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Europe at a turning point: 4 ways leaders can strengthen the region’s economic resilience

The 64km tank column that Russia sent into Ukraine failed to take Kyiv but succeeded in ending the illusion that Europe is insulated from direct military attack. This birth of a geopolitical Europe, a moment I have best heard described as “Europe’s adulthood”, has brought the curtain down on an age of innocence that for most Western Europeans had lasted an entire lifetime.

In this new context, there is one thing that matters above all else for the survival of the EU: its capacity to defend itself and stand united against external threats. But adulthood also means being able to respond to crises without losing sight of strategic priorities. As the knock-on effects of the war ripple through the continent, several European leaders from business and government are already thinking long-term.

Here are at least four areas where they could join forces to forge a more resilient, competitive and sustainable Europe.

1. Delivering on the promise of Europe’s strategic autonomy
Strategic autonomy, usually understood through a security prism, has also come to mean autonomy in the materials, technologies and skills that will fuel tomorrow’s economic growth. In all these areas, Europe has undergone a transformational shift in policy and mindset first triggered by the sobering supply chain shocks of the pandemic and now hardened by the return of war to the continent.

Germany, for example, increased its defence budget by €100 billion to reach 2% of the country’s GDP, a NATO commitment that had long eluded most NATO members in times of peace. This will push the EU’s collective defence budget north of 20% of total global expenditure this year.

The imperative of building Europe’s “open strategic autonomy”, floated for years in think tank circles, has now become received wisdom across national capitals. Europe’s dependence on one or two markets for critical raw materials is more complete – up to 98% in some cases – than its better-known security and energy dependencies. Market solutions alone haven’t been able to drive over-dependence down, and the European Commission is now actively considering concrete policy proposals to strengthen Europe’s primary materials industry.

Taken together, the uptick in defence spending and the drive to deliver on promises of strategic autonomy will see major increases in investment in military and civilian research and development. Europe’s “deep tech” ecosystem is already having a moment, quietly attracting unprecedented levels of foreign investment.

Stronger mechanisms for public-private cooperation will ensure that the major public investment outlays due to come online crowd in as much private capital as possible. And that supply-chain vulnerabilities are identified and patched up before they stifle growth and innovation – or see some of Europe’s most promising deep-tech start-ups fly the nest.

2. Transforming Europe’s energy dependence into economic opportunity
Given Europe’s reliance on Russia for its hydrocarbon imports, the war has increased pressure on the region’s energy systems. Russia supplies 40% of Europe’s gas, 20% of its oil and 45% of its coal, making the diversification of energy supply and the uptake of renewable energy one of the major priorities for European leaders to work on jointly.

Last March, the European Commission launched its RePowerEU plan to decouple the European energy system from Russia by 2023 and deliver on its climate commitments on an accelerated timeline. While RePowerEU hinges on further increasing targets for energy saving and for uptake of renewable energy sources, it will also be a vehicle for the Commission to help provide affordable energy to Ukraine and other countries directly affected by the war. The additional €210 billion needed to achieve energy independence will need coordinated efforts from the private and public sector, at both the national and EU level.

Businesses have been very active in developing and deploying innovative climate solutions, from carbon capture technologies to breakthroughs in fusion power to sustainable fuels. This notwithstanding, Europe still lags on innovation when compared to other geographies. The objective of investing 4% of the EU’s GDP into research and development is still out of reach – with the bloc reaching only 2.3% last year.

Leading on climate innovation will help Europe move away from the fossil-fuel paradigm to a new one, which promotes R&D through government policies and tax credits that accelerate the adoption and scaling up of innovative technologies. Only then, can climate innovation become a source of long-term competitiveness for Europe and fuel the continent’s economic growth.

3. Making Europe’s labour markets more resilient
A consequence of the pandemic-induced economic shock was the increase in the unemployment rate across the European Union, up 6.2% in 2022 (a 2% increase versus the previous year) and reaching alarming levels in Spain (13.5%), Greece (12.9%) among other countries. As member states implement their National Recovery and Resilience plans to address the challenges of their national labour markets, it would be important to complement those reforms with policies that can help integrate Ukrainian refugees into the workforce.

Since the start of the war, almost 6 million people have fled Ukraine and almost 8 million have been displaced internally, relocating to western areas of the country.

This is the biggest forced population movement that Europe has experienced since World War II. The magnitude of the Ukrainian humanitarian crisis (five times the Syrian refugee inflow in 2015) is going to be felt across Europe if countries are not immediately able to respond with the right support.

As Ukrainian men aged between 18-60 are required to remain in the country to support its defence, women accompanied by their children and elderly relatives are forced to flee. Due to the war, women face the double burden of taking care of their young and elderly family members even as they become the primary financial provider for their families, sometimes entering the labour market for the first time.

When the EU activated its Temporary Protection Directive, it provided all Ukrainian refugees with a residency permit for up to three years, access to education and employment as well as free movement across the EU. However, the sheer scale of the challenge requires active public-private cooperation to ensure that Ukrainian refugees thrive in their new homes.

The role of business is paramount in four key ways: help governments develop reskilling and upskilling programmes for Ukrainian refugees willing to work; offer apprenticeships, internships, or maternity cover programmes to integrate refugees rapidly into the labour force and into society, even if for a temporary period; provide subsidized childcare opportunities so women can enter the workforce; help establish “support groups” to help Ukrainian families navigate their new local environments.

4. Strengthening Europe’s global leadership on food security
Conflict is the main cause of food insecurity around the world, and the war in Ukraine, which involves two of the world’s largest sources of calories destined for human consumption – 12% of the food traded globally comes from Ukraine and Russia – could see the number of undernourished people grow by 7.6 million. Some regions, such as the Middle East and North Africa and East Africa are acutely dependent on Ukrainian and Russian cereals imports; a staggering 50% and 90% respectively.

Europe is a net exporter of agri-food products and appears not only able to absorb the shocks stemming from the war to its food system, but also capable of supporting partner economies through exports of its food surplus. Beyond keeping trade in food flowing globally, Europe could stimulate sustained investment in long-term food security programmes in countries hit particularly hard by the war and by the commodity shock it triggered.

At the same time, rising inflation, skyrocketing energy prices and gradual land degradation could, over the medium to long-term, hinder Europe’s capacity to meet its own food needs and reduce its capacity to produce a food surplus for export. Here, public-private cooperation would be crucial to foster sustainable and innovative agricultural practices that preserve land quality while enhancing crop performance.

An opportunity for action
In a few days, European leaders from government, business and civil society and their global counterparts will convene in Davos for the World Economic Forum’s Annual Meeting. It will be a crucial platform for progress on these four key areas for Europe’s future trajectory through the structured multi-stakeholder dialogues that the Forum will host. These high-level dialogues will complement the ongoing work that the Forum leads through its action-oriented communities, such as the CEO Action Group for the European Green Deal, which aims to support the EU in achieving its climate objectives, and Leaders for Europe’s Digital Decade whose focus will be on accelerating the region’s digital transformation.
Source: World Economic Forum

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