The European Union faces a complex challenge, standing at the crossroads of a pivotal decision-making process that involves the successful execution of the green transition, ensuring economic security, and upholding fiscal discipline. This trifecta creates a nuanced scenario, and as Germany leans towards fiscal discipline with its debt brake and Constitutional Court ruling, a strategic mistake might be unfolding.

The intertwining dynamics of the green transition and economic security reveal a symbiotic relationship that, if harnessed effectively, can generate a positive feedback loop. The urgency of the green transition is unequivocal, not only for the European continent but on a global scale. Scientific evidence propels the imperative to accelerate the pace, aiming for net-zero carbon emissions by 2050, thereby averting the catastrophic consequences associated with unchecked global warming. The EU Scientific Advisory Board for Climate Change underscores the magnitude of this task, emphasizing the need for a staggering 95 percent reduction in emissions by 2040.

However, the rapid pace of this transition comes with a price tag. Macro-economic adjustments, if distributed unfairly, can sow the seeds of social and political unrest. With far-right parties critiquing the Green New Deal and businesses expressing concerns about competitiveness vis-à-vis global counterparts, notably the United States and China, a cautious approach is warranted.

Amidst a geopolitical landscape marked by great power rivalry, the necessity of bolstering the EU’s economic security has become apparent. Past events, including extraterritorial sanctions, Russia’s geopolitical maneuvers, and China’s coercive measures, have compelled EU member states to reconsider their economic strategies. The revival of industrial policy signals a shift toward safeguarding and promoting industrial capacities. The new mantra— “protect and promote” — as outlined in a paper by the Spanish Presidency of the European Union Council, calls for increased public investment in critical sectors such as energy, technology, health, and even military security.

This industrial renaissance comes at a cost, whether pursued horizontally through completing the single market and enhancing human and physical capital or vertically, with focused investments in semiconductors, quantum computing, artificial intelligence, biotechnology, and defense capabilities. This brings us to the third prong of the trilemma — fiscal discipline. European Union member countries are currently engaged in negotiations to determine fiscal rules for this new era. While there’s consensus on the priority of fiscal sustainability, the pace and automaticity of fiscal adjustments remain subjects of debate.

Germany, advocating for a stringent approach, aligns with its domestic debt-brake framework. In the midst of a recession, the country is grappling with decisions on how to trim its public budget. In stark contrast, the U.S. pursues a different course, evident in initiatives like the Inflation Reduction Act and unlimited tax breaks for green technologies produced domestically. This signals a prioritization of the green transition and economic security over strict fiscal discipline, at least in the short term. The U.S. fiscal deficit is projected to surpass 6 percent of GDP this year.

These divergent strategies highlight the balancing act faced by the EU. While the U.S. benefits from issuing the primary international currency and its associated privileges, the EU, as the issuer of the second most used international currency, should leverage its position accordingly. For instance, NextGenerationEU, the bloc’s post-pandemic recovery plan, acts as the embryo of a centralized fiscal capacity. However, it is currently divided into national approaches. The next logical step is to develop a European industrial and tech strategy that aligns with this embryonic fiscal capacity, ensuring a level playing field within the single market.

Implementing such a strategy could allow European Union member countries to strive toward achieving all three objectives — the green transition, economic security, and fiscal discipline. Importantly, countries facing reduced fiscal room, such as Spain or Italy, can benefit from NextGenerationEU public funds to invest in their green transition and economic security.

Of course, there’s no such thing as a free lunch. The debt issued for the deployment of NextGenerationEU, and potentially for the continuous fiscal capacity needed to compete with global powers, will need to be repaid. This underscores the urgency of concluding the EU debate on own resources, which could contribute to aligning EU debt yields closer to German and French levels.

In the grand scheme of things, the current climate, geopolitical shifts, and the evolving geo-economic landscape demand higher public investment to provide the necessary public goods across the European Union. Convincing Germany and other European stakeholders of the imperative for increased public investment sooner rather than later becomes not just a recommendation but a strategic necessity for the EU’s future. The ability to navigate this trilemma successfully lies in recognizing the interconnectedness of the green transition and economic security while striking a delicate balance with fiscal discipline.