These are critical months for Europe. 

In June, the continent will vote in European parliamentary elections. Shortly after, Mario Draghi, former Italian prime minister and president of the European Central Bank, will release a much-anticipated outline for European economic growth and competitiveness. Then, the process of choosing the next European Commission president will begin. 

Underlining it all will be one question: can the old continent enact the economic and political reforms required to ensure it continues to play a central role in an increasingly complex and less amenable new world order?

Several factors are key 

First, the economic landscape of Europe, since the malaise of the eurozone crisis, has fundamentally shifted. 

Convergence was always a promise of the single currency, but it never happened. 

Since adopting the euro at the turn of the century, for the first two decades the countries that prospered within it were the richest – largely Germany and the affluent north – while those to whom it had been promised would flourish, Italy, Greece and Spain, floundered. 

Since the pandemic, however, the tides have turned. 

A recent growth spurt in southern Europe is reviving hopes of faster convergence between the eurozone’s traditional laggards, the Mediterranean economies, and its industrial behemoths in the north. 

According to the Financial Times, Portugal, Italy, Greece and Spain have collectively outgrown Germany — the bloc’s largest economy — by about 5% since 2017. 

Together they have added over €200-billion to their GDPs, in price-adjusted terms, which is more than Portugal’s entire economy.

By contrast, Germany’s economy has stagnated since the pandemic struck in 2020. A sharp slowdown in its vast manufacturing sector was exacerbated by a rise in energy prices precipitated by Russia’s invasion of Ukraine. 

Southern European countries, meanwhile, have been boosted by their lower exposure to the manufacturing downturn and Russian gas.

The significance of this shift in economic outcomes within Europe is of existential importance. Without a sense of shared progress and a common destiny within the EU, unity and cohesion are impossible.

Second, politically, the pandemic served as a clear reminder of the essential need for further and closer integration. 

The precedent set by the extraordinary decision in 2020 to create an $800-billion pandemic recovery fund of common borrowings, used to support investments disproportionately in poorer members, changed Europe forever. 

The EU now has over €1-trillion of debt outstanding, making common European debt a global benchmark. 

Europe has now essentially issued “Eurobonds” and become a “transfer union”, which for decades were both unthinkable in Berlin and other more “frugal” capitals.

Unprecedented

However, while these are welcome developments, the challenges and threats confronting Europe are unprecedented in modern times. 

First is the maintenance of military and financial support for Ukraine, especially with the US becoming increasingly preoccupied at home. 

Second is boosting Europe’s defence capabilities, which are estimated to need an additional €56-billion of funding a year, according to German think tank, the Ifo Institute. 

Finally, there are the political insurgencies of upstart right-wing nationalist parties throughout the EU who play on voter frustrations with migration and an underfunded welfare state. 

They want nothing less than to break down the edifice from the inside  and revert to a much looser “Europe of nations”, as described by French far-right politician Marine Le Pen. 

Growth through critical reforms 

The solutions to all these challenges are investment and growth. 

In a recent speech in Florence, Isabel Schnabel, the German member of the European Central Bank’s executive board, outlined how Europe can grow its economy.

“To assert its role,” she said, “the euro area needs to remain competitive. It must be capable of creating the sustainable growth that our social and economic fabric depends on.” 

But to achieve this, she argued, far faster progress on reforms needs to be made. 

First, member state specific reforms are essential. 

Germany needs to reorient the country’s export-focused economic model, while southern nations must build on recent progress and step up structural reforms. 

Improving public sector efficiency, private sector competition, and innovation are all key, as well as ensuring remaining EU recovery funds are deployed effectively.

But national reforms alone are insufficient. 

Eurozone-wide growth and the continued convergence of economic trajectories can only come from coordinated economic policy and deeper integration. 

More common borrowing to support investments in defence and the green economy will be needed. 

Other reforms, such as a completed banking and capital markets union, are equally crucial to allow investment and savings to flow between the north and the south.

As the global order becomes ever more fractured, Europe’s role should not be overlooked. 

In a world increasingly torn apart by the vagaries of a schizophrenic America, a bellicose Russia and an increasingly assertive autocratic China, Europe still represents a counterbalance of liberal, rule-based foreign policy and social democratic values.  

For all those around the world who value such notions, rarely have the odds been higher. DM