Faced with US and China, EU leaders call for sweeping competitiveness deal

Mared Gwyn Jones & Vincenzo Genovese

The 27 leaders of the European Union have called for a “new competitiveness deal” to close the economic gap with its global rivals and reverse a worrying trend of industrial decline.

The political endorsement came Thursday after hours of discussion in Brussels and despite profound disagreements between leaders over proposals to harmonise corporate tax rules and a decades-old plan to integrate the capital markets of EU countries.

It comes as the bloc faces an increasingly volatile geopolitical context, rapid demographic changes and stiffer competition from foreign governments that are roping in investments with attractive subsidy packages.

In the summit’s conclusions, leaders call for policies that will enhance Europe’s “economic, manufacturing, industrial and technological base” to ensure “economic resilience” and “industrial renewal.”

“We need to mobilise more money, more tools to invest in strategic sectors,” said Charles Michel, the President of the European Council. “During this meeting, all of us, we understood that, on the hand one, it’s important to scale up, to get bigger but taking care of our SMEs and making sure we have the right mix, the right balance.”

The “new deal” is an attempt to retain a competitive edge on the global stage and prevent Europe from becoming an industrial desert at the expense of the United States, China, India and other emerging powers.

For now, it is a declaration of intentions and will only be translated into tangible results after the upcoming elections to the European Parliament. Hungary, which takes up the rotating presidency of the Council in July, has vowed to take on the task of implementing the deal, according to Belgian Prime Minister Alexander De Croo.

“Our Union’s competitiveness and single market start from a strong base. Now, we need to transform this into sustainable long-term growth,” said European Commission President Ursula von der Leyen, speaking next to President Michel.

Von der Leyen added that the bloc needed to ensure Europeans were not merely “consumers of technologies and digital services produced somewhere else” and called for concrete actions to boost access to capital, reduce energy costs, tackle skill shortages and further strengthen trade ties.

The wording on the agreement was sealed following discussions with former Italian Prime Minister Enrico Letta, who pitched to leaders his newly-drafted 147-page report on how to strengthen the EU’s single market to boost growth, close the financing gap and bring more jobs and prosperity to Europe.

In his report, Letta – who has been dashing across 65 European cities for consultations over the past months – sounds the alarm on an outdated structure established in the 1980s that holds back productivity in the 21st century.

The single market, which for decades has allowed the unhindered movement of goods, services, capital and people, should be enlarged to cover energy, telecommunications and finance, Letta says.

These strategic sectors, dubbed the “three leftovers,” were initially considered too strategic to extend beyond national borders, but according to Letta now represent “a major brake to growth and innovation,” and should be integrated across the EU to make the bloc a more attractive destination for investment.

Bloc scrambles to unlock capital

In his paper, Letta also floats radical suggestions on how to progressively give the EU more collective power to subsidise companies – also known as state aid – a prerogative currently reserved for national governments.

This pan-European approach is seen as an answer to the far-reaching Inflation Reduction Act (IRA) introduced by US President Joe Biden, which foresees billions in tax credits and rebates to promote American-made green technology.

Beijing, on the other hand, employs a long-running scheme that heavily favours domestic companies through grants, cheap loans, preferential treatment and regulatory requirements to the detriment of non-Chinese firms.

Such generous foreign subsidies designed to attract investments – coupled with a shortage in the supply of critical raw materials, persistently high energy prices and lack of high-skilled workers – are seen as major setbacks to EU efforts to remain an industrial powerhouse.

Capital Markets Union divides opinion

Also under consideration is an ambitious plan to conclude the Capital Markets Union (CMU), a project to integrate the stock markets of the 27 member states.

“Deepening the Capital Markets Union is key to unlocking private capital,” the summit conclusions read. “It will provide European companies with access to more diversified financing at lower costs, help channel domestic savings and mobilise the substantial amount of private investment needed to meet the challenges, notably the green and digital transitions and the needs of the European defence industry.”

First launched in 2014 and never finished, the CMU aims to significantly bolster the bloc’s relatively small individual bond markets and provide more opportunities to unlock venture capital for European start-ups and SMEs, which increasingly flock to the US to secure the funding they need to grow.

“The EU has €33 trillion in private savings. We must find ways to channel it into our companies,” Michel said on social media platform X. “EU start-ups get less than half the funding of US start-ups. This must change. The answer is: Capital Markets Union.”

Von der Leyen claimed that as much as much as €300 billion of European savings are diverted abroad, mainly to the United States, and that €470 billion in European capital could be freed up every year under the CMU.

But smaller countries fear the CMU would see regulatory powers concentrated in bigger countries, such as France, which pushes for a Paris-based European Securities and Markets Authority (ESMA).

Diplomatic sources told Euronews that a majority of member states had expressed reservations about the long-stalled plan during Thursday’s discussions, despite consensus around the overarching need to boost competitiveness.

Another issue that proved divisive was the idea, defended by the likes of Estonia and France, of a new round of common borrowing to finance defence capabilities, a top priority in the aftermath of Russia’s invasion of Ukraine. The only time the bloc has issued joint debt on a large scale was during the height of the COVID-19 pandemic when leaders agreed to set up the €750-billion recovery fund.

But frugal-minded countries like Germany, the Netherlands and Denmark oppose fresh borrowing, pointing out that nearly €100 billion in the recovery cash was left unused.

(Source: Euronews)