Call it the Italian Job. Two former prime ministers of Italy are on separate missions with the same goal: to revive the European Union’s competitiveness. Mario Draghi and Enrico Letta are crisscrossing the continent meeting with business leaders, bureaucrats, and bankers. Yet to have any chance of succeeding, they will need to persuade European citizens a revamped bloc can work for their benefit.
For all the handwringing about Europe’s lack of competitive edge, the shortfall is hard to discern in economic data. Per-capita GDP in the EU is about 30% lower than in the United States, when measured on a purchasing power parity basis. Yet that’s partly because Europeans work fewer hours than Americans — and the gap is broadly stable. Nor is the EU obviously a trade laggard.
For the past decade it has consistently maintained a collective current account surplus of more than 2% of GDP with the rest of the world, except in 2022, after Russia invaded Ukraine. Europeans also live longer.
Nevertheless, Europe faces daunting external challenges. When the EU launched its single market in 1993, lowering barriers to trade, movement of labour, and capital flows across the continent, it was following the prevailing free-market orthodoxy.
Three decades on, the world looks vastly different. The United States has deployed tariffs and sanctions to restrict cross-border trade. Tensions with China, the Covid-19 pandemic, and the fallout from the war in Ukraine have prompted governments and companies to reconsider global supply chains. This shift affects an open economy like the EU more than others.
Energy is a particular weak spot. Russia’s attack on Ukraine exposed Europe’s dependence on imported gas. Though the bloc has quickly shifted to other suppliers of hydrocarbons, the upheaval has pushed up the price of power, prompting industrial groups to shift production elsewhere. While the crisis has spurred investment in renewable power, this transition will take decades.
European business leaders also fret about the continent’s dependence on overseas technology. Most advanced semiconductors come from Asia, particularly Taiwan. Despite the European Commission’s efforts to regulate and rein in tech giants, the likes of Microsoft, Alphabet and Amazon.com dominate.
“When I move data to the cloud I have a choice of three American suppliers,” says a European bank CEO. The vast computing resources required for artificial intelligence look set to embed large US tech groups even more deeply into European business.
Meanwhile, the EU is ill-equipped to match the muscular industrial policies adopted by the United States. President Joe Biden has unleashed generous subsidies to stimulate American manufacturing, boost local production of semiconductors, and attract green technology. The EU lacks the coordinated fiscal firepower to respond.
European companies are gratefully pocketing US subsidies. Investment dollars are flowing elsewhere. Capital spending by European companies fell slightly between 2015 and 2022 after taking account of inflation, the McKinsey Global Institute calculates. Over the same period, their US counterparts upped investment by 30%.
The subsidy race has exposed flaws in Europe’s single market. Its architects, led by the late Jacques Delors, wanted to create a level playing field across the continent. Strict rules prevented rich governments from favouring local firms.
The EU suspended that regime during the pandemic and has struggled to reintroduce it as states supported power suppliers stricken by spiking gas prices and handed out subsidies to green energy producers.
Between March 2022 and August 2023, the Commission approved state support schemes worth 733 billion euros , according to the Financial Times. That rivals the sums being spent across the Atlantic – but pits European governments against each other.
When it comes to addressing the EU’s problems, proposals fall into two broad categories. The first is to deregulate. Business leaders point to the lengthy approval processes required to clean up industrial facilities or get new drugs onto the market.
“We have the oldest industries in the world and the most regulations,” sighs one European boss. Competition rules are a particular bugbear.
The Commission has spent 18 months examining the merger of French telecoms group Orange’s Spanish operations with rival MásMóvil, which would reduce the number of mobile operators in the country from four to three. Frustrated executives point out that China, whose population is 30 times the size of Spain’s, has just three major operators.
Yet even as they complain about red tape in Brussels, companies are also pushing for more centralised decision-making, particularly on finance.
The single market has failed to lower national barriers in banking, limiting the scope for cross-border competition. The EU’s attempts to unlock financial flows through a capital markets union have been a flop, in part because governments and national regulators are reluctant to give up power.
It is up to the former Italian premiers to resolve these contradictions. Letta is due to deliver his conclusions in the next few months; Draghi’s recommendations will follow later in the year. Yet perhaps their biggest challenge is finding a way to enthuse EU voters.
In the 1990s, leaders sold the single market as improving choice and opportunity for ordinary Europeans. These days the audience is more sceptical. Citizens fret about immigration.
Small and medium-sized businesses are concerned about larger rivals. Consolidation could raise prices for consumers. European farmers are protesting about green regulations.
Politicians have tapped into the anti-Brussels mood: Geert Wilders, whose far-right Freedom Party won last year’s Dutch election, ran on a manifesto that included a promise to hold a referendum on EU membership.
To have any chance of success, though, the Italian Job of boosting competitiveness will have to start with EU citizens.
— Reuters
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