Political economy in European integration: new growth patterns (Part II)

At the basis of the European integration are the unified efforts of the member states towards “common European goals”: the latter are based on common directions in the states’ political economies and growth patterns. The necessary changes in the states development are enforced by the global and European challenges, from one side, and by the national priorities, from the other. Hence, the member states’ governance structures have to create their growth and development programs generally guided by the Union’s quasi-federal priorities oriented to: a) elaborating priorities in perspective growth (in line with MFF-27 appropriations); b) transforming these priorities into socio-economic models; c) enforcing necessary advances in structural reforms, and d) instigating national strategic security through external and internal stability.

Analysis of these priorities is the purpose of the second article in the EII’s series on European future; the first one can be seen in:

https://www.integrin.dk/2021/01/18/perspective-directions-in-the-eus-integration-key-global-and-european-challenges-part-i/

 

A number of modern global and European challenges have entered the process of perspective integration: e.g. sustainability, circular development, digitalisation, technological advances, etc. which each in its turn affects national welfare policies. In short, European integration in its present and perspective dynamics is to be implemented by the states, but its ultimate results are for the people, their wellbeing and happiness!

Alongside the mentioned priorities in the member states growth patterns, some other components in a modern political economy shall be taken into consideration, such as the needs of ardent followers of the new development trends, strengthening competencies in the domains of public health and safety (including training in recognizing mental health issues), and sharing the  governance’s leadership with the national scientific community’s experts to supply the leadership with the professional competence.

As soon as the European integration’s ultimate aim “rotates” around socio-economic issues concentrated on peoples’ welfare and wellbeing, these issues seem easy for formulation and implementation in national/regional policies. Probably, the only stumbling block is the needed financial resources: in this regard, the Portugal Presidency in the Council during the first half of 2021promissed to be active in putting massive €750 billion EU’s recovery and resilience funds on track: that is the first Council Presidency after the adoption of the EU’s multi-year budget and recovery funds, which aims at coordinating the ways the national governments use the available money by exerting closer control over national reform plans.  

 

Elaborating priorities in perspective growth

The new political economy’s paradigm would make a clear perspective for the member states development with proper directions and advantages in European and global competitiveness. So far socio-economic situation in the present global ratings shows that, for example, the Baltic States still needed additional impetuses. Thus, Estonia occupies 30th rank, Lithuania 35th and Latvia is on the 49th place in competitiveness among 138 states; political elites should treat such estimates as serious signal for urgent steps to increase competitiveness. However, some states, e.g. Latvia in its national-2020 plan included only a very modest task, to “reach 45th rank in the global competitiveness index.

More in: http://www.baltic-course.com/eng2/editors_note/?doc=17220&ins_print.  

 

One methodological remark: country’s competitiveness in a great extent depends on a chosen national growth model, the governance system and approaches to the inherent connections between politics and economics. “Politics” is a symbiosis in which politicians formulate national political priorities (generally, reflecting main global and EU’s challenges), and “economics” represent those practical implementations needed to realize national political strategies. Hence, modern approaches to political economy are based on decision-makers’ efforts in “composing” a sophisticated type of national political economy structures with a clear vision of enumerated growth’s elements.

With this in mind, the present system of divided and separate governance’s “branches” –legislative (parliaments), executive (ministries) and judicial (various legal institutions) – being adequate to an age-old state management system looks quite outdated presently: first, because the records of the meetings in all “three” are open and available on-line to all interested; second, the modern political economy’s concept presupposes that the “three” sit and work in closer contacts and not separately surrounded by guards… Therefore it looks ridiculous that about 7-9 parties in a parliament for several months “decide” the composition of the government and the name of a prime minister, to say nothing about almost every year’s government’s changes in some EU states.       

 

As to practical issues, e.g. such global challenges as the efforts to prevent dramatic climate changes, the sustainable development goals (SDGs) and circular growth will strengthen the national leaders’ commitment to global and European challenges while changing traditional political-economy’s approaches with new business opportunities should abound.

For example, electric or hybrid vehicles (EHVs) are expected to reach price parity with internal combustion engines vehicles by 2024. This clearly has motivated Amazon, the world’s largest retailer, to boost its investment in electrifying its delivery fleet. All signs point to the emerging importance of the green business economy: new regulations and new technologies are giving way to new platforms and ways of doing business. Hence, the rise of “green-collar-jobs” represents great opportunity for additional job creation and will serve as a salvation to many workers whose jobs will be eliminated by policies of cutting industrial pollution and/or digitalisation and automation.

Then, another issue: the European Commission restated in the State of the Union address (September 2020) the EU’s support for establishing a framework for a minimum wage with a view to ensuring all workers in the member states have access to a fair minimum wage. However, with wage-setting as a competence of national governments, the issue is politically sensitive and European intervention is viewed with reservations by some member states. This policy dialogue aims to bring some clarity to the debate by putting together a technical discussion on whether an EU minimum wage instrument aiming at full coverage is possible without impeding national traditions and mechanisms when autonomous collective bargaining systems already exist.

The minimum wages for some responsible entrepreneurs will be no issue at all as the SMEs are grounded in the social market economy: they know the value of their workers, their experience and pay them decently. But the current crisis has particularly hit sectors with a higher share of low-wage workers: i.e. sectors like tourism, retail, health and residential care. It is to help these workers that the Commission proposed a framework for minimum wages: fully respecting the crucial role of social partners in negotiating wages, which would expand collective bargaining across all EU countries and protect entrepreneurs.

But in order for the “next generation” project to success the EU institutions and the member states have to agree on the package: i.e. the national parliaments have to ratify the agreement needed to start the recovery process.

Reference to: https://ec.europa.eu/commission/presscorner/detail/en/SPEECH_20_2306

 

Political economy at the frontline

New political-economy’s approaches to national and transnational governance have to overcome traditional methods and instruments. Thus, national financial institutions have to balance profits and moral obligations to detect and deter financial crime and money laundering.  Present pandemic has forced institutions to adapt to a fully remote model, which opens up the opportunity to rethink their approaches to anti-financial crime efforts: transforming financial institutions can be done only through disruption of the cause, i.e. the illicit profits.

The pandemic has highlighted the importance for everyone’s digital independence as a human right: the “new normal” includes accelerating digital transformation in several strategic priorities, e.g. transform many industrial and manufacturing sectors. For the national political economies it is a new opportunity to advance national growth through smarter and sustainable methods of trade and construction, transport and energy, e.g. when energy saving metrics are woven into the value chain for creating “smart homes”. Turning housing into a driver for social, economic and environmental sustainability in the national “great reset” should be a priority.

In the pre-pandemic period, there was a growing awareness around the importance of protecting “personally identifiable information” (PII), particularly in the context of large enterprises that routinely handle consumer data. COVID-19 has underlined the need for innovative tech solutions to ensure such privacy is upheld. Post-COVID, there’s an opportunity for broader deployment of Privacy-Enhancing Technology (PET) across public and private sectors. The PET is already helping enterprises securely collaborate on sensitive data, and the process has a clear transformative healthcare applications: e.g. it could allow hotels or airlines to cross-reference a customer’s name against national lists of vaccinated individuals to confirm their health status while safeguarding their privacy.

 

Examples in recovery and resilience: the Baltic States  

Effective containment measures, a well-functioning health system and swift public support to firms and households, to name a few can help most countries to weather the COVID-19 crisis. Once a recovery is under way, national governance should aim to reform public companies, strengthen public finances, and ensure that growth benefits people.

The OECD’s latest Economic Survey of Lithuania says that prior to COVID-19, good economic management and an investment-friendly business climate were helping to lift average Lithuanian incomes closer to an advanced country levels. While the recession provoked by the virus has been milder than elsewhere (country’s GDP dropped by 2% in 2020 before rebounding by 2.7% in 2021), Lithuania’s market economy is being still vulnerable to disruption in world trade. Increasing public investment and improving governance at state-owned enterprises could help lift growth and productivity. Other reforms should focus on improving the effectiveness of spending and taxation; in the longer term, Lithuania should establish a clear debt reduction path and a long-term debt target, concluded the survey.

Recent Lithuania’s economic management and its swift response to both the health and economic aspects of the pandemic could helping the country to weather the COVID-19 crisis and restart the reform engine to ensure robust, sustainable and inclusive growth for the future, argued the OECD Secretary-General. More in: http://www.oecd.org/economy/lithuania-economic-snapshot/  

 

The pandemic has exposed some negative political economy’s aspects: e.g. high levels of income inequality in Lithuania, where relative poverty is high among the unemployed, the less educated, single parents and older people due to a tax-benefit system that is insufficiently redistributive. The survey recommends Lithuania to continue providing temporary support to people and businesses hit by COVID-19, as well as to increase regular social support while retaining incentives to work. In supporting the economy, while Lithuanian public spending has increased considerably over the past two years, it still remains below the OECD average; given the importance of modernising infrastructure and stimulating crisis-hit demand, the survey recommends maintaining or increasing current levels of investment and improving investment quality by carrying out rigorous cost-benefit analysis for individual projects. Increasing investment in rural areas, and giving local government more say in tax policy and spending, could help reduce regional disparities and promote inclusive growth. The survey also recommends phasing out environmentally damaging fossil fuel subsidies and increasing environmental taxation, which would benefit public finances while helping the shift to a lower-carbon economy.

 

The “governance’s” issues are most important in formulating political and economic guidelines for a national perspective growth. In the member states, the governance is balancing between the EU-wide and strictly national political priorities, while both are oriented towards “common goods” reflected in the peoples’ wellbeing. The latter is seen in the “happiness index”: on one side the wellbeing issue seems rather good: happiness” situation in the Baltic States looks quite positive compared to other states. Among 156 countries in the world by “happiness levels”, based on six main “happiness factors”: GDP per capita, life expectancy, social support, freedom to make life choices, generosity and level of corruption, Latvia ranks 53 between Romania and Japan; Estonia ranks 63 -between Bolivia and Paraguay and Lithuania’ 50th ranks -between Belize and Slovenia. Compared with the data from 2008, Latvia is one of the best in positive changes of happiness’s indices. 

All the top countries in the report tend to have high values for all six of the key variables that have been found to support well-being: income, healthy life expectancy, social support, freedom, trust and generosity, to such a degree that year to year changes in the top ranking are to be expected.  More in “World Happiness Report”:

https://s3.amazonaws.com/happiness-report/2018/WHR_web.pdf

 

Another example – the development prognosis in Latvia is to be seen through the National Development Program-2027 (composed of 137 pages!) adopted at a special Parliament session in June 2020. The plan has four socio-economic priorities: a) productivity, profitability and quality of life, b) adequate regional development, c) equal opportunities (GINI-coefficient in Latvia is still 35%), and d) knowledge society.

Source: https://data.worldbank.org/indicator/SI.POV.GINI

 

The Latvian national program has elaborated the strategic priorities through discussions at a cross-sectoral governmental group, composed of 9 Latvian ministries, 3 state bodies, foreign investment council and trade-industrial chamber (how about legislators?). The team decided in November 2020 that the main “development items” for the country are quite different: digitalisation and innovation, nature and culture, human resources and education. Hopefully, both political and economic priorities would go hand-in-hand with other important issues for the Latvian wellbeing…  

 

The EU programs through the states’ implementation

The COVID-19 crisis accelerated the EU and the states’ policy priorities towards modern challenges, which include, among other directions, three most important: i.e. new industrial strategies, the SME’s strategy for a sustainable and digital transition, and the “European Green Deal”, to name a few.  

These priorities have made the national governance re-oriented towards new and perspective guidelines in decision making in view of the following European priorities: a) more enterprises shall be in the cross-border operations, b) activate start-ups, young entrepreneurs and SMEs, and c) efficient corporate strategies with attention to accounting, VAT procedures, corporate survival, etc. Thus, for example, transformations in the European ‘green deal” imply that the following aspects in the SMEs and corporate strategies shall be revised: corporate contingency planning and ethics, sustainability issues and optimal supply-chain structures, as well as cross-border mobility, etc.

People’s quality of life and well-being are increasingly considered as key determinants in politics and socio-economic development as the most fundamental factors in perspective growth; hence, measuring progress only using GDP’s indicators means ignoring both the modern societies’ complexities and transformations in political economy. In search for the multifaceted approaches to long-term recovery and creating resilient societies, modern governance has to take into account all growth factors (i.e. not only economic, political and legal but social, cultural, environmental, etc.) which are dominant for national progress and peoples’ well-being. 

 

European recovery plan, Next Generation EU, implies that the EU financial injections would “spur reforms and investments that will generate growth and jobs”; hence, the member states’ governments will have to direct at least 37 percent of government spending on climate and at least 20 percent on digital. The national political economy’ guidelines will have to seek public approval to tackle inefficiencies in the public administrations and improve corporate management. The EU’s recovery and resilience fund (Next Generation EU) proposed huge subsidies to the member states in the perspective growth: one of the biggest is the assistance to Italy which would receive €209 billion, i.e. 127 in loans and 82 billion in subsidies.

However, discounts for net contributors to the budget and the share of duties on imports collected by member states will be increased, while research, innovation, climate, migration and health programs would be slightly reduced. About 40 European socio-economic programs financed from various MFF’s allocations have been agreed by both the European Parliament and the Council of Ministers for further financing. But the EU member states, at least in principle, have two options to “control” the final set-up: either to activate a so-called “emergency brake” procedure, and/or refer a complaint to the European Council; both are complicated and could last for several months.

Some commentators pointed out that “after the Brexit’s blow”, the EU is heading towards a new phase in its process of integration; as a matter of fact, five “frugal” EU countries have been tough negotiators…, but they failed to block the process of further integration.

Source: https://www.iai.it/en/pubblicazioni/european-council-and-europes-magic-lantern

 

However, there could be slightly different approaches to analysis of the roles of the most important “socio-economic operators” in the post-pandemic period. In some EU states, the following  “transitional components” in perspective growth have been under scrutiny: a) workforce and labour market, b) business and entrepreneurship, and c) regional and national governance as the most important aspects in both recovery and resilience efforts.

Some analysis of these factors has been made by the European Integration Institute (Denmark) in the research project published at the end of 2020:

More in: in: https://www.integrin.dk/2020/09/11/post-covids-political-economy-facing-inevitable-changes/ and https://www.integrin.dk/2020/10/25/post-covid-effects-on-modern-governance-and-political-economy/.   

 

Presently, the EU is eager to enforce the “green transition” in the member states: suffice it to mention that the present Portugal’s Council presidency in the first half of 2021, explicitly included in its priorities the notion of “Green and Resilient Europe” putting at the centre of the member states recovery coherent approaches coped with the “green, social, digital and global Europe” issues.

 

Advances in structural reforms

Success in European integration, to a certain degree, depends on optimal advance in national structural reforms; the latter are supposed to be in line with the modern global and European challenges. Particularly, at present, structural reforms are needed to make our economies more stable, inclusive, productive and resilient. Depending on the year, technical support is generally provided to help the states reform their budgetary systems, modernising public administration and enhance the quality and efficiency of national judicial systems, assisting in efforts to combat fraud, corruption and money laundering. Furthermore, support is rendered in a better management of natural resources and resource efficiency, to implement Union’s energy and sustainability initiatives. In addition, states will be assisted in the development of capital markets, in insolvency frameworks and in strengthening their ability to deal with non-performing loans. Most states in the post-covid period will benefit from support to implement reforms in healthcare and social welfare systems.

The EU’s support for structural reforms in the states is a rater recent endeavor: Commission started the “structural reform support service, SRSS” already in 2015; the program entered into force in May 2017. The main idea was to assist the member states in the preparation, design and implementation of institutional, structural and administrative reforms. The SRSS manages support programs with an average yearly budget of about €140 million during 2017-2020. The support provided through the program is available to all EU states upon their request and requires no co-financing.

European Commission through annual working programs support measures in the states concerning structural reforms: about 150 projects almost in all EU member states are getting technical support to carry out perspective transformations.

More in: Factsheet – Structural Reform Support Service

 

The chosen theme in the second article devoted to political-economy’s issues is, according to our Institute’s opinion, vital for the European future: only sophisticated and thorough member states’ development programs can provide for success in perspective integration.

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