TINOS, Greece, Sept 16 (Askume Breakingviews) – The European Union brought peace and prosperity to a troubled region in the decades after World War II. But in the decades to come it may lack energy and be impotent.
It’s not just the EU economy that’s stalling. Russia, China, and even the United States could threaten the bloc. While there are some potential solutions, such as the plan proposed by former European Central Bank President Mario Draghi last week, the EU and its member states are unlikely to implement them . It’s a sad, bleak future.
The sad part of this forecast is economic stagnation. Since 2015, EU productivity has grown by an average of only 0.7% per year. Draghi concluded in a report to the European Commission, the EU’s executive branch, that, with a decline in the working-age population, the economy will stagnate.
Worse, the moribund European Union. It is easier to strive for a strong country. Russia poses a military threat, especially if the Kremlin wins the war in Ukraine. The threat from China and the United States, whose economies depend on the EU, is growing faster than trade.
If Donald Trump wins the US presidential election in November, the stakes will be very high for the EU. The Republican candidate could not even muster the courage to say during his debate with Democratic rival Kamala Harris last week that he wanted Ukraine to win the war with Russia. He criticised China and its allies.threatens to impose tariffs . If the EU and the United States become embroiled in a trade war, they are unlikely to unite against Beijing.
blueprint
Draghi laid out a blueprint for revitalizing the EU. He hopes to invest an additional 800 billion euros in the sector each year, which would be about 5% of the region’s output. Most of this would be used to fund industrial policy that competes with the United States and China, with a focus on high-tech sectors such as clean technology and artificial intelligence.
The EU will also strengthen security to deal with the Russian threat. The EU’s arms industry is facing problems of fragmentation. Europe has 12 different types of tanks, while the United States has only one.
Germany’s defence systems are in a particularly dangerous state, according to a separate report released last week by the Kiel Institute. Russia now has the capacity to produce as many weapons in six months as the entire German army currently produces.
Draghi also wants the EU to take a more integrated approach to economic policy. He suggested that industrial policy should be coordinated with initiatives to prevent unfair competition from China and policies to ensure alternative supply chains for key products and materials so that the EU does not become overly dependent on the People’s Republic of China.
The action plan doesn’t end there. The former Italian prime minister also called for reforms to the EU single market to boost productivity growth and improvements to EU governance to prevent the region’s 27 member states from vetoing many initiatives.
While their recommendations are commendable, the political conditions for implementation are not yet ready. This is because the most ambitious measures – covering finance, foreign policy, defence and governance – require unanimous approval by EU member states.
When the governments of Germany and France, the two largest countries, are strong, they can work with the European Commission to shape the EU’s broader interests and persuade smaller countries to take new initiatives, said Marco Buti, a former senior EU official. But that is no longer the case. German Chancellor Olaf Scholz and French President Emmanuel Macron are both politically weak.
In addition, both leaders face challenges from populist right-wing and left-wing parties in their respective countries that are indifferent to the European project. Ironically, the EU will suffer if it fails to do its job of providing more support to extremist parties.
where is the money?
It is hard to imagine how the region could raise 800 billion euros in investment annually. Theoretically, the EU could borrow some of it. But within hours of Draghi’s proposal, Germany’s finance minister rejected the idea.
Governments will also find it difficult to raise cash. France and Italy are already deeply in debt. At the same time, Germany has enacted a law called the ” debt brake” that strictly limits the amount of borrowing the country’s government can do.
In theory, the private sector could provide most of the funding. However, the European Commission and the International Monetary Fund estimate that if 5% of GDP were put into investment, economic growth would reach only 6% over 15 years . That’s not a great reward.
According to the committee’s modelling, for investment to reach the required amount, the cost of capital for the private sector would need to fall by about 2.5%. The public sector must therefore provide the fiscal stimulus – pushing the problem back onto the EU or national budgets.
fingers crossed
The outlook for the EU is not entirely bleak. First, Germany’s federal elections next year are likely to produce a strong center-right government that is able and willing to reform the debt brake. The EU’s largest economy can borrow money to improve its security and boost investment.
On a more optimistic note, Germany could soften its opposition to increased borrowing at the EU level. Jean Pisani-Ferry, a senior researcher at the Brueghel think tank, said the EU might be able to implement parts of Draghi’s plan by then.
Harris’s victory in the US presidential election could also ease pressure on the EU, especially if it deters Russia from taking action on Ukraine. A Democratic White House is also unlikely to pose a threat to the EU.
In addition, Erik Nielsen, chief economic adviser at UniCredit Bank, said China’s economy could stagnate over the next decade. It is already facing many challenges and its working-age population will decline much faster than the EU’s in the coming decades. While the less liquid People’s Republic will buy fewer European exports, Beijing’s ability to bully Brussels will also diminish.
Prayer is not the equivalent of the bold strategic plan championed by Draghi. But it is probably the best the EU can manage.
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