The European Union (EU) has found itself at a pivotal moment as its leaders grapple with the pressing need to enhance the bloc’s competitiveness and address economic challenges. At a recent retreat, the heads of cabinets for the EU’s 27 commissioners identified competitiveness and the revitalization of the EU’s economy as a top priority for the coming months. This unexpected emphasis prompted Commission President Ursula von der Leyen to make a significant announcement during her annual State of the Union speech: former Italian Prime Minister and European Central Bank chief Mario Draghi would be tasked with preparing a report on the state of the EU’s competitiveness and proposing strategies for improvement.

The EU’s economic landscape is marked by several pressing issues. Notably, the EU economy has lived a decline relative to the United States, with the EU’s GDP in dollar terms shrinking to 65% of the size of the US economy, down from 91% in 2013. Per capita GDP gaps have widened, and the EU lags behind in key areas such as technology and education. The emergence of the COVID-19 pandemic, coupled with Russia’s war against Ukraine, has further complicated matters, leading to increased energy prices, demographic pressures, and a shortage of skilled labor.

To address these challenges, the EU has provided substantial state aid and financial support to its member countries, reaching €733 billion between March 2022 and August of the same year. The EU commission has also recently eased the state aids in order to compete with the impacts of IRA and support reindustrialization in Europe. While these supports aims to mitigate the immediate impacts of crises and accelerate the green transition, it has also raised concerns about the potential distortion of the “level playing field,” favoring some big countries over the smaller ones. And the level playing field remains a fundamental principle of the EU’s single market.

Former Italian Prime Minister Enrico Letta is simultaneously preparing a separate report on the state of the internal market, focusing on how to navigate the delicate balance between preserving the single market’s strengths and freedoms while competing with global economic powers like the US and China.

One of the central challenges facing the EU is its ability to take advantage of the full potential of its 450 million-strong population and foster collaboration among innovators, companies, and financial institutions across the 27-country bloc. The failure of the single market to function seamlessly as one entity, aggravated by national bureaucracy, some protectionist policies, and also too many EU regulations, has hindered progress.

The EU’s struggle to match the technological prowess of the US and China, particularly in areas like artificial intelligence, quantum computing, semi-conductors, critical raw materials and new forms of energy, has raised concerns about the bloc missing out on the next technological revolution. Analysts attribute this gap to a lack of scale and cooperation among EU member states. And governments don’t realize the potential of this single market which will allow to create pan-European projects such as Airbus at the beginning of the seventies.

As the EU addresses short-term economic challenges, such as the aftermath of the COVID-19 pandemic and geopolitical tensions, it must grapple with the medium-term risks stemming from the significant increase in state aid. The relaxing of state aid rules, while understandable in times of crisis, has altered the balance in the single market, potentially giving an advantage to companies from bigger and/or wealthier member states.

The reports commissioned from Mario Draghi and Enrico Letta are expected to play an important role in shaping the future priorities of the EU, especially as a new European Commission takes office in 2025. These reports will likely provide a roadmap for addressing structural issues, regulatory barriers, and fostering collaboration across member states to drive economic growth and enhance the EU’s global competitiveness. But, these reports should be limited to the economic landscape and not take into account other recommendations such as promoting a foreign or defense policy or some kind of federalism… which Mario DRAGHI probably also supports…

Besides, achieving the necessary reforms will require substantial political will and consensus among member states. The state aid boom, particularly during the COVID-19 pandemic, has given bigger member states an incentive to maintain existing rules, posing a challenge to achieving a unified approach.

Draghi and Letta reports could impact the EU’s commitment to tackling economic challenges, fostering innovation, and ensuring a level playing field in its single market. The outcomes will likely influence the trajectory of the next European Commission, shaping its legislative focus and determining whether the EU can adapt to evolving global dynamics and strengthen its competitiveness in the years to come.

Pierre MAURIN – Senior Consultant