Ursula Von der Leyen’s Economic Program Bodes Well for Her Mandate

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Senior Fellow - Economy

Just before the European Parliament’s vote on 16 July, Mrs. Ursula von der Leyen presented her program to the plenary session. Now that she is elected President of the Commission, her speech has become the Commission's roadmap for the next five years. In what follows, I analyse the latter’s economic dimension, leaving aside its institutional, political, defence or diplomatic dimensions.

Ursula von der Leyen emphasized four points: a proactive EU policy to reduce CO2 emissions based on a carbon price and a border tax, a step forward in the taxation of multinationals creating value in Europe, a form of minimum wage in each EU country and, finally, a European unemployment benefit reinsurance scheme. On the other hand, she remained rather vague on issues related to the capital market union or international economic relations, and did not say a word of topics such as the EU’s industrial policy. Let us dig deeper on each of these points.

To achieve carbon neutrality by 2050, put a price on carbon

Von der Leyen pledges to present a "Green Deal for Europe" in the first 100 days of her mandate, enshrined in a climate law passed by Parliament. The law would include a more ambitious emission reduction target (50-55% by 2030, compared to 1990, thus going beyond the current 40% target) and an investment program of €100 billion per year, partly financed by the European Investment Bank. These proposals are neither new nor convincing. The goals are laudable, they introduce the possibility of a legal recourse in the event of non-compliance, but unfortunately, they do not guarantee the decrease of emissions. Public investments are also commendable, but only if they go to research and innovation rather than to subsidies, the cost of which has by far exceeded their effectiveness. Consider, for example, French subsidies for solar energy: their cost in terms of avoided carbon emissions is 25 times higher than the cost of the damage that this emission would produce, according to Christian Gollier's calculations. Another way to put it is that it is 25 times higher than the carbon tax on fuel rejected by the Yellow Vests.

The novelty of the new President's program lies elsewhere. She adds: "Emissions must have a price that changes our behaviour". The crucial word here is "price". An overwhelming majority of economists, recently illustrated by a call from American economists, including almost all Nobel Prize winners in economics, both right- and left-wing, believe that it is only by imposing a high and predictably increasing price on carbon emissions over time that we will succeed in significantly reducing these emissions. In France, the two reports produced by the Commission chaired by Alain Quinet had proposed a precise and well-argued trajectory for the price of carbon, which was unfortunately set aside given the violence of the Yellow Vests movement. It is therefore excellent news that the President of the European Commission has embraced economic rationality and recognised the irreplaceable role of the price signal in economic decisions, whether they concern investment made by companies or governments or based on consumer behaviour.

The price per tonne of CO2 is yet to be decided. It should in theory match the present value of the estimated cost of the future damages caused by its emission. According to estimates by the Quinet Commission as well as by Christian Gollier, which are quite close to the Stern-Stiglitz report’s, it should now approximately be worth 50€/tCO2. Ursula von der Leyen says nothing of the desirable price for carbon, which is understandable given the concision of her program, which, in addition, will have to be negotiated within the Commission and with the Member States. However, she does put forward a suggestion: that of extending the European Emissions Trading System (EU ETS) to new sectors, such as air and sea transport. This would render some countries’ taxation attempts obsolete, and would have the advantage of encompassing the whole Union.

Ursula von der Leyen proposes two measures: an EU border tax equalizing the carbon price of imported products to that of those produced in the EU, and a "Just Transition Fund", "to support those most affected".

The question of whether we need to extend the system to all companies (only large industrial ones are subject to it) or tax the carbon content of goods and services consumed in the Union is neither mentioned nor rejected, which represents a small step forward compared to the position endorsed by CDU leader Annegret Kramp-Karrenbauer, who is against any carbon tax. During the parliamentary debate, a Green MEP suggested that Mrs. von der Leyen would have a preference for the EU ETS because the low carbon price it implies would favour large industrial groups. This objection does not hold: the market price per tonne of CO2 has already risen sharply, to around €30, and the futures markets are betting on a further increase, in anticipation of the system’s phase 4, with some experts even saying that the price will rise to €65 by 2020.

In addition to the introduction of a single carbon price in the EU, Ursula von der Leyen proposes two measures: an EU border tax equalizing the carbon price of imported products to that of those produced in the EU, and a "Just Transition Fund", "to support those most affected". The first proposal, which puts European producers on an equal footing with their competitors in countries with a lower carbon price than the EU, is clear - which does not mean, however, that it is easy to implement.Yet the second proposal is rather vague, even if the intention underlying it is straightforward: it aims to defuse the opposition of countries whose income is below the EU average and whose energy resources are essentially fossil, such as Poland.

The taxation of digital giants: an option based on added value

"Taxing the GAFAs" (Google, Amazon, Facebook, Apple) has become a must for European politicians, perhaps because they have failed to create the right conditions to favour the emergence of European digital giants. The reform of the taxation of multinationals, which often take advantage of the differences in tax regimes between countries where they have subsidiaries, is a well-known topic, and is the subject of fierce negotiations within the OECD. Yet the taxation of digital platforms is more open and more difficult to tackle because it is more specific. The previous European Commission, under the pressure of France and Germany, proposed a 3% tax on the turnover of digital platforms, to be divided between countries according to their number of users. By emphasizing the importance of the education system, skilled labor or infrastructure, Ursula von der Leyen seems to be leaning towards a taxation of the value created in Europe, rather than the turnover. The argument in favour of turnover, according to which the user of the digital platform is the one creating value by allowing data about her to be collected - consider Google, for example -, is not without merit, but it can be challenged. Indeed, if it weren’t processed by the platform's algorithms, the information would be worthless, and thus not taxable. If the algorithms are partly created in Europe, von der Leyen's position seems more legitimate. And at the same time, in this multifaceted market, the user gets the information she is looking for for free, having implicitly traded the information she provides about herself for the service she is looking for. If the exchange were commercial, a consumption tax would be justified. From this point of view, taxing one of the data flows but not the other is highly asymmetric.

In fact, the situation has changed since the American position shifted in favour of an international agreement on the taxation of multinationals, be they tech companies or not, within the OECD framework, following the American corporate tax reform. In my opinion, the stance of the new President of the Commission seems to indicate that the European position will be more open, which would help to reach an agreement before the end of 2020, i.e. the goal set by the G20.

A minimum wage in each Member State? Really?

Ursula von der Leyen took up the idea of a "minimum wage", probably under pressure from Renaissance, as the latter’s head of list Nathalie Loiseau prioritized an extended minimum wage during her campaign. Since wage policies - or their absence (as in Germany) - are the prerogative of each country, the proposal was strongly federalist. Renaissance even seemed to consider that national minimum wages should be negotiated at the EU level. This would have allowed countries with high productivity, and therefore high wages, to put pressure on countries that are catching up, and therefore with low wages, thus reducing their competitiveness and ultimately worsening inequalities between countries. As a supporter of the social market economy, the foundation of Germany's extraordinary success since 1948, von der Leyen found a way to water down this pernicious idea. She claimed that the best solution was to have "collective bargaining by employers' unions and trade unions" so as to "tailor the minimum wage to the sector or to the region", which would implicitly prohibit the EU from interfering in minimum wages. And if the social partners do not see the need for a minimum wage, as in Denmark, Finland or Sweden, then it shouldn’t even be on the agenda.

An Unemployment Benefit Reinsurance Scheme: a good, yet not so simple idea

Still in her section on "social justice", even if it actually tackles macroeconomic stabilization, von der Leyen proposes a "European Unemployment Benefit Reinsurance Scheme". She does not detail it much, except for the fact that it would be a way of dealing with severe external shocks. The issue of insurance against cyclical fluctuations between countries of the Eurozone had already sparked many debates among economists before the launch of the Euro. But since the Eurozone crisis, many concrete proposals have been made, based on the idea of contributions to a common pot made by countries in normal or good economic shape, which would fund transfers to countries affected by an economic shock. Most are considering basic insurance for employees in the Eurozone, with benefits paid directly to individuals. The idea of reinsurance between national systems differs in that payments to countries in difficulty would be made to their own unemployment insurance systems. This would have two advantages: the system would encroach less on the social and fiscal sovereignty of Member States, and it would be considerably easier to manage, as for companies.

The economist Daniel Gros, Director of CEPS, and two of his colleagues have presented a detailed version of this idea upon the request of the European Commission. They proposed a system that would only trigger in the event of a serious crisis, with the transfer then covering most of the needs of the national unemployment insurance system. The trigger point would be determined based on the statistical deviation of the number of short-term unemployed people. The system would be funded by an annual contribution of 0.1% of each Member State's GDP until the reinsurance fund has accumulated a credit balance of 0.5% of the EU's GDP. According to the authors' simulations, Spain, Greece and the Baltic States would have benefited most from the system between 2008 and 2012, and, had it been implemented since 2000, the system would have maintained a positive balance during the crisis.

The idea of a reinsurance scheme is both efficient economically-speaking and smart politically-speaking because, unlike the establishment of a common set of standards, it does not appear to be part of a forced march towards federalism. Moreover, there is no obligation to implement it in the whole Union, or even in the entire Eurozone: a group of countries could well decide to launch this fund before everyone is ready.

As attractive as the idea may be, it nevertheless raises difficulties. Countries of the said group must agree on a statistical trigger point, not question it afterwards and not influence the statistics so as to activate it.The heterogeneity of labour markets can lead them to respond differently to the same shock, depending on the degree of protection or the share of short-term jobs. Finally, as in any insurance system, the moral hazard problem can make matters more complicated. Unlike the Baltic countries, which were hit hard by the contraction of the Russian economy in 2009, Spain and Greece were hit by the European debt crisis in part because they had let debt soar - private debt in the case of Spain, public debt in the case of Greece. The moral hazard came from the insurance offered by the ECB, and it might have been even greater if the reinsurance scheme had been in place.

Commitment to multilateralism is good, but it does not make a trade policy

Ursula von der Leyen defends multilateralism, fair trade and a rules-based world order. But she has not gone any further in terms of economic and trade relations with the rest of the world. While the defence of multilateralism is clearly intended to differentiate the European approach from the United States' trade policy, no reference is made to strategic rivalry with China, even implicitly.

From countries such as France to important German industrial groups, many actors are pushing for an overhaul of competition laws in order to encourage the emergence of European champions, even if it means reducing competition within the internal market. Von der Leyen's silence on this topic is a good omen. As with the fight against climate change, she seems to have assimilated the economic argument: by preserving competition in the internal market, not only is the consumer protected from producers holding excessive market power, but above all, the key driving forces of innovation are kept intact.

On the other hand, her silence on the need to review the Union's trade policy - one of the areas where the EU has the upper hand - now that Chinese companies, supported by Chinese state-owned banks and benefitting from a strong preference in the Chinese domestic market, is disturbing. The new Commission will not be able to avoid this topic, nor that of reciprocity, and its new President will have to work on this matter, just as she will have to encourage countries of the Eurozone to complete the Banking Union, which she rightly describes as an essential condition for the competitive funding of the Union's SMEs.

With these reservations made, one must admit that the future President of the Commission was not expected to present such a clear and constructive program, based on solid economic foundations. A positive omen for her mandate.

Copyright : FREDERICK FLORIN / AFP