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31. How DeepSeek has changed artificial intelligence and what it means for Europe

Author:
Bertin Martens
Publication Date:
03-2025
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
By mid-2024, artificial intelligence large language models (LLMs) were running into diminishing returns to scale in training data and computational capacity. LLM training began to shift away from costly pre-training to cheaper fine-tuning and allowing LLMs to ‘reason’ for longer before replying to questions. Fine-tuning uses chain-of-thought (CoT) training data that includes questions and the logical steps to reach correct answers. This increases the efficiency of learning for smaller AI models, such as DeepSeek. CoT data can be extracted from large ‘teacher’ LLMs to train small ‘student’ models. These changes shift the cost structure of AI models from high pre-training costs to lower fine-tuning costs for model developers and more inference costs for users. While smaller models are cheaper to use, a positive AI demand effect is likely to exceed the negative price effect. Price competition between models will increase, resulting in tighter margins for AI firms. Specialised models can still fetch premium prices. Cheaper LLMs are an opportunity for European Union companies to catch up in building smaller AI models and applications on top of LLMs. Increased demand for AI services will require more investment in computing infrastructure, including in the EU. Investing in large LLMs and the corresponding hyperscale infrastructure is riskier, especially as price competition between models increases. Knowledge extraction between AI models puts pressure on model developers to protect their investments against free-riding by others. It also creates a dilemma for policymakers: should they favour free-riding to promote competition and innovation, or should they clamp down and reinforce monopoly rents to stimulate investment in AI models? Past policy will not be an appropriate response in a world that offers vastly expanded opportunities for knowledge pooling and innovation at lower cost.
Topic:
Science and Technology, European Union, Economic Policy, Microeconomics, Innovation, Artificial Intelligence, Large Language Models (LLMs), and DeepSeek
Political Geography:
Europe

32. The demographic divide: inequalities in ageing across the European Union

Author:
David Pinkus and Nina Ruer
Publication Date:
03-2025
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The European Union is projected to enter a period of population decline after 2026, with implications for economic development and labour markets, though these will vary because of different trends in different EU countries. Between 2023 and 2050, Eastern and Southern EU countries will face the sharpest declines because of both natural population decrease and limited net inward migration. In contrast, Northern and Western countries could see population growth driven by higher migration. By 2050, working-age populations are projected to decline in 22 out of 27 EU countries, while the share of those aged 85+ in the EU as whole will more than double. This shift will strain healthcare, pension and long-term care systems across the continent. Eastern and Southern EU countries will face more severe ageing and workforce shrinkages, undermining their competitiveness and potentially contributing to increasing inequality. Western and Northern countries will also age, but slower natural population decline and larger migration inflows will give them more time to adjust. However, regional disparities within countries will likely widen as migrants concentrate in urban areas, leaving rural regions even more vulnerable to depopulation. Policies must be adapted to these different demographic trends. Eastern EU countries should focus on retaining talent, attracting migrants in sectors with labour shortages and increasing labour-force participation by women and older workers. Southern countries should strengthen family-friendly and youth-employment policies, while improving migrant integration and regional infrastructure. Western and Northern countries must prioritise migrant integration, rural development and gradual labour-market reforms for ageing populations. A coordinated EU plan for these different trends would support EU countries in addressing the challenges they will face. Integration of migrants into labour markets and societies will be especially important, though relying on sustained high migration may not be a viable long-term solution and will not be a substitute for maximising the participation of residents in labour markets.
Topic:
Demographics, European Union, Inequality, and Aging
Political Geography:
Europe

33. Making the best of the new EU Social Climate Fund

Author:
Eva Jüngling, Giovanni Sgaravatti, Simone Tagliapietra, and Georg Zachmann
Publication Date:
04-2025
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The slow pace of decarbonisation of buildings and transportation threatens the European Union’s goal of reducing emissions by 55 percent by 2030 and achieving net zero by 2050. To address this, a new emissions trading system, ETS2, is being introduced to put a carbon price on fuels used in buildings and road transport. However, the resulting cost increases risk a disproportionate impact on vulnerable households and small and medium sized enterprises. The European Union has created the Social Climate Fund (SCF) to address these distributional challenges. This instrument redistributes a portion of auction revenues generated by the ETS2 among EU countries, in order to protect the most vulnerable. A much larger share of ETS2 revenues will flow directly to national governments, offering significant opportunities for social measures and investments in the green transition. The use of those revenues will dictate how successful EU countries are in managing the transition and protecting households, particularly in higher-income member states, which will receive relatively smaller shares of SCF funding. ETS2 is an essential part of the EU climate policy toolkit. Governments should employ good practices, as identified by the European Commission, to tackle emissions from buildings and transport and to gradually phase out income support, in line with the achievement of investment targets and milestones. Higher-income EU countries should develop additional targeted financing levers to protect the vulnerable and to introduce extra enablers to encourage private investment. Proper sequencing, outreach and communication will be essential to ensure the uptake of measures and public support for policy instruments. Cross-country learning should be leveraged, including through the creation of a European policy registry that will help countries compare their approaches and potentially amend their SCF spending plans on the basis of learning from policies that been successful elsewhere.
Topic:
Climate Change, European Union, Welfare, Transportation, Carbon Emissions, Decarbonization, and Protection
Political Geography:
Europe

34. The governance and funding of European rearmament

Author:
Guntram B. Wolff, Armin Steinbach, and Jeromin Zettelmeyer
Publication Date:
04-2025
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Europe faces a grave security threat. Gaps in European military equipment are substantial compared to Russia’s military build-up. The European defence market is fragmented and weakened by home bias in procurement, low order numbers and technological gaps. These problems reflect the combination of past reliance on the United States and Europe’s nationally-based defence governance. With the US now retreating from its role of European guardian, greater cooperation is essential to close technological gaps and reduce rearmament costs. Unless procurement is pooled and fragmentation reduced, additional demand for defence goods will mainly drive up prices. Better-integrated defence markets would both increase competition and facilitate entry of new defence technology firms. The combination of integrated markets and scaled-up procurement could lead to a halving of unit costs. European Union measures including the European Defence Fund, the Act in Support of Ammunition Production, the European Defence Industry Reinforcement through Common Procurement Act and ReArm Europe represent progress towards strengthening the supply of military goods but the incentives offered are too small to address the home bias in procurement or to coordinate the provision of ‘strategic enablers’ such as military satellites. To go further, the EU and its European allies have two options. First, the role of the European Defence Agency could be broadened, possibly in combination with a new lending instrument similar to the EU’s 2020-22 SURE programme. Second, a European Defence Mechanism (EDM) could be created: an institution similar to the European Stability Mechanism, based on an intergovernmental treaty. The EDM would undertake joint procurement and plan for the provision of strategic enablers in specified areas, with a capacity to fund these roles. It could own strategic enablers and charge usage fees to EDM members, reducing the budgetary impact of rearmament. EDM membership would entail prohibition of both state aid and procurement preferences that benefit national defence contractors at the expense of contractors from other EDM members. Of the two options, the second is preferable, as it would (1) create a defence industry single market among EDM members, (2) create a financing vehicle that might make large-scale projects fiscally feasible, and (3) include non-EU democracies such as the United Kingdom on an equal footing, while also giving an opt-out to EU countries that lack the political appetite for more defence integration, or that have national constitutional constraints.
Topic:
Security, Defense Policy, Governance, Geopolitics, Weapons, Macroeconomics, and Russia-Ukraine War
Political Geography:
Russia, Europe, and United States of America

35. Who should be charged? Principles for fair allocation of electricity system costs

Author:
Conall Heussaff, Eva Jüngling, Simone Tagliapietra, and Georg Zachmann
Publication Date:
04-2025
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The high costs in the European Union of supplying electricity can only be structurally reduced through decarbonisation and deeper European electricity system integration. In the short-term, policymakers have few choices. They can redistribute system costs by shifting components from one consumer to another. Another immediate distributional option would be to reduce energy taxation, implicitly shifting costs to the taxpayer. Meanwhile, decision-making processes that translates electricity system costs into final consumer prices are fragmented. Rules on the short-term production, transmission and consumption of electricity are determined at EU level. National regulators and governments determine how the fixed costs of the system are recovered from consumers, while national policymakers also set energy taxes. This Policy Brief sets out options for shifting the fixed costs of the electricity system between consumers, for changing energy taxation to reduce prices and for evaluating systemic trade-offs between system cost and other characteristics, such as sustainability and reliability. We also estimate the quantitative effects of shifting costs between consumers and reducing taxes on electricity. We set out four principles for pricing electricity fairly. Policy interventions in the electricity system should not seek to achieve broader economic objectives at the expense of energy-policy goals. Consumer prices should incentivise efficient system operation. Carbon emissions should be priced in. The fixed costs of the electricity system should be primarily recovered from inelastic consumption. European policymakers should develop transparent analytical tools to assess the distributional effects of electricity-policy interventions. Lessons should be learned from the energy crisis, during which EU and national policies attempted to shield consumers from price impacts, and these lessons should form the basis of ongoing efforts to reduce prices. EU guidelines for electricity cost recovery should be established, following fundamental economic principles, and could form a policy toolbox for national governments to reduce energy prices. Finally, the long-term strategic goal of deeper physical and institutional integration of the European electricity should be pursued to structurally reduce electricity prices.
Topic:
Climate Change, European Union, Electricity, and Energy
Political Geography:
Europe

36. Building coalitions for climate transition and nature restoration

Author:
Jean Pisani-Ferry, Beatrice di Mauro, and Jeromin Zettelmeyer
Publication Date:
07-2025
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Global climate and biodiversity outcomes will largely be determined in emerging and developing economies (EMDEs). We propose a four-pillar strategy to support climate and nature preservation in line with the economic interests of both developing and advanced countries. This would move beyond voluntary pledges to embed climate and nature objectives into the structures of trade, finance and industrial policy, creating a self-reinforcing system of cooperation and reducing the net costs of the green transition. Under Pillar 1, a coalition of advanced and developing countries would link tiered carbon pricing with a common carbon border adjustment mechanism (CBAM). Pillar 2 would create a climate-finance coalition to decarbonise the power sectors of developing countries. Pillar 3 would involve partnerships to develop clean energy-intensive industrial production stages in developing economies with rich renewables endowments; these would feed into the supply chains of the European Union and other energy-importing advanced economies. Pillar 4 would redesign markets to create scalable and credible mechanisms to fund carbon removals. Technology-based removals can be incentivised through the introduction of clean-up certificates into the EU emissions trading system, while nature-based removals would require improved market design centred on a new asset class: nature shares. The four pillars reinforce each other. A multi-country CBAM and carbon pricing coalition (Pillar 1) would reduce the cost of financing power sector decarbonisation (Pillar 2). Linking EMDE membership of the CBAM and carbon-pricing coalition to financial support for the decarbonisation of power sectors would also make it more attractive for EMDEs to adopt carbon prices. Decarbonisation of power sectors (Pillar 2) would be a precondition for developing clean, highly energy-intensive industry in renewables-rich EMDEs (Pillar 3). The Pillar 1 coalition should include the EU, China and as many other countries as possible. Advanced countries and China could underpin the Pillar 2 financier coalition. Pillar 3 would involve the EU and potentially other energy-poor advanced countries, along with EMDEs that are richly endowed with renewables. Pillar 4 would include the main custodians of the planet’s natural capital. Enabling these coalitions will require EU leadership.
Topic:
Climate Change, Economics, Industrial Policy, Trade, Sustainability, Decarbonization, and Green Transition
Political Geography:
Europe

37. Reconciling the European Union’s clean industrialisation goals with those of the Global South

Author:
Ben McWilliams, Simone Tagliapietra, and Jeromin Zettelmeyer
Publication Date:
07-2025
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Clean industrialisation is a political and economic priority for the European Union. For it to work, affordable clean energy is needed. However, producing this energy in Europe is constrained by limited renewable energy endowments (sunshine and wind) and land availability, while the transportation costs for imported clean energy (in the form of electricity or hydrogen) are much higher than for fossil fuels. An alternative way to fuel Europe’s clean industrial sector would to import energy-intensive primary tradeable products such as ammonia, methanol and reduced iron. We estimate that more than ten percent of total future EU clean energy demand will be met by such products. Public policy in Europe should aim to facilitate trade in energy-intensive intermediate inputs, which are cheaper to import than energy directly. Imports of these inputs could boost the competitiveness of downstream stages in the energy-intensive value chain (such as steel production). By lowering overall energy demand and thus electricity prices, such imports would also raise EU competitiveness more broadly. In many cases, they would replace imports of less energy-intensive commodities such as iron ore, therefore not adding to Europe’s overall import dependency. The direct economic impact in terms of jobs and value added that would be offshored is not substantial. The international benefit of such a strategy would be that it would embed third countries – especially emerging and developing economies – into clean industrial value chains. Stable European demand can help such countries develop export-driven, clean industrial strategies. Politically, this could be an important incentive that could offset the EU’s carbon border adjustment mechanism. Governments should therefore not use taxpayer money to fight the relocation of energy-intensive and tradeable primary products, beyond some minimum threshold that is desirable for economic security and innovation reasons. Meanwhile, ongoing negotiations with third countries to establish Clean Trade and Investment Partnerships should put trade in energy-intensive clean products at the core of new international clean supply chains.
Topic:
Industrial Policy, European Union, Global South, Industrialization, Decarbonization, Energy, and Emerging Economies
Political Geography:
Europe

38. The time is right to make a European Union-India trade deal happen

Author:
Ignacio Garcia Bercero and André Sapir
Publication Date:
07-2025
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Nearly 20 years have passed since the EU and India started negotiations on a bilateral trade and investment agreement. After seven years of intense negotiations, the process stalled in 2014, primarily because of the failure of the respective political leaders to make difficult choices. Talks restarted in 2022 and now offer a reasonable chance of delivering a bilateral free-trade agreement “within the course of the year”, as Indian Prime Minister Narendra Modi and European Commission President Ursula von der Leyen declared in February 2025. The EU and India both rank among the world’s five largest economies in terms of GDP. Yet much separates the two economically. India’s GDP per capita is much lower than the EU’s, and its level of trade and investment protection is much higher than that of the EU or even its middle-income peers. However, India has recently enjoyed faster growth than any other large economy, including China. The EU and India are also being brought closer by the global geopolitical situation and their common pursuit of strategic autonomy and economic security. The two sides should learn the lessons from past failure and reach an ambitious agreement in areas that previously proved difficult, such as goods tariffs and services, and in new areas, such as climate protection, that could again derail the revived negotiation if not managed well. A deal by the end of 2025 will have economic benefits and will also reinforce the broader economic and political links between the EU and India at a time when world affairs are under severe strain. An ambitious agreement could also help reconstruct a rules-based global order for the new multipolar world. This is particularly important for the multilateral trade and climate regimes, where converging EU and Indian positions could have a major influence on the redesign of international institutions and rules.
Topic:
Treaties and Agreements, Bilateral Relations, Governance, European Union, and Trade
Political Geography:
Europe, South Asia, and India

39. Analyzing How the Tools of the British Far-Right Have Evolved

Author:
FARAS
Publication Date:
08-2024
Content Type:
Policy Brief
Institution:
Future for Advanced Research and Studies (FARAS)
Abstract:
Since July 30, 2024, several British cities and towns have been gripped by a wave of far-right violence described as the worst since World War II. This outbreak followed the killing of three girls in a knife attack at a children's party in Southport, northwest Britain. The violence involved a series of criminal and inflammatory actions in what appear to be coordinated efforts to thwart immigration and intimidate minorities in Britain. This reflects the British far-right's ability to utilize and even evolve its traditional tools to adapt to the current context and available resources.
Topic:
Immigration, Violence, Far Right, and Civil Unrest
Political Geography:
Britain, United Kingdom, and Europe

40. How the Aid Fund for Northern Syria can upgrade humanitarian aid and EU geopolitical engagement

Author:
Erwin van Veen
Publication Date:
04-2024
Content Type:
Policy Brief
Institution:
Clingendael Netherlands Institute of International Relations
Abstract:
UN bureaucratic inertia, weak leadership, Stockholm syndrome and a laissez-faire attitude by donors have allowed structural problems with humanitarian aid delivery in Syria to persist for too long. These problems include regime capture of aid, dependency on Damascus to deliver aid cross-border and, more recently, too much focus on lifesaving aid. The coming humanitarian funding crunch demands that these problems are finally addressed at pain of a rapid increase in the misery of millions of Syrians. This will have consequences both in terms of local predation and international migration. The Aid Fund for Northern Syria (AFNS) could be the vehicle to break existing molds due to its more diverse governance structure, independence of both Damascus and the UN, greater focus on Early Recovery and an innovative, if emergent, localisation strategy. As a bonus, it can support a pragmatic conflict management strategy for northern Syria based on the ‘safe, calm and neutral environment’ concept of the 2012 Geneva Communiqué and UNSCR 2254. Donors should consider the practical actions proposed in this brief to put their money where their mouths are.
Topic:
Humanitarian Aid, European Union, Geopolitics, and Donors
Political Geography:
Europe, Middle East, and Syria