Perhaps Europe’s biggest problem is not external competition but internal fragmentation.
The obstacles to growth and global competitiveness faced by EU industries should also be blamed on the member states’ reluctance to address the issue of fragmentation within the European system head-on, observers from across the EU say.
Deepening the single market
The incomplete nature of the European internal market, or ‘single market’, poses a significant barrier for the European Union, as emphasised in a landmark report by Enrico Letta.
This is estimated to lose the European economy between 300 and 500 billion euros in GDP each year.
Lachezar Bogdanov, chief economist at the Institute for Market Economics in Bulgaria, agrees. He points out that many member states have failed to fulfil their obligations in this regard.
Lachezar Bogdanov, Chief economist, Institute for Markets Economics, Interview by Eleonora Tropanska, BNR (in Bulgarian)
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โEach country imposes its own national requirements, which are very often different. And not just for services, but also for goods. In fact, quite a few countries are periodically subject to disciplinary proceedings for restricting the functioning of the single market. In this respect, too, we have failed to do our homework. So, before we look to the US for tech giants or to China and other Asian countries for industrial giants, we must ask ourselves what is hindering the growth of companies in Europe. One of the obstacles is the fragmentation of the single market and the barriers being erected. Ultimately, we have 27 national markets instead of one large, common European market.โ
The single market is particularly fragmented in key sectors such as finance, digital services and energy. European start-ups report reaching a growth ceiling in these sectors and, in order to scale up, often choose to move to the US to access capital and a large, unified market. As an aside, while countries such as Germany are concerned about erecting new global barriers, it is interesting to note that they do not score particularly well when it comes to removing internal ones!
Earlier this year, EU institutions agreed on a roadmap entitled ‘One Europe, One Market’, setting out the way forward. It focuses on deepening and integrating the single market, further simplifying rules, reducing administrative burdens, ensuring affordable energy, achieving the energy transition, fostering Europe’s industrial renewal and innovation, reducing dependencies and mobilising investment. All institutions have committed to implementing these actions by the end of 2027 at the latest.
Capturing capital
A fully-fledged Capital Markets Union is another essential step towards competitiveness, says the former governor of the Bank of Portugal, Carlos Costa. It would help pool out resources to support EU industriesโ energy transition, finance European innovation, and support security investments.
Carlos Costa, Former governor of the Bank of Portugal, Interview by Pedro Mesquita, Renascenรงa (in Portuguese)
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โThis implies two things: the ability to place capital where it is most efficient, regardless of the country where those opportunities arise. And it also implies guarantees for those who invest capital for that purpose. The fact is that member states have been very protective of their specific market organisation, their rules and even their authorities, and have not been willing to create a single stock exchange, a single market authority, a single insolvency regime, or a single jurisdiction. And what the EU has observed is that this limits its capacity for investment and innovation.โ
But what might such a union look like in practice?
Carlos Costa, Former governor of the Bank of Portugal, Interview by Pedro Mesquita, Renascenรงa (in Portuguese)
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โNow, there are two possibilities: either the European Commission proposes a common regime, running in parallel with each member stateโs regime, in which investors and companies can operate outside national rules; or โ as per the solution now emerging from the European Council โ a majority of member states agree to move forward in the expectation that the others will subsequently follow, once persuaded by evidence of the resulting benefits.โ
While the European commission and parliament are actively pushing ahead with the banking union project, financial centres such as Ireland, Luxembourg and Malta, along with a few other countries, are resisting, keen to preserve their national legislation.
But could the wind turn? In fact, it is already looking like these financial centres may have lost some of their dynamism. Vincent Hein, director of IDEA, a think tank of the Luxembourg Chamber of Commerce, says that the country has experienced zero growth since the energy crisis โ a first โ and that the financial sector has ceased to act as a lifeline.
Vincent Hein, Director of IDEA, Interview by Jean-Claude Majerus, Radio 100,7 (in French)
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โWhat has been happening here since 2022 is that the financial centreโs added value is falling โ and falling more than the Eurozone average. [โฆ] Overall, we see that this sector is still struggling to regain positive momentum because there is also an interest-rate crisis. The 2022 crisis is an interest-rate crisis accompanied by a market correction.โ
In this context, the integration of capital markets at European level could bring some new growth opportunities to Luxembourg, in particular as it is already a global leader in green bondsโฆ
Meanwhile, the energy crisis poses a huge threat to the entire global economy, and the European economy is particularly vulnerable, asserts Portuguese MEP Bruno Gonรงalves from the socialist and democrats group.
Bruno Gonรงalves, Member of the European Parliament – S&D/Portugal, Interview by Alexandre Abrantes Neves, Renascenรงa (in Portuguese)
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โWhile we may be speaking in the medium term, there is a structural problem within the global economy. There is no point in lying to people: we are heading for a global recession. And Europe is the continent that stands to lose the most in this regard. We are at a disadvantage in terms of both price and availability as we rely heavily on natural gas from the Middle East.โ
In response to the war in Ukraine, the Commission launched the โRePower EUโ programme in 2022 to reduce our dependence on Russian gas, save energy, diversify our suppliers and accelerate the production of clean energy.
Four years on, we have indeed reduced our dependence on Russian gas to less than one third of 2021 levels โ yet we have, conversely, increased our reliance on American gas.
We have also seen a boom in renewable energy across the continent. However, when the economy bounced back following the major energy crisis triggered by Russiaโs war on Ukraine, several member states lost sight of the urgency of implementing greener yet more restrictive and demanding measures. It is therefore only now, with yet another crisis โ due to the war in the Middle East – that member states are finally realising the importance of this roadmap and resuming its implementation.
Other plans include decoupling the electricity and gas markets to reduce dependency and price volatility, accelerating electrification to replace fossil fuels, and introducing ‘electricity as a service’, where users pay for so-called โenergy outcomesโ such as comfortable temperatures, bright spaces or operational power, rather than just the volume of kilowatt-hours consumed.
Until member states agree to surrender their national vetoes, unify their financial markets, and issue collective funding, the EU’s structure will continue to act as a handbrake on its own competitiveness.
- Hermine Donceel, Euranet Plus News Agency
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