More than two decades ago, the EU unveiled its Lisbon Strategy, which set out to transform the bloc into “the most dynamic, competitive, sustainable knowledge-based economy, enjoying full employment and strengthened economic and social cohesion”.
We know how well that worked out. Hardly dynamic, certainly not competitive, the EU has consistently lagged behind other nations across virtually every key economic metric. As the US and China intensify their race for 21st-century technological supremacy, Europe is left watching from the sidelines — beset by economic stagnation, high energy costs, political upheaval and bureaucratic inertia.
And now it’s panicking about the threat of import tariffs from Donald Trump. But would a rebalancing of the European economy, which currently runs a massive trade surplus against the US, really be such a bad thing?
The reality is export growth does not indicate a successful economy. Quite the contrary — just look at Germany. The EU has always been an exporting powerhouse precisely because of its sagging economy, caused by a lack of domestic consumption and investment.
The US has been voicing its concern about the EU’s beggar-thy-neighbour mercantilist policies for a long time — since well before Trump even appeared on the political scene. More than a decade ago, the US Treasury Department lambasted European authorities for dragging down the world economy. “Europe’s overall adjustment is essentially premised on demand emanating from outside of Europe rather than addressing the shortfalls in demand that exist within Europe,” they wrote. Since then, nothing has changed.
Trump’s trade war, in other words, has been a long time coming. And his tariffs might actually prove to be a blessing for the EU, if they force the bloc to move away from its flawed export-led model, which is fundamentally based on suppressing domestic demand and investment in favour of demand from abroad: primarily the US.
Indeed the Trumpian threat has already prompted movement within the EU to address its structural weaknesses. One such initiative was announced the other day by Commission president von der Leyen. Her new “plan” promises to undertake that rebalancing and make Europe “the place where future technologies, services, and clean products are invented, manufactured, and put on the market” — and all this “while being the first continent to become climate neutral”. It’s called the Competitiveness Compass and it largely builds upon the recommendations of last year’s Draghi report. Brussels sees it as a significant leap forward in getting the EU economy back on track.
Upon closer examination, however, the Commission’s plan appears to be little more than a familiar mix of buzzwords — AI, advanced materials, quantum computing, biotech, robotics — paired with perplexing imagery, including a compass that tellingly points in eight different directions at once. It’s a PowerPoint presentation disguised as a strategy, as Wolfgang Münchau so accurately described it.
The planned “unprecedented simplification effort”, beginning with a major overhaul in sustainability reporting and due diligence, would — if followed through — offer European companies a bit of respite from the EU’s pervasive and ever-growing regulatory framework, which has become a stifling barrier to growth and innovation, especially in the tech sector.
But this won’t solve the bloc’s underlying economic problems: its chronic shortfall of productive investment, especially in R&D; its low consumption levels; its ingrained bias against industrial policy; high energy costs; and the fundamentally bureaucratic, multi-layered nature of the Union’s governance regime. On these issues, there are only vague commitments to future strategies and proposals — all of which are likely to take years to make their way through the EU’s byzantine legislative process.
But the reality is that many of the EU’s fundamental problems do not arise from mere “policy missteps” or, even less so, from the bloc’s supposedly “incomplete” nature. Instead, these issues are deeply embedded in the EU’s supranational design. In other words, the only way to truly tackle the EU’s economic challenges is to recognise that the core issue is the EU itself.
One of the most significant — and frequently overlooked — constraints on the EU economy is the euro. The loss of monetary sovereignty entailed by the currency, coupled with the stringent deficit and debt rules enshrined in the EU treaties, remains one of the single greatest barriers to growth in Europe, hampering the ability of member states to stimulate their economies through public investment and active industrial policies.
Moreover, the EU has failed to offset this surrender of sovereignty with adequate European-level fiscal and investment tools, limiting itself to temporary measures such as the Covid-19 recovery fund. This structural limitation is a key reason why public sector investment in the EU has consistently lagged behind that of the United States and other advanced economies.
Besides, even if the EU were to succeed in expanding its “federal” fiscal and investment capacity, as envisioned by the Competitiveness Compass, this would only create more problems than it solves. Rather than addressing the EU’s structural issues, such a move would only further empower its supranational institutions, particularly the Commission, deepening the bloc’s technocratic and undemocratic governance.
Another issue is the EU’s historical bias against robust industrial policy. Since its inception, the EU has been deeply influenced by neoliberal economic doctrines that emphasise the supposedly “distortionary” nature of industrial policies. Stringent state aid rules broadly prohibit any support granted by member states that could favour certain companies or industries, unless explicitly allowed under specific exceptions. The idea is that allowing member states to support their domestic industries could lead to an uneven playing field, creating conditions where companies with state backing have an advantage over others. But this leaves Europe dramatically ill-prepared to compete with countries such as China and the US, which have relied heavily on state-led industrial policies — such as the CHIPS and Science Act and the Inflation Reduction Act (IRA) — to achieve a competitive edge, especially in recent years.
In response, EU leaders have been talking more about the need for a “Made in Europe” strategy to counterbalance the potential economic impacts of the “America First” policies. But the reality is that the EU’s institutional framework makes it seriously unfit for confronting the new 21st-century geopolitical landscape of state-led economic renationalisation. In this context, even if the Competitiveness Compass recognises the importance of boosting technological sovereignty or strengthening European manufacturing, member states will find it challenging to implement the sort of targeted, industry-specific measures that could truly spur innovation or anchor supply chains.
The EU’s complex governance framework poses an additional challenge. The bloc operates through multiple layers of decision-making, involving not only the member states but also several key institutions. This highly bureaucratised, multi-level apparatus results in a slow and convoluted decision-making process, which often leads to fragmented and inconsistent policy responses. This is why, for instance, the limited investments and industrial policies that do take place remain fragmented and split along national lines, as well as between member states and the EU.
Moreover, when the EU rolls out a new policy such as the Competitiveness Compass, it must navigate multiple institutional veto points, each with its own priorities and constraints. The resulting policy is inevitably watered down or disconnected from local needs, diluting its impact and failing to address the genuine needs of citizens and member states. Furthermore, the legislative and implementation processes can stretch over years, rendering policy action behind the curve.
When viewed against these systemic challenges, the limitations of the Competitiveness Compass become apparent. Although it may set targets to boost investment, encourage innovation and improve skills, the reality is that all these efforts operate within the straitjacket of the euro, the EU’s constraints on industrial strategy, and a cumbersome governance model. Moreover, any solution aimed at further centralising industrial policy, as noted, would only further empower the very institutions that often exacerbate these structural problems through flawed policies. An obvious example is the increase in energy prices caused by the bloc’s ill-thought-out decision, under strong pressure from the Commission, to decouple from Russian gas. Both the Draghi report and the Competitiveness Compass highlight this as one of the main reasons for the EU’s loss of competitiveness.
Ultimately, a true reckoning with the EU’s economic troubles means recognising that these are rooted in the economic and political constraints of the supranational model itself. And as Europe’s industry and economy grinds ever slower, it is becoming increasingly evident that neither cosmetic reforms nor narrowly targeted initiatives can rectify the fundamental issues at play. Europe undoubtedly needs a new compass, but the solution lies in a radical revision of intra-European collaboration. If Trump really wants to rebalance transatlantic trade relations, then, the most effective approach would be to support the dismantling of the EU.
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Source: UnHerd Read the original article here: https://unherd.com/