The European Union faces a daunting challenge over the next five years: Get public finances in order while mustering the investment needed to confront a growing array of common challenges, not least the clean-energy transition.
The task will require a level of discipline and cooperation that is anathema to the hard-right populists who, after a strong showing in the latest elections, will occupy a quarter of the European Parliament until 2029. All the more reason to get it done.
The combined blows of the global pandemic, the war in Ukraine and Russia’s weaponization of energy supplies have taken a toll on government finances. Total euro-area sovereign debt is projected to exceed 90% of gross domestic product in 2025, up from about 84% before the pandemic and 66% before the 2008 financial crisis — a trajectory that threatens to undermine the common currency. France and Italy in particular — with among the region’s highest debt-to-GDP ratios — must slash budget deficits or face sanctions under the EU’s new fiscal rules.
Meanwhile, the EU desperately needs funds for projects that will benefit the entire region. The green transition alone will require more than 5 trillion euros in public and private investment over the next five years. Updating physical and communications infrastructure, bolstering defense capabilities, ramping up military production, and supporting Ukraine will cost hundreds of billions more.
How can member nations pursue these goals while restoring fiscal prudence? One answer is in a deeper union. A united Europe has much greater financial firepower. It can support a budget large enough to satisfy common investment needs — ideally with dedicated revenue and the flexibility to respond to regionwide crises. By integrating its capital markets, it can unlock trillions of euros in added private investment.
Europe’s leaders have taken some steps in the right direction. In 2020, they created a joint 750-billion-euro fund to support the recovery of states hardest hit by the pandemic. Although some have criticized the program as wasteful, early evidence suggests that in Italy — by far the largest recipient of funds — it has actually boosted potential growth by reviving much-needed reforms of the judiciary, government procurement and public works.
Right-wing populists will make progress difficult. Most are fundamentally opposed to a stronger union, fiscal or otherwise (with the possible exception of funding for defense). Italian Prime Minister Giorgia Meloni has already worsened the country’s finances with a “superbonus” aimed at stimulating home renovation. France, too, might find itself in a budget standoff with EU officials, now that President Emmanuel Macron’s snap election has empowered populists on the left and the right.
No doubt, the rise of the far right reflects popular dissatisfaction with bureaucrats in Brussels. Yet issues such as climate change and the economy remain among Europeans’ top concerns, and centrists still have the majority in the European Parliament. If they fail to meet these looming challenges, voters will hold them responsible. If they show the leadership required to further the European project, to achieve a resilient and prosperous union, they stand a much greater chance of keeping extremists at bay. They should seize this opportunity while it’s within reach.
— The Bloomberg Opinion Editorial Board
