The Legacy of Ursula von der Leyen

Alexander Privitera

AGI Non-Resident Senior Fellow

Alexander Privitera a Geoeconomics Non-Resident Senior Fellow at AGI. He is a columnist at BRINK news and professor at Marconi University. He was previously Senior Policy Advisor at the European Banking Federation and was the head of European affairs at Commerzbank AG. He focuses primarily on Germany’s European policies and their impact on relations between the United States and Europe. Previously, Mr. Privitera was the Washington-based correspondent for the leading German news channel, N24. As a journalist, over the past two decades he has been posted to Berlin, Bonn, Brussels, and Rome. Mr. Privitera was born in Rome, Italy, and holds a degree in Political Science (International Relations and Economics) from La Sapienza University in Rome.

Is the EU Fit for the New Global Disorder?

The recent political turmoil in Washington seems to have triggered a new bout of angst among European partners. It served as a reminder that their powerful ally across the Atlantic is likely to become more erratic as elections for Congress and the White House approach, and the continent is still not ready to stand on its own feet, in particular on all matters related to its own security. As Europe enters its own phase of political uncertainty leading up to next year’s European parliamentary elections in June, and Commission president Ursula von der Leyen is expected to seek a second term, it is time for her and leaders in EU capitals to reflect on what has and has not been achieved and what to do about it.

Indisputably, von der Leyen’s tenure at the helm of the Brussels-based institution has been rocked by multiple challenges. From COVID-19 to the war in Ukraine, her term started with a health care and economic emergency and morphed into a potential geostrategic disaster—the latter contributing to some additional economic damage of its own, from the energy crisis to the ongoing fragmentation, or recalibration, of global trade patterns. Both had a significant impact on inflation and, as a result, interest rates, all additional headaches Europe is grappling with, complicating the difficult transition toward a green economy. Add the more recent spike in migratory flows to Europe, and the ingredients for a perfect storm all seem to line up.

The problem with all these calls to action is that they are met with increasing domestic political constraints. Many European leaders do feel their backs are against the wall at home, mostly under pressure from populist forces.

Traditionally, such a combustive mix has forced the continent to come together and leap toward a stronger Europe. Don’t EU leaders only act on behalf of the union when their backs are against the wall? Are there signs they will do so?

The recent responses to some (by no means a comprehensive list) of the most significant challenges do not bode well. Particularly, if what was undertaken in the short term is stacked against its potential longer-term impact:

    1. Let’s start with the green transition, arguably the most important challenge the world is facing. The Commission started with grand fanfare but got its wings slightly clipped by the U.S. Inflation Reduction Act. After the initial shock, it is finding its footing and perhaps adding a necessary dose of pragmatism to its own plans. That is in large part because the ambitious start is causing a partial backlash with public opinion in member states, wary of the costs associated with the transition towards climate-neutral economies. Some specific challenges remain unaddressed, such as the treatment of nuclear power in the Green Deal. For that roadblock to be removed, France and Germany will finally need to see eye to eye.
    2. Things get even murkier in other areas that until recently were hailed as overall success stories. The COVID-19 emergency is a case in point: after the initial fragmented response, the EU managed to come together and coordinate closely on both health care and economic fronts. The latter produced a temporary but impressive common financial commitment to address the economic damage, especially in the hardest-hit member countries. “Next Generation EU”—commonly known as the recovery fund—was hailed by federalists as the Hamiltonian moment Europe needed to create its own fiscal capacity, tasked with responding to short- and long-term common challenges. However, the political momentum toward the goal of a permanent facility has faded, not least because spending common funds in a timely and efficient manner is proving to be challenging, Italy being the most relevant case. Hence the doubts of those still wary of pooling debt, most prominently Germany. To be sure, if common European debt could be issued more cheaply than German bunds (government bonds) in the future, perhaps the German government could reconsider. However, for as long as the recovery fund is perceived by markets merely as a temporary tool, investors are likely to ask for a premium to hold common EU debt over German bunds. This will preserve the “exorbitant privilege” of bunds as the Eurozone’s de facto only safe asset and make it much harder, among other things, to move towards more integrated capital markets in the EU. The refusal to pool liabilities, including bank deposits, has also prevented the EU from making real progress toward the completion of a banking union in recent years. Here, the EU appears to be stuck.
    3. One consequence is the apparent stalemate on the future of the Stability and Growth Pact (SGP) tasked with limiting member countries’ deficits and public debt. The SGP was suspended until 2024 to allow member states to spend more freely in the wake of the COVID-19 crisis without incurring potential fines from the European Commission. The emergency highlighted how unfit the common rules were to force fiscal policies of member states to converge. In the wake of the pandemic, a consensus emerged around the need to replace them. With what has become hotly contested. All options currently on the table—various combinations of automatic enforcements of numerical rules and a la carte debt reduction paths for individual member countries over the length of an equally debated period—fail to square the circle. The underlying problem of all current proposals is that member states will resist and perhaps even undermine the commission’s enforcement for as long as common constraints are put on spending national, rather than common EU money. The persuasive power of the EU’s common recovery fund is that the commission can withhold disbursements to member states of what are the EU’s own funds. It cannot credibly do the same when the money is national. The derived lesson should be common fiscal rules can only be enforced by creating a permanent common financial tool, big enough to have an impact on national budget planning. The alternative is a porridge of rules which usually disintegrate upon impact with their first serious challenge.
    4. Equally troubling are the increasing risks to competition and the enforcement of the EU’s state aid rules tasked with ensuring a sufficiently level playing field for companies operating in the EU. The increasing global constraints on free trade and the geoeconomic challenges posed by China have convinced the EU to temporarily loosen its state aid regime to protect its industries against unfair competition. This has allowed member states to support national industries more openly. Of course, some member states—such as Germany and France—can afford to do so, as they have more fiscal space than others, thus risking distortions in the single market. At heart, this has become a more fundamental battle between the more interventionist France and those in the EU advocating for strict enforcement of competition rules. A solution to this conundrum has yet to emerge.

The underlying problem with all exceptions of course is they tend to become the rules. Even more importantly, with one of the EU’s main stakeholders, Germany, in search of its proper place in a new global disorder, Europe appears adrift. Unsurprisingly, there has been no shortage of Cassandras recently, with urgent calls to act. They tend to paint the picture of a union too focused on responding to an overload of challenges in a pragmatic, but largely ad hoc, manner and by doing so, creating precedents that risk undermining its proper medium to long-term functioning. Notably, critics of the current situation include the former head of the European Central Bank and more recently prime minister of Italy, Mario Draghi. According to him, unless the union leaps forward, including taking real steps towards a fiscal union, it will fall back. A manifesto signed by many former senior European officials strikes a similar tone. A German-French working group of think tankers has issued its own wide-ranging recommendations on how to update and upgrade the institutional setup and decision-making system. The essence of the report is that it would officially turn the EU into one made of many concentric circles, a bit more a la carte but more nimble and able to make decisions more easily—including on how to welcome potential new EU candidates such as Ukraine, and—why not?—one day perhaps even the UK. The problem with all these calls to action is that they are met with increasing domestic political constraints. Many European leaders do feel their backs are against the wall at home, mostly under pressure from populist forces. Even when they realize the troubled international context calls for steps towards a stronger EU, they simply can’t see how to do it. That is certainly not the legacy the current commission’s president hoped for.

The views expressed are those of the author(s) alone. They do not necessarily reflect the views of the American-German Institute.