Is Europe Changing Its Green Course?

Economic policy in Europe is visibly making a turn towards taming green objectives and putting competitiveness first. Within the last year, first former Italian Prime Minister Enrico Letta published an ambitious report in support of the EU single market, then came Mario Draghi’s widely quoted report on the future of European competitiveness, and just a few days ago the new European Commission unveiled the Competitiveness Compass, which should provide the framework for policies in the next five years.

Competitiveness is the new buzzword in Brussels. This is the logical result of the overstretching of green targets in recent years and the clear realisation that Europe is losing the global race. The EU’s share of the world economy is shrinking from 25.8% in 2004 to 17.6% in 2024. In two decades, the EU has opened a big scissors with the US and has been overtaken by China. And now, while China is challenging the US in the world of artificial intelligence and Trump is on the verge of taking a highly aggressive trade policy towards Europe, Brussels has no choice but to look for a new path and get out of the quagmire of low growth, endless regulations and high debts.

Here the example of the Central and Eastern European countries can be very useful. One of the weak points in Draghi’s report is the complete lack of the perspective of the new member states. Indeed, while the old member states have been in prolonged stagnation and losing the global race distinctly, the new member states have been growing, increasing their share of the world economy and doubling their share of EU trade over the last two decades. Paradoxically, the phrase “Europe at two speeds” is beginning to have a different meaning – not the usual centre versus periphery, but rapid growth in the new member states versus stagnation in the continent’s largest economies.

Economies in the CEE region have grown by 60-80% in real terms in the last two decades. Poland, Romania, Slovakia, Lithuania and Bulgaria have seen the greatest progress. During this period, the new CEE member states have maintained markedly higher growth, including relative to the US economy, benefiting from their competitive advantages, access to the broad EU market and real labour productivity growth. At the opposite pole are the southern countries, with Greece reporting a real decline, Italy stagnating and Portugal, Spain and France at around 115-120 points on the 2005 GDP-based index. Germany is at 125, indicating that even the EU’s largest economy and Bulgaria’s main trading partner, has seen weak growth over the past two decades.

The experience of the new member states shows that the future of Europe’s competitiveness is not about more public spending and subsidies, new green targets and regulations, or more state aid and coordination of economic policies. The global race is won with aggressive policies to support single market freedoms, a clear commitment to removing barriers and regulations, withdrawing the state from key sectors and reducing the tax burden on labour and capital, and embracing innovation and free competition. All this is clearly visible in the new IME report “Europe in the Global Race: Reinventing EU Competitiveness”.

Bringing competitiveness to the fore in Brussels is a good signal, but we should not fool ourselves that the turn will be taken quickly, nor that the direction will be bold enough. All the documents cited give a fresh look at the green targets, but by no means do they cancel them out. Yes, it is possible, for example, that the ban on the sale of internal combustion engine cars after 2035 will be reconsidered, but emissions trading and the big climate neutrality targets are likely to remain in place. Challenges regarding the single market for services, including digital services, and the capital markets union will also be difficult to overcome quickly.

This fragmentation in the areas where Europe is lagging behind the most will weigh heavily in the years to come. That is why the ambitious pledge of the new Commission, as well as of some of the leading European parties, must not remain mere words, but must be developed into real action. It is in the interest of the new Member States, in turn, to impose their vision, which implies preserving competitive advantages within the large European market – an open opportunity for lower taxes, more flexible regulations on business and the labour market, more sensible social programmes, and limiting the ideas of state aid and policy coordination under the pretext of responding to the US and China.