When the heads of cabinets of the EU’s 27 commissioners huddled in the Belgian countryside in late August for their back-to-work retreat, all were invited to talk about what they thought should be the priority for the autumn.The standout theme was clear, and unexpected.“People mentioned ongoing support for Ukraine, but it wasn’t top of anyone’s list,” says a person present in the room. “Everyone, over and over again, kept on coming back to competitiveness, and fixing the state of the EU’s economy.”Three weeks later, Ursula von der Leyen, the commission president, took to the dais in the European parliament in Strasbourg and delivered her annual State of the Union speech, a laundry list of past accomplishments and future ambitions for the EU’s executive branch. The headline announcement was a surprise initiative: former Italian prime minister and European Central Bank chief Mario Draghi was returning to the fray to write a report on the state of the EU’s competitiveness and how to fix it.While acknowledging “the birth of a geopolitical Union”, citing support for Ukraine and a tougher line against China, von der Leyen dedicated around a third of her speech to reshaping the EU’s economy.“We need to look further ahead and set out how we remain competitive,” she said, introducing Draghi by rehashing his 2012 declaration that is seen as the turning point in the eurozone sovereign debt crisis: “Because Europe will do ‘whatever it takes’ to keep its competitive edge.”You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.The headline numbers are stark. The EU economy, in dollar terms, is 65 per cent of the size of the US economy. That’s down from 91 per cent in 2013. Per capita, US gross domestic product is more than twice the size of the EU’s, and the gap is increasing.Drill down into the details and the story is the same. Take the list of the global top 20 technology companies; or the world’s top universities; or semiconductor manufacturing capacity: Europe lags behind.Longstanding structural issues undermining the effectiveness of the EU’s single market, which is theoretically supposed to make 27 individual markets into a single frictionless one, have been compounded by years of crisis.The Covid-19 pandemic, which bled into Russia’s war against Ukraine, pushed up energy prices and costs. Demographic pressures and educational bottlenecks have created a skilled labour shortage. And there is a burden of red tape and bureaucracy that small and medium business owners and EU diplomats both say crushes growth potential.“There needs to be seriousness [in Brussels] about fixing the single market, because you cannot just talk about it as the ‘crown jewels’ of the union without treating it like that,” says Markus Beyrer, director-general of BusinessEurope, which represents business lobby groups from across the EU. “People don’t understand at the moment how important it is . . . both the general public and policymakers.“We will need to find a narrative and a way to make it exciting again,” adds Beyrer. “Because the real technical work is unexciting, to go through all the regulations, and the barriers, and work out the things that would reverse the negative trends.” At the same time, efforts to help the EU weather the worst short-term impacts of the twin Covid and Ukraine crises have created medium-term risks.An outpouring of state aid and financial support from Brussels to European companies has radically altered the “level playing field” between countries and their businesses once guarded as the central pillar of the single market. EU state aid expenditure rose from €102.8bn in 2015 to €334.54bn in 2021. Between March 2022 and August this year, Europe approved €733bn in state support, according to unofficial commission figures seen by the FT.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.That push has been exacerbated by a desire to speed up the continent’s green transition away from fossil fuels and to invest in new, low-carbon technologies. It is also a response to competing programmes such as Joe Biden’s $369bn Inflation Reduction Act (IRA), and longstanding state support offered by Beijing to Chinese rivals.As such, while Draghi assesses competitiveness, another former Italian prime minister, Enrico Letta, is preparing a separate report on the state of the internal market, due to be presented in March.Letta, the president of the Jacques Delors institute, has embarked on a tour of European capitals to, as he puts it, “come out of the Brussels bubble to listen to worries on the ground”. Europe’s dilemma is preserving the strength of the single market, and the freedoms of movement, capital, goods and services, while competing with America, China, India and others, says Letta.“How do we push on the power button while developing the four freedoms and not destroying the spirit of the four freedoms? Because we want to work on European sovereignty, on a new industrial policy, on a strong capacity for Europe to flourish and be powerful,” he says. The desire for Europe to compete with the US, China and emerging powers like India, makes it “easy to destroy what we have built”, he adds. That is in Letta’s view, “this idea of a level playing field and free competition, which has been very, very important until now.” Disunity in the unionOne moment of truth for the EU was in the early 2000s, when the internet technology boom created dozens of major US conglomerates, but hardly any in Europe. In the decades since, EU companies have failed to come even close to the likes of Apple, Alphabet or Amazon, or challenge the scale of Chinese rivals such as Alibaba.Now EU policymakers are very concerned that the next technology revolution — in artificial intelligence and quantum computing — will similarly pass Europe by and further widen the gulf with the world’s two economic superpowers.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Part of the reason for that gulf, say officials and analysts, is a question of scale, and of failing to fully realise the potential of the EU’s population of 450mn — a group larger than the US population of 332mn. Another part is a lack of co-operation between EU innovators, companies and finance from across the 27-country bloc.Both are about the failure of the single market to truly function as one entity, rather than 27 individual markets bridged by various agreements, but held apart by national bureaucracy, protectionist policies and poorly-implemented EU rules.Every industry has its bugbears. Retailers say barriers are ultimately hitting consumer prices. Ahold Delhaize, a Netherlands-headquartered supermarket active across seven European countries, told the FT in May that it regularly noticed different purchase prices on branded products made in the same factories but sold in different countries. Top of the list of corporate gripes, alongside a shortage of skilled labour and high energy prices, is the regulatory burden imposed by Brussels, says Beyrer.Many cite an increasing number of reporting restrictions they face as part of the bloc’s “Green Deal” — a push to rapidly transition the EU to environmentally friendly technologies.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.“‘Let’s cut red tape!’ they say, and then a day later pass a new set of due diligence legislation,” says one senior EU diplomat with a smile and a shrug.In her State of the Union speech, von der Leyen acknowledged this complaint, promising that each new piece of EU legislation required “a competitiveness check by an independent board”, and pledging new laws that would reduce “by 25 per cent” the reporting regulations at an EU level for companies.State aid unleashedTo some member state diplomats, the biggest challenge to the bloc’s competitiveness has not been long-term trends or the inexorable rise of external rivals. Instead, the threat comes from internal decisions made in the heat of crises.The Covid-19 pandemic and then Russia’s war against Ukraine posed threats to the EU’s economy, society and physical borders that Brussels had never before experienced. Von der Leyen responded by assuming a more external-facing role than any of her predecessors, taking unprecedented control of the commission’s power levers, and promising a “geopolitical” commission that would see Europe throw its weight around more than ever before.“This geopolitical commission means it hasn’t been an economic commission, and there’s also a lack of natural interest and competence in economic areas at the top of the machine,” says one senior EU diplomat. “Which means areas like competitiveness, single market, etc, haven’t been taken care of.” To support the fight against Covid, and the war against Russia’s invasion of Ukraine, Brussels threw the economic rule book into the fire. Rules on the permissibility of state aid and national subsidies were lifted and EU oversight of its members’ deficits and debts were suspended. The EU’s state aid rules were drawn up to protect poorer states with less fiscal firepower from the richer states that would otherwise be able to pump cash into their national champions and give them an unfair advantage.That, say some officials from mainly southern and eastern countries, is exactly what has happened. Governments in countries such as Germany and France, in the name of economic stability for the entire bloc, have given their own companies the financial clout to outcompete their EU rivals, trampling on the safeguards of the single market in the meantime.Of the €733bn in state support that Europe approved between March 2022 and August this year, Germany accounted for almost half.“All of the states did some pretty strange things during the pandemic and the war, and basically all realised they had carte blanche to do what they wanted,” says one official who participated in critical meetings where decisions were taken to effectively relax the rules given the unprecedented crises.During her State of the Union address in September, European Commission president Ursula von der Leyen announced that former Italian prime minister Mario Draghi was to write a report on the EU’s competitiveness and how to fix it More
