Europe must reform rapidly or sink into irrelevance

These are critical months for Europe. In June, the continent will vote in European parliamentary elections. Shortly afterwards, Mario Draghi, former Italian prime minister and president of the European Central Bank (ECB), will release a much-awaited outline for European economic growth and competitiveness. Then the process of choosing the next European Commission president will begin.

Underlining them all will be one question: can the old continent enact the economic and political reforms required to ensure it continues to play a central role in an increasingly complex and less amenable new world order?

Since the eurozone crisis, the economic landscape of Europe has fundamentally shifted. Convergence was always a promise of the single currency, but it never happened.

After the adoption of the euro at the turn of the century, for the first two decades the countries that prospered were the richest – largely Germany and the affluent north – whereas those who had been given the promise of flourishing – Italy, Greece and Spain – floundered.

Since the pandemic, however, the tide has turned. A recent growth spurt in southern Europe is reviving hopes of faster convergence between the eurozone’s traditional laggards, the Mediterranean economies, and its industrial behemoths in the north.

According to the Financial Times, Portugal, Italy, Greece and Spain have collectively outgrown Germany – the bloc’s largest economy – by about 5% since 2017.

Germany’s economy has stagnated since the pandemic struck in 2020. A sharp slowdown in its vast manufacturing sector was exacerbated by a rise in energy prices precipitated by Russia’s invasion of Ukraine. Southern European countries have been boosted by their lower exposure to the manufacturing downturn and Russian gas.

The significance of this shift in Europe is of existential importance. Without a sense of shared progress within the EU, unity and cohesion are impossible.

Politically, the pandemic served as a clear reminder of the essential need for closer integration. The precedent set by the extraordinary decision in 2020 to create an $800-billion pandemic recovery fund of common borrowings, used to support investments disproportionately in poorer members, changed Europe forever.

The EU now has debt of more than €1-trillion outstanding, making common European debt a global benchmark. Europe has essentially issued “Eurobonds” and become a “transfer union”, which for decades were both unthinkable in Berlin and other more “frugal” capitals.

Although these are welcome developments, the challenges confronting Europe are unprecedented in modern times. First is maintaining military and financial support for Ukraine, especially as the US becomes increasingly preoccupied at home.

Second is boosting Europe’s defence capabilities, which are estimated to need an additional €56-billion of funding a year, according to the Ifo Institute, a German think-tank.

Finally, there are the political insurgencies of right-wing nationalist parties throughout the EU, which play on voter frustrations with migration and an underfunded welfare state. They want nothing less than to break down the edifice from the inside and revert to a much looser “Europe of nations”, as described by French far-right politician Marine Le Pen.

Critical reforms

The solutions to all these challenges are investment and growth. In a recent speech in Florence, Isabel Schnabel, the German member of the ECB’S executive board, said: “To assert its role, the euro area needs to remain competitive. It must be capable of creating the sustainable growth that our social and economic fabric depends on.”

But to achieve this, she argued, far faster progress on reforms needs to be made.

First, reforms specific to member states are essential. Germany needs to reorient the country’s export-focused economic model, and southern nations must build on recent progress and step up structural reforms.

But national reforms alone are insufficient. Eurozone-wide growth and the continued convergence of economic trajectories can only come from coordinated economic policy and deeper integration.

More common borrowing to support defence and the green economy will be needed. Other reforms, such as a completed banking and capital markets union, are equally crucial to allow investment and savings to flow between the north and the south.

As the global order becomes ever more fractured, Europe’s role should not be overlooked. In a world increasingly torn apart by the vagaries of a schizophrenic America, a bellicose Russia and an ever more assertive autocratic China, Europe still represents a counterbalance of liberal, rule-based foreign policy and social democratic values. For all those around the world who value such notions, rarely have the odds been higher. DM