EconPol Policy Reports

From the earliest announcement of the European Green Deal, the current EU political cycle has been defined by an unprecedented acceleration in the scale and pace of climate policy. Under difficult conditions that sometimes tested the ability to engage stakeholders, including various external shocks, the EU has put forward and largely passed an unprecedented legislative agenda, which was meant to have, and is having, deep impacts on the EU economy and society at large. Much has changed in the world since the European Green Deal and the “Fit for 55” packages were conceived, including a dramatic increase in industrial policy actions by Europe’s trade partners, a deteriorating geopolitical landscape, and an energy crisis that has been aggravated by these factors, all of which has led to persistent fiscal and economic pressures. 

In 2023, Russia experienced a 3.5% economic growth, but forecasts for 2024 indicate a slowdown to 1.5% due to tightened monetary policies and the expected global economic slowdown. Despite large military spending and Western energy sanctions eroding budget revenues, fiscal deficits have been generally kept under control. Intensified scrutiny of third-country firms violating energy sanctions widened discounts on Russian oil prices in late 2023. Generally, Russian import patterns remained relatively stable. In particular, EU exports of economically critical and common high priority goods to Russia in November 2023 represent just 2% of its prewar levels, underscoring the effectiveness of sanctions in halting direct exports. Besides China and Hong Kong, Türkiye and CIS countries became vital suppliers, meeting Russia's demand for economically critical goods and high-priority items.

 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.