Simon Nixon / Sep 2024
Ursula von der Leyen and Mario Draghi. Photo: European Union, 2024
A big week lies ahead for Europe. After months of politicking, the European Union institutions will finally turn their attention to policy. On Monday, Mario Draghi is expected to publish his long-awaited report into how to improve Europe’s competitiveness. Then on Wednesday, Ursula von der Leyen will announce the new college of Commissioners, who will run the executive arm of the EU for the next five years. To set the stage, Bruegel has published a book of “memos” to the incoming Commissioners setting out recommendations on how they should address the challenges they will face in their portfolios. These were then discussed at the think-tanks annual meetings in Brussels last week.
I have to say that I came away feeling distinctly gloomy about the outlook for the continent. That is unusual for me since I have always been pretty upbeat about Europe’s ability to overcome its various challenges, in line with Jean Monnet’s dictum that “Europe will be forged in crisis”. Over the past decade or so, Europe has come through a series of shocks with more success than most commentators expected or would acknowledge. They include the global financial crisis and eurozone debt crisis, Brexit, the pandemic and the energy crisis caused by Russia’s invasion of Ukraine.
The challenges today are less immediate but just as pressing: they include the need to bolster the continent’s defence in the face of Russian revanchism and potential American isolationism and the need to revive an economy that is falling ever further behind America on almost all measures. Europe’s GDP per capita, for example, has risen 25 per cent since 1999, compared to 38 per cent in America. Indeed, as I have previously argued, the two are linked, since without a strong economy there can be no strong defence. Foreign policy, after all, begins at home.
The problem is that many of the solutions that the Bruegel scholars are proposing, while eminently sensible, will either require member states to stump up more money for the EU budget at a time when every government is grappling with its own debt pressures or or to hand Brussels new powers. Neither are easy. Jeromin Zettlemeyer, the director of Bruegel, admitted that he didn’t see how the EU could fulfil its ambitions for both clean energy and defence without a new issuance of common EU bonds, similar to the unprecedented - and supposedly one-off - €700 billion next generation EU programme designed to fund the pandemic recovery. Yet a senior Dutch finance ministry official was clear that her new government was likely to oppose more EU borrowing. What the EU could tax to fund increased spending, given the reluctance of member states to provide bigger grants, was an open question. Most participants seemed to consider Bruegel’s suggestion that member states should co-fund the Common Agricultural Policy’s farming subsidies to be a non-starter.
Meanwhile many of the reforms identified as priorities to deepen the single market and improve competitiveness impinge on the most sensitive areas of national sovereignty, including energy, capital markets and defence. These raise issues that are so intractable that they have defeated EU reformers for years. A panel on creating a capital markets union to provide European businesses with alternative sources of funding rehearsed exactly the same arguments I used to hear a decade ago. During that time, the need for action on this front has become even more acute as over-zealous post-crisis banking reform has effectively killed the banking sector as a provider of risk capital. The only difference now is that Bruegel has been reluctantly forced to accept that vital reforms of insolvency rules, taxation and pension systems needed to create a pan-European bond and venture capital market, is out of reach. Instead it recommends that Brussels establishes a new pan-EU regulator.
That makes it hard to be optimistic about the long-term outlook for the European economy. The truth is that Europe has fallen dramatically behind in almost all the key technologies of the future. It has lost the lead in clean energy technology, despite having invented much of it; it is losing the battle over electric vehicles; it is nowhere in AI and quantum computing. There are many reasons for this, of course, and I plan to examine them in a future post. But there is no doubt that the lack of an appropriate financial ecosystem is one of them. As one despairing panellist put it, the EU generates a huge current account surplus equivalent to 3 per cent of GDP, yet these savings get invested in American funds, which are then invested in European innovations that typically end up being commercialised in America.
I have similar concerns about Europe’s ability to get its act together on defence, even though everyone recognises this is an absolute strategic priority. The reality is that Europe’s deeply fragmented defence industry is not producing anything like enough weaponry to compete with Russia, which has placed its entire economy on a war footing. Addressing this would require eliminating national vetoes on the defence industry to allow for the creation of a genuine single market. It would also require the use of EU funds to manage joint procurement programmes which in turn are essential if the current inflated costs of European armaments are to come down.
This new single market should, as Bruegel recommends, be extended to the UK, which has an important defence industry well-integrated into the EU market. But how realistic is any of this? Which smaller countries will be willing to see their own domestic defence industries disappear in cross-border consolidation, or see the EU budget used to fund investments in the defence industries of much larger economies? And will any EU government be willing to see EU defence industry jobs, technologies and subsidies ending up benefitting above all others the renegade UK?
Perhaps I am being too pessimistic. Whatever Draghi recommends following his review into the EU’s competitiveness which was itself commissioned by von der Leyen, is likely to its way into the mission statements issued to the new Commissioners. The former Italian prime minister and European Central Bank president is a formidable operator and knows how to get things done in the European system, so perhaps there will be sufficient political impetus to drive some of these reforms.
The question is whether the EU can defy its own history and generate the political momentum to deliver such reforms in the absence of any immediate crisis to focus minds. What’s more, can it do this at a time of political polarisation and fragmentation both within and between countries which makes forging compromises even harder than usual? The alternative is a drift into ever greater weakness, vulnerability, polarisation and fragmentation, until crisis becomes unavoidable.
Simon Nixon writes the Wealth of Nations newsletter on Substack
