Economic Research syndicated feed
Find out here below our sliding banners. Our banners are available to be published on your website.
If you need to customise a feed, please contact: manuel.dacruz@credit-agricole-sa.fr
Find out here below our sliding banners. Our banners are available to be published on your website.
If you need to customise a feed, please contact: manuel.dacruz@credit-agricole-sa.fr
United Kingdom – 2024-2025 Scenario
UK economic growth was sluggish in 2023, with a slight recession in the second half of the year as tight monetary policy weighed on demand. Economic activity grew strongly in first-quarter 2024, although household consumption remained low.
Domestic demand, and household consumption in particular, is expected to be the main driver of the coming recovery, driven by solid real income growth and future rate cuts. In the short term, households could continue to be overly cautious given past price shocks, high interest rates and an ongoing easing in the labour market. The investment outlook is accompanied by an upward bias thanks to the advent of a period of political stability and Labour’s pro-business policy.
Inflation returned to the 2% target in May 2024 (and was stable in June) amid widespread disinflationary pressures. It is expected to return to slightly above the target in the second half of the year on less negative inflation in energy prices.
Given the continued easing in the labour market and the prospect of inflation below the medium-term target, the BoE is expected to start a very gradual cycle of monetary easing on 1 August, though a further postponement is not to be ruled out.
Spain –2024-2025 Scenario
The Spanish economy managed to maintain a robust growth rate at the beginning of the year despite numerous unfavourable factors, including the weakness of the Eurozone economies, persistently high inflation, and the impact of the rise in interest rates, which were expected to peak in first-quarter 2024. The strong performance resulted from several key factors, with positive labour-market momentum, persistently dynamic immigration flows, and sound international tourism data, which once again exceeded expectations and explain the strong contribution of external demand to growth. On a less positive note, growth in domestic demand remained more modest.
First-quarter data, together with a slightly more favourable situation overall, have led us to revise our GDP growth forecasts upwards to 2.4% for 2024 and 1.7% for 2025. We expect domestic demand to take over as the key growth driver. A lower contribution from public consumption would be more than offset by a gradual recovery in both private consumption and investment.
France – Is the French economy stalling since the snap election call?
A month after President Emmanuel Macron dissolved the National Assembly and called the election, some signs of a French economy stalling have arguably appeared. At least this is what Bank of France Governor François Villeroy mentioned recently. In practice, this is fully debatable. Although previous episodes of political uncertainty in other countries have triggered downward growth revisions (eg, Greece in 2015, Italy in 2018), we do not see any hard evidence of this in France so far.
Countervailing duties on Chinese electric vehicles: a setback for China and a test of European unity
Since 2019, the European Union has expanded the range of tools at its disposal for limiting or preventing strategic dependence on foreign partners (for which read China) in critical sectors linked to the energy transition. A particular area of focus is dependence arising from imports of goods unfairly subsidised by third countries at the expense of European industry.
In October 2023, the European Commission launched an ex officio (i.e. started by the Commission on its own initiative rather than at the request of industry) investigation into a sample group of Chinese manufacturers of electric vehicles (of the more than 300 that exist in total) and non-Chinese ones based in China. Manufacturers that agreed to participate in the investigation but were not included in the sample group could face countervailing import duties not exceeding the weighted average tariffs imposed on those manufacturers that were investigated.
This investigation falls under EU anti-subsidy regulations and complies with World Trade Organization (WTO) rules. This means the tariffs are not intended to make imported products less competitive than their domestic counterparts but merely to offset the unjustified competitive advantage third-country subsidies bestow on exporters. The Commission calculates that advantage in the course of the investigation.
The Commission has gathered sufficient evidence that the manufacturers in question have received significant subsidies from the Government of the People’s Republic of China in various forms:
As well as proving that these subsidies exist, the Commission must also demonstrate a threat of injury to EU manufacturers and a causal link between the subsidies and the injury.
It has successfully proved that subsidised imports have grown at a sustained pace in both absolute and market share terms and that surplus capacity in China that cannot be absorbed by other markets is highly likely to result in a substantial increase in imports into the EU in the near future. European imports of Chinese electric vehicles have increased rapidly, rising from $1.6 billion in 2020 to $11.5 billion in 2023. By lowering production costs and selling prices, the subsidy policy puts pressure on European manufacturers’ sales, market shares and profits in the single market. As well as extensive subsidies, Chinese manufacturers also benefit from cheaper labour and energy. Fierce competition in the saturated Chinese market has led to a price war. Manufacturers are therefore seeking to make up for their squeezed margins in the Chinese market by selling their products at higher prices in the European market.
On 4 July, the Commission imposed provisional import duties, on top of the standard 10% import tariffs already in force, on three Chinese manufacturers: 17.4% for BYD, 19.9% for Geely and 37.6% for SAIC.
All other Chinese (or China-based) manufacturers that cooperated with the investigation but were not individually investigated are subject to a countervailing duty of 20.8%. BMW Brilliance Automotive, Audi FAW NEV Company, FAW-Volkswagen and Dongfeng Peugeot-Citroën all belong to this group. So does Tesla for the time being, though the latter could, following a substantiated request, receive “an individually calculated duty rate at the definitive stage”. Manufacturers deemed not to have cooperated face a 37.6% duty.
These provisional duties apply for four months – long enough to give Member States time to agree to the permanent tariffs proposed by the Commission (or to oppose them by a qualified majority vote – i.e. one backed by 15 countries and 65% of the EU’s population). The permanent tariffs, once agreed, will remain in force for five years.
The Kiel Institute for the World Economy (IfW Kiel) expects the tariffs to have a limited impact on prices within the domestic market but a major impact on sales of Chinese electric vehicles in the single market. Simulations on five major European economies (France, Germany, Italy, Spain and Austria) using the KITE model1 show that an additional 21% tariff on electric vehicles imported from China would push selling prices up by between 0.3% and 0.9% in the long term and by nearly twice as much as that in the short term. The assumption is that Chinese manufacturers would absorb a big chunk of the import tariffs by cutting their margins. The premium available to Chinese manufacturers in the European market is so high that they still have room to lower their pre-tariff prices. However, the premium is not so high for non-Chinese manufacturers based in China and exporting to Europe, who do not receive the same level of subsidies as their Chinese counterparts. This could call into question China’s role as a base for exports to Europe for these manufacturers (be they European, Japanese or American). Weak growth and low profitability in their domestic market, a lack of attractive alternative export markets, and excess capacity – both existing and under construction – mean Chinese manufacturers are still very keen on the single market. However, the tariffs are likely to have a significant impact on the volume of electric vehicles imported from China, with the decline quantified at 42%. Even European manufacturers – who, through joint ventures, make 55% of electric vehicles produced in China and imported into the EU – would be adversely affected, though the impact on European added value would be limited, since 85% of the subcontractors they use are Chinese.
This decline in sales of Chinese vehicles would be offset by increased imports from other countries (+0.8%) and, above all, higher domestic production in Europe. Among the third countries that stand to benefit from the diversion of export flows, the big winners would be Japan, the United States and Turkey.
China should use the next few months to negotiate lower tariffs in exchange for direct investment in the EU. BYD is set to open a production facility in Hungary, but the diversionary effect of tariffs will also benefit Turkey, which is also on course to host a production site for the Chinese manufacturer.
Negotiation implies the threat of reprisals. A non-escalatory approach would mean targeting products that are significant for European exports but not critical. Products that are central to China’s own interests would also be excluded. The aim would be to target countries that have significant leverage over European decisions (i.e. major influential countries) and/or to activate central political groups. This is how to understand the Chinese government’s decision to launch an anti-dumping investigation into European pork exports, targeting the core electorate of the European People’s Party and of a number of major exporting countries such as Germany, Spain and France. Although EU pork exports to China have already declined significantly over the past few years, they still added up to €3 billion in 2023 and could be hit hard by a hike in import tariffs. IfW Kiel estimates that an increase in Chinese import tariffs to 50% could lead to an 80% fall in German and Spanish exports of pork to China and a 55% fall in French exports. The threat of an investigation into cognac also targets France in particular, which has strongly backed the EU’s action on electric vehicles.
Other reprisals, some of which have already been applied in the past, remain a possibility, such as revoking licences to operate in China, encouraging Chinese consumers to boycott European products and imposing export controls. Having recently restricted exports of gallium, germanium and graphite, China could potentially target lithium, cobalt and copper, restrictions on which would pose a significant risk to the EU’s ability to manufacture green technologies.
However, China’s most likely course of action is to exert its influence on various EU Member States with the aim of sowing division and opposition to the European Commission’s actions.
The EU has some other aces up its sleeve. The single market ban on products linked to forced labour or representing a risk to cybersecurity (because they incorporate cameras and sensors controlled by Chinese manufacturers) could be applied to cars. The Commission could also launch an anti-dumping investigation, particularly if Chinese manufacturers were to respond by lowering their prices. European countries could also draw inspiration from the example of France, which has made its “green bonus”, available to buyers of new vehicles, contingent on sustainability criteria, automatically excluding Chinese manufacturers. Other products where government subsidies distort competition could be targeted. Ideal candidates would be wind turbines, heat pumps, medical devices and steel.
The EU could also block Chinese companies from bidding on public tenders in the single market on grounds of unfair competition. Greater use could be made of other measures, such as controls on inward investment.
The EU’s most difficult task will be maintaining its members’ unity around these policies. Germany and Sweden have already signalled their opposition to countervailing duties on electric vehicles, while central European countries are more divided: they are integrated into the German value chain but could also benefit from Chinese investment. The Nordic countries have expressed fears over the risk that imports of raw materials needed by their burgeoning green industries might be blocked. France, meanwhile, has adopted a more aggressive stance on using tools to defend the single market and European industry.
For China, the goal is to ensure that the European market remains open to its exports and to limit its trade confrontation to the United States. But there’s no denying that this procedure looks to be a setback. China is going to have to avoid any escalatory action that might prompt Europe to align its trade and security policies more closely with those of the United States and that could fuel the EU’s desire to further reduce the risk arising from dependence on China. However, this procedure could become an asset for the Chinese authorities if they were to succeed in making it an example of a new bilateral negotiation process. Meanwhile, European authorities have signalled both firmness and moderation by opting for an anti-subsidy procedure rather than an anti-dumping procedure that would have entailed higher tariffs. This procedure falls within WTO rules and aims to correct imbalances and competitive distortion. It has, however, been adopted as part of a preventive and protective approach before damage to the single market and European industry materialises.
The overriding priority for the European Union is to maintain its economic openness based on international rules, but this means managing a complicated trade-off between a market for affordable green technology and the development of a new European green industry. Although the EU is on its way to becoming the world’s second-largest market for electric vehicles, this transformation is happening at a time when China’s share of global demand is growing. Member States have differing views on these trade-offs depending on where they stand in relation to these technologies (whether they are manufacturers or consumers; how invested they are in old technology) and what kind of relationship they have with China. Will they be able to show a united front?
1 G. Felbmayr, K. Friesenbichler, J. Hinz and H. Mahlkow, “Time to be open, sustainable and assertive: Tariffs on Chinese BEVs and retaliatory measures” Kiel Policy Brief, issue 177, July 2024
The new grammar of the risk economy
If there is one certainty – not a happy one, mind you – it is that geopolitical tensions will form the backdrop to our individual and collective scenarios and trade-offs for years to come. And this will be the case regardless of what political developments may arise. But how is this context reshaping governments’ priorities?
There are at least three reasons for this certainty that geopolitics is once again an apparent basis for political economics. It can be taken as read that a hegemonic power struggle between two countries as large and powerful as the United States and China will not be resolved quickly. At best, the situation might stabilise. It can also be assumed that the existential conflicts in Ukraine and Gaza will not be quickly digested: they will continue to divide public opinion in many countries for at least a generation – the generation that will carry the associated emotional scars. The loss of the West’s moral reputation in the Global South as a result of its perceived double standards is neither geopolitically marginal nor quickly reversible. Meanwhile, China has no established soft power; countries mired in Chinese debt and tensions in the South China Sea have led many to see Beijing as a key trading power but a geopolitically dangerous one. Lastly, it is clear that no election can resolve the deep political and, now, social polarisation in the United States: problems with the country’s governability and political legitimacy are entrenched, with all the attendant implications for the global economic scenario.
The idea of borders, confrontation, power and a world divided up into friends and enemies is thus becoming a “mental new normal” that is shaping how people think. Consequently, this vision of the world is also beginning to form the intellectual core of the political and economic consensus not forgetting that a consensus, once accepted by a majority, looks like a certainty. So, for example, the 1980s Washington consensus, according to which prosperity was linked to free trade, is being supplanted – in the US in particular – by the emerging picture of a zero-sum neo-mercantilist world in which a gain for one country necessarily means a loss for another. Within this framework, a country’s trade surplus is no longer interpreted based on the relationship between savings and investment but rather on the principle of a political economy in which the wealthy amass their wealth at the expense of everyone else. Such thinking represents a huge mental shift: any country with a trade surplus becomes a potential rival.
And this reshaping of the consensus is happening against the backdrop of multiple fears, some of which sometimes spill over into anger: fear of conflict, scarcity, migration and so on. Our emotional environment is changing ever more quickly as geopolitical risk and climate risk collide and interact. Fear has a powerful effect on government priorities1 and helps create a political economy of fear – a “cognitive time” intuited by German sociologist Ulrich Beck back in the 1980s: a “risk society” fuelled by growing awareness of the threat as much as by the threat itself. “In their effect, with the recognition of modernization risks and the increase of the dangers they contain, some changes to the system occur. This, of course, happens in the form not of an open but of a silent revolution, as a consequence of everyone’s change in consciousness […]2.”
In truth, it is impossible to be safe in the face of major and, above all, unforeseeable risks3. Governments in the risk society must nevertheless offer a sense of safety. And this sense of safety will be one of the foundations of new forms of political legitimacy and of governments’ new priorities. Which means the risk society is merely the first step towards the security society.
This change in the perception of risk is clearly overturning part of the theoretical basis of liberalism but the latter has yet to be replaced by any coherent new corpus. We are still in a period of shifting beliefs linked to the transition from one system of thought to another, from one paradigm to another. This is what Gramsci called an “organic crisis of the system”. “It is a long business to shuffle out of the mental habits of the pre-war nineteenth century world”, said John Maynard Keynes in a speech given on 19 April 1933, the day before the dollar’s convertibility to gold was suspended. In this speech, Keynes explained why he had abandoned his free trade convictions in favour of protectionism. He explained that this shift was linked to his fears and pre-occupations, “along with those of many or most, I believe, of this generation throughout the world, being different from what they were4.”
The risk society is changing the role of the state, then, but this change is not a straightforward process. On the one hand, the functions of government are expanding to become those of a “katechon” tasked with warding off disasters and defining and protecting public goods. On the other hand, the normative state and its digitalised administration are meeting with increasing resistance. The state is now payer, employer, insurer, redistributor, regulator and strategist! The public health crisis also saw the return of the “hygienist state” of the kind that existed in the nineteenth century, and of the Hobbesian state as the guardian of collective safety – sometimes at the expense of individual freedoms. Last but not least, there is the paradox by which financialised economies and large globalised corporations still manage to remain more or less beyond the control of public authorities. When it comes to taxation, the list of points of tension can only grow longer.
Above all, though, risk society states will be judged on their ability to anticipate and protect against scarcity – which will require high levels of coordination between public and private stakeholders and central and local ones. Constraints on planning and storage, priority sectors… in fact, the safety paradigm is gradually supplanting (or transforming) the growth paradigm. The winners in the new global economic order will be those who are the first to understand this grammar of the economy of scarcity, though the latter will obviously not emerge in the same way in advanced countries as it does in the rest of the world. While the wealthiest seek to control value chains, vulnerable countries try to escape the status of being victims twice over, hit hard by shocks and the decline in foreign investment.
Paradoxically, economies of abundance are not those that are hit hardest by scarcity. However, the fact that citizens in such economies have been turned into consumers5, and that the social contract depends precisely on continued abundance, only amplifies their aspirations to safety. This means the political shock of scarcity is particularly powerful in such economies. Moreover, since differing levels of income fuel asymmetries of perception, scarcity reveals inequality. The wealthiest confuse scarcity with delayed supply or reduced variety, while the poorest struggle to meet their most basic needs. However, scarcity always has huge political implications for everyone – with a “memory effect” that lingers for at least two generations. The risk of supply shortages thus redefines the value of goods depending on their political value, which determines which resources are strategic and essential: water, land, energy, pharmaceuticals, fertilisers, semiconductors, minerals, food supplies, etc.
The safety economy has the clear advantage of bringing us closer to reality. But the increasing prevalence of crisis-based thinking means short-term policies are almost certain to take priority over long-term ones. And, above all, political analysts are raising the alarm about the risk of a drift towards what Romain Rolland, in his manifesto “Above the Battle”6, called the “doctrine of Public Safety”. There are even fears of a slide into a more or less thinly disguised permanent state of exception, regardless of the type of regime or administration in power – a situation in which the social contract revolves around managing potential coming catastrophes as much as actual ones… This would obviously be a failure of the kind of reflexive modernity Ulrich Beck wished for: he urged citizens to think of the causes of catastrophes not as exogenous factors – the logic of the “Black Swan” event that no one could have foreseen – but as endogenous phenomena forged in the very heart of our economic and political systems. He urged us to think of events from the perspective of what we have done to bring them about.
World – Macro-economic scenario 2024-2025
It may seem odd to stick an ‘extension without disruption’ label on an economic and financial scenario beset by political uncertainties of varying intensity, which will be removed either sooner (legislative elections in France) or later (US presidential election). Whereas the second event is likely to significantly structure/alter a scenario’s major plot points, the first is less likely to wipe out the backbone of a quarterly global scenario.
In the Eurozone, growth is still expected to accelerate, underpinned by private consumption. The cracks showing in the US seem unlikely to drag down growth, which could once again prove its staying power – just as inflation has done as we reach the end of this deflation road.
In the US, the resilience that characterised the 2023 economy actually hung on into early 2024. Coupled with the booming job market, reduced short-term sensitivity to interest rates (balance sheet repair, persistently low cost of debt) meant growth could better absorb monetary tightening, which turned out to be the most aggressive in decades. And while the negative impact of monetary policy has been much less brutal than was feared, it has not vanished. Its effects play out over time. Corporate debt is up, to be refinanced at higher rates in 2024 and 2025; actual mortgage rates are climbing back up; defaults on other types of debt (credit cards, auto loans) are on the rise; surplus savings (specifically in lower-income households) have dried up; and savings rates have declined quite a bit. These are the first cracks still forecasting a mild recession as 2024 flips to 2025. After 2.5% in 2023, our scenario is based on growth of 2.0% in 2024 and just 0.4% in 2025: declining growth paired with an alternative scenario in which the economy is likely to once again display surprising resilience. In line with a soft slowdown paired with an upside risk to growth, the slide in inflation should continue on a gradual and uneven trajectory, leaving inflation higher than its target until the end of 2025.
In the Eurozone, though European elections have confirmed the overall balance in the European Parliament’s representation, uncertainty about the vote in France is ushering in a downside risk. Estimated as ‘politics as usual’ before the French National Assembly was dissolved, our central scenario does not include this risk and does retain its key assumption. The principle of accelerated growth driven by private consumption remains, despite the cautious approach consumers are still taking and a deflationary process that promises to be rocky in 2024.
The decline in inflation – the benefits of which are already visible – is now a little less easy and a little less clear. Inflation is hanging on, owing mostly to its inertia in services, which reflects delayed pressures on payroll costs, connected to the late recovery of past losses of purchasing power in wage negotiations. And lastly, though consumption is the prime mover of this recovery, it may bring a bit brisker external demand with it, buoying Eurozone GDP by 0.8% in 2024 and by 1.5% in 2025.
Rather than the ‘pivot’ the markets were waiting for, it has focused on the ‘plateau’. And now this is a matter of extending that plateau before easing later.
Obviously, there are few hopes that the ‘American obstacle’ will be quickly removed, a constraint especially for some emerging countries; inflation numbers indicate that it is merely moving toward its target slowly, that growth is holding steady, and that the labour market is solid despite recent signs of weakening – all of which calls for prudence.
The Fed will need a little more time to be convinced that inflation is on a clear path toward 2%, and a little more time before it goes ahead with a first cut to its key rate. That could happen in September and would likely be followed by another reduction in December, bringing rates down by a total of 50bp in 2024. In 2025, easing could be more aggressive, totalling 150bp over the first three quarters. However, this kind of projection hinges on a relatively pessimistic economic scenario. If the economy and the labour market hold up better than expected, the Fed may adopt a more gradual pace.
The US status quo has not prevented the ECB from starting to cut rates. It will continue unless there is strong downward pressure on the EUR or a much clearer recovery, especially if it is more inflationary than expected.
Core and headline inflation are expected to reach 2% during H225 and allow the ECB to extend the rate relief that began in June, when it cut rates by 25bp. Our scenario points to gradual and ongoing easing, with the ECB lowering its deposit rate by 25bp every quarter until September 2025 to bring it back to 2.50%, our estimate of the neutral rate.
Indeed, the monetary easing theme has been floating around for a long time now. Whether it has already begun or is on the horizon (or being delayed, as in the US), easing is no guarantee that interest rates will fall. Several factors, including the widespread risk of inflation and the possible increase in the neutral rate, argue for stable or even slightly higher rates.
In the US, our bond yield projections have been nudged upward all along the curve. We currently expect 10-year Treasury yields to be 4.30% at the end of 2024, then 4.05% at the end of 2025. The upward revision of the long-term yield signalled in the dot plots deserves a look: stuck at 2.50% between 2019 and 2023, it was raised for the second consecutive FOMC, from 2.5625% in March to 2.75%. Such a nudge speaks of the possible increase in the neutral rate, which may be linked to factors like deglobalisation and slowing demand for Treasury bonds from world central banks, sovereign funds and national financial institutions.
In the Eurozone, the ECB began cutting its key rates and is expected to continue. The markets are fully pricing in this monetary easing cycle and expect the deposit rate to fall back near 2.50%. Amid a relatively optimistic outlook on European growth and persistently high public deficits (an excessive deficit procedure is affecting Belgium, France and Italy, all of which must present a debt-reduction plan by September), European sovereign yields have little chance of declining, especially if the Fed delays the start of its own easing cycle. Our scenario is for a German 10Y yield of about 2.65% at end-2024.
With spreads tight, adding a political risk premium (with no risk of redenomination) has resulted in a widening French spread compared to the Bund of up to 80bp. This OAT-Bund premium will continue to fluctuate according to the political uncertainties that will not necessarily be removed at the end of the election in the absence of a clear majority.
Next come some unique stories such as the political risk for the Eurozone, the worsening fiscal situation in Latin America or, on the contrary, the favourable carry for some Asian and European currencies. Our scenario calls for a modest depreciation of the EUR, to USD1.05 at the end of 2024.
Where is the median European voter from and what do they want?
As announced during our webinar European elections: continuity or change? on 17 May 2024, the elections of 6 to 9 June confirmed the overall balance of power within the European Parliament.
With 26.4% of the vote and 190 elected Members of the European Parliament (MEPs), the European People’s Party (EPP) gained 14 seats compared with the outgoing Parliament and asserted itself as the main European political force. The median European voter is now an EPP voter, whereas in 2019 they were a Renew Europe voter.
The EPP has stabilised its position in Germany, where it has its largest contingent with 30 MEPs, and Spain, where it gained 9 seats (returning 22 MEPs). It made progress in Poland (up from 16 to 23 seats) and Hungary (up from 1 to 8 seats), establishing itself as a credible alternative to Viktor Orbán’s party. Conversely, the French and Italian contingents were reduced (down 8 seats to 6 and down 12 seats to 9 respectively).
The social democrats of S&D polled 18.9% and limited their losses to three seats, managing to hold on to 136 MEPs. Their biggest gains were in France and Italy, where they increased their number of seats from 7 to 13 and from 15 to 21 respectively. Meanwhile, Germany’s socialist contingent lost two seats, returning just 14 MEPs.
The liberal-centrist Renew Europe group suffered the worst defeat, returning only 80 MEPs, compared with 102 in the outgoing Parliament, and just 11% of the vote. The biggest losses were in the French contingent, which lost 10 seats, holding on to just 13, and Spain’s Ciudadanos, which was nearly wiped out, holding on to just one seat out of a previous 9. The German liberals of the FDP gained one seat to become the group’s second-largest contingent after France.
The outgoing “grand coalition” (PPE, Renew Europe and S&D) thus lost 11 seats but, with 406 MEPs, held on to a 44-seat majority.
The Greens’ group, which often votes with the majority, suffered heavy losses, losing 19 seats, mainly due to the collapse of Germany’s Greens (returning 16 MEPs, down from 25) and France’s Verts (down from 12 to 5 MEPs). Conversely, the Greens made progress in Denmark and Sweden.
The far left gained 2 MEPs; with 39 MEPs, it might be able to change the configuration if it joins forces with other parties.
The real winners in these elections were the parties to the right of the EPP: the conservatives of the ECR (European Conservatives and Reformists) and the identitarians of ID (Identity and Democracy), which together won a further 16 seats. Compared with pre-election polls, these gains may appear limited. Above all, the expected collapse of the EPP and corresponding shift to the ECR and ID did not materialise.
With 76 seats, the ECR is now the fourth-largest European political force. Its progress is mainly down to the Italian contingent from Fratelli d'Italia, which won 14 more seats and now has 24 MEPs, making it the group’s main party ahead of the Polish PiS, which lost 7 seats (down from 27 to 20).
ID now has 58 MEPs, compared with 49 in the outgoing Parliament, mainly thanks to the progress of France’s National Rally, which gained 12 seats, and the Dutch and Austrian contingents, which gained 6 and 3 seats respectively, making up for the loss of 14 seats by the Italian contingent from Lega.
Parties not registered with a parliamentary group lost seats, in particular Hungary’s Fidesz party and Italy’s Five Star Movement (M5S), which lost three and two seats respectively. Meanwhile, Alternative für Deutschland (AfD), recently kicked out of the ID group, significantly boosted its presence (from 12 seats to 17) and is now Germany’s second-largest political force, with 15.9% of the vote, behind the CDU but ahead of the SPD.
Forty-four new MEPs from new small parties not yet affiliated could redraw the boundaries of existing parliamentary groups. The large national contingents of Fidesz and M5S could appeal to certain groups, while AfD’s radicalisation should see it relegated to a more solitary role. The groups that look the most fluid are those to the right of the EPP. However, the fault lines between the pro-NATO and pro-European Union PiS and Fratelli d'Italia in the ECR group on the one hand and the more Russophile and Eurosceptic parties of the ID group (National Rally and League) on the other make any union between these right-wing groups a complicated prospect. Such a union would, however, constitute the third-largest political force, ahead of Renew Europe. Voting agreements are very likely in some areas (such as immigration).
It will be the EPP, then, that dictates Europe’s political line, with the option – admittedly a complicated one – of forming an alternative political alliance to its right. However, a so-called “constructive” right-wing coalition with Renew Europe, the EPP and the ECR would not command a majority, requiring support from ID. The EPP has therefore quite naturally turned to its historic coalition allies, affirming that voters have mandated it to work with the parties with which it has the most common ground in terms of values: commitment to the European Union, respect for the rule of law and a pro-Ukraine stance.
What is emerging is an EPP leadership built around a centrist consensus: a coalition agreement aimed at setting a clear direction not dictated by how the Parliament happens to vote, especially with votes more scattered than in the past. But the EPP has also sent its partners a clear message: the vote of confidence by EPP voters is not a backward-looking vote but rather a vote for the future. The EPP is thus calling for a break with past policy, in particular to take into account questions of security and citizens’ income. It is also calling for policy to be clarified in three areas: energy transition, agricultural policy and innovation policy.
The EPP’s coalition allies have answered the call, but on one condition: there is to be no alliance with the far right. Renew Europe has said it is ready to work on what the groups have in common, notably security issues, support for Ukraine and strengthening the single market. The S&D group wants to make the Green Deal more “social” and work on a “Made in EU” strategy. It accepts the idea of the coalition platform being expanded, but only to include the Greens.
The first test for this coalition will be the vote on the presidency of the European Commission. While the coalition has in the past demonstrated a high level of voting discipline (around 90%), discipline has always been lower when voting for the president of the European Commission (around 80%). This time, though, the Spitzenkandidat principle means we can expect greater cohesion. Ursula von der Leyen is the candidate of the party that won the most votes, unlike in 2019, when her candidacy was put forward by the centrists after they refused to support the EPP candidate. A deal seems to have been struck at the last European Council meeting at the proposal of Ursula von der Leyen, with a balance of parties across the various institutions being ensured by the candidacies of Portugal’s António Costa (S&D) for the European Council (whether for half a term, followed by a member of the EPP, or for a full term remains to be defined) and Roberta Metsola (PPE), to be followed by Katarina Barley (S&D) for a full term, as president of the European Parliament. Renew Europe could secure the post of High Representative for Foreign Affairs with Kaja Kallas and the NATO presidency with Mark Rutte.
Ursula von der Leyen should, in theory, ensure a degree of continuity in the work of the Commission and could provide S&D and the Greens with reassurance as to the continuation of the Green Deal. However, judging by her last State of the Union speech, she seems to have taken on board growing resistance to the green agenda. She will therefore be forced to deviate from a regulatory agenda which, during her last mandate, had moved forward at a very sustained pace, ultimately promising to deliver a very attractive European green market.
Now that the regulatory framework is in place, the task of the next Commission will be to work towards creating the conditions needed to ensure that green production in the EU can be profitable in the short to medium term and maintaining a low-carbon manufacturing base in Europe. The right and the liberals should therefore be able to find common ground on leveraging the single market’s potential, innovation, and boosting competitiveness, and the social democrats will be able to join them on strengthening green industrial policies, protecting the single market and ensuring an inclusive transition.
But who will seize the political initiative? France’s loss of influence in all political groups in the European Parliament, with the exception of ID, will have implications for the Franco-German axis, which has come out of the elections weaker in both the European Parliament and the European Council. Will it be able to be as much of a driving force as in the past? Shifting alliances between countries are probably going to be more frequent than before.