“Economic giant, political dwarf” is the epithet so often used for Japan and Germany, but it has also been used for the EU, according to a report by the FT. Many of its leaders today see the challenge as finding the political clout to match the bloc’s economic weight. This is what the Greek governments seem to believe as well, which over the years have highlighted the need for greater integration at the economic and geopolitical level, as well as strengthening competitiveness. After all, the establishment of the Recovery Fund is a “tool” for deepening the EU.
Back to the FT article, in economic terms, the EU is still under par. That, in essence, is the warning issued last week by two former Italian prime ministers: Enrico Letta, who presented his report on the single market, and Mario Draghi, who in a speech gave the first touches of his forthcoming report for European competitiveness.
Both emphasize that the EU’s economic institutions were built for a different world, with less international interdependence and fewer geopolitical threats.
The forms of integration adopted in the 1980s and 1990s are no longer sufficient – and may even become a brake on growth.
Leta report: “No time to waste” for Europe
What went wrong?
Europe still does not take full advantage of its size. As Letta notes, some sectors were left out of the single market for political reasons – others – notably services and data – were neglected because they were a less important part of cross-border trade than they have since become.
As a result, some of today’s most vital sectors actually remain national, hopelessly small, especially when competitors enjoy continent-sized markets like the US and China.
Leta and Draghi focus on defence, telecommunications and energy infrastructure as areas that need to become truly European markets. Many other industries are not as “unified” as the above. And all sectors suffer from the lack of a seamless banking and capital market.
The basic proposition
What should be done? One of Letta’s most important proposals is for a “28th figure” in company law – an EU-wide business code that European companies could join and which would make it easier to grow and attract investors from across the EU (and beyond), without having to wade through 27 sets of rules on everything from licensing to creditor rights.
This could be the only policy that offers profound changes, avoiding the political dilemma of harmonizing national rules. A well-designed, minimally bureaucratic EU business code could be a game-changer for the ability of small businesses and start-ups to scale quickly.
Other ideas include a ‘fifth freedom’ (beyond those for people, goods, services and capital) for education, innovation and research to facilitate, for example, data processing on a European scale – with strong consumer protection.
Leta also wants a much more integrated European health sector.
Greater integration
Beyond the specific policies, there is the politics. To exploit the potential of the single market, there is no way to avoid enhanced governance at EU level. Letta recommends greater use of regulations (which are identical for everyone, as opposed to directives, which member states implement in approve) and stronger EU regulators. He rightly wants more effective enforcement of single market rules.
It is also inevitable that we manage more public spending together – through shared procurement, harmonized subsidy systems or more shared debt for shared public goods. Equally important is the utilization of private capital. Letta takes aim at a sacred cow of the EU – the structural trade surplus – denouncing “the annual diversion of around €300bn of European family savings … mainly into the US economy”. His solution is a “savings and investment union”, where households will be able to easily invest in promising EU companies.
Which sectors need consolidation?
Policymakers must be prepared for consolidation in sensitive sectors, from telecoms (where Draghi counts at least 34 operators compared to as few as the US and China) to finance, rail transport and utilities. Care is needed here so that the level playing field in Europe is not lost and there is fragmentation. Europe could no doubt have fewer telecom operators, but every consumer in every country should have a real choice of supplier.
All of this is politically difficult, and leaders last week shied away from the challenge. But a key message from Letta is the need to see two things as two sides of the same coin: on the one hand deepening the single market and on the other the strategic goals of Europe’s green and digital transformation and ensuring the bloc does not become dependent on geopolitical rivals . Multiplying economic integration is a prerequisite for achieving anything else.
This connection happens very rarely. Deepening the single market risks dying of…boredom, as it is a technical matter with little political payoff. Popular voices do not arise for an ear and many special interests who wish to maintain certain advantages.
But so was the original single market programme. It took all the political efforts of leaders as powerful and as diverse as Jacques Delors and Margaret Thatcher to make it happen. The leaders who listened to Leta last week must prove they can do the same.
