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Carlo Altomonte upon invitation: the good old days of Europe’s growth model are over

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EU member States, starting with Germany, have to realize that the good old days of the export-led model are over, and that the new global (dis) order requires the design of a new framework for Europe, finds Carlo Altomonte.

“Without these further steps in our integration process, both on the internal and external fronts, there is a real risk that Member States would fail, for the first time since World War Two, to adapt to the new geo-political context determined by the Ukrainian conflict.”

To find out about the risks the European model is facing, and what Professor Altomonte envisages for the future of the European Union, tap the link in our bio.

Carlo Altomonte is Associate Professor of Economics of European Integration at Bocconi University and Director of the PNRR Lab at SDA Bocconi.

February 24th, 2022, the day of the Russian invasion of Ukraine, represents a structural change for Europe, similar to the fall of the Berlin Wall in November 1989.

The fall of the wall marked the end of the Cold War in Europe, and the start of a new phase in international relations, culminating in the creation of the WTO in 1995 and the acceleration of ‘globalization’. EU Member states, as they did in the 1950s with respect to the new post-war order, have adapted to the new world context through greater political and economic integration. In the 1950s it was coal and steel (1951) and markets (1957); in the 1990s the response involved the pooling of financial assets: the Maastricht Treaty in 1991 laid down the foundations for the creation of single European currency, and the enlargement of the Community (not yet Union) to the countries of Eastern Europe. Both endeavours, the euro and the ten new Member States, were accomplished by the early 2000s.

In the meantime, since the mid-90s, the EU gradually fine-tuned the new institutional set-up. Within the Member States, labour markets and pension systems reforms allowed production systems to overcome the rigidities of the seventies and eighties (‘eurosclerosis’), and made them apt to the new global context. At the EU level, a progressive institutional fine-tuning through a number of Treaty changes (Amsterdam, Nice, and Lisbon) put the Community method at the centre of the decision-making process, limiting the right of veto of individual States to the areas of taxation and common foreign and security policy.

The result of this process has been the emergence of an EU export-led growth model, based on an efficient continental value chain, with Germany at the top as the main point of origin for all EU exports. Access to the market was guaranteed by the globalization underway, and by the WTO rules, strongly defended by the EU, which prevented third States from having autonomous protectionist policies. Key inputs for production were guaranteed outside the EU by a continental energy policy configured in such a way as to allow access to low-cost energy from Russia, and within the EU by fixed exchange rates that prevented unfair competition and competitive devaluations. The security of the markets was guaranteed, also at a relatively low cost, by the American defensive umbrella under NATO.

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As a result, starting from the early 2000s Germany began to record large and growing current account surpluses compared to the past. The latter pushed the gradual increase in net exports of the euro area, with a significant contribution to the growth of the whole Old Continent.

Yet, on February 24th, 2022, the underlying conditions of this growth model, scrupulously planned and carefully preserved over the years, suddenly disappeared. The invasion of Ukraine and the risk, in the absence of a containment of the aggression, of further Russian expansionism on the European continent have dissolved the scenario of geo-political stability created after the fall of the Wall. The need to avoid a blackmail on gas has forced Europe to give up the cheap energy sources guaranteed by Russia itself, in favour of alternatives that are equally available, but certainly much more expensive. Finally, the persistence of evident tensions between the United States and China, and the possible welding of the alliance between the latter and Russia, question the EU access to the global markets that have been at the heart of the European growth model in the last twenty years.

It is therefore not surprising that in recent months Europe has appeared wavering and not very resolute in the management of the Ukrainian crisis. Germany itself has often oscillated between positions consistent with a plan of European ‘strategic autonomy’ on the various areas of discussion, and moves that try to safeguard, where possible, the original growth model pursued in the last twenty years, in particular as regards the residual relations with Russia and China.

Evidently this ambiguity has a cost, both in terms of relations between partners (France and Germany are at a relative low on this count), and as a function of the future choices that the EU will have to make in the coming months. These choices are substantial, ranging from the new rules on European public finance, to the new structure of continental energy markets, to the management of trade rules in the new post-global context.

EU member States, starting with Germany, have to realize that the good old days of the export-led model are over, and that the new global (dis) order requires the design of a new framework for Europe. The latter has to be based on the EU ability to invest more in its internal market, which remains the richest in the world, and in technologies related to the energy and digital transition, including their combination in some key value chains, such as the electric car. The National Recovery and Resilience Plans of all European countries already point in this direction, and must represent a valid starting point around which coherently coordinate all future policy choices, starting with fiscal and energy ones.

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On the geo-political front, the concept of EU strategic autonomy has to acquire greater centrality. This implies adding to the EU investment capability also the security of energy supplies, on top of the digital and green transition, as well as the development of a defence policy able to project itself beyond the EU borders to geographically closed allied countries, through a strategy coordinated with, but functionally autonomous from, the USA.

On these last two issues, energy and military, however, the institutional structure of the EU has (still) few competences, being too often paralyzed by the unanimity rule, and having to reconcile very different interests, in particular between the East and West of the EU. Some progress has been made in the area of energy, with the rapid abandonment of the supply of fossil fuels from Russia through the Commission’s RePowerEU strategy, but a more structured strategic framework is needed, supported by an adequate financing of the necessary investment, and decision-making tools.

A starting point of discussion of this new European framework cannot but lay within the three main founding States, namely France, Germany and Italy. The three countries represent 65% of the euro area GDP, more than 50% of the energy supply, and 80% of the military expenditure. The institutional instrument to promote a structured dialogue among them already exist: the Treaty of Versailles historically links France and Germany, while Italy and France since 2021 are linked by the Treaty of the Quirinale. The completion of an agreement between Germany and Italy, consistent with the provisions of the other two treaties, would close the triangle of bilateral agreements existing among the three founding EU States.

Building on this wide-ranging political agreement, the Commission could then put forward proposals for a new institutional governance consistent with the reform program proposed by the Conference on the Future of Europe. Some of these proposals do not imply a modification of the Treaties, others imply it, but could be carried out through the instrument of enhanced cooperation, i.e. beyond the paralysing veto right, in particular in areas related to the themes of the common foreign and defence policy.

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A new European framework also implies the capacity to project European interests over an area necessarily wider than that of the EU-27, to include all the Balkans and the countries of the Caucasian ridge from Ukraine to Turkey, as well as the southern Mediterranean, with respect to which the problem of immigration must be managed in a common way. Hence the idea of a broad Confederation of countries, geographically linked to Europe, which can participate to an economically integrated area.

Various proposals have already been made in this direction, and some institutional elements of this possible Confederation already exist today, by virtue of the network of bilateral association agreements that the European Union already has with almost all of these countries. Each of these agreements provides for an ‘Association Council’ between the EU and the partner countries. Hence, a first step towards a European Confederation could be the creation of an advisory body that brings together all the Association Councils, in order to determine a common strategy for the development of the economic integration lines of this enlarged area.

Without these further steps in our integration process, both on the internal and external fronts, there is a real risk that Member States would fail, for the first time since World War Two, to adapt to the new geo-political context determined by the Ukrainian conflict. In this context, the EU-27 appears to be at the same time too small, because it is geographically limited, and too large, because it is politically heterogeneous, with respect to its ability to satisfy the new demand for European public goods in terms of energy, military and economic security arriving from its citizens (EU members or not).

But when an institution fails to respond efficiently to its citizens’ needs, sooner or later it is handed over to the history books.

Author profile
Associate Professor of Economics of European Integration at Bocconi University

Carlo Altomonte is the Associate Professor of Economics of European Integration at Bocconi University and Director of the PNRR Lab at SDA Bocconi

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