A Deep Dive into the Growing Divergence Among EU States
June 14, 2023
By Acuity Trading
Despite various policy initiatives and monitoring systems adopted over more than two decades of the European Union’s formation, the members appear to be more divided than ever. While the creation of the Economic and Monetary Union (EMU) promised a future of peace and prosperity, the quest for economic integration is still on and seems distant at best.
The 27 nations that comprise the EU have always had their differences. This divide is pronounced and exists not just between western and eastern Europe, but also between the northern and southern nations. This is because the countries have marked differences in income levels, socio-economic conditions, political ideologies and, what has come to the fore in recent years, energy poverty.
The GDPs of Germany, France and Italy comprise more than 50% of the EU’s $16 trillion economic output. The top 10 countries account for a whopping 85% of the EU’s GDP. The household gross savings per capita reached €5,976 in Germany in 2022, while the figure is closer to €300 in Poland and reached a negative €4,473 in Austria. The more advanced nations are not always forthcoming about pulling the weight of the less prosperous ones.
Market sentiment for Eurozone stocks is bullish, as can be seenin Acuity’s AssetIQ Widget.
Much of the EURO STOXX 50 index is made up of blue-chip companies from Germany and France. The sentiment for the indices for these countries is also bullish, as seen on Acuity’s Dashboard.
Russia-Ukraine War Highlights the Great Divide
The Russia-Ukraine conflict highlighted the tangled history of the EU and the many fractures in the relationship among its members. The EU is still struggling to have a common narrative vis-à-vis Russia. Eastern EU countries, like Poland, the Czech Republic, and the Baltic states were quick and definite in their support for Ukraine, after the Russian invasion. On the other hand, the western nations hesitated due to their reliance on Russia for energy resources.
For the eastern EU countries, Russia represents a security threat due to the geographical proximity. The western EU nations were always in favour of maintaining Soviet ties as the military powerhouse was considered a part of their security architecture and essential for stability in the region.
The EU did seemingly come together to impose sanctions on Russia. However, there were divergent views on this too. Imposing sanctions on Russian crude oil meant rising energy costs. The timelines proposed by the European Commission, of phasing out the bloc’s dependence on imports from Russia the end of 2022, were opposed by less developed members due to the negative impact on their economies.
Hungry had signed a 15-year deal with Gazprom in 2021, which it wasn’t willing to end. The country was further aggrieved by the European Commission withholding funds for its economic recovery but agreeing to a €18 billion financial aid package for Ukraine.
Moreover, the sanctions were regarded by the western EU nations through the lens of a necessary, yet short-term measure. In the longer-term, these countries may lean towards re-establishing ties with Russia in a post-conflict world.
Economic Instability Widens the Divide
The economic disparity among EU nations is a nightmare for policymakers. Bringing all these countries under common fiscal and foreign policies is a Herculean task, which makes policymaking cumbersome and slow.
Take the Green Deal for instance. The EU, which has been at the forefront of the Net-Zero by 2050 initiative, now finds itself at a crossroad. While the bloc tries to put up a united front in its fight against climate change, there are marked divergences among EU members. That too by the powerhouses of Germany and France.
Germany delayed a deal to ban new internal combustion engines by 2035. Meanwhile, France has asked to pause EU’s environmental regulation. Why? Macron is concerned about stiff competition in the automobile industry from the biggest US-based EV brands. Belgium has followed suit, saying climate legislation would adversely impact agriculture and worsen food shortages in Europe.
Divergence among member states casts doubt on the core objective of EU’s founding treaty, that of “creating an ever closer union among the peoples of Europe.” Economic integrity has been threatened by a cascade of crises in the region. In just over three years, the bloc has suffered the impact of the pandemic, supply chain disruptions, Russia-Ukraine war, soaring inflation, energy crisis and, more recently, tensions in the banking segment. Any one of these events could have put a strain on intergovernmental collaboration.
Strength in Numbers
The EU has in the past demonstrated a remarkable capacity to unite and to deploy effective measures. During the pandemic, EU leaders approved a financial package of some €1.8 trillion to help economies recover. The bloc can come together again. The market’s faith in the EU can be seen on Acuity’s Market Alerts Widget.
Most of the EU members are aware that they cannot navigate today’s economic challenges alone. The EU is the world’s second-largest economy, behind only the US. It must leverage this purchasing power as a single entity. Take the energy crisis for instance. The bloc could pool demand and negotiate for long-term contracts as a single buyer, to secure energy at more reasonable prices. At the same time, the EU can plan integrated and accelerated investments into renewable energy. This not only has a dampening effect on inflation, but also spurs economic growth. In the same vein, the EU can decide to stop procuring expensive military equipment off the shelf from the US and make coordinated efforts to invest in homegrown defence companies.
While posing as a single buyer, the EU doesn’t need to follow a single monetary policy. It’s time to think out of the box. For instance, the ECB doesn’t need to follow a single monetary policy for the entire region. The EU can assume the role of a policy advisor and monitoring agency to facilitate the proper functioning of member economies, while giving individual nations the flexibility to take initiatives to overcome macroeconomic challenges like regional inflation.