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Quo Vadis World Economy-III: The EU’s test with the interventionist state

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Both sides of the Atlantic reacted differently to the 2008–9 financial crisis. While the US and UK were pouring vast amounts of money into the market through enormously large rescue packages to bail out big banks. Evidently, this is a policy separate from the neoliberal doctrine of ‘fiscal discipline.’ On the other hand, Germany-led EU went for the neoliberal way. It did not only pursue the austerity measures that sparked social tensions throughout the continent and led to the rise of left and right populisms but also forced anti-austerity countries to implement them.

Now, while the ‘post-neoliberalism’ is being discussed, the United States is pursuing “protectionist” economic policies and seeking to involve its European and Asian allies in its struggle against China (and Russia). As a result of being severed with inexpensive Russian energy, the Inflation Reduction Act (IRA) and the CHIP Act are fueling the EU’s concerns about deindustrialization. On the one hand, indebted and having dependent competitiveness on state interventions, Southern and Eastern Europe and the richer Northern countries, not in favor of rescuing the poorer with joint EU loans, on the other, Brussels is awaiting much more challenging days.

Letter of objection to the European Commission

The European Commission has received a letter signed by Austria, Czechia, Denmark, Estonia, Finland, Ireland, and Slovakia.

Not signatories to the letter, Germany, Belgium, and the Netherlands also oppose the overall concept. The letter raises concerns about a proposed joint fund to support and shield the green industry from US subsidies. Instead of looking for new money, the letter demands, existing loan capacity should be utilized.

Only around 100 billion euros of the total of 390 billion euros of the post-pandemic recovery fund have been used, the seven countries recalled.

Central banks against governments

The tension between governments and central banks, which increase interest rates and employ monetary tightening to focus on ‘fighting inflation,’ is a prime illustration of the contention.

However, the epidemic years were a glorious time: The IMF, the World Bank, and national central banks all issued statements urging governments to “spend as much as you can.” It is believed that at that period, the United States pumped more than $2 trillion into the market via bond purchases and monetary expansion. During the same period, the EU helped the member countries stay afloat through joint borrowing and joint funds.

Now the disparity is widening, and it seems to be one of the most discussed topics among policymakers in the informal gatherings in the halls at the World Economic Forum (WEF) Davos summit.

Anticipating further inflationary pressure due to pandemics, geopolitical conflicts, and green transitions related to the ‘climate crisis,’ governments have prioritized spending more to ease the financial burden on consumers, notwithstanding the central banks argue and act the other way around.

Crying out “fiscal authorities must do more” in recent years, central banks seem to have received their wish, although in an unexpected form.

Furthermore, this difference, called “fiscal authority against monetary authority,” has not yet wholly appeared. According to IMF economist Gita Gopinath, the limits of tension between fiscal and monetary authorities have not been tested.

The European Union (EU) may be the only place where the rising tension is more visible. Member governments continue to unveil substantial aid packages to their citizens battling with energy and food inflation despite the European Central Bank’s aggressive interest rate increases to combat inflation.

Summary: Government aid packages

In the context of energy, the diverging monetary and fiscal policies are pretty evident.

To help with grid fees, a significant part of electricity bills, the Austrian government, for instance, is getting ready to offer a new aid package. In addition to the initial support package of 475 million euros until the middle of 2024, Vienna has revealed intentions to distribute an extra 200 million euros. Thus, the government will pay 80% of the network/infrastructure costs.

Due to rising wholesale power prices, France’s electricity and natural gas regulator CRE has suggested a 108 percent hike in residential electricity rates.

Despite the CRE’s recommendation, the French government only raised the rate by 15% with subsidies for electricity prices.

Households, small local governments, and micro-enterprises with annual revenues of less than 2 million euros are eligible for the government’s “tariff shield” system.

Greece, one of the EU’s weakest economies, even gave subsidies on energy bills to 840 million euros. Citing a fall in gas prices, Kostas Skrekas, the minister of energy, announced that subsidies would be reduced to 95 million euros.

Is the energy crisis over?

Governments seem to have concluded that the worst is over, thanks to the mild winter and energy costs plummeting.

For example, RTE, the French power grid operator, recently announced the risk of power cuts left behind. According to RTE, this is due to increased nuclear power output and the mild winter. RTE has reported that the utilization of nuclear energy capacity has reached 70%.

Once again, the mild winter seems to be reducing power use. This year’s consumption was 8.5% lower than the average for the same period of 2014-2019. Also decreasing by 13% was the use of natural gas.

Indeed, natural gas’s MW/s price on the Dutch stock market dropped from 200 euros to 70 euros in January. Moreover, 81 percent of the EU’s gas storage tanks are still full, and it is anticipated that this rate for Germany is close to 90%.

Still, Klaus Müller, the president of Germany’s federal grid agency Bundesnetzagentur, pointed out that if many heat pumps and charging stations continue to be installed, local power cuts will become a source of concern.

In order to avoid power outages, TransnetBW, the grid operator in southern Germany, has asked residents to decrease their energy use in the evenings.

South Holland has similar problems. The grid is reportedly overloaded due to balancing demand and integrating new energy sources.

For this reason, inconveniences occur in the ‘transition to green energy,’ an objective of these two countries. The load on the electricity grid is growing as demand for industrial heat pumps and charging stations increases. Considering a 27 percent growth in demand for electric cars in Germany alone, it is next to impossible to expect this problem to be solved quickly. In the short term, major transmission issues, particularly on local low-voltage lines, are anticipated to arise in Germany. From 2020 to 2021, investment in distribution networks had a 10% increase, much below the expected 40% rise.

Eurelectric predicts that in 2021, between 375 and 425 billion euros would need to be invested in energy infrastructure to render it endurable for the new electrification mechanisms. In addition, the inflationist change in electrical equipment over the last two years makes this prediction seem unduly optimistic.

The flutters of Brussels

The 0.2 percent shrinkage in Germany, the largest economy of the Old Continent, in the last quarter of 2022 is another indication that things are not going well. However, Olaf Scholz has pointed to declining energy prices and a mild winter as evidence that the recession is beginning to turn around.

One of the largest steel makers in Germany and the world, Thyssenkrupp, has urged the German government to match Washington’s “protectionism,” a sign that warning bells are ringing. Martina Merz, CEO of the conglomerate, emphasized the need to succeed in the green transition without deindustrializing the continent. Highlighting the sufferings of the steel, cement, and chemical industries from higher energy costs, Merz said that “tomorrow’s markets are being carved up now.”

Carved-up markets are ominous words that require no explanation. The European Commission’s “Green Deal Industrial Plan” seems like another dead-cat bounce by Brussels before the EU leaders’ summit to be held next week. The proposed draft urged Europe and its allies to combat “unfair subsidies” and “prolonged market distortions.” The United States and China seem to be the primary targets of this battle.

The loosening of the EU’s government incentives system appears vital for Europe in the ‘green energy transition.’ EU members have the same right as governments outside the EU to provide subsidies to businesses operating within the union.

The combined economic might of Germany and France, of course, exists here as well. Recalling that German and French industries get 77% of EU-wide state incentives (€356 billion and €162 billion, respectively), financially weak nations in the south, such as Italy, Spain, and Portugal, are once again bringing up joint EU borrowing for subsidies. The German and Dutch coalition, on the other hand, blame poor countries for seeking ‘grants’ rather than using the money in the pandemic recovery fund as a loan.

Moreover, the fragmentation is not only between EU countries but indeed between regions. Craig Douglas, the founder of World Fund, for instance, says the discrepancies between the specific buckets of capital in Europe are sharp, and there is more regional capital available in Aachen or Bavaria than in Paris if they want to build a manufacturing facility.

‘Europe is in panic mode’

Fear of the escape of investments created by the IRA has gripped all of Europe. “Europe is in panic mode,” Paul Tang, a Dutch member of the European Parliament, told the Financial Times (FT).

Panic is not a temporary problem. Concerns over the very fundamentals of the EU’s economic model are not comparable to this panic. Long before the IRA, the pandemic and the Ukraine crisis have already started to undermine the economic orthodoxy of the German-led EU.

Mark Rutte, the Dutch prime minister, is among those drawing attention to this, reminding that a more ‘interventionist’ approach could have a long-term impact far beyond the IRA.

However, the genie is out of the bottle. Ineligible for state subsidies, several EU-based manufacturers decide to relocate their operations to the other side of the Atlantic. These are by no means a few. Since the transition to “green capitalism” calls for significant investments, state interventions are crucial in managing and directing these investments and convincing society with the carrot and stick for this shift. A state that provides only fiscal discipline and austerity is no longer acceptable. Therefore, without German-French intervention, the goal of “strategic autonomy of Europe,” which has been brought up specifically by France, is unrealistic.

Moreover, the EU is still far away from the ‘clean technology’ investments and initiatives flowing to Asia and North America. In other words, the challenge comes not only from the United States but also from Asia, particularly China. In the next article, I put an end to the with a piece focusing on Asia and ‘developing countries,’ especially China.

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German carmakers face historical crisis as Chinese competition and market contraction erode profits

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03/08/2026

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The German automotive industry is enduring a severe period of distress, driven by intensifying competition from Chinese vehicle manufacturers and an increasingly overheated domestic market in China.

For decades, China served as the primary engine that propelled German carmakers into global titans, yielding robust sales and billions in profits. Today, that historic reliance has transformed into their heaviest liability.

According to an analysis published by Politico, domestic Chinese manufacturers—having spent decades observing, learning, and investing—are now producing better-equipped electric vehicles at prices lower than those offered by Volkswagen, BMW, and Mercedes-Benz.

At the same time, China’s automotive market—the largest in the world—has become severely overheated and contracted by a fifth this year. The sharp downturn has forced both domestic and foreign automakers into a ruthless battle for survival.

The tangible impact of this pressure became clear this month as German carmakers reported their half-year financial results, disclosing billions of dollars in losses alongside announcements of widespread layoffs and plant closures across Europe.

“The environment has never been as challenging as the one we face today,” Oliver Blume, Chief Executive Officer of the Volkswagen Group, told investors. “Looking ahead, the risks before us are steadily mounting.”

The structural distress within the auto sector delivers another blow to Germany’s already struggling economy. It also presents a escalating political predicament for Chancellor Friedrich Merz’s fragile coalition ahead of critical state elections this autumn.

Dismantled dreams in the automotive sector

Since the 1980s, China had functioned as the primary engine of high profit margins for German automakers.

To gain access to a vast and rapidly expanding consumer market, carmakers were required by Beijing to establish joint ventures with local partners.

For decades, that arrangement proved highly lucrative, delivering massive returns to shareholders.

However, in the post-pandemic era, Chinese companies rapidly outpaced their German rivals in electric vehicle technology, which gained swift adoption across China.

While German brands long enjoyed high prestige among Chinese consumers, buyers have swiftly shifted toward domestic manufacturers offering superior technology at lower price points.

“They are suffering massive losses in China and may no longer be able to recover there,” said Pedro Pacheco, an automotive analyst at the consulting firm Gartner.

Chronic problems spread beyond China into Germany

The fallout is increasingly being felt inside manufacturing plants within Germany itself, rather than remaining confined to China.

BMW announced this week that it will eliminate 8,000 jobs across Germany by the end of 2027, with severance payments set to begin in October.

Mercedes-Benz is asking its workforce to extend weekly working hours from 35 to 40 hours for the same pay.

Meanwhile, industry flagship Volkswagen is locked in negotiations with labor unions over plans to lay off 100,000 workers and shut down domestic factories.

This severe downturn is providing political momentum to the Alternative for Germany (AfD) party, which is gaining traction in national polls.

The party is leveraging the auto sector’s decline and job losses to launch sharp attacks on the government.

“Even major industrial pillars like Volkswagen, Porsche, or Infineon are recording historic drops in profits and planning hundreds of thousands of layoffs in the coming years,” AfD co-leader Alice Weidel said this week. “This demonstrates how far the deindustrialization of our business hub has truly advanced.”

Merz and his governing coalition will get an initial indication of how these cutbacks resonate with voters during state elections this autumn in Saxony-Anhalt and Mecklenburg-Western Pomerania, both of which are strongholds for the AfD in eastern Germany.

Chinese vehicles begin to dominate European market

While automakers continue to perform well in North America and Europe, the collapse of sales in China is eroding overall profits.

Facing fierce domestic competition and systemic overcapacity at home, Chinese carmakers are exporting vehicles in record volumes.

Europe has emerged as their primary target market: China now sells more vehicles in Europe than Germany sells in China.

European consumers are enthusiastically embracing these imports. According to the latest data from the automotive industry association ACEA, sales of Chinese-made cars in the European Union surged by 63% in the first half of this year, rising from 338,000 units in 2025 to roughly 549,000 units in 2026.

That figure now represents nearly 10% of total European automobile sales.

Although German car companies carry an unparalleled exposure to China, even manufacturers with no operational footprint there, such as Renault, are feeling the severe impact of rising Chinese vehicle sales in Europe.

Automotive analyst Matthias Schmidt noted that the influx of inexpensive Chinese vehicles featuring advanced technology has put pressure on Renault and its budget brand, Dacia.

Renault disclosed on Thursday that sales of its Dacia brand fell by 8% year-on-year in the first half of 2026.

European firms forced into cooperation with Chinese rivals

The European Commission attempted to intervene by imposing tariffs on Chinese-made electric vehicles following an anti-subsidy investigation, but the added costs have done little to stem the inflow.

The tariffs do not apply to plug-in hybrid vehicles, leaving a lucrative loop-hole for Chinese manufacturers to exploit.

These shifting dynamics are driving several European automakers to forge direct partnerships with Chinese competitors.

Stellantis, the Franco-Italian-American conglomerate, established a joint venture with Chinese manufacturer Leapmotor. According to ACEA data, Leapmotor’s European sales surged from just 7,701 units in the first half of 2025 to 48,261 units during the same period this year.

Volkswagen CEO Blume hinted that his company could pursue a similar path, telling investors the carmaker might begin manufacturing certain models in Europe that were originally developed in China for European consumers.

Olaf Lies, Minister-President of Lower Saxony—a major shareholder in Volkswagen—said earlier this summer that it would be a strategic error for the automaker to isolate itself from China’s technological advancements.

“Our objective should not be to isolate technological developments from one another,” Lies stated.

However, Schmidt warned that such a strategy carries significant risks for the German brand’s equity.

He noted that these vehicles would effectively remain Chinese-engineered cars bearing a VW badge, a dynamic that could prompt consumers to buy the cheaper Chinese-branded versions directly.

Accelerating the search for new markets

European automakers are also attempting to offset losses by pursuing growth in emerging markets.

“North America, India, and the Global South represent our growth engines for tomorrow,” Blume told investors during a briefing.

Yet Chinese manufacturers have already established a commanding presence in those regions, dominating electric vehicle sales across Southeast Asia and Latin America.

Under heavy pressure, European automakers are also attempting to monetize their mass-production expertise by capturing a share of rising global defense spending.

Blume told investors that Volkswagen is engaged in “very advanced discussions” with a defense contractor, adding that he expects “a decision to be made within this year.”

However, portions of the workforce, particularly in Germany, remain hesitant about associating the company with the arms industry.

Furthermore, the move carries a serious risk of retaliation from Beijing. Earlier this month, China imposed export restrictions on 14 defense and technology firms, including German defense giant Rheinmetall.

While those measures were presented as retaliation against export curbs targeting Chinese entities, automotive companies entering the defense sector could find themselves exposed to similar actions.

“European carmakers must act very, very carefully because this is not just a quick gain,” Pacheco warned. “It may look like one, but once you step onto that chessboard, you need to know how to play chess.”

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Morawiecki launches Rozwój Plus movement following high-profile split from Poland’s PiS

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31/07/2026

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The first major event organized by the political circle of Mateusz Morawiecki, following his split from Law and Justice (PiS), is set to take place in Warsaw’s Praga district.

The gathering comes just days after the former prime minister and dozens of his allies severed ties with the national-conservative PiS.

The move also led to Morawiecki’s resignation from the presidency of the European Conservatives and Reformists (ECR) group in the European Parliament.

Organized by his Rozwój Plus (Development Plus) movement, the conference—dubbed “Morawiecki’s barbecue” due to the prominent inclusion of charcoal-grilled kiełbasa sausages—will mark a significant moment in Polish conservative politics.

The event will bring together key figures from the emerging movement alongside featured guests, including former world chess champion Garry Kasparov and General Rajmund Andrzejczak, the former chief of the General Staff of the Polish Armed Forces.

The gathering will offer Morawiecki’s camp an opportunity to present a political vision distinct from that of the current PiS leadership.

“Poles care about the fight for a strong Poland, their wallets, their jobs, housing, development, identity, culture, the Christian faith, and the defense of the cross hanging in the Sejm,” Morawiecki said this week. “These are our principles; this is our faith.”

Discussions will focus on demographics, security, and the politics of memory—topics that have grown increasingly sensitive amid recent tensions in Polish-Ukrainian relations.

While Morawiecki describes Rozwój Plus as an “expert group and think tank,” its political ambitions are becoming increasingly clear.

A new parliamentary group established on Wednesday brings together 40 deputies and one senator, providing his allies with an official platform in parliament and a base from which to challenge PiS.

“This is a threat to us,” Mateusz Kurzejewski, a PiS politician and spokesperson for Przemysław Czarnek’s prime ministerial campaign, told Euractiv. “After all, this is an initiative that reduces our chances of victory, though it does not eliminate them entirely. Therefore, we will continue to work hard.”

However, whether Morawiecki can successfully reshape the Polish right remains uncertain.

An SW Research poll commissioned by Onet revealed that 32.9% of respondents would consider voting for a party led by the former prime minister.

The strongest potential support comes from voters who already align with the right. Among respondents currently close to PiS, 14% said they would consider supporting Morawiecki, while 7.1% of those aligned with the further-right Confederation held the same view.

The initiative could also draw limited support from the ruling camp. Approximately 7.4% of voters currently supporting Prime Minister Donald Tusk’s pro-EU Civic Coalition, The Left, Poland 2050, or the Polish People’s Party indicated they would not rule out voting for a party led by Morawiecki.

Sources within Tusk’s government believe the split in PiS could benefit the ruling coalition in the short term.

“Particularly because this situation helps soften the impact of the hospital scandal,” one source told Euractiv. “Today, no one is talking about it anymore, and fortunately, no new statements have been made.”

The controversy revolves around allegations that a Warsaw hospital operated a preferential admission system for politicians belonging to the governing Civic Coalition, allowing them to enter a VIP lounge and receive medical treatment ahead of other patients.

Questions have also been raised regarding the salary of the doctor heading the hospital’s emergency department, who is reportedly linked to Tusk’s party.

Yet the same source warned that Morawiecki’s departure may have little long-term impact on the Civic Coalition.

They argued that PiS possesses a fiercely loyal electorate, whereas enthusiasm for Rozwój Plus could prove temporary.

“Look at the IBRiS poll for Rzeczpospolita,” another source said. “70% of PiS voters say they are voting for their ideal party. This core electorate accounts for about 70% of PiS’s current voters.”

A similar perspective prevails within PiS, where politicians contend that Morawiecki is chasing a voter base that may be too small to sustain a new party.

Speaking to Euractiv, Kurzejewski said:

“People do not want to vote for politicians who have been excluded from PiS. As for Law and Justice voters, they do not want to vote for those who betrayed them. That is why this project means Rozwój Plus will fail to clear the electoral threshold.”

Today’s event will therefore serve as an early test of whether Morawiecki can translate curiosity and institutional support into lasting political clout—or whether his departure will become merely another short-lived fracture on Poland’s crowded right wing.

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Ceuta migration crisis sparks diplomatic row as Italy demands Spain’s suspension from Schengen

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31/07/2026

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An influx of thousands of migrants entering Spain from neighboring Morocco has plunged the autonomous enclave of Ceuta into chaos since Wednesday, prompting fresh backlash against Prime Minister Pedro Sánchez’s immigration policies.

Local authorities warned on Wednesday that an increasing number of migrants were reaching Ceuta by sea.

Juan Jesús Vivas, the president of Ceuta, told reporters that the situation constituted “an absolute humanitarian and social emergency” and demanded that the central government take action.

The situation escalated further on Thursday as thousands of people entered Ceuta by land and sea, overwhelming reception centers.

Videos shared online showed individuals using wetsuits and life jackets to swim to shore.

In a statement posted Thursday on X, Sánchez announced that he was working with Moroccan authorities to restore order as quickly as possible and promised an immediate response.

The border chaos erupted just weeks after the Spanish Supreme Court issued a ruling preventing the direct deportation of migrants arriving by sea.

Sánchez’s political rivals laid the blame for the crisis directly on the prime minister. Santiago Abascal, leader of the right-wing Vox party, characterized the events as an “invasion,” while Alberto Núñez Feijóo, leader of the center-right People’s Party (PP), was also among those condemning the prime minister.

The developments drew additional criticism from anti-immigration figures across Europe, including Alice Weidel, co-leader of Alternative for Germany (AfD), and Manfred Weber, chairman of the European People’s Party (EPP), the largest group in the European Parliament.

“This proves one thing: the Migration Pact and return regulations must be put into force today, not tomorrow. Furthermore, Frontex must be strengthened,” Weber wrote.

Tensions have remained high in Spain since the Sánchez administration launched a program enabling undocumented migrants to apply for legal status and remain in the country. More than one million people have applied under the scheme.

This represents the most severe border crisis to hit Ceuta since 2021, when at least 8,000 people entered the territory from Morocco.

The autonomous Spanish cities of Ceuta and Melilla are the only EU territories sharing a land border with Africa.

Italian leaders demand Spain’s expulsion from Schengen

Meanwhile, the fiercest reaction to the migration crisis in Spain emerged from Italy. Top Italian politicians demanded that Spain be expelled from the Schengen Area as tensions continued to escalate.

Italian Prime Minister Giorgia Meloni said in a statement on X: “The images coming from Ceuta are shocking and demonstrate once again that uncontrolled illegal migration poses a real threat to the security of Europe’s borders.”

Meloni added that Italy was prepared to act, “including through extraordinary measures,” to protect its borders and guarantee the safety of its citizens.

Together with Deputy Prime Minister Matteo Salvini and Foreign Minister Antonio Tajani—the most senior ministers representing parties in the Italian right-wing coalition—Meloni demanded the suspension of the Schengen Agreement or the exclusion of Spain from the border-free zone.

Under the accord, individuals can travel freely between 29 signatory European countries.

However, several member states have reinstated checks at certain borders, as permitted under the agreement, citing migration risks.

Italy had previously temporarily reintroduced controls on its border with Slovenia to prevent smuggling and terrorism.

Tajani went beyond calling for Spain’s exclusion from Schengen, attributing responsibility for the events in Ceuta to the immigration policies of Spanish Prime Minister Pedro Sánchez, who had promised to legalize hundreds of thousands of undocumented migrants.

The minister characterized the policy as “profoundly wrong” and claimed it provided “an incentive for human trafficking.”

The remarks provoked a sharp reaction from Spanish Foreign Minister José Manuel Albares, who summoned the Italian ambassador to account for Tajani’s statements.

Replying to Tajani on X, the Spanish minister wrote: “This message is unbefitting the foreign minister of a partner and friendly country from whom we expect European solidarity, not partisan demagogy.”

Separately, European Commissioner for Migration Magnus Brunner, who is also an EPP member, stated that the European Commission supports Spain in protecting the integrity of its borders, including Ceuta, and is in contact with Spanish Interior Minister Fernando Grande-Marlaska regarding the matter.

A spokesperson stated that the Commission welcomed “the close cooperation established between Morocco and Spain to combat these migratory flows and to ensure the swift return of individuals who entered Ceuta illegally, in accordance with applicable rules.”

“When it comes to our cooperation with partner countries, Morocco is a key and reliable partner for the EU. In recent years, we have intensified our cooperation in the areas of migration and border management, as well as the fight against smuggling. We are currently working to turn our relations into a comprehensive and strategic partnership,” the spokesperson added.

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