The EU’s eight economic challenges in 2021: reforms in exchange for European manna

With the way out of the crisis still up in the air, the EU club has many open issues, above all the recovery fund

In the wake of the pandemic’s shock to the European economy and without yet knowing the impact of the third wave on growth, these are the main debates for the EU club in the coming months.

Next Generation EU

The 750 billion euro fund to deal with the ravages caused by the coronavirus is the great hope for the countries hardest hit by the pandemic, such as Spain and Italy. Until the end of April, the EU’s capitals had to submit their reform and investment plans to the EU executive in exchange for the European manna, which will not begin to flow until the second half of the year. The big question is how the European Commission will evaluate these plans and whether any country will activate the “emergency brake”, which will allow it to delay the arrival of aid. Another unknown is the capacity to absorb the money in the short and medium-term. In the case of Spain, it has always lagged behind other countries. As of September 2020, Spain had only executed 34% of the 2014-2020 multiannual financial framework funds, 10 points below the EU average.

Fiscal rules

The exceptional nature of the pandemic led to the activation, for the first time in 2020, of the “escape clause” of the Stability and Growth Pact, which regulates public deficit rules in the EU. In this way, European governments have been given full rein to inject public money into the economy. But nothing lasts forever. The Portuguese presidency has already announced that it should be clear when the fiscal rules will work again and on what terms during this semester. This means that countries like Spain may be forced in the coming years to curb spending and reduce their deficits – and not just focus on reforms and investments – in exchange for European aid.

Aid to companies

The EU executive also recognised the extraordinary circumstances by allowing more flexibility in 2020 in the public aid that European countries could grant to companies devastated by the pandemic. This temporary framework expires on 30 June 2021 but could be extended if necessary. Although this step forward was necessary to support companies, it has also triggered divergences in the common market. Countries with healthier public accounts, such as Germany, have had much more room for movement than the most indebted economies.

Google tax

Although the entry of Joe Biden into the White House has brought some relief for European countries, there is no evidence that it will be any easier to reach an agreement on such thorny issues as the taxation of tech giants. For now, the EU club has preferred to wait for a global agreement within the OECD, but the Commission is prepared to go ahead this year with a European Google tax if it is impossible to reach a global consensus. Despite this, the differences between the partners are palpable, and countries such as Ireland and the Netherlands are fiercely opposed to this tax.

A crusade against technology companies

This is not the only point pending with the giants of Silicon Valley. At the end of 2020, Brussels presented a proposal to force these companies to break up their businesses in the event of abuse of their dominant position in the market and assume greater responsibility for the content posted on the web. This initiative will have to continue this year. Everything indicates that 2021 is not off to a good start, as shown by the fact that both German Chancellor Angela Merkel and Internal Market Commissioner Thierry Breton have criticised the closure of Donald Trump’s Twitter account by Twitter.

Banking union

The holes in the real economy may end up causing turbulence in financial institutions and resurrecting old ghosts from the past decade. In November, countries agreed to use the European rescue fund (ESM) as a safety cushion to aid banks if the Single Resolution Fund, paid for by the institutions themselves, is not sufficient. This new function of the ESM is expected to be operational in 2022, as European countries must ratify the agreement at a national level during this year. In addition, old debates continue within the Eurozone, such as creating a European bank deposit fund to come to the rescue of savers in a European country in distress or European unemployment reinsurance if mass unemployment in a country makes it impossible for it to pay benefits to its workers. Spain has always argued that the implementation of SURE – the European instrument to finance the ERTE (Record of Temporary Employment Regulation) – could be the seed for such an initiative. Still, the Nordic countries are opposed to considering SURE as a precedent.

Climate change

The fight against global warming is one of the flagships of the EU club, which aspires to become the first territory with zero greenhouse gas emissions by 2050. At the heads of state and government summit in December, European leaders agreed to a 55% reduction in emissions by 2030. This agreement was made possible after overcoming resistance from Poland, which produces 80% of its electricity from coal. Although Warsaw will be the capital that will benefit most from the energy transition fund that will become operational this year, the country wanted greater guarantees on how much money it will have at its disposal from the future carbon border mechanism (a tariff for those countries that do not respect environmental criteria and want to place their products on the European market). The creation of this instrument will be one of the main debates in the EU club this year.


Future of the City

Brexit is not over; rather, it has just begun. The agreement reached on Christmas Eve in extremis leaves some points unfinished. One of the most important is the future of the all-powerful City of London, Europe’s largest financial centre and one of the largest in the world. Since 1 January, the UK has lost its passport to operate freely in the EU’s financial markets. British banks and companies will only access them if they obtain “equivalences” that the European authorities can withdraw with just one month’s notice. The Christmas Eve agreement calls for the parties to agree on a memorandum of understanding by April 2021. One of the big questions is which European city or cities stand to benefit most from these changes.