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European integration: No need to write off Europe just yet

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Natale Labia writes on the economy and finance. Partner and chief economist of a global investment firm, he writes in his personal capacity. MBA from Università Bocconi. Supports Juventus.

Despite a torrid week for European integration, Europe is in a position to be a key actor on the global stage.

First published in the Daily Maverick 168 weekly newspaper.

All eyes were on Europe this week as European integration teetered on the brink. First was the utterly disastrous visit of the most senior European Union foreign affairs official to Moscow.

In an almost farcical news conference, Russian foreign minister Sergei Lavrov embarrassed EU foreign policy chief Josep Borrell by describing the EU as “an unreliable partner”, after Borrell had praised Russia for developing a vaccine that worked, though he had also expressed disapproval of Russia’s recent arrest of opposition leader Alexei Navalny. Three European officials were kicked out of Russia for taking similar views.

The Financial Times called it “a bungled visit”, which marked a low moment in the EU’s foreign policy. Yet it has become clear that Russia is nothing short of an existential threat to the EU. The Russian policy of divide-and-conquer of the EU is wreaking havoc, and unity is essential if the bloc is to survive. Second, the EU’s flagship Recovery and Resilience Facility, which is the cornerstone of its €1.8-trillion multi-year budget, was signed into law by members of the European Parliament.

This will enable the European Commission to borrow vast sums, up to €1-trillion, on the international financial markets and disburse them to member states in the forms of ultra-cheap loans and grants.

This is the first time there will be shared borrowing on a substantial level by Europe and represents what many have termed an almost Hamiltonian moment for European integration, in a reference to the US’s crossing-the-Rubicon moment when it pooled its debt, as advised by founding father Alexander Hamilton.

The third is perhaps the lesser known but more critical part of the EU’s Recovery Plan. In return for the vast sums disbursed to states by the commission, the member states themselves will have to adhere to formally agreed plans of structural reforms.

This will be both a carrot and a stick: not only will governments have to push through the essential but difficult reforms needed to grow sclerotic and stuttering economies like Italy and Spain, but they will also be sticks – if governments do not deliver on the plans agreed to attain funds, voters will not continue electing them. Now there is a true way to ensure that European member states are held to account and have to conform with the European political establishment.

Finally, Mario Draghi, a respected technocrat and former governor of the European Central Bank, was sworn in as prime minister of Italy with an overwhelming majority. Italy, for years the laggard and weakest link of the European project, now runs a real chance of going through the types of reforms that have taken Portugal and Greece from being also-rans to some of the fastest-growing and most dynamic economies in Europe.

Draghi is a true European heavyweight at the table who will be able to advance the agendas of a common European budget and capital markets union in a way very few can.

Enormous problems remain. The EU has shown itself to be far from able to deliver on what was meant to be a flagship moment for integration and co-operation – an effective and co-ordinated rollout of vaccines. Being so behind on the vaccine puts great pressure on the ability of the European economy to bounce back. In addition, major democratic deficits remain at the heart of the European project. Democratically elected member states will still be accountable to unelected officials within the European Commission.

Embarrassed European officials such as Commission President Ursula von der Leyen and Borrell have shown just how difficult it is to hold the stereotypical Eurocrats to account. Despite shambolic performances of rolling out vaccines and tackling Russia, neither has lost their job.

Despite these causes for pessimism, however, the progress made in the past few years since the Eurozone crisis has been enormous. Europe now looks well placed to bounce back and be the key actor it has never been on the global stage.

Investors would do well to take note. After years of disappointing growth, perhaps the greatest opportunities lie not in the New World or in Asia but in the Old Continent. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores.

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