflationary trends.
Preventing financial fragmentation naturally calls for containing the spread, but the Next Generation EU experience teaches that the best way to do that and also create the conditions for greater trust is by gradual debt reducing.
Advancement of the twin transitions requires an incremental approach to containing debt while increased European system flexibility is pivotal to fostering investments in competitiveness.
The fact remains that, given a global situation less favorable than even a few years ago, each of these four challenges involves a specific trade-off for the EU.
Further complicating the picture are concerns over the European banking system ahead of possible contagion by the United States and of interest rate changes, which are justified even in the positive light of the Old Continent’s stricter sector rules. The main problem may be traceable to non-banking institutions, many of which are heavily indebted and in need of restructuring.
As regards the green transition, progress is already conditioned by the increasing urgency to ensure energy supply security (not least in terms of infrastructure). There is a growing perception of the strategic importance of energy and digital technologies to an efficiently functioning economy. Thus, European legislation must actively contribute by embracing a broad and balanced approach; for example, when integrating the component of natural resources (that, in turn, require complex mining activities and at times lengthy refining processes) into transition policies.
In more general terms, an overarching industrial policy is essential to the realistic pursuit of such aims – and according to some participants, one with less stringent timeframes than those of the EU’s 2030 and 2050 targets.