The many problems facing the EU

The US now enjoys twice as much GDP and income per head as the European Union (EU). America’s economy has been growing faster than the EU for most of this century. Between 2019 and 2024, the US increased its GDP by almost 14% with the EU at half that level (7%).

The latest International Monetary Fund (IMF) projections see the US growing 2.7 times as fast as the Euro-area this year, after growth that was 3.5 times last year. The EU’s own report into its performance highlighted many of the problems. Expensive energy, less success in the digital-technology arena, higher taxes and tighter regulation have all contributed to a poor performance.

The EU governing structure

The EU has made many legislative strides to greater integration of the divergent economies and societies that form its membership. It is a treaty-based organisation, driven by extensive law codes under the treaty. The European Commission (EC) requires the inputs of member states governments and the European Parliament on proposals it has made.

There are four presidents of the EU who represent it and take decisions in their specified areas, in addition to the Presidents of European Courts. There is the President of the EC, the effective EU government. There is the President of the Parliament and of the Central Bank. There is the President of the Council who leads the work of the Council and represents it abroad.

There is also the rotating Presidency of the Council, which each member state takes in turn for a period of six months. This allows member states to work more closely with the EC over policy and agendas.

At international gatherings, the EU often sent two of the presidents – typically the EC and the Parliament or the Council. This causes difficulties for international hosts who might want to allocate one chair to the EU.

In the heyday of German economic success and power, German Chancellor Angela Merkel often became a de facto Head of the EU that the world could recognise. She was often trusted and used by the EC. Her successor, Chancellor Olaf Scholz, has not gained a similar cachet, giving Ursula Von Der Leyen, as EC president, a more front-of-house role.

Problems for Germany and France

The European Parliament has a very diverse membership, with no bloc anywhere near a majority – so the Parliament rarely tries to dictate policy to the EC. The Commission is influenced by the views of member states. The Franco-German axis has usually been the most influential and, for many years, Franco-German collaboration has given them considerable sway.

Today, with Chancellor Scholz facing an election with poor poll ratings, and with French President Emmanuel Macron trying to find a way of governing when he has no majority in parliament, the influence of both has reduced. Nevertheless, German concerns over its own poor economic performance with two years of small declines in output is a worry for the whole EU, as German money is central to the budgets of the Union.

This background has led to the Commission undertaking various work strands around the theme of boosting competitiveness. The new plan for Europe’s sustainable prosperity and competitiveness still contains much of the old, based as it was on faster progress to ‘net zero’. They now wish to “turbo charge investment to accelerate green, digital and social transition”.

The EU has always recognised the importance of digital transformation, as well as of the green transition. It now talks of €4bn investment in artificial intelligence (AI) research, which is a small sum compared to the US commitments. It wants the European public sector to make more use of AI. It remains wedded to the idea that regulation of the sector is crucial and proposes “stepping up enforcement of digital laws”.

The one change that the new plan embraces is the need to cut back on the overall burden of regulation. It proposes cutting the administrative burden on business by 25%, with a 35% cut for small-and-medium-sized enterprises. It offers simplification of regulation without diluting standards. It wants to speed up planning permissions for green investments.

At the same time, it announces a new 90% reduction in emissions target for 2024, an expensive regulatory commitment. There are general proposals to get the EU to buy more of its own products, to give special assistance to critical materials and technologies, to invest in more supercomputing and an improved strategy for life sciences.

What might happen?

The EU remains committed to ‘net zero’ so it still needs to resolve how renewable energy will be stored and shared as the proportions rise. There is no immediate prospect of an abundance of cheap renewables getting European energy prices down to anything like the US and China prices which make them more competitive.

It will continue to be driven by legal structures as it extends its regulatory controls into further areas. The underlying theme is to extend and control the single market, with a clear wish now to deepen it in areas like healthcare and digital.

It is unlikely the EU will succeed in cutting administrative costs of companies by 25% or 35%. These exercises in deregulation usually cancel out of date, unimportant or low impact regulations but leave the core ones in place. If it measures success by number of regulations it can always replace a range of individual regulations with a beefed-up, consolidated one.

There are no easy ways out from expensive and scarce energy. The EU remains very dependent on imports from Norway, the US and other fossil-fuel producers to supplement their wind and solar. Nor are their easy ways to catch up with the success of US digital activity. The EU runs on Microsoft software, Google searches, Amazon web storage, online shopping and Apple devices. The EU’s concerns to tax and regulate the digital industry more does not generate more EU-based digital enterprise.

The EU wants the larger budget deficits, such as the one built up by France, to shrink – but recognises the political difficulties of such instructions. Meanwhile, EU states need to respond to President Trump’s wish for them to spend more on wider defence projects and on helping Ukraine, a move that will reduce the financial burden on the US. The EU will want to resist possible US tariffs but must explain to Washington its own intention to impose the carbon-border mechanism, or tariff, on high-energy content imports.

Conclusion

Even with France and Spain slowing a little, the Euro-area and EU economy should grow a bit more in 2025, as the IMF suggests. There should be a modest recovery in Germany.

As inflation is subsiding, the European Central Bank can come to the aid of the economies with more interest-rate cuts. The EU is likely to go slowly and gently on trying to lower the budget deficits of the member states. Germany, under a new government, may expand its spending and borrowing a bit.

The NATO members will be under pressure to increase their military budgets. Governments will respond to the EU wish to see more invested into AI and computing power applied to the business of government, offering more commercial opportunities to the US companies that dominate this market. The latest EU plans are unlikely to lift EU growth to US levels, let alone start to narrow the US/EU gap.