Faced with US and China, EU leaders call for sweeping competitiveness deal

The political endorsement came Thursday after hours of discussion in Brussels and despite profound disagreements between leaders over proposals to harmonise corporate tax rules and a decades-old plan to integrate the capital markets of EU countries.

It comes as the bloc faces an increasingly volatile geopolitical context, rapid demographic changes and stiffer competition from foreign governments that are roping in investments with attractive subsidy packages. 

The pact is an attempt to retain a competitive edge on the global stage and prevent Europe from becoming an industrial desert at the expense of the United States, China, India and other emerging powers. 

For now, it is a declaration of intentions and will only be translated into tangible results after the upcoming elections to the European Parliament.

The move was sealed following discussions with former Italian Prime Minister Enrico Letta, who pitched to leaders his newly-drafted 147-page report on how to strengthen the EU’s single market to boost growth, close the financing gap and bring more jobs and prosperity to Europe.

In his report, Letta – who has been dashing across 65 European cities for consultations over the past months – sounds the alarm on an outdated structure established in the 1980s that holds back productivity in the 21st century.

The single market, which for decades has allowed the unhindered movement of goods, services, capital and people, should be enlarged to cover energy, telecommunications and finance, Letta says.

These strategic sectors, dubbed the “three leftovers,” were initially considered too strategic to extend beyond national borders, but according to Letta now represent “a major brake to growth and innovation,” and should be integrated across the EU to make the bloc a more attractive destination for investment.

Bloc scrambles to unlock capital

In his paper, Letta also floats radical suggestions on how to progressively give the EU more collective power to subsidise companies – also known as state aid – a prerogative currently reserved for national governments.

This pan-European approach is seen as an answer to the far-reaching Inflation Reduction Act (IRA) introduced by US President Joe Biden, which foresees billions in tax credits and rebates to promote American-made green technology.

Beijing, on the other hand, employs a long-running scheme that heavily favours domestic companies through grants, cheap loans, preferential treatment and regulatory requirements to the detriment of non-Chinese firms.

Such generous foreign subsidies designed to attract investments – coupled with a shortage in the supply of critical raw materials, persistently high energy prices and lack of high-skilled workers – are seen as major setbacks to EU efforts to remain an industrial powerhouse.

Capital Markets Union divides opinion

Also under consideration is an ambitious plan to conclude the Capital Markets Union (CMU), a project to integrate the stock markets of the 27 member states.

First launched in 2014 and never finished, the CMU aims to significantly bolster the bloc’s relatively small individual bond markets and provide more opportunities to unlock venture capital for European start-ups and SMEs, which increasingly flock to the US to secure the funding they need to grow.

“The EU has €33 trillion in private savings. We must find ways to channel it into our companies,” Michel said on social media platform X. “EU start-ups get less than half the funding of US start-ups. This must change. The answer is: Capital Markets Union.”

But smaller countries fear the CMU would see regulatory powers concentrated in bigger countries, such as France, which pushes for a Paris-based European Securities and Markets Authority (ESMA).

Diplomatic sources told Euronews that a majority of member states had expressed reservations about the long-stalled plan during Thursday’s discussions, despite consensus around the overarching need to boost competitiveness.

Another issue that proved divisive was the idea, defended by the likes of Estonia and France, of a new round of common borrowing to finance defence capabilities, a top priority in the aftermath of Russia’s invasion of Ukraine. The only time the bloc has issued joint debt on a large scale was during the height of the COVID-19 pandemic when leaders agreed to set up the €750-billion recovery fund.

But frugal-minded countries like Germany, the Netherlands and Denmark oppose fresh borrowing, pointing out that nearly €100 billion in the recovery cash was left unused.