Asian giants put pressure on Europe’s economic model

A red letter day is one of special significance whose origins date back to the Roman Empire when important occasions were colored red on calendars.

Fast forward around two millennia later, and the EU has its latest big moment of significance earlier this month with former Italian prime minister Enrico Letta delivering his potentially landmark report on the future of the European Single Market.

While this is a topic intrinsically economic in origin, it is geopolitics too, driving what is a sweeping set of recommendations.

According to Letta, the need for change reflects a vastly changed international political context facing the EU in recent years, even with longstanding allies.

He has specifically warned that a “Trump 2 will be different from Trump 1 … the single market of the beginning was for a small world, now we need a single market with teeth for a big world.”

What Letta is pointing to here is how much the world has changed since 1993 when the Single Market came into being to allow for the free movement of goods, services, people and capital, within the EU.

While this initiative is widely seen as one of the bloc’s biggest achievements, there are growing concerns that it needs a reboot to reflect the vastly different world of the 2020s.

Whereas the EU accounted for around 20 percent of global GDP thirty years ago, it is nearer half that today (approximately 13.3 percent), and declining still.

While one constant today is that the United States remains an economic peer of the EU, the massive Asian emerging markets of China and India are the new kids on the block, bringing with them a major new set of challenges, and opportunities too.

So Letta is clear in his almost 150-page report that the Single Market faces its greatest ever threat as the EU recovers from the economic aftermath of the pandemic, and war in Ukraine.

He argues that “no single member state can compete with the United States on gas or oil prices, as they are the world’s largest fossil producer … Nor Europe can replicate some advantages that China’s state-controlled economy can deploy.

But the EU has a continental scale energy market united by a modern, sophisticated regulatory framework unmatched around the world,” indicating that the bloc increasingly needs to find continental scale solutions, including looking at how subsidies “can become a more European tool and less a national tool.”

His conclusion therefore is that “the EU must step up its efforts to develop a competitive industrial strategy capable of counteracting instruments recently adopted by other global powers, such as the U.S. Inflation Reduction Act (IRA).”

The report has a strong focus on integrating the energy, telecommunications and finance industries with a roadmap to achieve progress in the next half decade.

Take the example of energy which Letta asserts the EU should further integrate.

Specific ideas proposed include adopting a cross-border cost-benefit allocation methodology to expedite roll out of regional offshore wind projects; developing cross-border systems for procuring flexibility and joint auctions for renewables; developing green bonds to support energy infrastructure projects; revising the EU gas supply security framework and setting up a mechanism for joint purchasing of critical minerals.

So the goal is advancing the EU’s green and digital transitions while boosting its strategic autonomy, industrial, trade and market competitiveness.

According to various stakeholders, including former European Central Bank chief Mario Draghi, and wider stakeholders such as the European Trade Union Confederation, this means plugging a funding gap between Europe and other economic peers like the United States in terms of investment that may be equivalent to around half a trillion euros a year, or more than 3 percent of the bloc’s GDP.

The Letta report is being discussed this week by the EU’s senior leaders, including its 27 presidents and prime ministers.

Moreover, it will be given an added boost by the synergy it has with the forthcoming report on the broader topic of European competitiveness by Draghi, another former Italian prime minister.

Draghi also argues that massive investments are needed in the green and digital transitions.

On the digital transition, the region risks potentially not capitalising upon the next technology revolution of AI and quantum, in the same way as it did not do with the early 2000s internet technology boom.

On the green transition, meanwhile, the EU is placing much emphasis on this policy area through its Green New Deal.

However, this is not always matched by commensurate resources, while the $369 billion dollar IRA is widely seen as a game changer, with China continuing to offer significant state support to its firms.

The Letta and forthcoming Draghi reports reflect major moments in Europe’s political economy, and the key question now remains is whether, in the midst of a big election year, Brussels will be able to act decisively with other crises ongoing like Ukraine and the Middle East.

The key next step will be marshaling a broad bloc-wide consensus around a bold set of reforms, and the funding to deliver this, with a potential window of opportunity in the next European Commission from late 2024 and 2025.