Stop Europe’s 'slow agony' of decline

 

Von der Leyen’s mission:

Stop Europe’s 'slow agony' of decline

 

The European Commission president has pledged to boost the EU’s ability to compete with the U.S. and China.

 

By CARLO MARTUSCELLI

and BARBARA MOENS

in Brussels

Illustration by Deanne Cheuk for POLITICO

December 20, 2024 4:02 am CET

https://www.politico.eu/article/ursula-von-der-leyen-mission-europe-economy/

 

When Americans visit Europe, it’s usually to gawk at the monuments of the past: the classical ruins of Italy and Greece, the Enlightenment-era wonders of Paris and Vienna; the trenches and memorials of the continent’s two world wars.

 

When Europeans visit the United States, the trip’s highlight is often a glimpse of the future.

 

Shortly after Paolo Belcastro, a Vienna-based software industry employee, booked a taxi via Waymo in San Francisco, a sleek black Jaguar pulled up to the curb with nobody at the wheel.

 

A flashing screen on the roof signaled to Belcastro and his friend that they should get in, and then the car pulled out into traffic — all without a driver.

 

Belcastro said he enjoyed being able to speak freely, without worrying about being overheard. “I was really surprised by the quality of the experience,” he said. “The driving was perfect, literally.”

 

The trip was also a reminder of how far behind his homeland can be when it comes to cutting-edge technology like autonomous taxis. “I suspect it’s going to be a while before any country in Europe allows a company like Waymo to run self-driving cars,” said Belcastro. “That’s the frustrating part.”

 

That contrast, between the old world and new, hasn’t escaped policymakers in Europe.

 

Warnings that the continent is turning into “an open-air museum” reached a fever pitch this summer with the publication of a report by Mario Draghi, the former head of the European Central Bank (ECB), urging policymakers to take action — and quickly.

 

Europe must become more competitive, Draghi warned, or it will suffer the “slow agony” of decline.

 

Standing at Draghi’s side as he presented his recommendations was Ursula von der Leyen, the president of the European Commission who has promised to boost the European Union’s ability to compete with rivals like the U.S. and China during her second term, which started on Dec. 1.

 

The question is whether she’ll be able to deliver — especially as Europe’s traditional ally, the United States, is expected to levy painful tariffs under its incoming president, Donald Trump.

 

“This is what people will write about in the history books: Did she manage to hold firm against Russia? And did she stop Europe’s economic decline?” said an EU diplomat. “All the rest are details.”

 

Digital divergence

Europe has long lagged the U.S. in economic performance, but recently worries have grown that it’s falling further behind.

 

The gap across the Atlantic grows wider with each new digital technology. Artificial intelligence is a case in point: Almost all big platforms — the so-called foundation models — are American.

 

In his distressed black T-shirt, Berlin-based Andreas Klinger, a 40-something-year-old startup founder and serial tech investor, looks more like a DJ than a typical denizen of the Brussels bubble. But as one of the founders of the pressure group EU Inc he’s made it his mission to warn that Europe needs to change its way of doing business quickly, or risk becoming obsolete.

 

The lure of Silicon Valley is only growing, Klinger warned. When he was first finding his feet in the world of tech startups, European founders waited for their companies to gather momentum before thinking about decamping to the U.S.

 

“Now, founders in their early 20s, they want to move to the U.S. before they even have the idea for a company,” said Klinger, who is campaigning to lower the regulatory burden on European startups and whose group has attracted big names like Markus Villig, the founder of ride-hailing app Bolt and Paul Graham, a founding member of the famed venture capital firm Y Combinator.

 

Beyond the tech sector, things aren’t looking much prettier. In the U.S., the economy has grown by about 2 percent a year since the Covid pandemic. The EU has averaged about half that. In its recent World Economic Outlook, the International Monetary Fund projects that the U.S. economy will grow by 2.8 percent this year, versus 0.8 percent for the eurozone.

 

Thanks to the Russian invasion of Ukraine, power prices for industry are now double what they are in the U.S.

 

Steel production on the continent is the lowest it’s ever been on record, said Eurofer, the association that represents the energy-intensive industry.

 

In Germany, Europe’s manufacturing powerhouse, the economy is stuck in a protracted slump as rising energy costs combine with unprecedented competition from China, especially in the realm of electric cars.

 

Volkswagen, a carmaker synonymous with the German industry, recently announced the planned closure of three of its factories in its home market, an unprecedented step in its 89-year history. Thousands more layoffs have been announced by home appliances company Bosch and car-parts maker Schaeffler.

 

Michael Jackson is an American tech investor who lives in Paris. He has a self-admittedly “amazing” quality of life in Europe. But he’s skeptical that it will ever close the technological gap with the U.S. 

 

“If you’re looking at a lot of European policies … they’re not playing to win. They’re trying to not get blown out,” he said.

 

Draghi’s prescription

When it comes to kick-starting the European economy, the closest thing von der Leyen has to a manual is Draghi’s report, which he presented in September.

 

The former ECB chief’s analysis zoomed in on the technology gap. One of the main reasons why the U.S. grew faster than Europe in previous decades was larger improvements in productivity. Those in turn were largely driven by its dominance in digital technology.

 

Draghi’s proposed solution is a revamp of the EU’s financial sector so that startups can scale up quickly, without having to go to the U.S. to raise money or getting bought up by rivals. He suggests combining that with a push for more public and private money into research.

 

To stem the tide of deindustrialization, Draghi wants a reboot of the power sector. European manufacturers pay about twice as much for electricity as their counterparts in the U.S. Draghi also proposes shaking up the EU’s competition policy to facilitate the emergence of so-called European champions — companies powerful enough to take on their competitors across the globe.

 

It’s one thing to propose, however. It’s another to deliver. “The pretense is we’re going to try to do as much as possible,” said Jeromin Zettelmeyer, director of the Brussels-based economics think tank Bruegel. “But how it will pan out and whether the result will still be consistent is unclear.”

 

To see the limitations of Brussels policymaking, one needs to look no further than the EU’s Chips Act, one of the marquee pieces of legislation of von der Leyen’s first term. The act — intended to encourage European production of microchips — set out an ambitious goal of doubling semiconductor production to 20 percent of the world’s total by 2030.

 

Longtime EU watchers could be forgiven for having a sense of déjà vu. A decade ago, the Commission set for itself the same target — only the deadline was 2020.

 

Already, the effort is stumbling into fierce headwinds. In September, the U.S. chipmaker Intel reversed course on a planned factory in Germany. Weeks later, another tech company, Wolfspeed, also announced it was halting plans for a €3 billion factory in the country.

 

Japanification

The biggest question regarding proposals is just how the EU intends to pay for it. The former ECB chief has called for a massive boost in investment of public and private funds, on the order of 4 to 5 percent of the bloc’s gross domestic product.

 

Together with the EU’s other commitments, that’s not the type of money that’s easily found under the couch cushions. (The EU’s budget has traditionally tracked at about 1 percent of the bloc’s GDP.)

 

“We clearly need financing for investments, for the Green Deal, for defense, et cetera,” said a senior EU diplomat who was granted anonymity to speak candidly. “That money is currently not foreseen, and on top of that, demography isn’t looking good, debt is rising, productivity is not great.”

 

Some have urged EU countries to band together to borrow money like they did during the pandemic. That’s unlikely to be met with approval in Germany, where fear of indebtedness is baked into the country’s politics.

 

The man most likely to become its next chancellor after elections in February, the center-right politician Friedrich Merz, has said he’s against more joint borrowing. Von der Leyen, a former conservative German minister, also hasn’t signaled support for this option.

 

Other proposals, like redirecting funds from areas like agriculture, which accounts for a third of the bloc’s budget, are likely to run into similar vetoes.

 

“Where should we find the money?” fumed a second EU official. “The battlefields are always the same, and it’s really hard to get out of the trenches.”

 

What von der Leyen and her fellow policymakers may discover is that the best indication of Europe’s future doesn’t lie to the west with the U.S.’ robot taxis, venture capitalists and energy-rich manufacturers.

 

A better example might be found in the Far East, where Japan has never fully recovered from a devastating real estate crisis in the 1980s. Once at the technological frontier, the country saw itself gradually fall into the periphery. GDP grew by less than 1 percent for years, while real income barely budged.

 

And yet, life went on — and comfortably so. Japan’s cultural importance has only grown since its heyday in the 1980s — thanks these days to the popularity of Japanese content on TikTok and Instagram. Meanwhile, a weak yen has brought a record influx of visitors to the archipelago nation. And even if Japan, Inc. isn’t the awe-inspiring economic juggernaut of yore, it remains at the forefront of key sectors, like robotics.

 

In Europe, one of the fastest-growing economies is Spain. It owes that distinction not to AI or microchips but to playa and paella. Last summer, the number of tourists, including some 850,000 Americans, visiting the country hit a record high.

 

Even as officials in Brussels scramble to turn around the bloc’s economy, Europeans might be just as content to do what they do best: sit back, take a deep breath and enjoy what they’ve got