Economic & Fiscal Policy

To improve defence capabilities, Europe has to increase defence spending immediately and also to create fiscal space for a permanent rise in defence spending. Many European countries have collected a considerable peace dividend since the end of the Cold War. In the same period, welfare states have expanded to a degree not backed by the general economic development. This Policy Report shows that if European NATO countries shifted around one percent of non-defence expenditure towards defence, this would be sufficient to meet the NATO 2%-target.

The Covid-19 pandemic hit Germany hard in 2020. Driven by the need to limit close contact and the resulting strict lockdown measures, economic activity fell sharply. To counter the effects of the Covid-19 pandemic, the German government introduced several policy measures. While the macroeconomic impact of the Covid-19 pandemic is well documented, evidence on the distributional impact on household income at the micro level is more limited. Our analysis shows that German households experienced a loss of over 3 percent of market income in 2020 due to the Covid-19 pandemic.

Europe is facing a whole new set of challenges: The cost of living is rising, war is on our doorstep, and an environmental turnaround is needed. How should the EU framework for economic governance change to make Europe stronger, more sustainable and more resilient? The European Commission has recently developed guidelines for a reformed economic governance framework. In March 2023, the European Council endorsed these guidelines. They aim at strengthening national ownership and facilitating the enforcement of projects. At the same time, they are intended to enable strategic investments and set a framework to reduce the high level of public debt. However, such economic policy coordination efforts at the EU level and the individual governance reform proposals open new debates. To what extent do they correspond to the real needs and interests of the EU? And do they take into account country-specific economic, structural and social problems of the member states?

Innovations form the backbone of sustained economic growth and, as such, they play a key role in safeguarding prosperity. Governments, aware of this, invest heavily in public research at universities and research institutes, and strive to create ideal conditions for private sector research and development (R&D), usually through specific R&D tax credit schemes or direct funding.

A strong middle class is important for political stability in democracies and can be an anchor against political extremism. With their consumption and labor input, middle class households make a significant contribution to economic growth and a prosperous society. With their taxes and other levies, the middle-income groups also contribute significantly to revenues and thus to the government budgets and the financing of EU welfare states. At the same time, the middle class has come under pressure in many countries in recent years. In many European countries, it is therefore questionable whether and to what extent the middle class will be able to bear further fiscal and financial burdens during the current crises and to meet the state’s additional financing needs to cope with major challenges such as climate change, the energy transition, the security policy shift, or demographic change.