NO single European state can cope with the world’s disorders. There is therefore 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 address these disorders ? These are actually the questions that the new Commission will have to answer and come up with concrete solutions. From defence to the twofold transition 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 calling on the EU for an existential political change of the magnitude of the creation of the Common Market in 1957. Will the Member States be ready to follow him ?

First of all, what are the main disorders in the world that are shaping our lives today ?

There are four of them : climate change, the digital revolution, identity rises (individual and collective) and, above all, the systemic divide. This last point deserves further elaboration because it is less known. The United Nations Charter no longer has the foundation on 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" keeps on growing with the emerging countries (BRICS), whose increasing number (Egypt, UAE, Ethiopia, South Africa, and tomorrow Turkey) is a symptom of the widening gap between the North and the South.

These disorders are the main cause of growing insecurity that is above all more and more structural. We need to learn to live with these risks and threats, because the days of the fog of peace are behind us. It is hence essential for the European Union to build a sturdy backbone, a resilient immune system around narratives that are not afraid to show up : more independence, more autonomy, more sovereignty. However, beyond narratives, it is about setting up a modus operandi with clearly defined priorities and funding to defend both our values and our interests.

What is the situation in Europe ?

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

In some sectors, such as energy, we succeeded in reducing these dependencies (on Moscow for example), but the risk is quite real to move from one dependency to another. From Russian gas to exorbitantly expensive American LNG, 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 indeed is a comprehensive strategy. The new Commission is gearing up for this. However, are the Member States ready for it, and do some of them even want it ? Is not the European project condemned anyway to become a vassal of the United States for its security or of China for new technologies ? What place do we have left as political actors capable of making decisions autonomously ?

A comprehensive strategy : does the EU have the levers for 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. However, the Union has genuine levers of power that the Member States have no longer had for a very long time :

1. Lever of 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 both EU and Member States). We are a solidarity power.

2. Lever of economic, commercial, and normative power. A few figures allow to measure this leverage. 500 million people, a GDP of 15,000 billion euros, more than 50 trade agreements versus 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 worlwide, such as the REACH regulation for chemicals or the GDPR for data protection.

Hence let us not throw the baby out with the bathwater. However, we must also acknowledge the reality that the EU remains a political dwarf unable to ensure its own security. We remember the humiliating sequence between Sergueï Lavrov and Josep Borrell in 2021 during the press conference that turned to be an ambush (condemning the American sanctions against Cuba) or the expulsion of three European diplomats posted in Russia even before the end of the talks. Yet the EU is capable of resisting diktats. We did it in front of Presidents Putin and Trump. With President Putin on the war in Ukraine. With President Trump on the Iran nuclear accords, on climate change and on trade agreements. However, resistance is no longer enough. A genuine strategic agenda needs to be set up. This will be overall the challenge facing Ursula Von der Leyen’s new Commission.

The issue is that the EU’s DNA has been built precisely on the renunciation of any political ambition. This was to avoid the tragedies of the past, including possible collusions 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 army divisions. This dismemberment of power is a suffering for the daily work, but it has probably contributed to a certain 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 magnitude 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 based on the use of our commercial, financial, and regulatory levers for political as well as economic goals. With 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 funded ? Beyond the hype, 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 in the wake of the Letta and Draghi’s reports.

Let us take a detailed 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 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 we have the 2021 Indo-Pacific strategy. Backed by France (its own regional strategy dates back in 2019), this strategy focuses on building a security architecture, resilient value chains and standards that support emerging technologies. The Indo-Pacific region must remain a free and open space, while 40% of the EU’s external trade transit across the South China Sea. The European Union intends to create its own network of robust partnerships to rebalance our dependency 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, far from it, a common approach to the region but conversely there are several sensitivities depending on strong ties with the United States (Poland, Netherlands for example), the quest for greater strategic autonomy (France), or the desire for a balanced policy with China (Germany, Italy). The very notions of "systemic rival" and "de-risking" vary greatly from one European country to another ;

2. The second axis of this global agenda is the Global Gateway programme, also adopted in 2021. Here, the objective is to facilitate the development of the Union’s partners, starting with Africa, by building infrastructures 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 foster European and African companies co-financing concrete projects with the support of major European lenders (EIB, EBRD). This is the very spirit of "Team Europe". To date, however, Global Gateway has been widely criticised as a communication exercise or the rebranding of already existing European projects. It is still a little early to criticise the lack of concrete results, but one thing is sure : Global Gateway relies mainly on the European Fund for Sustainable Development Plus (EFSD+), a financial instrument that aims to mobilise private investments and public-private partnerships. We will have to keep a close eye on the effectiveness of the funding of this instrument in the coming years.

A more sovereign and autonomous agenda

The European Union is only able to move on through crises. The COVID-19 and Ukraine crises shaped the last years of the previous legislation and are the causes of DNA change that is pivotal 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 states in Versailles in March 2022 was certainly a turning point, a tough but necessary wake-up call. Three priorities were set out :

1. Putting an end to our strategic dependencies, protecting our supply sources, diversifying and repatriating them if necessary, and preparing strategic stocks. The Commission is undertaking a periodic and in-depth review of Europe’s strategic dependencies (in particular through its industrial strategy revised in 2021) in five areas : rare earths, chemicals, solar panels, cyber security, and computer softwares. This work is remarkable, but extraordinarily complex, because it involves evaluating basic, intermediate, and finished products for industries that are, for most of them, in a digital and ecological transition. The simple definition of a "finished" product is complex.

2. Second priority : 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 anticipated : ammunitions, anti-missile defence, tanks, combat aircraft, intelligence, command and control (C2). Everything must be re-assessed. This is the purpose of the Strategic Compass. This compass is more than just a White Paper. It is 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). While real progress is being made in cooperation and investment, the issue of operations remains problematic for many Member States, and for the United States as well, with significant risks of duplication with NATO. One example is the concept of a rapid deployment capacity (RDC), which under certain circumstances could duplicate NATO’s NRF and future ARF. 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 bell was rung with new Commission’s initiatives (EDIP, EDIS) which still need to be approved.

3. Third and final priority : 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 (REPower EU) but both are clearly at the heart of the debates of the March 2022 Summit and will undoubtedly be priorities for the new Commission.

A few words about each of these plans :

. NextGeneration EU. The reasons why Germany finally gave in on this 750 billion euros recovery plan (aid and subsidies) in the midst of the COVID-19 crisis will not be analysed here. However Berlin was certainly the key to unlocking this unique instrument (joint debt repaid by the Commission and not by Member States) aimed at repairing the economic and social damages done to Europe after COVID, and to stimulate the recovery of climate (37% of the plan) and digital (20%) transitions. A plan that financed 40% of France’s €100 billion recovery plan. This is less well known. Four years on what is the outcome ? What metrics should be used to assess the socio-economic and environmental impact of this spendings with a wide range of objectives ? To date, less than a half of the €750 billion has been spent. And many questions remain : 1/ The Member States’ capacity to absorb the funds ; 2/ A diversion from the initial objectives (the funds didn’t all served the emergence of new initiatives, but have sometimes replaced other national funds already committed) ; 3/ The rising of energy costs and the disruption of supply chains have slowed down the expected achievements ; 4/ The real duplication with other European funds (RePowerEU, Net-Zero Industry Act, European Sovereignty Fund). There are undoubtedly lessons to be learned for those Member States seeking to replicate the experience of a common debt fund to relaunch the overall EU’s competitiveness or the defence industry.

. If we were to give an example of a European initiative that followed the Versailles Summit with real, concrete and operational deliverables, it would probably be RePowerEU. Adopted in May 2022, this proposal aims to reduce the European Union’s dependency on Russian fossil fuels and speed up the transition to green energy. Genuine results have been achieved for the Russian gas (diversification strategy) and for the targets of reducing fossil fuel consumption by 2030. On the other hand, there has been delays in wind power, biomethane and hydrogen. However, the main stakes of this initiative lie elsewhere. First of all, we ought to recognise the complexity of the financial mechanisms put in place, particularly in view of the multiple and opaque transfers between European and national funds to support RePowerEU. Above all, the issue lies in the administrative mille-feuilles between the states and their own regions, while the latter are often responsible for implementing the energy transition without always having the means. The sustainability of the initiative is a major question mark.

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, the industrial policy is an old European sea serpent. The Davignon programme, the Maastricht years, the Lisbon strategy, major projects of common European interest (IPCEI), Horizon 2020, it is impossible to make a complete list. What is certain is that most of them have been failures. What is also certain is that most of them were aimed at catching up technologically. Just like today.

With a new dimension however. We have indeed fallen behind in key areas for our twofold transition, but there is a more political dimension in addition to this : 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 of living has given way to Europe as a playground for superpowers.

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

The stakes of the new Commission (2024-2029)

A few figures are enough to explain the stakes’ scale. The Commission estimates the EU’s investment needs for the ecological transition (Green Deal + RePowerEU) at €620 billion per year and €125 billion for the digital transition. The sectors identified as strategic are : defence, energy, critical raw materials, digital, semi-conductors, health and food products. The technologies that must 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 and the IRA is planning a budget of $1,000 billion to support investment in clean energy production between now and 2032. In the introductory remarks to his report on competitiveness, dated 9 September 2024, Mario Draghi, former head of the ECB and ex-President of the Italian Council, confirms these figures. The EU, he says, needs to invest €750-800 billion a year, or 5% of its GDP, if it were to avoid falling behind China and the United States.

Renewing with investment and competitiveness are therefore the new top priorities of the Commission. How to do that ?

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 in the Draghi report. Four specific objectives are being prioritised to relaunch growth : industry, to reduce our dependencies and ensure the twofold transition ; innovation, without which we will fall further behind ; public and private financing, the keystone 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 operationalise the policy corpus planned to reduce our dependencies ?
Whether we are talking about semi-conductors, raw materials, health, investment control, coercion or 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. The adequacy between target and critical products is unsound, the cost-benefit analysis of each measure is too often absent, and this policy corpus is based on weak governance. The Draghi report suggests ways of regularly identifying critical import dependencies (and of monitoring our exports more closely), of ensuring that EU companies pay more systematic attention to their supply chains, and of setting up an "EU ARPA" based on the US model to strengthen governance and the ways of financing critical technologies. Take, for example, IPCEI, the major projects of common European interest that enable Member States to support their industry with national aid for critical technologies. The governance of these projects could be greatly improved. For example, between 2022 and 2023, Germany and France accounted for 3/4 of the aid allocated by these projects within the EU. The spectrum must be broadened. A genuine European industrial policy, i.e. unified at EU rather than national level, must be preferred to the support of national champions in order to strengthen the economic and social cohesion of the European territory. There is probably a all reflexion to be launched on the link between competitiveness and cohesion policy (structural funds between regions), which account for 1/3 of the European budget.

2. How the industrial and financial machinery, in particular productivity and investment, can be relaunched ?

Restoring competitiveness in Europe requires faster growth and to do that boosting productivity is needed. 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 United States and China in digital technologies. Among 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. Of course, not all countries are equal, and France is rather a poor performer in this respect. However, the problem is widespread, and is probably partly due to the European economy’s difficulty in mobilising savings for innovation and cutting-edge technologies instead of buying American debt. Until fairly recently, it was also due to the reluctance of banks such as the European Investment Bank (EIB) to finance risk. While it was growing older, the European Union has become risk averse.

The Letta report also highlights another factor (in addition to productivity) in the competitiveness decline in Europe : the excessive fragmentation of markets in the financial, energy, telecoms and defence sectors. Excessive high barriers to entry, insufficient vertical and horizontal concentrations and limited funding are preventing markets from evolving and coping with global competition. Relaxing the rules on corporate mergers and acquisitions is among the measures proposed by the Draghi report.

However, according also 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. However, it will be necessary to ensure that such a strategy is accompanied by measures guaranteeing the stability of the financial markets in order to ensure that investments are properly channelled into the real economy and to mitigate the risks of speculative drifts.

Finally, it should be remembered that the revival of the industrial machinery will have to be accompanied to some extent by a revival of the financial machinery, which will mean accepting (or not) to go even further in the current transgression of European budgetary rules. Here, we have a head-on clash between certain Member States in the North of Europe, the so-called frugal states (Austria, Denmark, the Netherlands, Sweden), generally supported by Germany, and the countries in the South which are more than 100% in debt (France, Italy, Portugal, Greece). There is already a body of case law to help arbitration. In fact, 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 Articles 101 and 102), clearly allowing to operate the money printing press. Then, in July 2020, the EU Member States agreed on a unique recovery plan in the history of the Union amounting to €750 billion. This is a common debt financed by the Commission. Germany played a key role in this historic agreement (Berlin’s green light was also facilitated by the trade war with the US on the car market) and what was unthinkable yesterday has become possible. Is it still possible and desirable today ? In other words, should we finance our industrial policy (competitiveness, defence industry) with a common debt alike the United States ?

Here we are probably reaching the limits of the exercise. These limits are largely due to Germany’s acknowledgement (or not) of Europe’s current stalling, which would be of such a magnitude as to justify exceptional financial measures, as it was the case for COVID-19. Recent decisions seem to show that Berlin is not yet ready for this :

. On 20 December 2023, after months of negotiation, France and Germany finally reached a compromise on a reform of the European budgetary rules that however seems to benefit Berlin. The agreement reached retains indeed the 3% and 60% thresholds (deficits must remain below 3% of GDP and the level of public debt must not exceed 60% of GDP), with the possibility conceded to France of extending the adjustment period to 7 years (instead of 4). This concession will benefit only those Member States that will implement reforms and investments in the framework of the European Union’s political priorities (double transition, defence). For France, this is a compromise that still requires some serious internal budgetary adjustments. With a budget deficit of 5.5% of GDP in 2023, a public debt of 111% in the same year, and Commission forecasts of 113.8% for 2025, there is little room for manoeuvre ;

. The new French government (Michel Barnier) will therefore have to respect the tightening of its budgetary policy approved by the eurozone ministers for 2025 in order to strengthen public finances that have been seriously affected by the recent successive crises (pandemic, war in Ukraine...) ;

. It is clear that the budget reform of December 2023 reinforces the German position and raises existential questions for the French economy. How can France be reindustrialised under such tightly conditions ?

. On closer scrutiny, the two countries are the problem and a large part of the solution : if Germany and France cannot agree to revive the European economy from their respective strengths - austerity on the one hand (German deficit forecast at 1% in 2025) and a sense of commitment and initiatives on the other (cf. the many French initiatives for EU industrial policies), the EU will most probably fall behind. To succeed, Berlin and Paris must go part of the way towards each other by renouncing, for Germany, to a certain budgetary rigidity in order to revive their economy (and that of the European Union), and for France, by committing to greater financial rigour to restore national and European confidence in its policy. Restoring this confidence is the key to getting Europeans’ savings out of American hands in order to stimulate investment. Let us make it clear. It is not just a question of promoting Franco-German champions, but of putting in place a genuine industrial policy that is not simply national, but European, which will make the European Union boom in all its territories. The rule of fair return must give way to a more strategic vision of tomorrow’s stakes. Whether on space, aeronautics, defence, energy or the capital market, we need to allocate our strengths throughout the whole European territory.

As we can see, there is a long way to go since there are so many conditions to avoid decoupling. That is why, while maintaining the strategic vision, we need to simplify the issues at stake by starting to define existential priorities, i.e. the priorities that are rooted in all the others : energy and defence. These are two sectors which, if not mastered, will increase our economic, psychological and political dependency. Security of supply, control of energy prices and costs, coordination and complementarity of energy mixes are the sine qua non condition of our international competitiveness. Equally important is our credibility in the domain of defence. The question is not so much to know by what pillar should Europe strengthen its defence - either EU or NATO - because neither will work without the other. The real issue is about our determination to reinvest in a strategic sector that we have neglected for too long and whose current weakness is contributing to our political and economic dependency.

The European Commission and the Member States are fully aware of these stakes. The framework is in place. Now it is timely to take action. Germany and France have shown on several occasions in their recent history the ability to overcome their differences. This time more must be done : we need to reset our course of action and stop blaming foreign powers for our difficulties to face up to tomorrow’s stakes. The EU is both the issue and the solution.

Copyright October 2024-Dupré/Diploweb.com