In November 2023, Mario Draghi, former President of the ECB, released an interview at the “FT’s Global Boardroom conference” expressing concerns about the current condition of the European Union (EU).
“Either Europe acts together and becomes a deeper union, a union capable of expressing a foreign policy and a defence policy, aside from all the economic policies… or I am afraid the European Union will not survive other than being a single market.”
According to Draghi, the surveillance of the EU itself is in danger, and it will hinge on its ability to evolve beyond being merely a single market but a deep union of countries and so people.
In this article, we will delve into the role that the single market plays in the EU, emphasizing on the significance of competitiveness, and we will analyze why an unhealthy single market can threaten the dream of reaching a deeper union.
Draghi’s mandate and the importance of competitiveness in the EU
Draghi is still playing a significant role in the EU’s ambit. In the 2023 State of the Union, the President of the European Commission, Ursula VdL emphasized the significant challenges the European Union is facing, highlighting issues such as labor and skills shortages, inflation, and the need to enhance the business environment for our companies.
Recognizing the necessity for strategic positioning in the face of these challenges, the President stressed the significance of maintaining competitiveness. For this reason, the President asked Mario Draghi himself to prepare a comprehensive report on the future of European competitiveness. Saying that Europe will do "whatever it takes" to keep its competitive edge, resembling Mario Draghi's words that saved the Euro at the Global Investment Conference on July 26, 2012.
This move mirrors a similar initiative by José Manuel Barroso, one of her predecessors, tasking Mario Monti to draft the report titled "A New Strategy for the Single Market: At the Service of Europe’s Economy Strategy."
In his ongoing analysis, the former President of the European Central Bank highlights the need for an integrated and more productive Europe to articulate a unified and powerful political vision today, stressing the necessity for much greater integration. Additionally, he highlights the need for significantly higher productivity to support an aging society, asserting that this can be achieved only through high-value-added and technologically advanced investments.
Simultaneously, the EU must commit to swiftly regaining competitiveness with other economic areas lost in the last 20 years. Draghi particularly underscores the imperative to act to increase Europe's weight in the technological domain, starting with increased investments in the sector.
He also addresses the importance of mechanisms to rationalize defense spending and the need to explore common energy supplies to reduce prices.
The EU lags behind the USA
In addition, a good analysis point can be reflecting on the competitiveness between Europe and the USA. Why does Europe, despite its larger population, lag economically? This results in Europe being nearly 30% below in income per capita when adjusting for purchasing power. The primary explanation for this discrepancy is a deeper fragmentation of the internal market, which denies Europe the productive and commercial economies of scale enjoyed by the American economic system. The gap will widen further as substantial subsidies provided by the Biden administration through the Inflation Reduction Act (IRA) and the Chips & Science Act could convince major European groups to relocate some operations to the USA to take advantage of the incentives provided.
Why is the EU so concerned about the health of its single market?
According to Mario Draghi, the very existence of the EU is intricately linked to the competitiveness of its single market. The EU is a cooperative and competitive game in which players (member countries) are constantly engaged in tactical alliances and concerned about pursuing interests that remain national. Indeed, the EU itself is the outcome of a series of agreements that an increasing number of European countries have reached during the last century, starting from the end of 2WW, to stabilize their relationships.
These previous settlements have had a common denominator, they were all commercial pacts aimed at facilitating regional trade, by reducing tariff barriers, in a sort of positive-sum game. The EU itself has been established to unify common economic interests. However, the single market does not represent the endpoint; the EU, in order to survive, must take a step forward, from a union of economic interests to a union of European people and cultures.
The cost of this transition, even though merely attitudinal, will be costly and painful. The single market should have been initially the vehicle to bring countries into this unified framework called the European Union, and, later, the reason for developing a common and inner feeling of being “citizens of Europe”. However, as it has been discussed, the single market is losing competitiveness and member states themselves are less and less attracted by that. The risk may be having 27 countries aimed at pursuing their own interests with no regard to the EU ones.
Current issues: competitiveness vs. health of the single market
As Markus Beyrer, director-general of BusinessEurope, which represents business lobby groups from across the EU, has reported, “There needs to be seriousness [in Brussels] about fixing the single market, because you cannot just talk about it as the ‘crown jewels’ of the union without treating it like that. People don’t understand at the moment how important it is . . . both the general public and policymakers. We will need to find a narrative and a way to make it exciting again”.
Concerning the issues within the single market, Enrico Letta, former Italian prime minister, who is preparing a report on the state of the internal market, has recently pointed out the dilemma of balancing the strengths of the single market with the need to compete globally. Preserving the strength of the single market, and the freedoms of movement, capital, goods and services, while competing with America, China, India and others.
This matter is significant since the single market is based on liberal trade principles and on the pillar of the level playing field between countries and their business.
However, while the EU pushes to speed up the continent’s green and technological transitions, it must respond to competing programs such as the US Inflation Reduction Act (IRA), and longstanding state support offered by Beijing to Chinese rivals. Maintaining international competitiveness in this scenario (huge public expenditures in the two economically biggest countries) appears unachievable unless the EU does not sustain specific economic sectors and businesses.
For instance, between March 2022 and August 2023, The European Commission approved €733bn in state support since March 2022 for businesses affected by the war in Ukraine and the green transition. This huge financial support from Brussels to European companies has radically altered the level playing field damaging the competitive game in the single market.
Therefore, there is a relevant trade-off between international competitiveness and the health of the single market (so, its players’ businesses).
The EU beyond the single market
To ensure the EU's survival, it must evolve into a federation of people rather than mere economic interests. This transformation may require building a European common defense system, a common energetic strategy, a common foreign policy, and eventually a common fiscal system. Although these proposals are strictly related to the theme of “national security”, member states' reluctance to cede authority underscores the complexities of this
For example, Germany and Hungary have voiced skepticism, driven by their personal interests, when the EU was facing the necessity of cutting oil and natural gas imports from Russia.
Moreover, in April 2023, French President Emmanuel Macron embarked on a trip to China to finalize commercial agreements along with French entrepreneurs and the president of the European Commission, Ursula Von der Leyen. Notably, Macron was accorded the highest honors by the Chinese, while Von der Leyen had to follow a comparatively less prestigious path. This discrepancy, seemingly insignificant at first glance, reflects instead Macron’s underlying perspective: when we are dealing with national interests, France comes first. In addition, on the return flying journey, Macron released an interview supporting a strong position over the China-US question as it was talking on behalf of the same EU.
Another example involves the Chinese-Lithuanian matter, where Germany sided with China. Briefly, Lithuania faced economic repercussions from China due to its decision to permit Taipei’s government to establish a consular mission with Taiwan’s name in Vilnius. As a result, given that the boycott has obstructed European imports containing Lithuanian components, Germany (the major European exporter to China) has put pressure on the Baltic state to resolve that crisis by acquiescing to China’s requests.
While more instances should be cited, these examples are sufficient to depict the main threat for the EU to remain a competitive player in the international arena: each country has undeletable national interests that somehow and somewhen will clash with the EU ones.