The debt crisis, Brexit, the impact of the energy crisis on industry, the reliance of the EU on foreign trade in the context of growing geopolitical tensions, lower growth-rates in comparison to other large jurisdictions, the absence of any EU country in the top 10 of start-up ecosystems worldwide, ageing populations, low investment rates in R&D, decreasing fiscal spaces and an unfinished economic and monetary union are among the reasons for some economists and policymakers to believe the economic and political weight of the EU and the euro area is set to decrease in the coming decades.
While these elements should be fully taken into account when deciding what public policies to design, other strengths may have been overlooked recently, leading to a gloomier prospect regarding the EU and the euro area than is truly deserved.
First, the EU is the largest single democratic market in the world, with almost 500 million consumers and uniform rules. Between 2012 and 2021, the yearly trade of goods in the EU increased from €2.4 trillion to €3.4 trillion, whereas the yearly trade of goods between the EU and the rest of the world in the same period went from €1.8 trillion to €2.2 trillion.
Therefore, while geopolitical tensions and lack of respect for multilateral trade rules have a negative impact on the EU, the true cornerstone of the EU is the single market — which this year turned 30.
For this reason, it is of utmost relevance that the single market continues to be preserved and for that, adequate implementation of competition policies is necessary, avoiding an unwarranted use of state aid instruments by deep-pocketed member states.
Second, EU and euro area labour markets are strong and resilient, with unemployment rates at historically-low levels and labour-force participation rates at historically-high levels.
In October 2023, the unemployment rate in the euro area stood at 6.5 percent and during the second quarter of 2023, 65.5 percent of euro area population between 15 and 74 years old was employed or seeking employment. Yet, figures are even better in other areas, such as the US, where the unemployment rate is at 3.8 percent and the labour force participation rate is at 69 percent.
As a result, it is important not to be complacent and keep up the needed reform momentum in active and passive labour policies to foster the matching between supply and demand of labour.
Third, the European banking sector, which a decade ago was in a crisis, is now well capitalised, with increasing profits and high liquidity ratios, having shown great resilience vis-à-vis the financial turmoil that originated in the US last March.
Resilience was confirmed before the summer break by the results of the latest banking stress tests performed by the European Banking Authority. Still, there should not be room for complacency on this front either and banks should use part of the increase in profits observed in the short term to strengthen their resilience, and better cope with possible worst-case risk scenarios.
Fourth, public support for the transformation of the economy by EU, national and regional authorities is substantial. The reaction to the Covid-19 pandemic, the Next Generation recovery fund, amounts to almost €800bn in transfers and loans focusing mostly on the green transition and digital transformation of our economies.
Much talk has been devoted to the US Inflation Reduction Act (IRA), with its $369bn [€341bn], but the amount of funds for the green transition in the US is not higher than in the EU. What differs between the US and the EU is the way public funds are channelled to the private sector, with the US relying more on tax credits at the federal level and the EU on lengthy administrative procedures at different levels. Thus, any efforts the EU could make to increase the speed and certainty with which public funds reach the private sector would be welcome.
Fifth, the euro area counts on a thriving external sector and the euro, the second-most relevant international reserve currency after the dollar. Except for a few months lately, the euro area has traditionally relied on sizeable current account surpluses, granting the block with financing capacity vis-à-vis the rest of the world. The status of the euro as an international reserve currency is also remarkable, though efforts should be made to preserve its international role.
Innovate vs imitate vs regulate
Sixth, the EU is a regulatory power, a standard setter that benefits from the so-called ‘Brussels effect’. This grants the EU the first-mover advantage, so when other major jurisdictions consider regulation, they often find inspiration in the legislation approved in the EU.
Nevertheless, the EU should strive not only to maintain its status as a regulatory authority, feeding the saying that ‘the US innovates, China copies and the EU regulates’, but also to become a place of innovation.
Finally, the EU and the euro area are strong because they are very much aware of their weaknesses and missing pieces. All parties around the table agree on the importance of enlarging the EU, the need to finalise the Banking and Capital Markets Union and introduce a permanent fiscal capacity financed by common debt, the relevance of ensuring the sustainability of our public finances, the pertinence to foster R&D and have a pro-investment regulatory environment, among others.
Being aware of the missing pieces is crucial, but the EU should not wait until the next crisis to take action.
Indeed, in the last few years, deepening efforts in the economic and monetary union have only taken place when confronted with major crises, such as the euro area sovereign debt crisis, when the Banking Union and the European Stability Mechanism were launched, or the Covid-19 crisis, when the recovery fund was created.
In a nutshell, of course, there is hope for the EU and the euro area. We are confronted with challenges, but have also many strengths to build on. All we need is the political will to go ahead.
