In 2023, the EU's economic policy agenda will likely focus on the bloc's response to a large-scale U.S. plan to subsidize green technology, but fiscal rules, trade policy, Ukraine's recovery and financial stability will also be on the EU's menu, EuroActive writes.

The U.S. inflation law has raised concerns across the EU because the law, which took effect Jan. 1, broadly allocates subsidies for electric cars and the production of other technologies needed to move toward greener industries.

Germany and France are particularly concerned about requirements that limit subsidies for electric cars made in the U.S. On Dec. 29, the U.S. relaxed these requirements slightly, noting that subsidies for commercial electric vehicles will also be available for cars made in the EU.

Industrial policy and a level playing field

Nevertheless, the EU's reaction to the U.S. bill is likely to dominate economic policy discussions earlier this year. The European Commission announced a relaxation of state aid rules, as well as a very vague definition of a European Sovereignty Fund to help finance the expansion of green industries.

The debate will pit Germany against other countries that are less inclined or less financially strong to provide large subsidies to companies. Smaller countries fear that the level playing field of the single market will be threatened if large countries like Germany and France start subsidizing their industries on a large scale.

A European fund to support green European industry could counteract this unequal playing field.

But it would mean centralizing more purchasing power in Brussels, something already rejected by Germany's liberal finance minister, Christian Lindner, and which could also meet with skepticism from small and medium-sized member states, which do not want further increases in Commission power.

Most EU member states would agree on the need to find a more amicable solution with Washington. However, this could be costly.

The U.S. desire for greater autonomy over green and other technologies is fueled by a desire to become more independent from China. Thus, the U.S. can expect the EU to become more independent of China if it wants to allow EU companies to benefit from its industrial policies.

The geopolitics of supply chains

China will undoubtedly play a role in other EU policy debates as well. Member states and the European Parliament are negotiating an anti-coercion instrument that would allow the EU to take countermeasures more effectively if a country tries to put economic pressure on an EU member state.

The Commission submitted its proposal in December 2021, and both the Parliament and the member states have already found their negotiating positions. One of the key issues will be how much power will be transferred to the Commission.

Another aspect of the more geopolitical trading environment is the Single Market Emergency Instrument (SMEI) proposed by the Commission last fall.

It aims to secure the supply of strategically important goods by increasing control over critical supply chains. This year there will be negotiations both in Parliament and among member states on the issue.

Another push for free trade

Meanwhile, the push for greater control over the most important raw materials and products could interfere with one EU policy goal: supply chain sustainability.

Last February, the Commission submitted its proposal for a corporate sustainability due diligence directive (CSDDD), also known as due diligence law, to hold companies operating in the EU market responsible for violations of human rights and environmental standards in their value chains.

Member states agreed on a relaxed version last December, and the European Parliament intends to come up with a common text early this year. Nevertheless, industry associations and civil society organizations are on high alert and are likely to wage a major lobbying battle.

At a time when the trade environment has deteriorated in recent years due to geopolitical tensions, the Commission is trying to put free trade agreements back on the agenda.

Having completed negotiations with New Zealand and Chile in 2022, the Commission wants a major victory this year with a free trade agreement with the South American trade bloc Mercosur under the Spanish presidency of the EU Council in the second half of this year.

At the same time, free trade negotiations are underway with India, a potentially major trading partner that has traditionally held very protectionist views.

Prices too high, too few workers

On the macroeconomic level, there remains a lot of uncertainty. Fears of a new recession have yet to materialize, but could still come true if gas and energy shortages become real next winter.

A recession can be averted if the Chinese economy reopens. But a restart of the Chinese economy could also give an additional boost to energy prices and thus boost inflation, one of the main macroeconomic phenomena this year.

Relatively weak labor unions suggest that wage and price growth in the EU is unlikely, even if unemployment figures are currently at record lows.

Low unemployment rates go hand in hand with the skills shortages many companies face. The Commission has named 2023 the "EU Skills Year" and is expected to unveil a digital skills and education package in February.

But if inflation persists, the hawkish stance of the European Central Bank, which has steadily raised its interest rates, could create headaches for heavily indebted companies and member states, which will have to refinance their debt at higher interest rates.

Fiscal rules and financial stability

The debate over fiscal rules is likely to intensify this year.

Late in the fall, the Commission presented guidelines for reforming outdated fiscal rules for EU member states, seeking to give member states with high debt-to-GDP ratios more flexibility and time to reduce their debt burdens, allowing for more investment.

However, some member state governments oppose this approach, and the Commission has yet to formally propose changes. Any change in the fiscal rules must be completed before member states set their 2024 budgets, by September at the latest.

If the changes are not approved quickly enough, the Commission could be under pressure to deactivate the current fiscal rules with a general exemption clause for a fifth consecutive year.

That pressure could increase even more if member states feel compelled to start giving more state aid to their companies in a subsidy race with the U.S. or France and Germany.

In addition to fiscal rules, the Commission may deal with another perennial issue of eurozone stability: the stability of the banking system. The EU executive is expected to unveil a package of bank crisis management and deposit insurance measures in March to plug holes in the EU's financial stability architecture.

EU budget under scrutiny

Budget problems worry national governments, but so does the EU budget itself.

The year 2022 has shown some encouraging signs that an EU budget conditionality mechanism based on the rule of law can be a useful tool to force autocratic member states to implement some reforms. This year will show whether Hungary will really go for reforms in the face of withholding EU funds.

Moreover, the EU's long-term budget, the so-called Multiannual Financial Framework (MFF), is also ripe for a midyear review. After a series of crises and rising prices, the Commission and Parliament believe that the available financial resources are no longer sufficient to solve the problems.

Nevertheless, as member states' budgets are also under stress, obtaining fresh EU resources will be difficult.

The issue of general EU debt or other sources of the EU's own resources is likely to come up again, especially since two new potentially major funding needs need to be met somehow: the "European Sovereignty Fund" and the reconstruction of Ukraine, which is likely to cost several hundred billion euros.

Approving urgently needed macrofinancial assistance to Ukraine of several billion euros in the form of guarantees from member states as early as 2022 has proven very difficult.

This year, we will be talking about much larger sums of money, either because the war will be over and large-scale reconstruction can begin, or because the war will continue and the EU must support the Ukrainian war economy.