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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is group chief economist at BNP Paribas
A compass is useful for a long walk in unfamiliar woods. Less so if you come across a bear and have to run for your life. And so it is with the European Commission’s so-called Competitiveness Compass. This is a serviceable follow-up to last year’s Letta and Draghi reports, but it is inadequate to deal with the radically changed geopolitical context in which the EU now finds itself. Europe urgently needs a show of strength, both military and economic.
Encouragingly, European leaders signalled at their March 6 security summit that they grasp this, not least by including UK prime minister Sir Keir Starmer in their deliberations. Meanwhile, Germany’s “whatever-it-takes” fiscal moment is a tangible sign that people are ready to shift. But beyond this, there are precious few ideas for boosting growth quickly and permanently — as is essential if public debt is to remain sustainable despite higher deficits and rising interest rates. So here are five things European heads of government should decide to do when they meet in Brussels on March 20.
First, boost intra-EU trade. The EU is its own largest trading partner — so much so that it would only take a 2.4 per cent increase in intra-EU trade to make up for a 20 per cent fall in exports to the US. As Mario Draghi, former president of the European Central Bank, has noted, the myriad differences in domestic rules and VAT rates across member states add up to the equivalent of internal tariffs of 45 per cent on goods and 110 per cent on services.
EU leaders should decide to provide, within six months, mutual recognition of other member states’ rules for the majority of traded goods and services. Further, they should ask the commission to increase the so-called one-stop shop thresholds (currently at a measly €10,000 of annual sales) for collection and reporting of VAT and excise duties on intra-EU trade. According to the European Investment Bank, 60 per cent of exporters cite regulatory inconsistencies as a barrier to expansion.
The second priority is to increase trade with the UK. The commission has been busy finalising new free trade agreements with other countries. While these are welcome, the quickest way to boost trade would be to remove frictions with the UK, its closest trading partner. One way to do this would be to quintuple reciprocally the “de minimis” threshold for the collection of customs duties and VAT for EU-UK exchanges (currently a mere €150).
Third, the EU ought to be regulating for growth. Taking a leaf out of UK chancellor Rachel Reeves’ book, the commission and all EU and national regulators should be asked to review their mandates, making growth and competitiveness part of their objectives.
The fourth thing is incentivise the savings and investment union. In the decade since the idea of capital markets union was first mooted, the gap between words and action has hardly narrowed. Proper incentives are needed. On the savings side, a powerful move would be to create an EU investment savings account that would give households across the bloc access to all the financial products available in any member state. On investment, it is time to relax the overly conservative prudential constraints on securitisation, notably capital surcharges on both issuers and investors. They currently make it uneconomic for both. As a result, just 1.9 per cent of outstanding EU loans are transformed into securitised vehicles, compared with 7 per cent in the US. A 2024 report led by Christian Noyer, former governor of the Banque de France, made specific recommendations to change that. EU leaders should ask the commission to fast-track them.
The final priority is to find new ways to fund defence spending. Germany, the UK and France have already said that they intend to increase defence spending. But the latter pair are constrained by their fiscal situations, as are the next largest two EU economies — Italy and Spain.
Multiple channels will need to be mobilised, alongside banks, private savings and public-private partnerships. An ambitious solution would be a multilateral rearmament bank, based on a “coalition of willing” EU and non-EU countries, with enough paid-in capital to ensure that the bank could issue debt at an AAA rating. This would help increase defence spending more quickly and with less upward pressure on national governments’ bond yields. A rearmament bank could also usefully co-ordinate procurement efforts so that equipment sourced from European (including UK) companies can be produced quickly at scale and at lower cost to the taxpayer.
So European leaders should stash away the compass for now. It’s time for them to take action that yields quick and lasting results.
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