EU governments offer themselves friendly advice, we take look at the big 5

I sincerely hope you have noticed that it is that time of year again. Despite a few storms, temperatures are climbing upwards, flowers are in bloom, the birds are singing, and the European Commission has delivered its Country Specific Recommendations. Although one can criticize the recommendations as a merry go round of governments advising themselves, it is interesting to take notice of the recommendations to have some idea of the policy priorities in the coming six months. For this article we are having a look at the big 5: Germany, France, Italy, Spain and Poland.

The recommendations are part of a process known as the European semester. In this seasonal system the European countries take the months of November until June to monitor and align on economic developments. Then the member states have the months of July until October to implement the recommendations. The focus is on economic and fiscal policy. The European Commission is presenting the recommendations, itself a committee hand-picked by the European Council. This council consists of all 27 government leaders. Moreover, the commission has to align its recommendations with the council. Although the national press will cry havoc about new orders from Brussels, it is the national governments themselves who are deciding on this advice. Reporting on these recommendations as a showdown between the EU and national governments is folly. Be that as it may, it is interesting to look at the recommendations to get some idea of what reforms will be on the agenda in the coming semester.

In order of population, Germany is first. Unsurprisingly, the recommendations echo what the Bundesrepublik is already doing. The European commission advises the Germans to start ‘diversifying energy supplies and routes’. Something Germany is already doing by exchanging its dependence on Russia by dependence on Qatar. Furthermore Berlin is to foster renewable energy, something it has recently done by signing a pact with its North Sea neighbors to develop offshore wind turbines. More interesting is the recommendation to invest in high-capacity digital communication networks. Germany is notorious for being a laggard in digital innovation, be on the look out for proposals to improve its internet speed. The government is advised to operate within a ‘neutral policy stance‘. This means that the ECB will neither try to increase the money supply nor try to decrease it. An interesting position to take as inflation rates are nearing double digits. Furthermore the government should create fiscal incentives to increase the number of hours worked. Advise that makes little sense when one takes into account that the EU countries that work the least have the highest level of productivity.

For France the focus is a little different. As its energy needs are mostly met by nuclear power plants, it can do little in its energy mix to reduce emissions. Be that as it may, the French still need natural gas to heat their homes and offices. Therefore they are recommended to make home renovations a main priority. Another priority should be an improvement in the working conditions of teachers and expansion of work-based learning options. Expect the new government in Paris to make education a core focus. As we can see in the graph above the French are already mostly working full-time. Instead of an increase in working hours the French are recommended to ‘reform the pension system’. It seems the EU will not rest until we all work 50 hours a week until we are eighty years old. A dystopian future with unclear benefits.

Beautiful Italy is known for its history, food and fashion, but sadly also for its grotesque national debt. Ever since 2014 it has languished at 134% of GDP, this situation more or less continued until the pandemic pushed it up to 150%. Nevertheless, the commission is recommending increased spending on the ‘green and digital transition’, instead of cutting costs Italy will have to increase tax returns. Instead of taxing labor, the Italian government is advised to align cadastral values of property to current market values. In other words: home owners are to pay more tax on their house. All in all it seems a very meager reform in the face of the national debt hanging over the Italians as the sword that hung over a unlucky Sicilian courtier.

Although Spain also has a sizable national debt (118%), it has previously shown that it is able to reduce it, albeit very slowly. From 2014 to 2019 it managed to decrease it from 105 to 98%. The recommendations to Madrid are more on the environmental side. The sunny and hilly country is ideal for solar and wind energy production. Also, the government has been vocal in its ambitions to phase out nuclear and fossil-fuel based energy production. In the years leading up to the Great Recession, entrepreneurs used easy credit and generous subsidies to install as much solar panels as possible. The subsidies almost bankrupted the Spanish government and have since been curtailed. Even so, the government still faces the challenge of hooking up all of these power plants to the electrical grid. The kingdom is advised to hurry up this process while promoting self-consumption and decentralized installations. Once the installation are hooked up another problem is however going to rear its ugly head. As solar and wind power are inherently intermittent there will have to be other plants to supply power when the sun does not shine or the wind does not blow. The higher the percentage of solar and wind plants the harder the business case becomes to open a natural gas or nuclear plant, for in sunny and windy times the plant will have no turnover. This means that the government will need to subsidize both the windmill and the coal or gas plant, de facto nationalizing the entire electricity production and losing the price mechanism. It is unclear if Spain, or any government for that matter, has the finances and expertise to complete this task. Increasing the use of batteries, electric vehicles and hydrogen could help to store some of the excess energy, but all of these measures entail spending more energy than you will ever get back. Expect Madrid to downplay the importance of this herculean task and focus its attention on the recommendations to improve recycling and waste management.

Even though workers in Poland are already making long hours, the commission recommends the government to foster greater labor market participation by greater access to childcare and
long-term care. In other words: please stop taking care of your kids and parents, leave that to an agency; where you are unreplaceable is at the call center. The document also advises Poland to safeguard the independence of the judiciary ‘to enhance the investment climate’. To mention the judiciary issue in a economic document seems somewhat of a stretch, on the contrary the Polish judiciary reforms seem necessary to enable democratic change. Warsaw is also advised to make haste to improve public transport, install heat pumps and electrify motor vehicles: all challenges that far richer states have also not been able to meet.

All countries are recommended to make efforts to reduce dependence on fossil fuel and enhance flexibility to weather economic storms. Covid-19, the war in Ukraine and other calamities may threaten economic growth, while the ECB might be forced to increase interest rates at the same time. Something drastic needs to happen. Instead of reducing its programs the EU is looking for its solution in more taxes and more working hours. This is no order from the bureaucrats in Brussels, this is the consensus among your own governments.