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European elections 2024
analysis
The European Union competes as an economic area with the USA and China. Experts warn that Europe is falling behind in this competition. How is the EU really doing shortly before the elections?
Europe is under pressure. Difficulties in growth, budget crises, high energy costs and bureaucracy – these are pressing problems for Europe as a business location. There could be solutions after the European elections. But how far-reaching will they be in order to continue to compete with large economies such as the USA and China?
Because the economy in Europe is growing weaker than expected. The European Commission has already revised its forecasts downwards. Economic growth in the EU and the euro area was 0.5 percent last year. For 2024, the EU expects gross domestic product (GDP) to increase by 0.8 percent in the euro zone and 1.0 percent in the EU. The commission also lowered the economic forecast for the coming year.
Burdened by energy prices
The EU has lost significant momentum in the past two years compared to the USA and China, says Thomas Obst, economist at the German Economic Institute (IW) in Cologne tagesschau.de.
The companies were hit particularly hard by the high energy prices as a result of the Russian war of aggression on Ukraine. This generally drove prices up, although the situation has now eased.
Euro inflation in April remained at the previous month’s level, at 2.4 percent. This is the first time since December that inflation has not fallen any further. Economists continue to expect the central bank to cut interest rates for the first time in June.
Too little investment in research?
Europe is currently falling behind economically and technologically, says ifo President Clemens Fuest tagesschau.de. “Economic growth is weak, but Europe is also in danger of losing touch in terms of technology.” In Europe, for example, significantly less is invested in research and development than in the USA. “In addition, only a small proportion of European research funding flows into rapidly growing high-tech areas, such as information technology hardware and software,” said Fuest.
In contrast to the EU, the economy of the United States is significantly more dynamic with 2.5 percent growth last year, says IW economist Obst.
EU program for recovery
The total gross domestic product of the 27 EU states, i.e. the value of all goods and services produced there, was around 17 trillion euros last year. Germany remains the largest economy, Malta the smallest.
According to Thomas Obst, the economic driving forces in the EU have recently been Spain, Portugal, Italy and Poland. This is also due to the “Next Generation EU” development program, which is intended to help the EU states achieve economic recovery.
In Italy, for example, the “Superbonus 110” funding program was launched, which stimulated private investment in the construction industry. This means that citizens are reimbursed for climate-friendly investments, such as in climate-friendly heating.
Italy has highest National debt
However, this program is controversial because it also resulted in government spending significantly exceeding revenue. Last year, Italy’s deficit was even larger than expected: it was 7.4 percent of gross domestic product, well above the upper limit of three percent set in the European treaties. Italy therefore has the highest national debt, followed by Hungary and Romania.
In total, eleven countries had a deficit of more than three percent based on total economic output. This emerges from data from the EU statistics office Eurostat. In France it is 5.5 percent. Germany remains below the limit. “We are watching the issue with increasing concern,” says economist Obst. Penalties that were actually intended were recently suspended due to the Corona crisis and the consequences of the Russian attack on Ukraine.
Fragmented capital market
With a view to the future of the EU as a business location, the prospects remain rather bleak. With around 450 million consumers, the internal market is one of the largest common economic areas in the world. However, the European capital market is fragmented. Different rules in the EU are considered a major competitive disadvantage compared to locations in the USA or Asia.
In order to promote growth and make Europe more competitive, a capital markets union has been discussed for some time. This is intended to make the financial markets more open and integrated. Investments in Europe should become more attractive, as many capital gains still often flow abroad.
Worries in the industry
The EU states are indispensable as a sales market for German companies. But according to a survey of around 3,000 companies by the Chambers of Commerce and Industry, two thirds of German industrial companies are of the opinion that the attractiveness of the EU as a business location has declined over the past five years.
“The cause lies in poor general conditions, such as high taxes, excessive bureaucracy, dirigisme and a lack of willingness to prioritize investments and services over current consumption,” said economic researcher and Ifo boss Fuest tagesschau.de.
Hope for an agreement with Mercosur states
But there is also criticism with regard to the so-called “Green Deal” – one of the EU Commission’s central projects. By 2050, companies in Europe should, on the one hand, operate in a climate-neutral manner and, on the other hand, be competitive. Martin Wansleben, Managing Director of the German Chamber of Commerce and Industry (DIHK), calls for a “cash collapse”: “Bureaucracy must be reduced, not increased, so that companies have more resources to reorganize their business activities in a climate-friendly manner. This is the only way Europe can become more attractive again Become a location for companies.”
The DIHK is now hoping for the next legislative period, relief for companies and further free trade agreements such as the planned Mercosur agreement. This would mean the EU and South America would create one of the world’s largest free trade zones, which could cover more than 30 percent of global goods exports. More than 720 million people live in both regions.
The South American countries Brazil, Argentina, Paraguay and Uruguay joined forces to form Mercosur, based on the model of the EU – as an economic community.
More investment in the USA
However, it is still uncertain whether this new trade agreement with South America will become a reality. There is sometimes considerable resistance from the EU, for example from France. Among other things, farmers fear competition from cheap agricultural imports.
Meanwhile, the Inflation Reduction Act – the US government’s multi-billion dollar investment program – has directed large amounts of foreign direct investment to the United States, often from Germany. These are “investments that will no longer be made in Europe due to poorer competitive conditions,” says IW expert Obst.
If Europe wants to keep up better economically, politicians must pay more attention to the issues of growth and efficiency, says economist Clemens Fuest. “It is entirely possible to develop a policy agenda that creates better conditions for innovation, job supply and private and public investment, research and education.”