The economic effects of Europe’s election

Today kicks off the extraordinary exercise in multi-country democracy that is the election of the European parliament. MEPs have been chosen directly by national electorates for five-year terms since 1979. Turnouts leave a bit to be desired, but are comparable with US midterm elections. My Brussels colleague, Andy Bounds, has the ultimate guide to following the poll and what to look out for once the results are clear. Today, I offer some thoughts on how the voters’ choice could matter for the EU’s economic policy. What are yours? Email us at freelunch@ft.com.

While it may be the weakest of the big EU decision-making institutions (the others being the commission and the council), the parliament matters. It matters for positions — the new commission president and their commissioners need the backing of a majority of MEPs, and in the past they have shown themselves able and willing to kick commissioners out of office. It also matters for policies, since laws need to be passed by the EP as well as by the national ministers sitting in the council.

The most immediate impact of this week’s election on the direction of Europe, therefore, is going to be when the national leaders’ nominee for the next commission president brings a proposed work programme to a new parliament in the hope of its endorsement. The Greens — the great winners in 2019 — are set to lose a lot of seats. The biggest wins are projected for hard-right parties. How might such a result affect the policy direction of Europe for the next five years?

One answer is: less than you might think. The hard right is so fragmented that it does not manage to punch its weight in the parliament, either in terms of agenda-setting (which relates to obtaining committee leadership positions) or voting as a bloc. Good articles by Ivan Krastev and Cas Mudde explore this self-paralysis; the FT’s Ben Hall highlights the hard-right parties’ disagreements over Russia as another reason for their ineffectiveness in turning electoral success into political influence.

I think the real impact would be indirect. Strong gains from the hard right — especially if they are further emboldened by finding a soulmate across the Atlantic in a returned president Donald Trump — would very probably force adjustments in the other parties’ policy stances, towards the hard right’s preferences.

That could happen at national level (see, for example, how Denmark’s social democrats have outdone their rightwing nativists on immigration, and how the Netherlands’ centre-right have agreed a governing platform with the rightwing populist Geert Wilders). This will feed through to negotiations between national ministers in the council. This shift inside the political mainstream in the direction of the fringe electoral winners is likely to happen in the European parliament too. After all, something like it happened last time. The electorally successful Greens did not, in fact, join Ursula von der Leyen’s majority — but her tenure was defined by the green deal nonetheless, in no small part because the main parties absorbed many of the Greens’ priorities after seeing where the electoral winds had blown.

It’s not always obvious whether the hard right has a coherent economic policy view; its parties are more vocal on cultural and social issues. But once the dust has settled and a commission president nominee comes to seek the parliament’s support, here are the three economic policy areas I’ll be watching:

1. Whither the green deal?

The green deal was von der Leyen’s flagship policy to get MEPs’ support in 2019 — where elections, remember, came at the heels of huge youth demonstrations over climate change. The idea was to treat the net zero carbon goal as a vehicle for economic transformation and technological innovation — and, after Vladimir Putin’s war against Ukraine, for boosting domestic industry and repatriating production.

This election campaign has shown how the green deal is under pressure. In contrast with last time, the protesters are not young people enraged about their planet’s future but farmers angry about regulations to green agriculture. More and more mainstream politicians, especially but not exclusively in centre-right parties, are channelling voter concerns that green policy should yield more to ease of business and consumer purchasing power.

A big policy choice will, therefore, have to be made by the incoming commission hopefuls about the pace and scope of the green agenda. Not, I think, the direction — the net zero goal is here to stay, as is the aspiration to energy independence and hence much more renewable power. But watch the commitments, or lack thereof, on such things as tightening the carbon emissions trading system (to make emission permits costlier) or regulatory “sticks” to force consumers and producers to switch from more to less carbon-heavy activities. I expect a pro-nuclear turn in energy policy and a sharp slowdown in environmental protection that is not obviously connected with decarbonisation.

2. Europe’s evolving approach to trade

Any adjustment of the green agenda is also linked to the broader approach to trade. This had already become much more nuanced under the pressure not just from the political commitment to decarbonisation but geopolitical considerations and the end of indifference to how imported goods and services are made — in terms of human rights, animal welfare, respect for privacy in data, and so on. The earlier classical free trade agreements have increasingly started to include commitments on such non-trade issues.

The principle of trade opening itself has increasingly been weighed against geopolitical risk, especially after Covid and Putin’s war. And the traditionally most purist free-trading member states also happen to be keen on decarbonisation, so Sweden, for example, is quite happy with a carbon border tariff that prevents green steel production there from being undercut by imported dirty steel. These trade-offs are still being contested, with traditional protectionist instincts now often being rejustified in geostrategic terms.

Hard-right parties are not often big free-traders; the instinct to build stronger borders counts in the economy too. They suffer from some confusion over how to think about China — their nationalism should lend itself to China-bashing, but some admire the Chinese model, and Hungary’s leader Viktor Orbán has demonstrated the investment flows that are the reward for being friendly with Beijing. At the same time, hard-right parties are not too keen on the pan-European policies that are needed to complement a tough line against China — especially a common activist industrial policy to build leading green industries at home (nor always on the green industries themselves).

So it’s somewhat open how the trade agenda is shaped by the turn to the right — except that it will certainly become more complicated. Look for early signals on whether the EU will finally sign the trade deal with the South American Mercosur trading bloc (two decades in the making) or seek further protection against Chinese green tech imports than what Brussels is set to propose a few days after the election. In the longer term, look for pressures to make the EU more defensive and inward looking, especially if the US continues its path towards a much more closed economy.

3. Budget

The third economic issue where the changing distribution of political forces will make a difference is in the upcoming EU budget negotiations. They will start in earnest next year, over a seven-year budget to run from the start of 2028. The stakes here are big. They include how much to spend (and whether a repeat of the post-pandemic recovery fund is warranted), how to fund any increase and what to spend it on. Defence? Digital or green industrial policy? Infrastructure? Social considerations? What to do about the farm subsidies that still take up a third or so of the budget? There is also the question of whether to spend it on cross-border projects such as electricity interconnectors or nationally chosen priorities, and what conditions to attach to EU budgetary allocations.

A strengthening of the hard right in particular and of rightwing parties in general is bound to affect the relative force behind alternative priorities. Defence will, no doubt, command more attention. But will agricultural spending be curtailed, and if not, where will additional money be found? And how will the hard right approach industrial and infrastructure policy? It will be torn here between different instincts: a desire to get roads, power generators and factories built, against a dislike of the pan-European approach that such spending from the EU budget would necessitate.

These, then, are the areas where I could see the election shifting the EU’s course. It may not shift it much: hard-right parties face the singular conundrum that the policy solutions they like are hard to achieve without using the pan-European policy tools they dislike — that, after all, is how you convert representation in an EU institution into effects on the ground.

And, large or small, any impact on the policy direction means that changes in voters’ preferences make a difference. Whether you like the change we get or not, democracy works. So to readers who have the right to vote in the European election, I say: please use it.

Other readables

The European Central Bank will cut interest rates today.

By clinging to an overly narrow view of fiscal responsibility, the UK Labour party risks denying itself a mandate to carry out reforms that will expand the economy faster, I argue in my FT column this week. The party has now published yet another commitment not to stray too far from Conservative policy, this time on immigration — which, as my colleague Stephen Bush points out — tightens the fiscal straitjacket further.

Gazprom has been badly hit by sanctions, a secret report commissioned by the company admits.

I joined Robert Armstrong, my colleague who writes the nonpareil Unhedged newsletter, in his podcast to discuss global taxation.

My colleagues have put together a must-read article on China’s plan to sell electric vehicles to the world.