Strategic Insight 029/2023
Eoin Drea
09 November 2023
The Economic Constraints of a Geopolitical EU
The geopolitical aspirations of the EU are constrained by a series of internal economic divisions. These disagreements continue to prevent the EU from reaching the political unity required to project a coherent, consistent and meaningful voice on global affairs. It is a situation unlikely to improve in the medium term.
When Ambition Meets Reality
Even before assuming the responsibilities of President of the European Commission in 2019, Ursula Von der Leyen sought to define the EU as a geopolitical actor. It was a strategy of power projection reinforced through three subsequent events – the finalisation of Britain leaving the EU, the outbreak of the Covid-19 pandemic in 2020 and Russia’s invasion of Ukraine in 2022.
In Brussels’ eyes, the journey of the EU to serious, global player has been an unqualified success. To the European institutions the period since 2019 has been marked by “the birth of a geopolitical Union – supporting Ukraine, standing up to Russia’s aggression, responding to an assertive China and investing in partnerships”.
However, while the rhetoric is certainly soaring, the economic consequences of the EU’s geopolitical ambitions are a lot less ascendent. That is because, despite Brussels’ dreams of global influence, its actual capabilities are constrained by some fundamental economic weaknesses.
These internal fragilities primarily relate to tensions about how the EU should be financed; disagreements over the desirability of EU level borrowing on the financial markets; and disputes over how financial disbursement mechanisms to member states are increasingly linked to divisions over basic democratic principles such as the “rule of law”.
These failings are increasing fissures between member states while slowing the EU’s decision-making process. They also restrict the capacity of the EU to present itself as a unified actor on the global stage. Ultimately, these are the economic realities which constrain the EU’s wider geopolitical ambitions.
The EU’s Recovery Fund is an Economic Constraint
The EU’s Recovery Fund is a €750 billion Covid-era stimulus tool which was agreed in July 2020. To be financed by the borrowings of the European Commission on the capital markets (on behalf of all member states), it comprises both non-repayable grants and loans. Distribution is linked to National Recovery Plans submitted by member states with the focus on aiding the Green and Digital transitions.
Initially, the Recovery Fund was viewed as a transformative moment of deepening integration for the EU. A first step towards a fuller economic and political union in Europe. Even more-detached observers viewed the establishment of a joint European debt instrument as a necessary step on the path to greater economic integration.
However, what the events of the past three and a half years have actually shown is that rather than strengthening European Union integration and its ability to project power externally, the Recovery Fund has just increased internal political divisions and made further integration less – not more likely – in the years ahead.
Basic Differences Equals Big Problems Ahead
The Recovery Fund has crystallised divergences between member states on the fundamentals of the EU’s further development. Key among these include, but are not limited to:
Arguments about how to repay the Recovery Fund
Presently, the EU is funded through three main sources of revenue, namely customs duties, contributions on Value Added Tax (VAT) collected by member states, and direct contributions by EU countries, also known as Gross National Income (GNI). Yet, these resources are not sufficient to repay the borrowings of the Recovery Fund which will begin in 2028. The reality is that since June 2020, the EU has gone on a borrowing binge. Unfortunately for the EU taxpayer, no political agreement has been reached on introducing increased revenues for the EU’s ‘own resources’. This is weakening the EU’s credibility regarding future spending commitments. As of June 2023, only increased national contributions based on non-recycled plastic packaging waste had been implemented. A broader agreement is unlikely before 2026. Therefore, no significant EU revenue streams are yet in place for repaying the Recovery Fund. The EU is, in effect, running a mounting budget deficit.
The realities of a monetary policy
Due to rising interest rates, the initial borrowings of the Recovery Fund have already become significantly more expensive than originally envisaged. Debt servicing costs for EU borrowings in 2024 are estimated to be double the original estimates, with the EU’s stock of debt set to reach close to 1 trillion euros by 2026. Leaders from heavily indebted Eurozone member states – such as Italy – are also openly criticising European Central Bank policy due to the impacts of rising interest rates in slowing economic growth and further weakening their own precarious fiscal positions. Such dissension is hardly a recipe for deepening economic integration in the short term.
The effectiveness of the Recovery Fund
Despite its clear criteria for investment, the Recovery Fund’s resources remain only partially disbursed. As of June 2023, only €106 billion of grants and €47 billion of loans had been disbursed (in other words, just over 20% of the planned investment package). The Recovery Fund has also been subject to warranted criticisms regarding the nature of the projects submitted by some member states. Moreover, the Recovery Fund is heavily concentrated in three member states only – Italy, Spain and Greece – with nearly €300 billion of funding (nearly 40% of the total allocations) planned in these existing high debt countries. When combined, these factors cast doubt on the ultimate economic effectiveness of the joint borrowing mechanism.
Borrowing today, worry tomorrow
These economic instabilities are becoming even more important given the EU’s increasing dependence on borrowing to finance its activities. From the ongoing financial support to Ukraine (€18 billion with another €50 billion proposed up to 2028) to the increasingly ambitious environmental targets which require at least €1 trillion in investment over the next decade, the EU is spending like never before. And those spending commitments are in addition to the €646 billion allocated by member states to shield consumers from rising energy prices and the, as yet undefined, spending by both Brussels and the national capitals in response to President Biden’s Inflation Reduction Act in the United States.
In summary, a geopolitical Europe remains a political ambition, not an economic reality. The geopolitical aspirations of the EU are constrained by a series of internal economic divisions. These disagreements continue to prevent the EU from reaching the political unity required to project a coherent, consistent and meaningful voice on global affairs. It will likely result in the EU’s geopolitical ambitions becoming even more detached from its economic realities in the years to come.
Eoin Drea is a political analyst, writer, and senior researcher at the Wilfried Martens Centre for European Studies in Brussels.
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