international analysis and commentary

Phobos and tharsos: a more balanced Transatlantic economic relationship


It seems appropriate to discuss Europe’s role in the Transatlantic relationship at this time: after Emmanuel Macron’s speech on Europe’s “mortal danger” (perhaps a reminder of Paul Valery’s “Nous autres, civilisation, nous savons maintenant que nous sommes mortelles”, 1919) in April, after the European elections in early June, and some months before the American elections in early November. Of course, both elections are fundamental. But there are other (economic, demographic, institutional) structural forces at play.



To begin, three premises. The first. Since 1945, Europe has been defined by its relationship with the US, just as (better: even more than) the US has been defined by its relationship with Europe. This means that our identities and policies are much more relational (dependent on one another) than any other two areas in the world. The establishment in 2021 of the EU-US Tech and Trade Council (TCC) is a positive development in this sense. The TTC has seen progress, including alignment on export control and investment screening collaboration on the regulation of emerging technologies (see the Joint Statement of the EU-US Trade and Technology Council of April 4-5, 2024, in Leuven, Belgium). But frictions remain: on tariffs, on sanctions on Chinese banks and companies etc. Ex ante (not just ex post) coordination remains crucial to draft transatlantic standards to anchor the transatlantic relationship in a future common economic space.

Now, for any positively evolving economic and political relationship there has to be some kind of balance. There has been a strengthening of the economic relations between the EU and the US in the past few years – if we only consider that the exchange of goods and services between the two areas is about 40% higher than that between the EU and China (P. Guerrieri and Padoan, Europa Sovrana. Le tre sfide di un mondo nuovo, il Mulino, 2024) – a strengthening but not a balancing, with the European economy lagging behind.

Take one example. A recent paper on the European Economic Review argues that the last time EU countries in the sample hit full employment was back in the 1970s, differently from the US which hit full employment both before and after COVID (M. Gotken, P. Heimberger, A. Lichtenberger, “How Far From Full Employment? The European Unemployment Problem Revisited”, European Economic Review, 164, 2024).

Of course, and this is the second premise, the Transatlantic relationship is also shaped by EU and US individual relationship with the rest of the world, beginning with China – where we need to recognize that the EU and US stand in different positions (e.g. China supplies 95% of the solar panels used in the EU; only 2% of US import of EVs come from China, while a quarter of EV sold in the EU this year will be made in China, including Tesla), and that even within the EU a tougher stance on China is easier for instance for France, whose companies have a lighter presence than Germany’s – but not only China. True, the EU current account deficit with China increased by six times since the accession of China in the WTO in 2001.

But there is tendency in Europe to feel “caught in the middle” and “squeezed by” the US from the West and China from the East: this a narrow view of the world (North-to-North), while solutions can be also be found in the cooperation between North and South. The Declaration on Atlantic Cooperation signed among 32 countries last September is a positive example. Diversification and plurilateralism are key.

The third and last premise is that much of the Transatlantic relationship depends on domestic policy and public opinion. The apparent and often repeated trade-off between higher spending for defense and spending for social security can, if not wisely managed, even strengthen populism in dangerous times.

We can now turn to three points: the picture, the proposals on the table, the problems.



In 2008, the European economy was somewhat larger than America’s: 16.2 trillion versus 14.7 dollars. Today, the US economy is about 25 trillion while the EU and the UK together account for about 20 trillion. In other words, the European economy was bigger by about one eighth, and is now smaller of about one fifth. Also, in the past few years, the economy of the US has proven more resilient to recent shocks and rebounded faster, rising 8.7% GDP points above pre-pandemic levels by the first quarter this year. That is more than double the 3.4% rise in the eurozone and 1.7 in the UK. There is economic divergence, and it is deepening.

This divergence has of course many causes, including higher energy costs for Europe (two-thirds of its energy needs are met by net imports), and subsidies offered by Washington, including the IRA. The political economy of the problem – we all know it – is that economic statecraft has historically been interpreted in the EU as a “regulatory power”, aiming at the creation of a level playing field in the Single Market. While economic statecraft in the US has historically been interpreted as a “creative power” – the power to create demand, markets, and technologies, and not only to regulate existing ones – in order to compete on the world’s stage. The Inflation Reduction Act, (one can call it the Industrial Reconstruction Act) is only the latest example.

But there is more than that. The rule books that matter most are not regulatory: capital markets are fundamental; defense budgets can galvanize research and development; flexible immigration policies bring talent and plenty of US founders hail from abroad; state largesse plays an important role (A. Bradford, “The false choice between digital regulation and innovation”, Northwestern University Law Review, 2, 2024).

We see the beginning of a European Industrial Policy: see, for instance, the Chips Act and STEP (the Strategic Technologies for Europe Platform). But for many years, and with few exceptions, Europe’s industrial policy has been, to put it bluntly, delocalization towards Central and Eastern Europe and China. We should re-direct our almost exclusive attention to interest rates to industrial plants, and to ways to secure supply chains across the Atlantic and beyond. The Mineral Security Partnership (MSP) with 14 third countries is yet another positive development in this sense (Namibia, Ukraine, Kazakhstan and Uzbekistan, whom are not among the 14, were also present at the MSP forum launched at the sixth meeting of the Tech and Trade Council held in Brussels on April 4-5, 2024: see the Joint Statement of the EU and US Trade and Technology Council).

We can still talk – as in the past – about Mars (i.e. the US) and Venus (the EU), and the fact that Europeans live longer, they have better welfare systems and so on and so forth. True. But how is Europe going to re-build the economic conditions that can secure prosperity for the next generation? The crucial fact in terms of political economy is that the US has the dollar, an integrated capital market and a single fiscal policy: three conditions that make up the liquidity infrastructure for any plan of structural change.

The ECB estimates the investment gap to reach EU 2040 climate targets at 800 billion a year. A further 75 billion will be needed a year for capitals to meet NATO’s expenditure target of 2% of GDP.

Europe has the euro (the eurozone). That is no longer enough. Europe has Mercury, the god of commerce and of money. It needs Jupiter, the god of command, of power, and of the thunder.


Proposals on the table

Much is expected from the forthcoming Draghi report on competitiveness (due out in June 2024).

In the meantime, we have the Letta Report (“Much more than a Single Market”, April 2024).

The report – which is made of about 150 pages and six chapters, and which comes more than three decades after the Delors Report – offers an important contribution to the future of the Union, especially in the second chapter devoted to the mechanisms within the Single Market to mobilize private and public resources and direct them to bridge the current investment gap and the financing of common objectives.

There is an excess of savings that Europe can leverage on. The household savings rate in Germany, for instance, is about three times higher than Italy and more than four times higher than in the US. But bond markets in Europe are three times smaller than in the US. And EU venture capital lags behind (by one fifth).

The European Union – this is a quote from the Report – is “home to a staggering 33 trillion euros in private savings, predominantly held in current accounts”. But this wealth, however, is not fully leveraged to meet the EU’s strategic goals. “A concerning trend (again from the Report) is the annual diversion of European resources towards the American economy and US asset managers”. Europe needs a “Savings and Investment Union”.

The report also shows three facts: the diminishing share of the EU economy in the world in favor of Asian economies (again China, but not only China); the decline of the EU’s GDP per capita ratio compared to the US since the 1990’s, and its widening technological external dependency on the US and on China.

The forthcoming Draghi Report on Europe’s competitiveness – which will be out soon – will probably suggest converging recipes, at least from what it has been heard in a recent speech by the former Italian Prime Minister in La Hulpe, Belgium (April 16, 2024), which was based on three emerging common threads: “enabling scale”; “providing public goods”; “securing the supply of essential resources and inputs”. Incidentally, the speech has failed to emphasize the positive role of migrations in the context of Europe’s “demographic recession”, which is yet another difference with the US (in the speech one reads: “with ageing societies and a less favorable attitudes towards migration we will need to find these skills internally”).

Back to the Letta report, the capital markets union is an important means. But there has to be a greater goal. Speaking in Frankfurt at the European Banking Congress last November, Christine Lagarde gave a speech titled “A Kantian shift for the capital markets union”. A better title might have been a “Lincolnian shift”, since much of it was on the transcontinental railroad at the time of President Lincoln and on how the need to finance this project transformed the US financial system, “changing its destiny forever. Today, Europe is at a similar juncture” (see C. Lagarde, “A Kantian shift for the capital markets union”, November 17, 2023).

Can defense be that greater goal? Yes. Italian fathers of the European integration like Alcide De Gasperi and Luigi Einaudi thought it was. They thought that common defense would spark a common budget and a common budget a common Parliament. We have been going the other way round. We have a Parliament (which needs to be strengthened); a small budget (which needs to grow); but no common defense.

Yet, to be politically viable and socially acceptable as a common project, a defense program should be complemented by a European social program. One is reminded of David Lloyd George’s “People’s Budget” (1907). It was a “war budget”: against the German Reich, but also, crucially, against poverty in the UK.

There will be huge costs.



Yet – and we come to the problems now – a revival of the European economy will struggle to emerge in the context of the rules of the new Stability and Growth Pact (SGP). One of the initial aims of the reform was to reduce the pro-cyclical character of the rules to take into account the business cycle and the need for long-term investment. And yet. Even if national governments will now have a longer time frame (up to four and in some cases up to seven years) to fiscally adjust their positions according to their plans, countries with high public deficits (no less than 11 countries today) and high public debts will need to reduce deficits and debt by certain annual fixed ratios (0.5% of the “deficit to GDP” ratio, “only” 0.3 in the transitory regime up to 2027). “Ownership” for national governments is good, but pro-cyclicality comes back through the window.

This is a sword of Damocles. This is not to deny the importance of a savvy fiscal policy in the long-term, but to emphasize the importance of matching ambitions with the financial means to achieve them.

“The political determination to decarbonize, digitize and defend Europe economies will require stronger public incentives for business investment (…) The question is whether it will be national or common spending” (M. Sandbu, “EU’s recovery fund is already shaping its future”, Financial Times, April 8, 2024).

The Letta report, for instance, suggests the creation of a state aid contribution mechanism, obliging member states to allocate a portion of their national funding to the financing of EU industrial policy initiatives, to prevent the fragmentation of the single market following the increase in state aid in recent years.

Yet, until the EU starts issuing common bonds that will constitute a European safe asset and a fundamental political pledge for the future, savings will continue to funnel the growth of other areas.

Europe is at a crossroads. On one side there is fragmentation between those who have fiscal space and those who do not (Germany is about the remove the debt brake at the national level to allow for more investment, but is far from accepting a golden rule within the GSP for productive investment in public goods in the eurozone) and on the other one there is integration. The success in the implementation of the Delors’ Report in the 1980s was that integration in the 1990s was based on a high-level agreement between France’s political status and Germany’s economic might at the time of Francois Mitterand and Helmut Kohl (I. Maes, A tale of two treatises: the Werner report and Delors report and the birth of the euro, Bruegel, 2024).

More of this will be needed for any further step towards political integration, even more so if the EU will enlarge again (enlargement will be difficult, however, because the region is exposed to Chinese and Russian influence and meddling, as the case of Georgia and Serbia demonstrate). In the future, we need a new Schuman declaration open to a club of countries: not on coal and steel, but on the bomb (defense) and the bonds (finance) as the basis of a shared European sovereignty and a more balanced Transatlantic relation. This road should be taken by a club: 27 + 8 members at the existing conditions would produce chaos.

In the meantime, the institutional restructuring of the EU – and in particular the adoption of majority voting to strengthen the Union’s capacity to act – should not be delayed anymore, along the lines described in the “Proposals of the European Parliament for the Amendment of the Treaties” (November 22, 2023).

In the last chapter of his General Theory (1936), Keynes asks: “Is the fulfilment of these ideas a visionary hope? Are the interests which they will thwart stronger and more obvious than those which they will serve?”. In a different context, these questions will continue to loom large on the European horizon.



Finally, history shows that such high-level agreements are hard to achieve without two conditions: a substantial amount of fear and, in front of that, confidence. Interestingly, this is also Aristotle’s definition of courage: “courage is a means with regard to the feelings of fear (phobos) and confidence (tharsos)”.