Turning point | EU internal market: Corporations as weapons

The EU and its member states have a problem with their economy. Unlike in the past, they are now not just concerned with weak growth – overall economic output is considered too low. A lack of mass is being complained about. To strengthen its economy, the EU is now focusing on its core element: the "completion of the EU internal market" is intended to create the economic mass and the giant corporations that the EU sees as a prerequisite for its global power. Therefore, comprehensive liberalization and deregulation are on the agenda – and with it the question of who benefits from the internal market.

The EU sees itself as the victim of a threefold turning point: China has risen from Europe's growth engine to an economic competitor. Russia is seen as a military threat to Eastern Europe. To prevail against both, the EU needs the support of the USA, which, however, is taking a different approach: Washington is waging a tariff war. According to US President Donald Trump, supporting Ukraine is no longer in the national interest. Instead, he wants to involve the EU in his economic war against China, something the Europeans are only partially willing to do, as they need China's market as an engine of growth. The global competition for power and money has thus been unleashed on the part of the USA, and the joint US-European management of the globe has ended for the time being. The EU laments its resulting loss of power as a "return of power politics", according to the Letta Report on the EU internal market , and as the end of the "rules-based world order".

World powers and the rest of the world

The fact that the EU sees its "existence threatened" by this, according to former central banker Mario Draghi, reveals its ambitious standards: its status as a global power is under threat. In 1993, the EU's economic output was much larger than China's and roughly equal to the US. Since then, however, China has overtaken the EU, and the US has pulled ahead. Its gross domestic product (GDP) has grown by 60 percent, while Europe's has grown "only" by 30 percent. Europe was once a technological leader, according to a paper by European technology experts, but today it has degenerated into a "digital colony" of the US, thus endangering the "existence of the EU."

In relevant comparisons of industrial, technological, financial, and military capabilities, the EU compares itself to the USA and China, while the rest of the world is referred to as "RoW" (Rest of the World). The EU claims to continue to assert its interests in this rest region, as its economic success depends on unhindered access to the global market. "The EU is the smallest and most open economy of the three (USA, China, EU) and, due to its declining share of global GDP, has the most to lose if there is a move away from free trade and a rules-based system," explains the Brussels-based think tank CEPS.

"It is the willingness to wage industrial warfare and to sustain the war of attrition necessary for victory that would best deter Russia's plans."

Kiel Institute for the World Economy (IfW)

The EU must play a "leading role at the international level" in order to "promote and protect its principles and objectives worldwide," according to the report prepared by former Italian Prime Minister Enrico Letta on behalf of the EU Commission. As a first step, loans totaling hundreds of billions of euros will be mobilized to strengthen government-sponsored industries, upgrade infrastructure, and, above all, finance military buildup. "It is Europe's mass and thus its willingness and ability to wage an industrial war and sustain the war of attrition necessary for victory that would best deter Russia's plans," the Kiel Institute for the World Economy (IfW) explains the need for higher defense spending. The USA is another target. Finally, "weak security capabilities limit the EU's willingness to take action against unjustified tariffs."

The debts resulting from industrial policy and military buildup make it all the more necessary to expand the EU's economic base. Given the relatively weak growth of the global economy and the global trend toward protecting national markets, it is clear that growth will increasingly have to be achieved at the expense of trading partners.

This necessitates the EU focusing on expanding its internal market in two ways: first, expanding the internal market to include new members, especially in the east, i.e., toward Russia. "Previous enlargements," according to the Letta Report, "have enabled Europe to offset the loss of relative weight by the accession of new players." A larger EU is "as it was yesterday, the best instrument for protecting European interests and prosperity." The EU Commission has therefore presented a framework that places Moldova, Ukraine, and the Western Balkans on a "highway toward the EU internal market."

Europe's goal: centralization of capital

In addition to enlargement, the second, more important step is the "completion of the EU internal market," for which EU Commissioner Stéphane Séjourné has presented a strategy. This involves eliminating national rules and laws that are now considered barriers to free competition within Europe – from differing national requirements for product labeling and the recognition of professional qualifications to regulations for retail, construction, transport, and postal services.

EU member states enacted these rules and laws to protect their markets, consumers, and businesses. Today, they are considered "bureaucratic burdens on businesses" that lead to "significant additional costs for companies," the Letta Report criticizes. "National markets, once designed to protect domestic industry, now act as a blanket that hinders its growth potential." As a result, Europe's companies suffer "from a staggering disparity in size compared to their global competitors, especially from the United States and China." This inequality disadvantages Europe in numerous areas: innovation, productivity, job creation, and ultimately, the security of the EU itself.

These national barriers are now to be torn down and the EU internal market comprehensively liberalized so that European companies can use the entire EU market as an investment and sales sphere at low cost, in order to grow and compete globally against competition from the USA and China. "It is time for European companies to 'Europeanize' themselves before they 'internationalize' themselves," declared EU Commissioner Séjourné. The hope is that the emergence of even larger corporations will attract foreign investment, promote innovation, and convey a strong image of the EU. This will also enable the EU to negotiate favorable trade agreements and shape international standards, which will promote its global expansion. Liberalization is "essential if we want to maintain and expand our international role," said Letta.

The EU sees a particular need for liberalization in the financial services, energy, and electronic communications sectors. Banks should become major players through acquisitions and mergers, providing EU companies with the necessary credit for their global expansion. Europe's telecom companies should drastically expand their customer base, as "an average European operator serves only five million customers, compared to 107 million in the United States and 467 million in China." This ongoing fragmentation hinders the scale and growth of pan-European operators and limits their ability to invest and innovate.

The centralization of capital is being called for, especially in the arms industry. The problem here is the fragmentation of demand , which is driven by national public contracts awarded to a largely domestic industry. As a result, according to the IfW Institute, European "weapons tend to be expensive due to low production volumes in a fragmented market." If Europe were to reform its fragmented market structure in arms production, it could achieve economies of scale that would lead to lower unit prices. This cost efficiency is "crucial for achieving military goals," explains the IfW. In other words: the cheaper the weapons, the greater the increase in power through the billions of dollars spent on state armaments.

Against the "national dwarfs"

To encourage the emergence of large European corporations, the EU not only wants to abolish national rules but also weaken its requirements for state aid. Until now, EU member states have only been permitted to provide aid to their national companies in exceptional circumstances and subject to approval. This is intended to prevent large and financially strong EU member states from strengthening their industries at the expense of others. These concerns are now being put aside, making it easier for EU member states to survive the impending "subsidy race" with the US and China. The rules on EU competition policy, which were previously intended to prevent the emergence of overly powerful corporations, are also being weakened. "We currently have a competition policy that produces national dwarfs," complains French Finance Minister Éric Lombard.

The liberalization program thus contains political dynamite. First, the emergence of market-dominating companies in Europe could lead to disadvantages for consumers. Second, EU member states have protected their strategic sectors – energy, telecommunications, defense, and banking – because they feared being among the losers in a liberalized EU market and thus losing access to their strategic industries. For example, the German government vehemently opposed the takeover of Commerzbank by the Italian Unicredit .

"One of the biggest challenges is the trust deficit between member states, for example, the concern that equipment might not be available in times of need or that a European country might refuse to supply it," the Letta Report acknowledges, only to note at the same time that such national demands are incompatible with the 'EU global power' project: "Either we rely on strategic scaling and deeper integration to assert our global leadership, or we risk being marginalized in a world characterized by competition and changing power relations."