How to Prevent the EU from Falling Behind?

 

Summary

The future of Europe does not depend on what President Trump thinks or will do. Nobody knows and he is to a certain extent unpredictable. The future of Europe will depend on our capacity to take our destiny in our own hands and create the conditions to be more than a playing field. We have become risk averse. It is time to reverse this trend.

 

No single European state can cope with the world's upheavals. There is no other choice than the European Union, unless we want to put our destiny in the hands of one or more foreign powers. Is this what we want after almost 70 years of European integration? Is this what a country like France wants for itself, we who cherish our autonomy of decision and action? I do not think so. However, the next question is even more important: is the European Union capable, does it have the will, and does it have the levers to deal with these disturbances? These are the questions that the new Commission will have to answer and come up with concrete solutions. From defence to the twin transitions of climate change and digital technology, from industrial policy to the establishment of a genuine capital market, what more can the EU do to have a say on the international stage? Mario Draghi, whose report on competitiveness was published on 9 September 2024, is committing the EU to an existential political change on the scale of the creation of the Common Market in 1957. Will the Member States be ready to follow him?

 

But first of all, what are the main changes in the world that are shaping our lives today?

There are four of them: climate change, the digital revolution, identity awakenings (individual and collective) and, above all, the systemic divide. This last point deserves special mention because it is less well known. The United Nations Charter no longer has the anchor for which it was created. The notions of democracy, international law, governance, and territorial sovereignty have lost their original meaning. The war in Ukraine is a reminder of this. Multilateralism is seen as a Western legacy, and opposition to the ‘global South’ is only growing with the emerging countries (BRICS), whose growing number (Egypt, UAE, Ethiopia, South Africa, and tomorrow Turkey) is a symptom of the widening gap between North and South.

These disruptions are the main cause of the growing and, above all, increasingly structural insecurity. We need to learn to live with these risks and threats, because the days of foggy peace are behind us. It is therefore essential for the European Union to build a strong backbone, a resilient immune system around narratives that are not afraid to make themselves known: more independence, more autonomy, more sovereignty. However, beyond these narratives, we need to put in place a modus operandi with clearly defined priorities and funding for the defence of both our values and our interests.

 

What is the situation in Europe?

It is futile to think that it is still possible for a European state to stand up alone to the onslaught of the great powers. Our dependencies and vulnerabilities are now multiple and affect all strategic sectors: security, digital, energy, new technologies, raw materials, rare earths.

In some sectors, such as energy, we have managed to reduce these dependencies (on Moscow, for example), but there is a very real risk of moving from one dependency to another. From Russian gas to exorbitantly expensive American liquefied natural gas, from carbon-based energies to greener energies that consume large quantities of Chinese rare earths, how can we avoid falling from Charybdis to Scylla?

What we need is an overall strategy. The new Commission is preparing for this. The question is: are EU Member States ready for it, and do some of them even want it? Is not the European project doomed, in any case, to be subservient to the United States for its security or to China for new technologies? What place is left for us as a political player capable of taking autonomous decisions?

 

An overall strategy: does the EU have the levers to achieve this?

On the eve of a new European legislature (2024-2029), it is clear that the EU is still not a fully-fledged geopolitical player. Yet the Union has real levers of power that the Member States have not had for a very long time:

1. A lever for solidarity: the world's biggest contributor to development (€70 billion in 2021), third for humanitarian aid. And what about the 85 billion euros for Ukraine (combining EU and Member States)? We are a power of solidarity.

 

2. Leverage of economic, commercial, and normative power. 500 million people, a GDP of 15,000 billion euros, more than 50 trade agreements (compared to 18 for Japan and 14 for the United States). The EU is also a standard-setting framework. Standards that apply beyond our borders, such as competition law, or standards that serve as a reference for the whole world, such as the REACH regulation for chemicals or the RGPD for data protection.

Let us not throw the baby out with the bathwater. However, we must also recognise the reality that the EU remains a political dwarf incapable of ensuring its own security. […] Yet the EU is capable of resisting diktats. We did so in the face of Presidents Putin and Trump. With President Putin on the war in Ukraine. With President Trump on the Iran nuclear deal, climate change and trade agreements. However, resistance is no longer enough. A genuine strategic agenda needs to be put in place. This will be the challenge facing Ursula von der Leyen's new Commission.

The problem is that the EU's DNA was built precisely on the renunciation of any political ambition. This was to avoid the tragedies of the past, including possible collusion between industry and power. Henry Kissinger was well aware that everything possible was done to ensure that the EU had neither a telephone number nor its own armed forces. This dismemberment of power is a pain in the daily work, but has likely contributed, to some extent, to maintaining peace on the continent. Until recently, anyway. Until the war in Ukraine. What we need, then, is a change of DNA - one of the scale of what happened with the Treaty of Rome on 25 March 1957.

 

How can we change our DNA?

“The era of world trade governed by multilateral institutions accepted by all seems to be over," declared Mario Draghi on 9 September 2024. We need a radical change. The cornerstone of this change is the use of our commercial, financial, and regulatory levers for political as well as economic ends. We must direct our efforts toward three priorities:

1. A more autonomous and sovereign global agenda;

 

2. An agenda with an industrial policy that will enable us to boost the competitiveness of European industry in key sectors and counter coercive measures with a bold economic security policy;

 

3. An agenda that maintains our general objective of ecological and digital transition.

Numerous measures have already been taken for several years. However, at this stage, the implementation of these measures is still in its infancy, raising a critical question: how will they be financed? Beyond the rhetoric, this question of investment will have to be at the heart of the new Commission's action if the diplomatic and regulatory work of recent years is not to remain a dead letter. We will be putting forward a number of proposals in this area following the Letta and Draghi reports.

Let us take a closer look at this agenda.    

A global agenda

It is only very recently that the European Union has adopted a global agenda, i.e., an agenda that establishes Europe as a global power. Since 2020 there have been many EU regional strategies, but two main axes stand out: an Asian pivot and an African ‘New Deal.’

1. At the centre of the European Union's Asian pivot is the 2021 Indo-Pacific strategy. Backed by France (its own regional strategy dates from 2019), this strategy focuses on building a security architecture, resilient value chains and standards that frame emerging technologies. The Indo-Pacific region must remain a free and open space, with 40% of the EU's external trade passing through the South China Sea. The European Union intends to create its own network of solid partnerships to rebalance our dependence on China. This pivot is also a way of responding to the United States that Europe is ready, as requested, to support them, but on its own terms. However, there is not yet a common approach to the region […].
2. The second axis of this global agenda is the Global Gateway, also adopted in 2021. Here, the aim is to facilitate the development of the Union's partners, starting with Africa, by building infrastructure to facilitate the digital, energy and ecological transitions in emerging countries. The total amount is 300 billion euros, half of which is earmarked for Africa. 90 key projects have been launched (energy, transport, digital, health). The private sector is at the heart of this initiative to encourage European and African companies to co-finance concrete projects with the support of major European lenders (EIB, EBRD). […] The Global Gateway relies mainly on the European Fund for Sustainable Development Plus (EFSD+), a financial instrument designed to mobilise private investment and public-private partnerships. We will have to keep a close eye on the effectiveness of the funding from this instrument in the years to come.

 

A more sovereign and autonomous agenda   

The European Union can only evolve through crises. The COVID-19 and Ukraine crises shaped the last years of the previous legislation. They are the reason why a change in DNA is essential to the survival of the European project. The Commission is fully aware of this, certainly more than European citizens who are focused on more short-term objectives, and our common future will depend largely on its ability to change the course of events.

This realisation has a name: Versailles. The summit of heads of state in Versailles in March 2022 was certainly a turning point, a painful but necessary wake-up call. Three priorities were set out:

1. Putting an end to our strategic dependencies, protecting our sources of supply, diversifying them, repatriating them if necessary, and preparing strategic stocks. The Commission is undertaking a regular, in-depth review of Europe's strategic dependencies (in particular through its industrial strategy, which will be revised in 2021) in five areas: rare earths, chemicals, solar panels, cyber security, and computer software. This work is remarkable, but extraordinarily complex […].

 

2. Putting an end to 20 years of disinvestment in the defence sector. The war in Ukraine revealed weaknesses that we knew about, but whose extent we had not imagined: munitions, missile defence, tanks, combat aircraft, intelligence, Command and Control (C2). Everything needs to be reviewed. This is the purpose of the Strategic Compass. More than just a White Paper, this compass serves as a genuine roadmap for the next ten years in four areas: operations (taking action), resilience (ensuring security), investment (investing) and international cooperation (working in partnership). […] Lastly, there is an absolutely urgent need to restructure a fragmented defence industry with barriers to entry that are too high for technology start-ups, which are increasingly short of qualified personnel (engineers) and financial support. The alarm bells have been ringing within the Commission and new initiatives (EDIP, EDIS) are currently being proposed.

 

3. The third and final priority is to put in place large-scale recovery plans. Two major Commission initiatives should be mentioned here, one preceding the Versailles Summit (NextGeneration EU) and the other following it (REPowerEU), but both are clearly at the heart of the debates at the March 2022 Summit and will undoubtedly be priorities for the new Commission. […]

 

An industrial policy agenda    

We have been hearing a lot about industrial policy over the last five or six years, especially from former Commissioner Thierry Breton. In truth, industrial policy is an old European sea serpent. The Davignon programme, the Maastricht years, the Lisbon strategy, Important Project of Common European Interest (IPCEI), Horizon 2020 - the list is endless. What is certain is that most of them have been somehow failures. What is also certain is that most of them were aimed at catching up technologically -  just like today.

However, there is today a new dimension to consider. We have indeed fallen behind in key areas for our dual transition, but there is also a more political dimension: we are the victims of economic, commercial and financial predation by states prepared to do anything not only to establish their global dominance but also to make the European Union disappear as a distinct entity. Europe as a model for life has given way to Europe as a playground for the superpowers.

This awareness of an economic and political model whose very foundations are being challenged is relatively recent. We must applaud the industrial policy arsenal put in place over the last five years by Commission President Ursula von der Leyen to stem this. There are many initiatives: control of outward investment, dual-use regulation, an instrument to combat economic coercion, revision of competition law, an increase in European and national aid, support for the defence industry, regulation on critical materials, not forgetting the citizen himself with data protection (GDPR, Digital Markets Act, Digital Services Act). The Snowden and Cambridge Analytica affairs have also come to the fore. All this is no mean feat, and forms the toolbox of the economic security strategy of June 2023, the keystone of former Commissioner Breton. The question now for the new Commission is: beyond the texts and political declarations, how can all this be put into practice?

 

The challenges of the new Commission (2024-2029)

A few figures suffice to explain the scale of what is at stake. The Commission estimates the EU's investment needs for the ecological transition (Green Deal and RePowerEU) at €620 billion per year and €125 billion for the digital transition. […] Technologies need to be mastered: artificial intelligence, quantum technologies, biotechnology, robotics, net zero technologies. Many of these technologies are dominated by China, whose exports of electric vehicles, for example, have increased by 70% since 2022, and which produces 85% of the world's photovoltaic panels. For its part, the United States has imposed 100% customs duties on Chinese electric vehicles […]. In the introductory remarks to his report on competitiveness, Mario Draghi, former head of the ECB and ex-President of the Italian Council, says that the EU needs to invest €750-800 billion a year, or 5% of its GDP, if it is to avoid falling behind China and the United States in technology.

Fighting economic declassification and restoring competitiveness are therefore at the heart of the new Commission's priorities. How can we avoid falling behind?

 

What roadmap do we need for Europe to avoid falling behind?

On 20 June 2023, the European Commission and the High Representative of the Union for Foreign Affairs and Security Policy signed the Joint Communication on the European Economic Security Strategy.

All attention is focused on the competitiveness of the European Union, as shown by the Draghi report. Four specific objectives are being prioritised to revive growth: industry, to reduce our dependence and ensure the twofold transition; innovation, without which we will fall further behind; public and private financing, the key to reviving our competitiveness; and finally security and defence, for greater strategic autonomy, without which our political and economic independence will be lost.

However, these particular objectives pose serious challenges.

1. How can we put into practice the policy framework designed to reduce our dependencies?

Whether we are talking about semi-conductors, raw materials, health, investment control, coercion or the resilience of the single market, the measures taken in four years are unparalleled in the history of the European Union. However, as Jean Pisani-Ferry points out, major questions remain. […]

2. How can we revive the industrial and financial machine, in particular productivity and investment?

If Europe is to regain its competitive edge, it will need to grow faster, and to do that, it needs to boost productivity. Productivity has been falling for 15 years and, according to Mario Draghi, our technological deficit is set to increase still further with AI (70% of AI models are developed in the United States). We invest less than the US and China in digital technologies. Of the world's top 50 technology companies, only 4 are European. The reasons why productivity has not been boosted by the single market remain largely unexplained. […]

The Letta report also highlights another factor (in addition to productivity) in the decline in competitiveness in Europe: the excessive fragmentation of markets in the financial, energy, telecoms and defence sectors. Excessively high barriers to entry, insufficient vertical and horizontal concentration and limited funding are preventing markets from evolving and coping with global competition. Relaxing the rules on corporate mergers and acquisitions is one of the measures proposed in the Draghi report. However, according to the report, the Capital Markets Union should be the main cornerstone for boosting competitiveness in Europe. According to EU estimates, the integration of capital markets would make it easier for EU companies to raise funds on the financial markets. 470 billion a year in additional financing could be mobilised as a result of this harmonisation. […]

Finally, it should be remembered that the revival of the industrial machine will have to be accompanied to some extent by a revival of the financial machine, which will mean accepting (or not) to go even further in the current transgression of European budgetary rules. […] Twice in the last 10 years, the EU has shown boldness that has paid off. Firstly, in 2010-2012, during the sovereign debt crisis, Mario Draghi, then President of the ECB, transgressed the budgetary rules (with a broad interpretation of what are today Articles 123 and 124 TFEU), clearly allowing the money printing press to operate. Then, in July 2020, the EU Member States agreed on a recovery plan, the only one of its kind in the history of the Union, to the tune of €750 billion. This is a joint debt financed by the Commission. […] Is it still possible and desirable today? In other words, should we finance our industrial policy (competitiveness, defence industry) with a common debt, as the US does? Here we are probably reaching the limits of the exercise. […]

The European Commission and the Member States are fully aware of these challenges. The framework is in place, now it is time to act. […] This time we will have to do more: set a new course and stop blaming foreign powers for our difficulties in meeting the challenges of tomorrow. We are the problem and the solution.

 

This contribution is drawn from an article published by the Author on Diploweb.com. The full version of the article is available in both English and French on Diploweb.com. The Author wrote in his personal capacity.

Copyright October 2024-Dupré/Diploweb.com