EconPol Policy Reports

 Despite EU restrictions, only around one-third of pre-war exports to Russia are fully sanctioned; most trade remains unaffected or subject to numerous exemptions. While exports have decreased by 32%, imports have increased by 17% due to innovative ways to bypass trade sanctions. China is Russia’s most important alternative country of origin for products under sanction: 61 percent of all products subject to sanctions come from China. The Russian economy shows signs of recovery, driven by robust domestic demand from wartime fiscal stimulus, contributing about 10% to GDP in 2022-23. Real GDP and industrial production have grown by 2.5% and 3%, respectively, indicating recovery from the economic crisis.

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.

Rising geopolitical tensions, increasing supply chain disruptions, and falling public support for economic openness have given new impetus to economic nationalism. Governments around the world increasingly give precedence to domestic production and geopolitical considerations over gains from trade and economic efficiency. This policy trend has important implications for the EU, both as a global trading partner and as an important arena for economic policymaking. This policy report investigates possible repercussions of policy-driven de-globalization for the European Union.

More than twenty years after the beginning of negotiations, a new window of opportunity seems to have opened for the ratification of a trade agreement between the European Union and Mercosur. For Mercosur, this comes at a crucial juncture in its integration process: the future of the South American trade bloc appears to be more uncertain than ever, with member states holding diverging views on Mercosur’s objectives. Thirty years after its foundation, the original goals of Mercosur’s integration process have been only partially achieved. While there has been some success in terms of trade liberalization within Mercosur, the goals of forming a customs union and pursuing deeper integration steps remain unfulfilled. High Most Favored Nation (MFN) tariffs and non-tariff trade barriers within the region, coupled with the lack of trade agreements, hinder the integration of Mercosur countries into the global economy.

The EU faces the challenge to combine large and sustained investments to promote the transition towards a green, digital, and competitive Europe while maintaining fiscal sustainability. Based on a comprehensive literature review on the effects of fiscal rules and investment clauses on public finances, this in-depth analysis provides some guidance how higher public investments can be achieved by a targeted golden rule without harming fiscal sustainability in the EU fiscal framework. The study also discusses the role of investments in the current proposals of the European Commission on the reform of the EU Economic Governance.