EconPol Policy Reports

Watts Next: Securing Europe’s Energy and Competitiveness

Where the EU’s Energy Policy Should Go Now

Frédéric Gonand, Pedro Linares, Andreas Löschel, David Newbery, Karen Pittel, Julio Saavedra, Georg Zachmann

Russia’s invasion of Ukraine in February 2022 led to gas supply in Europe dropping significantly, shaking the EU out of its complacency regarding energy procurement and consumption habits. The costs of going green on top of more expensive energy are putting a strain on European competitiveness, with higher energy prices hitting the chemical, steel and metal processing industries in countries like Germany, Spain or Poland particularly hard.

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Climate Policy Priorities for the Next European Commission

Clemens Fuest, Andrei Marcu, Michael Mehling

From the earliest announcement of the European Green Deal, the current EU political cycle has been defined by an unprecedented acceleration in the scale and pace of climate policy. Under difficult conditions that sometimes tested the ability to engage stakeholders, including various external shocks, the EU has put forward and largely passed an unprecedented legislative agenda, which was meant to have, and is having, deep impacts on the EU economy and society at large. Much has changed in the world since the European Green Deal and the “Fit for 55” packages were conceived, including a dramatic increase in industrial policy actions by Europe’s trade partners, a deteriorating geopolitical landscape, and an energy crisis that has been aggravated by these factors, all of which has led to persistent fiscal and economic pressures. 

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Monitoring the Impact of Sanctions on the Russian Economy

Quarterly Report Vol. 2

Vasily Astrov, Lisa Scheckenhofer, Camille Semelet, Feodora Teti

In 2023, Russia experienced a 3.5% economic growth, but forecasts for 2024 indicate a slowdown to 1.5% due to tightened monetary policies and the expected global economic slowdown. Despite large military spending and Western energy sanctions eroding budget revenues, fiscal deficits have been generally kept under control. Intensified scrutiny of third-country firms violating energy sanctions widened discounts on Russian oil prices in late 2023. Generally, Russian import patterns remained relatively stable. In particular, EU exports of economically critical and common high priority goods to Russia in November 2023 represent just 2% of its prewar levels, underscoring the effectiveness of sanctions in halting direct exports. Besides China and Hong Kong, Türkiye and CIS countries became vital suppliers, meeting Russia's demand for economically critical goods and high-priority items.

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Monitoring the Impact of Sanctions on the Russian Economy

Quarterly Report Vol. 1

Vasily Astrov, Artem Kochnev, Lisa Scheckenhofer, Vincent Stamer, Feodora Teti

 Despite EU restrictions, only around one-third of pre-war exports to Russia are fully sanctioned; most trade remains unaffected or subject to numerous exemptions. While exports have decreased by 32%, imports have increased by 17% due to innovative ways to bypass trade sanctions. China is Russia’s most important alternative country of origin for products under sanction: 61 percent of all products subject to sanctions come from China. The Russian economy shows signs of recovery, driven by robust domestic demand from wartime fiscal stimulus, contributing about 10% to GDP in 2022-23. Real GDP and industrial production have grown by 2.5% and 3%, respectively, indicating recovery from the economic crisis.

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European Defence Spending in 2024 and Beyond

How to Provide Security in an Economically Challenging Environment

Florian Dorn, Niklas Potrafke, Marcel Schlepper

To improve defence capabilities, Europe has to increase defence spending immediately and also to create fiscal space for a permanent rise in defence spending. Many European countries have collected a considerable peace dividend since the end of the Cold War. In the same period, welfare states have expanded to a degree not backed by the general economic development. This Policy Report shows that if European NATO countries shifted around one percent of non-defence expenditure towards defence, this would be sufficient to meet the NATO 2%-target.

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Rethinking Geoeconomics: Trade Policy Scenarios for Europe's Economy

Andreas Baur, Florian Dorn, Lisandra Flach and Clemens Fuest

Rising geopolitical tensions, increasing supply chain disruptions, and falling public support for economic openness have given new impetus to economic nationalism. Governments around the world increasingly give precedence to domestic production and geopolitical considerations over gains from trade and economic efficiency. This policy trend has important implications for the EU, both as a global trading partner and as an important arena for economic policymaking. This policy report investigates possible repercussions of policy-driven de-globalization for the European Union.

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Integration of Mercosur in the Global Economy

Andreas Baur, Lisandra Flach, Feodora Teti

More than twenty years after the beginning of negotiations, a new window of opportunity seems to have opened for the ratification of a trade agreement between the European Union and Mercosur. For Mercosur, this comes at a crucial juncture in its integration process: the future of the South American trade bloc appears to be more uncertain than ever, with member states holding diverging views on Mercosur’s objectives. Thirty years after its foundation, the original goals of Mercosur’s integration process have been only partially achieved. While there has been some success in terms of trade liberalization within Mercosur, the goals of forming a customs union and pursuing deeper integration steps remain unfulfilled. High Most Favored Nation (MFN) tariffs and non-tariff trade barriers within the region, coupled with the lack of trade agreements, hinder the integration of Mercosur countries into the global economy.

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A Targeted Golden Rule for Public Investments?

A Comparative Analysis of Possible Accounting Methods in the Context of the Review of Stability and Growth Pact

Sebastian Blesse, Florian Dorn, Max Lay

The EU faces the challenge to combine large and sustained investments to promote the transition towards a green, digital, and competitive Europe while maintaining fiscal sustainability. Based on a comprehensive literature review on the effects of fiscal rules and investment clauses on public finances, this in-depth analysis provides some guidance how higher public investments can be achieved by a targeted golden rule without harming fiscal sustainability in the EU fiscal framework. The study also discusses the role of investments in the current proposals of the European Commission on the reform of the EU Economic Governance.

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The Global Impact of the U.S. Inflation Reduction Act: Evidence from an International Expert Survey

Klaus Gründler, Philipp Heil, Niklas Potrafke, and Timo Wochner

The US Inflation Reduction Act (IRA) promotes renewable energy and contributes to climate protection, but also offers generous tax credits and subsidies to incentivize production in the United States. While the planned generosity of the program has sparked an intense debate about potential negative spillover effects on the global economy, little is known about the quantity of potential adverse effects. In the new EconPol Policy Report the authors conduct a large-scale international survey among leading economic experts worldwide to quantify the effect of the US Inflation reduction act on the global economy. On a global scale, experts are little concerned about negative effects of the IRA on their domestic economy, estimating both the impact on national output and the risk of business outflows to be low. However, we uncover large heterogeneity in the potential impact of the IRA across countries and regions. In Europe, particularly in France and Germany, economic experts are highly concerned about the IRA and expect a significant effect of the IRA on the domestic economy. In terms of economic policy reactions, roughly 41% of the respondents support economic countermeasures.

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Minimum Income Support Systems as Elements of Crisis Resilience in Europe

Werner Eichhorst, Holger Bonin, Annabelle Krause-Pilatus, Paul Marx, Mathias Dolls, Max Lay

The new Policy Report analyses the role of social policies in different European welfare states regarding minimum income protection and active inclusion. It finds consistent differences in terms of crisis resilience across countries and welfare state types. In general, Nordic and Continental European welfare states with strong upstream systems and minimum income support (MIS) show better outcomes in core socio-economic outcomes such as poverty and exclusion risks. However, labour market integration shows some dualisms in Continental Europe. The study shows that MIS holds particular importance if there are gaps in upstream systems or cases of severe and lasting crises.

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