The EU should build more investment capacity to fund the ecological transition and nurture the Single Market

Energy - February 23, 2023

Since last fall, the EU economy has boasted some moderately-positive economic developments, as a recent report from the European Commission notes. Aided by efficiency measures and greater diversification of energy sources, gas prices have fallen considerably, reaching levels consistent with pre-war market quotations. At the same time, strong performance in the labor market has continued unabated with the unemployment rate reaching an all-time low of 6.1 per cent in December.

Confidence indicators, albeit still lower than in the period prior to the start of the war in Ukraine, have also improved. As a result, the EU economy has managed to escape a recession in the last quarter of 2022 and the first quarter of the new year. All in all, the economy is projected to growth by 0.8 per cent in the current year, against a projection of only 0.3 last fall.

This is certainly good news but one should be realistic about the prospects that lie ahead. To start with, GDP may well grow at a higher rate than previously foreseen, yet it is still projected at a level that is 2.4 per cent below what was expected before Russia’s aggression to Ukraine. Inflation appears to have peaked in October at a rate of 11.5 per cent, decreasing to 10.4 per cent in December and expected to fall further in the subsequent months towards a rate of 5.6 per cent this year. However, core inflation is stickier compared to what some may have expected and it will take a few years to converge to a low and stable level. As a result, assuming wage pressures will not match inflation dynamics, workers and their families will be experiencing a further contraction in their real purchasing power in the period ahead.

In the Eurozone, the dynamics appear quite similar to the broader EU developments. Current and expected inflation are well above the ECB’s medium-term target of 2 per cent and are not coming down fast enough. Accordingly, the central bank is expected to become more aggressive with further interest rates hikes in the near term, on top of the cumulative increase of 3 percentage points in the policy rates recorded so far since last July. Even more so, as the restrictive monetary posture has not yielded a recession so far.

Yet, the EU has a bigger role to play policy-wise. Its greatest achievement – the Single Market – is the asset that we mostly need to protect and nurture as a basis for our future prosperity. So far, this has included a great deal of rules and regulations. Another, equally promising avenue is to step up investments, building on a number of initiatives. Indeed, at the height of the pandemic, the EU rose to the occasion with the Next Generation EU. It should do the same by establishing an investment arm to fund the ecological transition rather than banning thermic engines. Building up a broader EU-wide investment capacity is key to modernize our economies and nurture the Single Market.