COLUMN-EU reform could under-promise and over-deliver: Peacock

The views expressed here are those of the author, the former head of communications at the Bank of England.

By Mike Peacock

Feb 10 - Ursula von der Leyen has adopted the European Union’s time-honoured reform strategy: focus on the art of the possible. That looks like a smart move. But the question remains whether the bloc’s national leaders will come on board.

U.S. President Donald Trump hogged the headlines at last month’s World Economic Forum in Davos, but the prize for clear-eyed economic analysis at the event surely belonged to the European Commission chief.

Whether the newfound zeal for practical reform is a response to the U.S. president’s aggressive trade posture or former European Central Bank head Mario Draghi’s blueprint for EU economic revival, it’s a welcome change for many in the financial community.

The central recommendation in Draghi’s lengthy proposal is that the EU should invest an additional 800 billion euros ($826 billion) each year until 2030 to become a world leader in clean energy and advanced technology. He said this would require common borrowing – something that remains taboo for many EU member states.

So the European Commission president is instead focusing on more realistic plans, including completing a long-planned capital markets union. Von der Leyen noted that EU household savings total nearly 1.4 trillion euros, far more than in the United States, but these funds are fragmented across member states.

“We do not lack capital. We lack an efficient capital market that turns savings into investments,” she told the World Economic Forum.

Von der Leyen is also seeking to improve the ease of doing business in the EU. Companies face countless laws and regulations across the 27 member states. The aim is to establish one set of rules that will apply across the bloc, covering corporate law, insolvency, labour and tax law. The European Commission believes this could cut business costs by 37.5 billion euros per year.

While the above plans benefit from not requiring huge up-front costs, von der Leyen’s third goal – the creation of an EU energy union – will be expensive. Brussels estimates that building a fit-for-purpose energy grid will cost almost 600 billion euros by 2030.

But the bloc pays hundreds of billions of euros every year for energy imports. There is also a political impetus to reduce the bloc’s reliance on traditional energy sources given the chaos created after Russia invaded Ukraine in 2022. And if the unified EU capital market is realised, it could help source a large chunk of this funding.

PEAK PESSIMISM

People whose opinions matter appear to be listening to Brussels. BlackRock CEO Larry Fink declared at Davos that there was too much pessimism about Europe and now was probably the time to invest.

ECB President Christine Lagarde said the diagnosis had been delivered by Draghi and now was the time for “action, action, action”.

True, similar calls have been made over the last decade to no avail, but the current geopolitical backdrop and long-term demographic shifts could inject urgency this time around.

HELPING HAND

Even if progress on these proposals is made, tangible results will take years to materialise. In the short term, the ECB may be able to lend an unofficial hand by keeping interest rates well below those in the United States and other developed countries.

The ECB cut euro zone rates to 2.75% on January 30, and Lagarde said her view was that the neutral rate was around 1.75-2.25%. The Federal Reserve and Bank of England are not expected to cut their key rates much below 4.00% for the foreseeable future.

“The ECB has managed to assert its independence from its U.S. counterpart without much market grumbling. We remain confident the ECB will break through neutral,” Gilles Moec, AXA Group chief economist, said.

What remains to be seen is whether domestic European politics help or hinder the European Commission’s plans.

Domestic political dysfunction could create roadblocks to reform, especially if it causes more voters to shift away from establishment parties and toward the extremes.

A test will be this month’s elections in Germany, the EU’s largest economy. Whatever government emerges will face an uphill battle as it seeks to revive the former engine of Europe’s growth.

The European Commission’s plans may not be as headline-grabbing as the news coming from across the pond, nor is the bloc’s growth likely to match that of the U.S. in the coming year. But if von der Leyen’s plans come to fruition, it might be wise to bet on the tortoise rather than the hare.

(Mike Peacock is the former head of communications at the Bank of England and a former senior editor at Reuters.)

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