EU faces decline without market reform, report warns  

The EU must integrate its financial, energy and telecommunications markets or face losing its “economic security” and falling further behind the US and China, the author of a new report has warned.

Enrico Letta, the former Italian prime minister tasked by European leaders to assess the state of the EU’s underperforming single market, told the Financial Times that further European integration was a matter of survival in the global economy.

“The problem is that in this new world, we are too small. And if we don’t integrate, we will decline,” Letta said ahead of the release of his report which will be the main topic of an EU summit on Thursday. “Inertia on the single market means decline,” he added.

Letta warned that a possible second Donald Trump presidency would require the EU to be bolder in using the power of its internal market.

“The US is exploiting its single market. And we are not,” he said.

The EU’s economic weight is shrinking, accounting for just 13.3 per cent of global gross domestic product compared with more than 20 per cent in 1993, when the single market was established. The economic clout of its 440mn consumers is surpassed by the US and China, with India not far behind.

Letta will use his report to argue that Brussels must use the next five years to pursue the integration of national markets for financial services, energy and telecoms. He will also call for EU merger rules to be changed to allow for more market consolidation.

“There was a fake communication that we had for 20 or 30 years . . . It is not a single market,” Letta said. “If you’re not able to integrate the single market for energy, finance, telecom you don’t have any economic security.”

Integration in these areas would also help unlock more private funding for Europe’s political priorities of greening the economy, extending EU membership to Ukraine, Moldova and the western Balkans, and boosting defence spending.

“If we’re not able to give an answer to the question of how to finance the green transition, the enlargement and the new security needs, it would be very, very complicated to avoid a social and political backlash,” he said.

Letta’s intervention comes as Fatih Birol, head of the International Energy Agency, castigated Europe for “monumental mistakes” in energy policy that have caused it to fall behind China and the US, and called for the EU to develop a “new industrial master plan” to recover.

The funding needs for greening Europe’s economy are estimated at €500bn a year, according to former European Central Bank president Mario Draghi — who is drafting a separate report on how to improve Europe’s competitiveness.

“If we don’t find a way to use private money, these needs won’t be covered,” Letta said. “It would be very complicated to find a solution based only on public money.”

But public resources would also be needed, meaning the EU common budget would have to increase above the 1 per cent of GDP level it currently stands at, he said.

To cover the needs of less-developed countries joining the bloc, he suggested setting up an “enlargement facility” which disburses money according to strict criteria meant to assuage concerns about the misspending the funds by newcomers.

“Enlargement is a boost, it is something positive,” he said. Existing member states must “enter in this enlargement process without the idea that they will lose everything”.

Other suggestions include a different rule book for competition policy, one which considers European companies as competing on a global scale.

Restrictive rules on how large EU companies can grow through acquisitions is a long-term gripe of countries including France and Germany that would like to create European industrial champions through megamergers.

Letta will also call for EU law to be applied more evenly across the bloc and to change the state aid regime to ensure it benefits cross-border projects.

The single market has long been plagued by national disregard for EU rules, haphazard enforcement, and resistance from capitals to centralising regulatory powers.

Asked why it would be different this time, Letta pointed to a changed geopolitical context facing the EU, one of increased tensions and conflictual relationships even with traditional allies.

“Trump 2 will be different from Trump 1,” Letta warned. “The single market of the beginning was for a small world, now we need a single market with teeth for a big world.”