A European Union of national champions

Soccer is the mirror of the world. For example, in Europe it is organized around a multitude of national leagues with very diverse financial strength, which send their leading teams to compete in the Champions League, instead of transnational teams, possibly with more solid and homogeneous financial structures, competing in a European league. The European Union is organized in a similar way; each country strives to create the most powerful so-called economic “national champions,” whether in finance, energy, telecommunications, or infrastructure, which then compete at the European level. The reason is simple: mutual trust between EU countries is scarce — hence the proliferation and complexity of its rules — and interests do not always coincide, and sometimes even diverge. And that is why the EU behaves like a union of countries where each one seeks to maximize its interest.

Almost two years ago I wrote in these pages that the EU needed a reset to face a post-pandemic world that is very different from that of 2019. Such a reset required reorienting efforts to defend itself from the external enemy — and wasting less time in never-ending and largely useless internal control debates — with two fundamental pillars: a significant increase in investment in strategic sectors to increase the scale of European companies and boost their productivity; and the development of European public goods partly financed by Eurobonds, to strengthen its resilience. The Letta and Draghi reports, and Macron’s recent speech, point in the same direction.

Enrico Letta’s report reveals a founding flaw of the EU: the barriers to the single market in the finance, energy, and telecommunications sectors. The exclusion of these three strategic sectors from the single market has encouraged internal protectionism and the creation of large national conglomerates. Mario Draghi’s report, still unpublished but from which some conclusions have been advanced, points in the same direction, proposing three measures to generate a “radical change” in the EU: facilitate the scalability of European companies to be able to reach the necessary size to compete on a global scale; increase the provision of European public goods in strategic sectors, such as energy or defense, and mobilize European savings through a more efficient and deeper capital market; and ensure the supply of essential raw materials. Macron’s speech is a more catastrophic wake-up call, declaring that the EU “could die,” but the recommendations on economic matters are similar: relax the limits on the consolidation of companies so that they can increase their size, and foster the single market in strategic sectors. In short, more Europe to confront a more hostile and complex world.

The recent history of the EU, however, does not indicate that these proposals for more Europe are being received with enthusiasm, beyond grand speeches and declarations, or that governments are acting decisively in that direction. In fact, there are many indications that preferences are moving in the opposite direction, towards national solutions — through ample subsidies to local industries, as in Germany — and the reinforcement of national champions.

A perfect example is the banking union, where despite the consolidation of supervision and the harmonization of regulation at the European level, banks have chosen to merge and grow at the national level — and, as a result, they are small at a global level. Which begs the question why banks do not believe that consolidation at the European level is profitable — perhaps they do not trust European solidarity in times of crisis. In the area of capital markets union there has been scarce progress, after a decade of debates, in the harmonization of legislation. Enrico Letta laments in his report that the lack of pan-European investment instruments limits European savers to depositing their savings in local bank accounts, or encourages them to invest them in American funds that finance the development of that country — and that is why Letta advocates for a “savings and investment union.”

But there is another fundamental difference between Europe and the United States: the different stock market investment culture in the U.S., partly due to the importance and size of the private pillar of the U.S. pension system, of foundations and philanthropy, and the endowments of private universities, which channel a large part of household savings into private investments, while in Europe these savings are channeled into the more risk-averse banking and public finance system. Are European savers prepared to take on greater risk in their savings? And, if not, doesn’t this difference imply that public investment should play a much more prominent role in Europe?

There are many more examples of behavior that goes against more Europe. For example, the persistence of tax competition strategies. Or France’s resistance to energy interconnection to protect its industry, thus hampering the creation of an internal energy market. Or the variety of responses to the dilemma of the relationship between the EU and China, which reflect the diverse, and sometimes divergent, economic and geopolitical interests of the different European countries. Fragmentation means that the EU does not have the economic scale the U.S. has to confront Chinese competition, and weakens the European position.

Just as the loss of trust in multilateral institutions led emerging countries to accumulate large foreign currency reserves as a self-insurance mechanism in the face of future crises, the lack of trust among European countries, amplified during the crisis of the euro, has generated this structure of national champions as a self-insurance mechanism. As a result, the meetings of European leaders, or their finance ministers, become fora for conflict resolution and de minimus agreements — or crisis management — instead of being avenues for promoting projects fostering long-term growth.

What does a segmented model of national champions imply? It involves smaller companies, with a smaller scale than American or Chinese firms. And that implies less capacity for innovation and productivity growth, in exchange for more national control. There is another alternative, with European champions and European public goods funded with Eurobonds, which will generate greater productivity growth but with less national control. European citizens must decide what combination of growth and control they want to deal with the geo-economic remains of the 21st century.

Returning to the soccer analogy: do you prefer national leagues and the Champions League, or a European Super League? That is the dilemma. Good luck Madrid in the Champions League final!

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