In today’s edition, we give you a compass to navigate two key reports that can potentially shape the EU’s future. Enjoy!

Reviving the European Union

2023 marked the 30th anniversary since the establishment of the Single Market developed under the impulse of then Commission President Jacques Delors – an occasion to retrace the achievements and reflect on the future of one of the EU’s critical assets. In June 2023, the European Council called for an independent high-level report on the future of the single market to be presented at its March 2024 meeting, the last summit among leaders before the European elections.

With Enrico Letta – former Italian Prime Minister and now President of the Delors Institute – having been tasked to write the report, the main topic revolves around Europe’s competitiveness and addressing fragmentation within the bloc. As European elections approach, this initiative can play a crucial role in addressing the concerns around an increasingly complex environment for business and place the Single Market at the heart of the EU’s strategic agenda.

Letta identifies three pivotal events that have profoundly shaken the foundations of the Single Market: Brexit, the COVID-19 pandemic, and geopolitical challenges posed by global threats like Vladimir Putin’s Russia. These events, coupled with heightened economic competition from international players like China and the United States, compel Europe to view the Single Market not merely through a European lens but as a crucial player on the global stage.

In navigating this new reality, Letta emphasises the delicate balance required – a “Europe of power” – without compromising the fundamental principles of the Single Market, including the free movement of goods, capital, services, and people. In this sense, the explosion of state aid witnessed in recent years due to the COVID-19 and energy crises is a cause for concern, potentially undermining the very essence of the Single Market.

State aid expenditures skyrocketed from €102.8 billion in 2015 to €334.54 billion in 2021. The EU approved €733bn in state support between March 2022 and August 2023, posing potential long-term risks.

Today’s geopolitical tensions necessitate a Single Market that ensures European power and industrial strength.

Letta poses a critical question: How can the objective of a “Europe of power” be achieved without jeopardising the system of the four freedoms that underpin the Single Market? The main issue is a profound cleavage between larger and smaller EU member states.

Smaller countries express concerns about their inability to subsidise industries to the extent of economic powerhouses like Germany and France, which constitute over 70% of the national state aid approved by the EU Commission.

When confronted with the risk of leaving these issues solely at the national level, the need for a unified European approach to industrial policies becomes apparent. He stresses the importance of devising European policies that address these concerns and bridge the existing divide.

While stakeholders in smaller member states call for a stop to the state aid splurge, Letta acknowledges the impossibility of returning to the pre-2019 status quo. The world has changed, and three years of weakened state aid rules have led to a complete paradigm shift in the way of thinking about the Single Market. He asserts that from now on, capitals must embrace a European perspective on industrial policies and recognise the imperative for collaborative solutions.

A critical component of Letta’s vision for a powerful Europe is completing the Capital Markets Union (CMU). He highlights the necessity of a functioning European financial market for Europe to exert influence on the global stage. Letta deems the current fragmentation of European capital markets as one of Europe’s weaknesses, underscoring the urgent need for a unified financial system.

Appearing before the European Parliament’s economic committee on October 9, Letta gathered perspectives and opinions on the Single Market, particularly on the CMU. He aligns with voices like Christine Lagarde and Fabio Panetta from the European Central Bank, who have called for completing the CMU. Panetta’s proposal for a European Safe Asset, akin to US Treasury bonds, receives Letta’s support, albeit acknowledging the political sensitivity of such a move.

Enrico Letta is not alone in his mission to shape the future of the European project. Another prominent figure, former Italian Prime Minister and ECB Chief Mario Draghi has been tasked by the EU Commission to draft a report on how the EU can ensure its future competitiveness.

The challenges are stark – the EU’s economy, in dollar terms, has shrunk to 65% of the US economy from 91% in 2013. Per capita, the US GDP is now over twice the size of the EU’s, emphasising the urgency of addressing these discrepancies.

The EU’s response to short-term crises, including a surge in state aid and financial support to companies, has altered the playing field and strained the single market.

Mario Draghi emerges as a compelling advocate for a Europe that prioritises growth, infrastructure, and productivity over traditional national budgetary divisions in this scenario.

In a noteworthy speech to the National Bureau of Economic Research in July 2023, Draghi emphasised the EU’s substantial investment needs, especially in a green transition, requiring over €700 billion annually to achieve climate goals.

Despite these needs, he highlighted the lack of adequate tools to meet them. In an op-ed for The Economist, Draghi argued that increased fiscal integration is the key to fortifying the EU against external shocks like Brexit, the COVID-19 pandemic, and conflicts: “Forging a closer union will ultimately prove to be the only way to deliver the security and prosperity that European citizens crave.”

In a recent address at the FT’s Global Boardroom conference, Mario Draghi painted a sombre picture of the European Union’s economic landscape. He stressed the imperative for urgent political integration as the linchpin for the European project’s enduring success, while emphasising the critical need for concerted action by articulating a vision where the EU evolves into a more profound union capable of unified economic policies, expressing a cohesive foreign and defence policy.

According to Draghi, this is a prerequisite for the European Union’s survival, transforming it from a mere single market into a resilient geopolitical entity.

The economic headwinds facing the EU are multifaceted. The aftermath of the coronavirus pandemic and the ongoing conflict between Russia and Ukraine have exposed vulnerabilities in the bloc’s supply chains, energy markets, and global dependencies. Draghi underscores that the geopolitical and economic model underpinning Europe since the post-World War II era is now obsolete. Europe’s past reliance on the US for defence, China for trade, and Russia for energy are no longer tenable.

Draghi identifies critical weaknesses in Europe’s economic fabric, citing low productivity, high energy costs, and a scarcity of skilled labour. He highlights the urgency of addressing these issues to build an economy supporting Europe’s ageing society.

Draghi urges a comprehensive reassessment of the EU’s economic strategy to address the erosion of Europe’s global competitiveness. In this sense, his report is expected to outline a roadmap based on an urgent political integration, a redefined economic model, and targeted measures to enhance productivity and energy efficiency as vital components of a resilient future for the European Union.

Letta’s report is due in March, while Draghi’s report is expected in early summer. Both leaders hope that their efforts will not be confined to mere documentation but will actively contribute to shaping the debate for the next European legislative period, commencing in the summer of 2024. However, the political landscape remains highly unpredictable, and the impact of their reports hinges on the unfolding political situation this year.

As Europe grapples with these challenges, Enrico Letta and Mario Draghi emerge as pivotal figures with the potential to put sustainable growth back on the EU’s agenda. However, there’s no denying the substantial work ahead.