international analysis and commentary

How the EU can survive the next enlargement

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Let me start from a sobering, general, viewpoint: my view on the future of Europe is quite pessimistic. The EU is confronting unprecedented global challenges, linked to the fragmentation scenario we are living in: de-globalization, geopolitical rivalry between the US and China, two regional wars in Europe’s neighborhoods, climate change, rising migration flows, and an adverse demography.

A “polycrisis” – to utilize economic historian Adam Tooze’s definition – amid global disorder. With the increasing role of middle powers. It’s a world à la carte, as it has been said. The main question is whether this world à la carte will produce a Europe à la carte – instead of a more coherent and effective global actor.

To become the actor we need to be – so as to defend Europeans’ values and interests in the world – the EU would have to shift from internal to external challenges; or better, the EU would need to adapt its internal construct to global priorities. And yet, this fundamental refocusing is happening in words only.

We talk of a geopolitical commission, strategic autonomy, a new wave of enlargements, and the likes; but these are nice definitions of something we are not translating into facts.

 

Illusions and reality

Five points are crucial to grasp the gap between illusions and reality.

1. Europe suffers an important competitive gap vis-à-vis the US but also China and Japan. While in 2008, the European economy, in GDP terms, was somewhat larger than America’s, it is now 65% of the US economy.

Yes, the Bruegel think tank argues that per-capita output growth is much more encouraging. And yet, a number of weaknesses – lack of tech giants, limited private capital availability, shortage of skilled labour in an aging Europe – are holding Europe back.

This is an inescapable starting point: Europe is back. And the next tech revolution – in artificial intelligence and quantum computing – will further widen the gap with the US and China.

2. Energy prices are a major part of the picture. You go nowhere when your industries pay for energy two or three times as much energy as compared to the US and China. Here enters geopolitics.

The succession of crises – COVID-19 and especially the consequences of Russia’s war against Ukraine – pushed up energy prices and costs. The war in Gaza is not adding new tensions to the energy markets – and this will likely remain the case unless the war goes regional, which I don’t anticipate.

And yet this very factor is going to remain a key disadvantage for Europe: we are not living an energy crisis, like in the ‘70s, and yet living in a “new normal” made of higher gas prices as compared to previous decades could be even more difficult.

In the meantime, the three pillars of the German industrial model – cheap gas from Russia, cheap security from the US, and exports to China – have been largely affected by the implications of the war in Ukraine.

This means that the largest economy of the euro area has been entering a difficult transition phase: the slowdown in Germany affects the Continent as a whole and Italy in particular, which is partially integrated into the German industrial supply chain.

3. Is industrial policy a remedy? We know that states are back in forging key economic decisions, related to tech exports, trade, and sanctions. With national security in mind. And in the case of the US, with the related strength of the dollar.

Europe, however, faces a paradox, well described by Daniel Gros: the EU’s effort, since 1992, has been to end the use of national industrial policy as a geopolitical tool among European countries.

This choice, however, has limited its ability, today, to respond to geopolitically motivated industrial policies by the US and China. Because, at this point, European companies mostly lack the scope and scale to compete with their US and Chinese counterparts.

It is likely that industrial policy will be left again, in the EU, to nation-states. The EU itself is talking again about industrial policy – with the number of “acts” already announced: the Chip Act, the Net Zero Industrial Act, and the Raw Materials Act, largely linked to the Green transition – but with no serious European budget attached. Let’s not forget that the Next Generation EU is conceived as a one-off instrument.

In brief: the EU does not have an active industrial policy now – when it officially thinks it would need to have one – for the simple reason that, unlike the US and China, it does not have a federal budget to support specific key sectors. Ursula von der Leyen has called for a new Sovereignty Fund; but important national governments oppose the idea.

Lacking EU-level financing for a common industrial policy, the EU is instead loosening rules for State aid. We are back to State aid, and this will last for a while. Between March 2022 and August this year, Europe approved 733 billion euros in State aid: Germany accounted for almost half.  Clearly, national governments are likely to finance national champions – more than potential European ones.

All that means that States with more fiscal space will have an industrial policy worth the name, and countries with no fiscal space will be in trouble. The risk is the fragmentation of the internal market.

We have in front of us a potential failure of the single market, the most relevant comparative strength of the EU.

4. Starting from these two key assumptions  – a competition gap and a policy gap between the two shores of the Atlantic – can we conceive a new economic deal between the US and the EU, in the context of US-China rivalry and fragmenting globalization?

The Tech and Trade Council has held several meetings since 2021. This is a positive development, but frictions are there. Europe’s reaction to the US Inflation Reduction Act is a case in point.

The European fear of losing industrial capacity in the renewable energy sector: fiscal credits in the US encourage European industries to move across the Atlantic (ENEL’s new plant in Oklahoma is an example).

The challenge posed by the IRA, thus, is not that it closes the American market but rather that it becomes more attractive for European companies.

The IRA has been defined by many Europeans as a protectionist move. It is best described, in my view, as a mixture of reshoring and friendshoring – and we Europeans are the friends here.

While China, with its dominance in the renewable energy sector, is the target. The real problem is that there is no reciprocity in the IRA framework. A form of reciprocity cannot be granted by ex-post coordination only, as has been happening with the IRA. It would require an additional framework, essentially a new Transatlantic agreement.

In a nutshell, Europe cannot blame the IRA as a whole: it cannot blame others for not having its own coherent industrial policy at the EU level. I realy doubt that the way in which the EU is conceiving the green and digital transitions can ever work.

We would need more money and more R&D spending to invest in common goods, to provide a stronger base for the high-tech industry in general: this is not happening, while we discuss the future of the Stability and Growth Pact and while we are going on with the State aid. North-South divides are back on the EU’s screen.

5. To reach a new Transatlantic economic agreement – however limited, as compared to TTIP’s past ambitions – three conditions are required.

First, Europe must give up ambiguities on its so-called “open strategic autonomy”: Autonomous from whom? Here, there are internal contradictions in European views and policies.

Are we aiming to become a “balancing power”, as French President Emmanuel Macron often describes it, or a “Euro-Atlantic” power? This second scenario better assesses our relative strengths and weaknesses (dependence on defense, and stronger economic interdependence with the US, as shown by foreign direct investments’s flows, massively tilted towards the Atlantic).

To become a stronger Euro-Atlantic actor, Europe must improve its defence capabilities (a stronger pillar of NATO, able to act independently when needed) and must enlarge to the Balkans and to Ukraine – I will be back to this point.

Second, an agreement must be reached on selective de-risking from China. Decoupling is out of the question, given its costs, for both the US and Europe. But even limited de-risking, related to critical dual-use technologies (advanced microchips) would be more costly for Europe than for the US. Germany, in particular, will have much more to lose. And here the fear of secondary sanctions could backfire, making a transatlantic deal more difficult.

Still, the “how to deal with China” factor is a key part of the equation. This implies a difficult restructuring of global value chains. Making investments with national security rather than economics as a guidance force entails more costs. Combining national security (nation states’ competence) and trade (EU’s competence) is not easy for Europe.

Simply, we are not equally able to play the same game.

Third, the US will have to resist a protectionist impulse, as a result of the 2024 presidential elections. According to the Economist, a second Donald Trump term would risk being a protectionist nightmare.

We have another paradox here: the widespread perception, in Europe, is that the results of the 2024 American elections will be more important for the Europeans than the results of the 2024 European elections themselves. Which is quite revealing about the limits of our pretended strategic autonomy.

Time and space for a transatlantic agreement on economic policy are on short offer. It will be difficult to reach results before 2024, and 2024 itself could make an agreement even more difficult.

Still, we must be aware that an alliance based on defense cooperation only is not healthy, especially in an age in which national security and economics interact more than in the recent past.

 

Conditions for a more competitive Europe

If Europe wishes to regain a competitive edge, both internal conditions (strengthening the single market, adopting a European fiscal policy, reducing the regulatory burden of the green transition) and external ones (a partial agreement with the US, a partial delinking from China) must be aligned.

Geopolitical tensions are beginning to shape trade flows. And early signs of fragmentation are appearing. A new economic order is being formulated and that will cause not only higher risks but more uncertainty and unpredictability.

A world reorganizing into rival – though still interlinked – blocs could emerge from this transitional phase. And much of the shift revolves around China.

The EU cannot become a “swinging middle power”, like most regional powers today. It must adopt the instruments and the strategic vision to build itself as a much stronger Euro-Atlantic actor.

As I was alluding to before, Europe must improve its defense capabilities and confront the challenge of a new round of enlargements to become a more relevant euro-atlantic actor.

On defense, we need joint procurement and industrial agreements between key European states to reduce duplications and improve the effectiveness of increasing military spending.

Modernization of European arsenals, paradoxically, could be facilitated by the degree of depletion generated by supplies to Ukraine.

European defense will be the result of combined national efforts: industrial cooperation programs, and pre-assigned forces to joint European missions. We also need to relaunch a substantial agreement with the UK.

In my view, then, European common defense will be, by definition, the result of variable agreements between the most important European security players. To the point that canceling the veto power on this issue does not make any real difference. Defense will not be a federal arm of the future UE. It will reveal its complex structure, partially federal and partially confederal.

Related articles:
Battaglie per l’Europa
Il dilemma dei confini europei
The State of the Unions: the US and the EU toward 2024
Why the European Union needs to take charge in the Balkans

 

What to do with Ukraine

As for enlargement, we enter a much more complex exercise. The Balkans cannot be left behind but the real challenge will be what to do with Ukraine. Here, the political imperative – we promised Kiev a European perspective – and the functional one cannot but clash.

From a functional point of view, digesting Ukraine will be costly, and will have a major impact on the budget, cohesion funds, and the Common Agricultural Policy. And, more in general, on the inner balance of power between European nation-states.

We already know that member states who have more to lose from enlargement – or try to use enlargement as a negotiating tool, as Hungary – will try to resist.

Hungary’s prime minister Viktor Orbán argues that the EU should sign a strategic partnership agreement with Ukraine instead of starting membership talks with the country. And this agreement, in his view, could last 5-10 years.

We will see whether the Commission’s proposal to unlock Hungary’s access to suspended EU funds will be enough to overcome Orbán’s reticence on Ukraine both on starting accession talks and on giving further financial aid to Ukraine from the EU budget: what he suggests, instead, is setting up a separate financial fund based on an intergovernmental agreement. In any case, the issue of Ukraine is part of a delicate trade-off between Brussels and Budapest.

Moreover, while France has been abandoning its former opposition to new enlargements, Poland has precise economic interests (agriculture) to defend; while a new government in the Netherlands can become enlargement-adverse.

Here, canceling veto power would make sense – even if it will likely be impossible since it requires a consensus that does not exist. We can use the famous passerelle clauses provided for by the TFEU, the Treaty on the Functioning of the EU.

From a political point of view, betraying our promises will further damage the EU’s credibility as a geopolitical actor. And I really fear that the old adagio – we have to reform internally so as to be able to enlarge – will simply become a recipe for constant delay.

Equally, the decision to start negotiations – provided this will be the case at the next European Council – without the political will to conclude them would be damaging for both parties – Ukraine and the EU itself.

As mentioned in a recent report by the ECFR, while the geopolitical arguments in favor of enlargement are even stronger today than they were 20 years ago (the first wave of enlargement), the process is likely to face more obstacles than it did back then.

 

All but institutions 2.0

Is there a way out? My view is that we have to become more creative in conceiving and managing further enlargements.

I agree with the main conclusion of ECFR: regardless of the outcome of the internal reform debate, the EU should be ready to offer candidate countries at least participation in the single market, access to the EU’s budget (maybe with some provisions for most exposed current members in specific sectors) and observer status in EU institutions by 2030.

It looks like an updated version of the “all but institutions” formula. And yet, entering sectoral policies and the single market will be a key result for Ukraine (whatever will be its provisional territorial extension).

Let’s not forget what happened in 2014, when all began: the bone of contention between Ukraine and Russia was not the NATO issue (after the ambiguous legacy of the Bucharest summit), it was the desire of the Ukrainian people to connect to the UE, through an association agreement that then Ukrainian president Viktor Yanukovych refused to sign in November 2013, leading to Euromaidan protests.

There is a fundamental political value, then, in linking up to the EU. And we, as Europeans, must conceive a way to make it possible in a reasonable time frame without destroying the current Union but also without alienating Ukraine for the second time in a row.

The EU as such, as a result, will become – more than it is today – a structure built upon differentiated integration: which is, in my view, a good solution for the future.

There is a difference between this kind of set-up and Europe à la carte – especially if all major member states are part of key common policies and institutions.

It could be that Ukraine is not able to recover the entire control of its original borders. And yet, Mr. Vladimir Putin will lose his tragic war if Ukraine combines strong security guarantees (through a nexus of bilateral agreements – the Israeli model – or through NATO) and entering European policies, before fully entering its institutions.

We can define it as a de facto integration, in a geopolitical scenario that would resemble the second post-war German one. The EU would save its soul – to put it bluntly. And Ukraine will finally reach the desired destination.

From a geopolitical perspective, this temporary solution will dissolve the very notion of Ukraine as a buffer state in the common and contested neighborhood between Russia and Europe. This means that Europe will have to consider much more seriously defense and deterrence vis-à-vis Russia.

The Kantian dream is definitively over. And this very factor – together with a less engaged future US – could create the necessary incentive to focus on external challenges, more than internal quarrels. The alternative is not rosy at all: Europe’s disintegration from inside. A Europe à la carte in a à la carte world.

 

 


*This article was originally published on December 6, 2023 by the Institute for European Policymaking of Bocconi University.