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      EU election: far-right shift to influence, not derail mainstream policy agenda
      TUESDAY, 04/06/2024 - Scope Ratings GmbH
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      EU election: far-right shift to influence, not derail mainstream policy agenda

      The expected rise in support for far-right parties in the European Parliamentary elections and across member states will likely influence EU policy making but should not significantly alter Europe’s strategic priorities for tackling structural challenges.

      By Eiko Sievert and Tom Giudice, Sovereign and Public Sector


      Given the reluctance of socialist and liberal political groups to work with far-right parties, the alliance between the European People's Party (EPP), Socialists and Democrats (S&D) and Renew Europe, with possible support from the Greens, is likely to elect the next European Commission (EC) president.


      Regardless of the outcome, we expect the EU’s strategic priorities will focus on defence and increasing economic competitiveness, potentially at the marginal expense of the green agenda, not least since the Greens are likely to be the party which loses the most seats. One key goal is enhancing the capital markets union (CMU) to mobilise private savings for investment to address an estimated EUR 500bn-a-year funding gap between the EU and the United States.
      Current EC president Ursula von der Leyen remains the frontrunner for a second term, though her willingness to work with far-right MEPs has weakened support from the S&D and Renew which could lead to the emergence of alternative candidates such as Italy’s Mario Draghi, Croatia’s Andrej Plenković, or Romania’s Klaus Iohannis.
       

      Still, the rise of far-right parties in many European countries, alongside Hungary’s Prime Minister Victor Orbán holding the rotating six-month presidency of the Council of the EU from July, will influence EU policymaking and could lead to slower progress on the green agenda and a tougher stance on immigration.


      Polling for the European Parliament election reflects the growing number of countries where far-right parties are either already in government, supporting a ruling coalition, leading in recent national polls, or are the second strongest party in national polls
       

      Improving Europe’s competitiveness and defence are strategic priorities
      Work to enhance the CMU will be an important focus for the next EC. The project has strong backing from euro area Finance ministers. The report by Enrico Letta on the future of the Single Market and the expected report by Mario Draghi on EU competitiveness will help shape how the EC addresses the competitiveness challenges.


      In focus is how to better mobilise private capital and improve the EU’s competitiveness by promoting job creation, the ease of doing business and enhancing research, innovation and education, with financing the green and digital transition in mind. Draghi has highlighted the EUR 500bn-a-year Europe-US funding gap. To help narrow it, a third of funds would have to come from public sources. Though around EUR 95bn of the maximum Next Generation EU envelope is unused, it leaves additional funds to be raised by mechanisms such as new common EU debt and public-private partnerships.


      Increased investment in security and defence will also be a priority given the geopolitical outlook. One indication of this trend is the European Investment Bank’s (AAA/Stable) decision to facilitate financing for SMEs in the security and defence industry. The scale and speed of Europe’s ambition to do more to finance defence, potentially through common debt issuance, will partly depend on the outcome of November’s US elections and the strength of the next administration’s commitment to NATO.

      Slow economic recovery, demographics and moderate productivity growth are structural challenges
      If the new EC acts decisively to follow up its strategic priorities, the EU will be well placed to help tackle some of Europe’s structural challenges, from the slow post-Covid economic recovery to coping with an ageing and declining population, and moderate productivity growth.


      Economic output in the EU27 has grown by 3.9pps since 2019, though the two largest members, Germany (AAA/Stable) and France (AA/Negative), have grown more slowly. GDP in France rose by 2.2pps while Germany’s economy has stagnated over the past five years. Compared with other large, developed economies, the EU outperformed the UK (+1.7pps) and Japan (+2.5pps) over this period, but lags well behind the US (+8.7pps), hence the importance of enhancing the CMU to help close the gap.

      Europe’s demographics remain a medium-term economic challenge. The EU’s population will decline by 4.7% to 423 million by 2050, according to United Nations’ estimates, with a worse outlook for Italy (-11.3%), Spain (-6.8%) and Germany (-5.2%). The EU still compares favourably to Japan (-16.2%) but the outlook is significantly worse than in the UK (+6.3% to 71.7m) and US (+11.1% to 375.1m). Labour-market reforms, such as improving mobility and skills, are essential to address the changing needs of employers and future shortages. Here, more influential far-right parties could drive policies that limit immigration, potentially curbing growth and fuelling inflation.

      EU productivity has increased faster in the past decade than in the UK, but slower than in Japan or the US. Declining hours worked per employee has been offset by increasing real labour productivity and employment. Proposals to reduce market fragmentation across member states would help companies benefit more from the scale of the single market, partially compensating for adverse demographics while increasing the EU’s international competitiveness.
       

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