Members' Research Service By / January 31, 2020

Economic and Budgetary Outlook for the European Union 2020

Growth in the European Union and euro-area economies – albeit still positive – slowed significantly in 2019. Moreover, prospects for the next two years remain muted, against the backdrop of a generalised slowdown.

Trade in goods with the world, euro area and US

Written by Alessandro D’Alfonso, Angelos Delivorias, Magdalena Sapała and Carla Stamegna,

Trade in goods with the world, euro area and US
Trade in goods with the world, euro area and US © European Union, 2020

Growth in the European Union and euro-area economies – albeit still positive – slowed significantly in 2019. Moreover, prospects for the next two years remain muted, against the backdrop of a generalised slowdown. Uncertainty is the overarching theme of this year’s outlook, whether at regional level, or more globally, and whether in terms of short-term policy or deeper, structural economic factors affecting the world’s important economies.

Gross domestic product (GDP) growth in Europe progressed at uneven speeds, from both geographic and sectoral perspectives. Moreover, while downward trends are expected for all the factors underpinning GDP (private and public consumption, investment and exports), their respective contributions to the final figure are also set to change (for example, private consumption will carry less weight). When it comes to employment, the positive trends observed last year are continuing. In this context, the forecasts for 2019 and 2020 have observed – and tried to explain – the reasons why, contrary to textbook theory, (i) an increase in wages did not come immediately after the improvement in employment conditions, and (ii) when the increase in wages came, it did not translate into an increase in prices (inflation).

For 2019, the general government deficit is expected to reverse its previous decline and pick up modestly, a trend that is likely to continue for the next two years. The debt-to-GDP ratio, meanwhile, decreased in 2019 both for the euro area and for the EU as a whole, and is expected to maintain its downward trend in 2020. Lastly, inflation for the euro area is expected to remain below the ECB target of 2 % in the near future, a trend that played a part in the European Central Bank’s decision to resume its asset purchase programmes in 2019, after a brief pause, and to take further accommodative measures. The 2020 EU budget amounts to €168.7 billion, representing only 2 % of total public spending in the European Union – approximately 1 % of gross national income (GNI). Despite its volume, the overall impact of the EU budget is amplified by a number of features, including: a higher share of resources devoted to investment than in national budgets; the capacity to leverage additional funding from other sources; and attention to policy areas where the pooling of resources can provide the EU as a whole with added value (such as research, innovation and development cooperation).

The most prominent aspect of the agreement between the European Parliament and the Council of the EU on the 2020 budget, highlighted by all the negotiating parties, was the increased focus on climate-related action. This additional ‘greening’ of the EU annual budget is designed to help the EU meet the 20 % goal for climate-related spending over the 2014-2020 MFF period. Other spending priorities include stimulating investment, growth and research, and new jobs, especially for young people, as well as addressing migration and security challenges. As in all previous years of the 2014-2020 MFF, the budgetary authority had to resort to the flexibility provisions in order to finance these persistent policy challenges.

The 2020 EU budget is the last under the EU’s current financing framework. This year, the EU institutions and Member States are expected to finalise the design of the next multiannual financial framework (MFF) to cover the 2021-2027 period. Negotiations, which are based on the proposals that the Juncker Commission tabled in mid-2018, are proving lengthy and complex. Taking into account the withdrawal of the UK from the EU, the proposal organises allocations for 27 Member States, around a new structure reinforcing priorities that emerged during the current MFF, such as research, innovation, digital transformation, climate action, borders, migration, security and defence. Against the backdrop of the new agenda for Europe set out by the von der Leyen Commission, financial support for the recently proposed European Green Deal and the transition to a climate-resilient economy will be a major topic in the debate on the next MFF.

Current global trends, the emergence of new economic powers and the development of new technologies are leading to a potential transition of the international monetary system from a still dollar-dominated environment to a more diversified and multipolar system involving several international currencies. After quickly establishing itself as the second most important global currency, the euro gradually lost international standing from the mid-2000s onwards, and has only recently shown signs of reversing the trend.

Recent unilateral third-country actions, such as the renewal of sanctions on Iran, and challenges to international rules-based governance and trade, have highlighted the need to reinforce the EU’s economic and monetary sovereignty. As a result, the idea that the single currency could be a tool of foreign economic policy is coming back into fashion, and the case for an increased international role for the euro being considered more prominently. The benefits arising from this role would seem to offset the possible challenges, nonetheless the consequences of a stronger international role for the euro should be carefully assessed, including those affecting the ECB’s monetary policy.

Against this backdrop, the Commission adopted a communication, ‘Towards a stronger international role of the euro’, and a recommendation on the international role of the euro in the field of energy in December 2018. In this context, the strengthening of the euro’s international role is seen ‘as part of Europe’s broader commitment to an open, multilateral and rules-based global economy’. In the same month, the Euro Summit discussed economic and monetary union reform and, in this context, noted the Commission’s communication, and called for ‘work to be taken forward to this end’.

Policies supporting the euro’s international role should address three broad weaknesses in the institutional design of the EU and EMU: the ability to provide stability both domestically and internationally; the limited depth and liquidity of euro-area financial markets; and Europe not speaking with a single voice on international matters, including security.

Read the complete study ‘Economic and Budgetary Outlook for the European Union 2020‘ in the Think Tank pages of the European Parliament.

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