Reforming Europe’s economy is all the more urgent following Donald Trump’s US election win, warned the author of a blockbuster report, Mario Draghi, ahead of talks Friday with EU leaders in Budapest on tackling the challenge.
Although Europe’s public reaction to the Republican’s return has been cautious, officials are on full alert over the implications for the EU economy if he delivers on his threats and slaps higher tariffs.
Ex-European Central Bank head Draghi was tasked last year with preparing the economic report that EU chief Ursula von der Leyen will use to steer her next five years in office.
Published in September, the sweeping document raised the alarm over Europe’s failure to keep up with the United States, pointing to the EU’s low productivity and economic slowdown.
“The recommendations in this report are already urgent, given the economic situation we are in today. They have become even more urgent after the US elections,” Draghi said.
The former Italian prime minister rejected a wholly pessimistic take on Trump’s return.
“There is no doubt that the Trump presidency will make a big difference in the relations between the United States and Europe. Not necessarily all in a negative sense, but certainly we must take note,” Draghi said.
With Germany mired in political turmoil, divergent national interests and bitter disagreements over how to face the challenges head on, there is no guarantee that the EU will be able to step up.
But Draghi has warned that failure to heed his recommendations would lead to the bloc’s “slow agony” of decline.
Arriving for Friday’s summit, EU chief Charles Michel said Draghi’s report formed an “excellent basis” for talks and that “everything is on the table,” especially financing.
‘Take time’
The report’s big takeaway is that Europe must invest up to 800 billion euros ($863 billion) more a year to avoid falling further behind the United States.
But there is a lot in the 400-page tome for the leaders to digest before lunch.
Besides his call for more investment to improve economic output, Draghi controversially called for common borrowing — an idea torpedoed by Germany — as well as reforming the EU’s approach to competition policy to encourage big spending.
In a draft declaration seen by AFP, the leaders stress “the pressing need for decisive action” and back Draghi’s proposals to deepen the single market, build the capital markets union that would better mobilise private capital as well as a trade policy that defends Europe’s interests.
They agree on “mobilising both public and private financing”, adding they would explore “all instruments… to match our goals”, a controversial inclusion that will likely spark long discussions.
Germany and other frugal northern European countries strongly reject taking on joint debt to finance investments despite the success of the pan-EU 800-billion-euro Covid recovery plan and Draghi’s proposal, backed by France.
German Chancellor Olaf Scholz said the report contained “many improvements and innovations that (Europe) needs”, yet without appearing to echo Draghi’s sense of urgency.
Minds have been focused in Europe after Trump repeatedly professed his love for tariffs on the campaign trail, threatening to target the bloc in particular.
That could trigger a damaging trade war between the United States and Europe, with economists warning that even 10-percent tariffs could hit European economic output.
Sparking debate
Raising Europe’s investment capacity could involve more public financing via the EU’s own budget or turning to the bloc’s own lender, the European Investment Bank.
The discussions however come at a difficult time as many countries in the EU scramble to bring under control their debt and deficit which ballooned during the coronavirus pandemic.
Friday’s talks only kickstart the conversation and concrete proposals are expected to come months later, with implementing reforms set to take even longer.
EU states all agree on the poison hurting Europe but the antidote, despite being clearly laid out by Draghi and others, has been harder for countries to accept.
The strong message from Draghi is to deepen the bloc’s cooperation overall by forming a capital markets union and creating single markets for telecoms, defence and energy. But whether leaders will act is another question.