Atlantic Council

How the E.U. Can Get its Mojo Back

  • Why it matters

    Why it matters

    The new report from the Washington-based Atlantic Council reflects in part the view from the United States about how the European Union can accelerate GDP growth and make a stronger case for the 28-nation bloc to its 500 million residents.

  • Facts

    Facts

    • U.S. President Donald Trump and Brexit are not the big existential threats to the European Union, according to the report’s authors, but the bloc’s own highly regulated and fragmented economy, which rarely achieves periods of significant sustained economic growth.
    • To make a stronger case to its 500 million residents, the European Union should accelerate economic reforms, streamline bureaucracy and create a functioning single capital market to finance private sector lending and growth, the report recommends.
    • The report is co-authored by Stuart Eizenstat, a Washington lawyer and former U.S. deputy treasury secretary and ambassador to the European Union, and Andrea Montanino, a former IMF executive director for portions of southern Europe and ex-official at the European Commission and Italian Finance Ministry.
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EU Council President Tusk chairs a EU leaders’ summit in Brussels
The biggest threats to the European Union are not Donald Trump or Brexit, but the E.U.'s own anemic growth and choking regulation, according to a new report by the U.S.-based Atlantic Council. Source: Reuters / Francois Lenoir

The existential threat to the European Union comes neither from U.S. President Donald Trump nor the United Kingdom’s decision to exit the Union, but from persistently slow growth for decades — roughly 1 percent less on average than in the U.S. since 1992, along with high unemployment, inadequate capital markets, and a lack of innovation and entrepreneurial spirit in its member states.

These challenges, combined with a migrant crisis of historic proportions, have sapped public confidence in the E.U. and have fueled the rise of nationalist sentiment across the Continent. Elections this year in Germany, France and the Netherlands could produce victories for anti-E.U. populists. The solution is swift, decisive action by Brussels and E.U. member states to achieve higher levels of growth and employment, and create a more vibrant, integrated European market.

Stronger economic growth in Europe is also important for the United States. Even without the U.K., the EU-27 is the largest recipient of U.S. goods and services worth around $370 billion, and the U.S. and Europe are each other’s primary destination for investment.

Forty-one percent of U.S. foreign investment is concentrated in EU27 countries, compared to a mere 3 percent in China. This relationship is a two-way street, as the EU27 countries account for 44 percent of foreign investment in the United States, which has created over 7 million American jobs.

A new Report by our Atlantic Council EuroGrowth Task Force recommends concrete short-term responses, medium-term deliverables and a long-term plan for closer economic integration.

In the short term, Brussels and the United Kingdom need to put aside sore feelings and negotiate a mutually beneficial Brexit and new economic relationship; uncertainty will impede growth.

As the Trump Administration is proposing pro-growth tax cuts and infrastructure investments, the E.U. must recognize that its tight budgetary restraints have become an economic straitjacket.

With record low borrowing costs, now is the time for a one-time expansion of public investment by E.U. member states with a budget-deficit-to-GDP ratio below 3 percent, which will not put long-term sustainability at risk.

More broadly, EU member states, like Germany, that have persistently large current account surpluses, must adopt more domestic demand-driven growth to avoid the imbalances that are fueling resentment.

Another immediate pro-growth initiative would be to kick-start negotiations with the U.S. for a re-branded Transatlantic Trade and Investment Partnership (TTIP) by removing TTIP’s most controversial components, such as the investment dispute system and geographical indicators, and focusing on removing all tariffs, improving intellectual property protection, assuring data flows and making regulatory improvements, with more mutual recognition of products.

Given the mammoth size of the U.S.-E.U. commercial relationship, this should be an economic catalyst on both sides of the Atlantic that the Trump administration could embrace.

“The existential threat to the European Union comes neither from U.S. President Donald Trump nor the United Kingdom’s decision to exit the Union, but from persistently slow growth.”

The Atlantic Council, Report on Restoring E.U. Confidence and Growth

In the medium term, over the next two years, the E.U. should complete single markets in services, energy and capital. In an era when modern economies are dominated by services, the E.U. should eliminate barriers to trade in services across the board, which could add 1 percentage point to E.U. GDP growth over a five-year period.

Especially attractive would be creation of a single market for digital services, now hobbled by 28 separate national rules, which will favor innovative startups and create jobs.

But one of the most important impediments to growth is a fragmented capital market, in which some 80 percent of private finance comes from traditional commercial bank loans.

Start-ups and small- and medium-sized enterprises (SMEs), which are prime job creators, are starved for the financial options that exist in the U.S. through venture capital, private equity, hedge funds, IPOs and commercial paper.

The U.S. venture capital market is seven times larger than its European counterpart. The answer is to complement the still-incomplete E.U. Banking Union with an E.U. Capital Markets Union that can transform fragmented national markets into one unified capital market comparable in size and breadth to that of the United States.

Only 11 of the world’s 100 most competitive companies are headquartered in Europe, and registered patents per capita for the E.U. are far below U.S. levels. E.U. average private research and development spending is also far below levels in South Korea, Japan and the United States. Regulatory burdens and bankruptcy rules that harshly punish failure create additional barriers to innovative growth.

Over the longer term, Europe needs an E.U. of concentric circles, in which the inner ring of founding and stronger E.U. member states can more deeply integrate economically, and issue Eurobonds to finance infrastructure, human capital, and R&D; create an enlarged budget for stabilization purposes, and a European Fiscal Authority with enhanced power to impose corrective budgetary measures to individual member states.

The E.U. faces hard choices. But as the past sixty years have demonstrated, Europe is stronger economically, politically, and militarily when it acts together. The U.S. should embrace a Europe that is united, whole, free and at peace as its strongest economic, diplomatic and military partner. There is no time to waste; Europe must put its economic house in order to save the European enterprise.

 

Stuart E. Eizenstat, a former deputy U.S. Secretary of the Treasury and former U.S. ambassador to the European Union in the Clinton Administration, coordinated the new Atlantic Council report that offers a road map for growth in Europe. Andrea Montanino, the director of the Atlantic Council’s Global Business and Economics program, is a former executive director of the International Monetary Fund, where he represented the governments of Italy, Albania, Greece, Malta, Portugal, and San Marino. To contact the authors: gastautor@handelsblatt.com