Nicolaus Heinen of DB Research -

It's not just the current crisis that will dominate the economic-policy agenda of the European Parliament in the legislative period following the June 4-7 elections: the EU Financial Framework, tax policy, EU enlargement and the security of energy supply in Europe will all be key issues too. DB Research looks at the prospects for these four central issues in the next term.

At present, economic policy in Europe is completely dominated by the economic and financial crisis. This also holds for the European Parliament and its economic-policy agenda for the upcoming legislative period. However, even though the crisis dominates the agenda, other economic-policy issues are no less important.

It is difficult to predict the key issues likely to face the European Parliament in the course of the next five years. For despite the Parliament's extensive consultation and co-decision rights, it does not enjoy the power of legislative initiative. Legislative initiatives are the prerogative of the European Commission, which is reappointed following the European elections. These initiatives are usually taken up by the Parliament in short order. Nonetheless, it is already possible to identify some issues that will keep the Parliament busy: these include, for example, the EU Financial Framework, European tax legislation, EU enlargement and the security of energy supply.

Financial Framework

During the upcoming legislative period, the European Parliament will adopt the Financial Framework of the Union for the years 2014-2020. The Financial Framework sets out ceilings on commitment appropriations on a seven-year horizon for overarching budget headings. The Commission's proposal, which subsequently becomes the subject of negotiations between the Council of the EU and the Parliament, will be influenced this year by the Commission's White Paper on the review of the EU budget set for publication in October.

There is no question about the need for a review. The heading Natural Resources (including agriculture and fisheries) still claims 42.8% of the current Framework of €864bn - a percentage crassly out of proportion to agriculture's 2.5% contribution to GDP in the EU. The second major heading focusing on measures for competitiveness and cohesion and claiming 44.4% of the total package covers generally sensible targets, but it is not necessarily a guarantee of dynamic growth as experience in some countries shows.

A realignment of the budget in the direction of more efficient and non-discriminatory promotion of competitiveness would be desirable. This would be a good time to tackle the issue, for the EU members' latest economic stimulus packages already address Europe's competitiveness. Therefore, it is to be hoped that this crisis-induced realignment towards competitiveness will also catch on when the next EU Financial Framework is drafted and be supported politically and pushed through by the European Parliament; the Parliament can exert considerable influence in this matter via its budget control power, for it may reject the proposal tabled by the Commission.

Tax policy

A further major issue of the upcoming legislative period will be European tax policy. Three proposals to amend the relevant directives were put forward in February. First of all, there is the proposal to extend the scope of the directive on the taxation of savings income in the form of interest payments that came into force in 2005. The scope of the directive is to be extended so that, among other things, the distortions in investment capital flows may be reduced. Furthermore, there is a proposal to amend the directive on mutual assistance between competent authorities aimed at improving efforts to overcome tax evasion.

However, critics fear this will largely overturn the principle of bank secrecy.

Another proposal points in the same direction with an amendment of the directive on the recovery of tax claims in order to guarantee greater efficiency in cross-border tax administration issues. The Parliament ought to provide constructive stimuli in this regard so it can promote effective tax competition in Europe via greater transparency and thus fight tax evasion by setting positive incentives. Despite a shortage of formal means of influence, the proposed hearing procedure does indeed offer scope to intervene at the political level.

One further issue is enlargement negotiations. The Parliament has to approve the admission of an EU accession candidate by an absolute majority of votes. Two countries that might be able to join the EU in the near future are Croatia and Iceland. Croatia's EU entry has been on the cards for some time. The country received official candidate status in 2004, with negotiations opening in March 2005. As long as the remaining institutional challenges can be mastered and the border conflict with Slovenia settled, there should be no further obstacles to membership or to obtaining the required approval of the Parliament. By contrast, Iceland's accession strategy is marked by short-termism. Motivated by the current precarious economic situation, the government of Iceland plans to launch its bid before the end of this summer and, after referenda in the coming year, this could pave the way for EU membership.

Energy

One final issue is the security of energy supply. Some 42% of European gas demand is met by Russia, and despite huge efforts towards greater autonomy this dependence will persist for many years to come. Over the past 20 years, a Partnership and Cooperation Agreement shored up energy security in relation to Russia. This agreement expired at the end of 2007 and now it must be renewed urgently. The Parliament has to ratify this agreement. There is a triangle of interests at play stemming from the EU's urgent need for energy security, the political situation in Russia and the Parliament's clear democratic mandate, which will not give the Parliament an easy job in weighing up its options.

The economic and financial crisis will dominate the public's awareness of European policy in the next few years. The examples discussed above show, however, that the Parliament holds much more responsibility than simply helping to draft legislative responses to the crisis. To bring this influence to bear, the Parliament should use its veto power in budget matters as a political lever. This would give the Parliament the possibility to steer the course of Europe's development via economic-policy decisions also in the wake of the crisis and help shore up growth in the long term.

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