There is a remarkable degree of expert consensus on how to address the competitiveness, security, and energy crises confronting the European Union. But implementing these reforms will require European leaders to overcome the inertia that prevails among member states.
PARIS – The European Union is facing three major crises. The first is a competitiveness crisis that was already apparent in the late 2010s but has worsened, leading to lackluster productivity and growth performance. More recently, Russia’s invasion of Ukraine created a security crisis that is compounded by the bloc’s deteriorating relationship with China. The war also triggered an energy crisis that puts Europe at a disadvantage relative to its major competitors, the United States and China.
Fortunately, there is a remarkable degree of intellectual consensus on how to tackle this triple crisis. Three major reports, recently published or soon to be released, reach roughly the same conclusions about the main challenges facing Europe – and even make similar recommendations for addressing them.
Former Italian Prime Minister Enrico Letta’s report, “Much More than a Market,” prepared at the request of the European Council, emphasizes the need for further integration of the single market, a project that was first conceived in the 1980s but is still relevant today. For example, research shows that crossing a national border in Europe reduces inter-regional trade in goods by a factor of six. Fragmentation is especially pronounced in sectors such as energy, finance, and electronic communications, with EU-US trade in digital services exceeding that within the bloc. As Letta notes, these sectors were deliberately excluded from the integration process because states deemed them too strategic to relinquish national control. But the report rightly concludes that this brake on integration has gradually become an economic and economic-security handicap.
European Commission President Ursula von der Leyen commissioned another former Italian prime minister, Mario Draghi, to produce a report on the future of European competitiveness. Its release is expected in the coming weeks, but Draghi has outlined his approach and recommendations in recent speeches. The tone is likely to be franker, and the policy proposals will certainly be more radical, compared to Letta’s report. In April, Draghi criticized the bloc’s organization, decision-making, and financing as being designed for “the world of yesterday.” Moreover, the EU’s narrowly national approach to competitiveness has prevented the creation of pan-European champions and resulted in member states competing among themselves, even in sectors like defense and energy, where they have “profound common interests.” In June, Draghi advocated a European industrial policy that includes tariffs and subsidies – a call to action that will undoubtedly be included in his report.
My Bruegel colleagues prepared the third report, which is scheduled for publication next week. These “Memos to the EU leadership” are produced after every European election to help incoming commissioners and members of the European Parliament set priorities for the bloc. As the preview from early July shows, the forthcoming report also focuses on the need to promote innovation and growth, and emphasizes the gains from building a single market for energy and removing barriers to a banking and capital-markets union. But rather than supporting across-the-board integration, it advocates deepening the single market in the areas with the highest growth impact and where the economic return clearly exceeds the political costs.
The fact that all three reports are largely in agreement is astounding. Gone are the major controversies over macroeconomic policy, trade openness, and industrial policy, to mention just a few of the disputes that normally arise. This likely reflects the immense economic and geoeconomic challenges the EU confronts today. The Ukraine war poses an existential threat, the high price of energy is a major impediment to competitiveness, and the bloc’s failure to innovate risks turning Europe into a spectator on the international stage. Even if the bloc acts, it likely won’t be enough to prevent its demographic situation from worsening and its economic weight from declining.
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But expert consensus does not necessarily translate into policy. The first obstacle is the inertia that prevails among member states. While today’s geopolitical challenges are unprecedented, the growth, integration, and governance problems plaguing the EU have been known at least since the 2004 Sapir report. And yet, the bloc has only acted in situations of extreme stress such as the eurozone debt crisis of 2010-12 and the COVID-19 pandemic. Even in these cases, the awakening has been short-lived. The banking union, for example, remains unfinished, and there has been no decision on the future financing of the pandemic recovery program.
The second challenge is that any major reform has winners and losers. Fragmentation creates rents, and those rents accrue to certain countries at the expense of others. The countries poised to lose the most will thus resist further integration. True, they may lose more in the long term than they gain in the short term. But it requires courage to overcome myopia.
Lastly, European enthusiasm is in short supply, especially with economic nationalism on the rise, and governments do not want to risk angering their voters. French President Emmanuel Macron and German Chancellor Olaf Scholz are widely unpopular and therefore in no position to provide the leadership required to break the current deadlock. One can only hope that von der Leyen will rise to the challenge.
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PARIS – The European Union is facing three major crises. The first is a competitiveness crisis that was already apparent in the late 2010s but has worsened, leading to lackluster productivity and growth performance. More recently, Russia’s invasion of Ukraine created a security crisis that is compounded by the bloc’s deteriorating relationship with China. The war also triggered an energy crisis that puts Europe at a disadvantage relative to its major competitors, the United States and China.
Fortunately, there is a remarkable degree of intellectual consensus on how to tackle this triple crisis. Three major reports, recently published or soon to be released, reach roughly the same conclusions about the main challenges facing Europe – and even make similar recommendations for addressing them.
Former Italian Prime Minister Enrico Letta’s report, “Much More than a Market,” prepared at the request of the European Council, emphasizes the need for further integration of the single market, a project that was first conceived in the 1980s but is still relevant today. For example, research shows that crossing a national border in Europe reduces inter-regional trade in goods by a factor of six. Fragmentation is especially pronounced in sectors such as energy, finance, and electronic communications, with EU-US trade in digital services exceeding that within the bloc. As Letta notes, these sectors were deliberately excluded from the integration process because states deemed them too strategic to relinquish national control. But the report rightly concludes that this brake on integration has gradually become an economic and economic-security handicap.
European Commission President Ursula von der Leyen commissioned another former Italian prime minister, Mario Draghi, to produce a report on the future of European competitiveness. Its release is expected in the coming weeks, but Draghi has outlined his approach and recommendations in recent speeches. The tone is likely to be franker, and the policy proposals will certainly be more radical, compared to Letta’s report. In April, Draghi criticized the bloc’s organization, decision-making, and financing as being designed for “the world of yesterday.” Moreover, the EU’s narrowly national approach to competitiveness has prevented the creation of pan-European champions and resulted in member states competing among themselves, even in sectors like defense and energy, where they have “profound common interests.” In June, Draghi advocated a European industrial policy that includes tariffs and subsidies – a call to action that will undoubtedly be included in his report.
My Bruegel colleagues prepared the third report, which is scheduled for publication next week. These “Memos to the EU leadership” are produced after every European election to help incoming commissioners and members of the European Parliament set priorities for the bloc. As the preview from early July shows, the forthcoming report also focuses on the need to promote innovation and growth, and emphasizes the gains from building a single market for energy and removing barriers to a banking and capital-markets union. But rather than supporting across-the-board integration, it advocates deepening the single market in the areas with the highest growth impact and where the economic return clearly exceeds the political costs.
The fact that all three reports are largely in agreement is astounding. Gone are the major controversies over macroeconomic policy, trade openness, and industrial policy, to mention just a few of the disputes that normally arise. This likely reflects the immense economic and geoeconomic challenges the EU confronts today. The Ukraine war poses an existential threat, the high price of energy is a major impediment to competitiveness, and the bloc’s failure to innovate risks turning Europe into a spectator on the international stage. Even if the bloc acts, it likely won’t be enough to prevent its demographic situation from worsening and its economic weight from declining.
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But expert consensus does not necessarily translate into policy. The first obstacle is the inertia that prevails among member states. While today’s geopolitical challenges are unprecedented, the growth, integration, and governance problems plaguing the EU have been known at least since the 2004 Sapir report. And yet, the bloc has only acted in situations of extreme stress such as the eurozone debt crisis of 2010-12 and the COVID-19 pandemic. Even in these cases, the awakening has been short-lived. The banking union, for example, remains unfinished, and there has been no decision on the future financing of the pandemic recovery program.
The second challenge is that any major reform has winners and losers. Fragmentation creates rents, and those rents accrue to certain countries at the expense of others. The countries poised to lose the most will thus resist further integration. True, they may lose more in the long term than they gain in the short term. But it requires courage to overcome myopia.
Lastly, European enthusiasm is in short supply, especially with economic nationalism on the rise, and governments do not want to risk angering their voters. French President Emmanuel Macron and German Chancellor Olaf Scholz are widely unpopular and therefore in no position to provide the leadership required to break the current deadlock. One can only hope that von der Leyen will rise to the challenge.