Christine Lagarde seems tired of repeating the same things over and over again, but she doesn’t give up her efforts. This Friday, the president of the European Central Bank sent a message to European leaders of tiredness over the lack of progress in deepening the European single market, which has remained stagnant for years on issues such as the banking union, digital services, capital markets and taxation.
“If we make our single market truly unique, Europe’s growth will no longer depend on the decisions of others, but on our own. That was my message six years ago. Today that message is even more urgent. Another six years of inaction – and loss of growth – would not only be disappointing, but irresponsible,” he scolded during his speech at the banking congress in Frankfurt.
The Frenchwoman gave as an example the tax labyrinth that companies have to deal with, in which many European technology companies remain trapped, penalizing innovation. “A digital platform that provides services software or cloud across Europe currently has to comply with 27 different VAT systems, each with its own definition of where value is created for tax purposes. This complexity tips the scales in favor of large American companies who can absorb the associated costs, exactly the opposite of what Europe needs if it wants to foster its digital leaders,” he exemplified.
After a few years in which Europe wanted to present itself as the antithesis of Donald Trump in trade matters, establishing itself as a champion of free trade and promoting bilateral agreements with Canada, Mercosur and Japan, among others, as alternatives to the American withdrawal, Lagarde believes that the time has come to stop looking outside what the continent can find within its own borders. And it recognizes that the foreign sector has not provided the expected returns, damaging economies that rely heavily on that income, such as Germany’s. “In mid-2023, ECB staff predicted that exports would grow by around 8% by mid-2025. In fact, they did not grow at all. Looking ahead, exports are expected to slow growth over the next two years. This was most evident in countries with large manufacturing sectors, which have suffered a prolonged recession in industrial production,” says the former French minister.
It is not just that European products and services are losing competitiveness abroad. But rather the vulnerability represented by the extreme dependence of the European industry on certain products. “An ECB analysis shows that more than 80% of large eurozone companies depend on a Chinese supplier of rare earths to just three intermediaries. Recent supply disruptions – for example the shortage of chips for the automotive industry – have shown how a single tipping point can paralyze entire sectors,” Lagarde warned.
Meanwhile, European citizens look to the United States to channel their savings, thus favoring the growth of North American companies to the detriment of EU ones. The ECB president explained that Eurozone residents hold almost 10% of their total investments in American stocks, totaling 6.5 trillion euros, about double the amount they had at the end of 2015.
And he doesn’t blame them for that. “It was a rational response: US markets have delivered returns about five times higher than European ones since 2000,” he justified. But that process “created a vicious circle.” “As US markets funnel European savings into high-productivity sectors, the performance gap between our economies widens, causing even more European savings to flow across the Atlantic.”
The scenario, however, also has its clear points. And Lagarde didn’t want to err on the side of misfortune. He recalled that the European labor market is behaving in an “exceptionally solid” way, breaking, after the pandemic, with the traditional dynamic which expected its growth rate to be around half of GDP. “This force created a virtuous circle: increased employment stimulated consumption, which in turn supported the production of services and created even more jobs, particularly in labor-intensive sectors,” he celebrated.
Furthermore, even excluding the size of American companies, it is noted that investments by European companies in artificial intelligence and digital infrastructure are strongly increasing. Public investment will offset around a third of the trade impact until 2027. And fiscal packages in the defense and infrastructure sectors like the one Germany is implementing come, according to the ECB president, “at the right time for Europe”, so “they will have a significant effect on growth”.
End of the good news. Lagarde referred once again to the paralysis caused by the requirement that many European decisions must be taken unanimously and called for greater use of qualified majority voting to break the deadlock. At the same time, he believes that processes should be simplified to allow companies to opt for a single European regulation in specific areas, without the need for total harmonization across all Member States. “The first step could be modest – such as creating a digital corporate identity, giving companies a single, trusted profile to register and operate online across the EU – but it could set an important precedent for future broader reforms,” he proposed.
Despite exceptions such as Spain, which has been the fastest-growing advanced economy for two years, activity is not growing as Frankfurt predicted. “In mid-2023, ECB staff forecast that the economy would grow by 3.6% cumulatively until mid-2025. In reality, it grew by only 2.3%, a shortfall equivalent to a full year of growth in normal times, and productivity turned out to be worse,” the ECB leader warned.
Therefore, the question that repeatedly hovers in the discourses most favorable to the deepening of European unity is, ultimately, how to put an end to the internal barriers that still persist. A central bank analysis reveals that internal barriers in services and goods markets equate to tariffs of around 100% and 65% respectively, so room for improvement appears large.
