Slow Agony: The Future of the EU
Michael Every of Rabobank has reported on a shocking revelation from Mario Draghi, the former president of the European Central Bank (ECB) and current Italian Prime Minister. Speaking in a large room with a small audience, Draghi stated that Europe must undergo radical changes to thrive. Although it's not a matter of life and death, Draghi warned that without these changes, Europe would face a "slow agony."
Draghi suggested that to avoid economic and geopolitical decline, Europe should invest an additional 5% of GDP (€800bn) annually. This suggestion has been met with silence, possibly due to the enormity of the proposed investment. However, it aligns with Rabobank's prediction made in December, which suggested that significant annual spending and extensive structural reforms would be necessary for the EU's quest for strategic autonomy.
Draghi further suggested that all EU policies, including industrial, defense, trade, energy, transport, and immigration, should be interconnected to serve an overall strategic goal and prevent the EU from becoming irrelevant. He also proposed that national champions within EU member states should be replaced by pan-EU champions with a more global scale.
Unanswered Questions
Despite Draghi's proposals, several questions remain unanswered. Firstly, who will fund these changes? Draghi implied that the EU private sector would need to step up, but if these kinds of projects were appealing, investments would already be happening. This suggests that private capital may need to be directed or subsidized to invest in the 'right' places. For the public sector, a new EU tax or joint Eurobonds could be used to fund these changes. However, it's likely that the ECB will need to back much of this spending.
Secondly, what will the demand side look like? It's one thing to arrange a large flow of ECB-backed liquidity to build a new EU military, but it's another to get EU politicians to agree on joint production of military goods and joint delivery. Who will guide Europe's Grand Strategy?
Resistance to Change
Despite Draghi's warnings, many in Europe seem to prefer the "slow agony" scenario. The German finance minister quickly dismissed Draghi's ideas, and many in the markets might agree. Not because the proposed reforms are radical, but because slow agony might mean low growth, low inflation, and therefore, rate cuts.
However, Draghi's "don't do this" scenario has been modeled, and it's not pretty: a permanent Euro stagflation that would please no one in politics, business, or markets. Draghi's threats should not be taken lightly, even if the market is ignoring much of what is being threatened.
Slow Agony in Other Economies
The terms "slow" and "agony" are also applicable to other economies. In China, concerns are growing over the risks of a deflationary spiral following weak inflation data. In the UK, the government is considering reintroducing austerity measures that weakened the economy the last time they were implemented. In Australia, there's a fight between the Reserve Bank of Australia and the government over inflation and interest rates. And in the US, the focus is on the second presidential debate between Vice-President Harris and former President Trump.
Bottom Line
The future of the EU, and indeed, the global economy, is uncertain. Radical changes may be necessary to prevent a "slow agony," but these changes are not without their challenges and unanswered questions. What do you think about these proposed changes? Do you believe they are necessary, or do you foresee a different path for the EU and the global economy? Share your thoughts with your friends and sign up for the Daily Briefing, which is every day at 6pm.
