Europe Needs a Radical Change

Interview conducted in London by Karolina Wójcicka

We live in increasingly unstable times, dominated by wars and revolutions. On top of this, Donald Trump will soon become the President of the United States. What does this mean for business?

We are on the brink of a new era. The scale of the changes we are currently witnessing is more akin to a 30-year frame, rather than a typical economic cycle like the 1987 stock market crash or the Covid-19 pandemic. These were events that lasted a few years, left some echoes but eventually faded. A 30-year frame, on the other hand, is something far more significant. After World War II, we experienced a post-war boom that lasted from 1945 until the early 1970s. Then came the 1970s and 1980s, a period marked by tensions. We saw the oil crisis, heightened geopolitical rivalry and the emergence of new players on the international stage who began to influence the global order. The last 35 years, meanwhile, have represented an era of global markets and a narrative centered around cooperation. We transitioned to digital technologies, expanded suburban living, and had abundant energy resources. This led to growing concerns about the climate, while money was cheap.

What has changed?

We are talking about the prospect of deglobalisation, our societies are aging, and fewer children are being born. Energy has become a scarce commodity. This problem could be exacerbated by the development of artificial intelligence. On top of that, we now face high interest rates. So, it turns out that everything we’ve dealt with over the past 35 years is gradually disappearing. In the face of such fundamental changes, the world seems to be becoming more unpredictable. We are all now trying to understand which direction we are heading.

It seems that Europeans view Trump’s second term as the main challenge. The Republican has already threatened to impose tariffs on goods imported from the EU. Is trade war inevitable?

Let’s take a step back. The EU has been struggling with issues of competitiveness for years, as we have repeatedly highlighted in our analyses. Mario Draghi also addressed this in his report. The core issue is that Europe grows more slowly and invests less. I think it’s actually because it’s less profitable to invest in Europe, not because there’s no opportunities. Europe is more fragmented, more complex, and subject to heavy regulations. As a result, Europe is less attractive to investors. This creates a competitiveness gap – investing in Europe is less profitable than in the US or emerging markets. We’ve had this problem before, and now new challenges, such as tariffs and NATO-related issues, are emerging. These could deepen the gap but could also create new opportunities for us.

What kind of opportunities do you mean?

If the United States decides to pursue a deregulatory agenda, Europe will have to respond with a similar strategy. It’s possible that US policy could act as a catalyst for change in Europe, and that would be good news. We will see how things unfold, but historically, tariffs have been more of a tool used in multifaceted negotiations. I think discussions with the Americans will also include other issues, such as defense spending, NATO’s functioning, or the future of ongoing military conflicts. Ultimately, tariffs may not be implemented, and the negotiations might cover a wide range of topics.

Mario Draghi suggested in his report that the era of open trade based on rules is coming to an end. Do you agree with him?

I believe that we will still apply some general principles. However, there’s no doubt that the world, which was once highly globalised, is moving toward a more bilateral model of cooperation –and this is already happening, not just some hypothetical future. More and more agreements are being made bilaterally or in small groups, with countries trying to secure access to specific goods, such as from Africa or Latin America. In the case of vaccines, we saw how Europe acted as a unified block, representing all Member States, while the US adopted an “America First” strategy. The key point, though, is that we might be witnessing the decline of global mechanisms such as the WTO or the UN. Instead, there will be more direct negotiations conducted by individual countries or groups of countries. These new bilateral or regional agreements might eventually lead to greater global coordination, but initially, their nature will be more local and driven by specific interests. All regions –the United States, Europe, China – will have to redefine their supply chains in a more local or bilateral context. However, this doesn’t mean complete deglobalisation, as no region is self-sufficient enough to function without cooperation from others.

Is Europe ready for these changes?

Europe always moves a bit slower – that’s just the way it is. Warren Buffett once said that Europe grows one percentage point slower than the rest of the world, and he might be right in this case. However, I believe Europe has woken up. After all, we are talking about Draghi’s report, which, not by coincidence, calls for radical changes. These changes are truly needed. I think we’ve reached a point where the awareness in Europe is at an entirely different level. I’m optimistic in this regard, mainly because five to ten years ago, it wasn’t even possible to openly discuss the issue of competitiveness. Now, everyone agrees that this is a problem. That’s an important step. We’ve made a common diagnosis, so now we have a chance to start taking action and move things forward.

Why is Europe so slow?

As I mentioned, Europe is not only fragmented but also multi-tiered. Take the European Medicines Agency (EMA), for instance, which operates at roughly the same pace as the US Food and Drug Administration (FDA). The problem arises, however, when EMA’s decisions are implemented in individual countries. This process takes a lot of time. So, it’s not always the EU itself that’s the obstacle – the problem is often the translation of EU regulations into actions at the member state level. Fragmentation is visible in other areas as well. Our reports show that launching a fintech startup in Europe is much more difficult than in the US. Despite having a unified IBAN number, you still need to create separate APIs for each country or bank, which raises costs and complicates growth. In the US, you can create one solution that covers the whole country. We explored in our research the option of a “28th regime” in Europe – a single standard jurisdiction in which projects could be carried out according to common rules. If other countries didn’t want to join, they could simply remain outside this system. Such organic standardisation could show how many partners a unified market could attract. Remember that Europe’s fragmentation is not only reflected in the complexity of actions but also in the lower profitability of businesses. As Draghi points out, Europe has about 100 telecommunications operators, whereas the US has only four. The need to duplicate actions 28 times across different countries increases costs, making it harder for companies to be competitive and grow.

What lessons should we take from this?

There are many things that need to be done. Our analyses of Europe’s competitiveness align with what Draghi is saying. To make Europe competitive, we need to make energy two to three times cheaper than it is now. Energy drives the world, and if it’s not cheap, our industry will be at a disadvantage. We also need to rethink mergers and acquisitions and the creation of European economic champions. This requires reducing fragmentation and supporting consolidation, both within countries and at the pan-European level. Another issue is regulations. In Europe, we often apply a model where certain requirements must be met by a specific deadline, which increases costs. In contrast, the US Inflation Reduction Act (IRA) offers subsidies for innovation, reducing costs. One approach raises expenses, the other lowers them – and it’s easy to guess where the funds go. It’s not a question of a lack of knowledge on the part of Europeans, but rather a certain entrapment in the current way of doing things. However, I believe that the awareness of the need for radical changes – mentioned in Draghi’s report and other studies – is now at an entirely different level. The question is whether we can make that big leap. ©Ⓟ