Europe Is Missing Its Moment

European leaders have long identified the necessary reforms to bolster the EU's economy and global influence. That said, the reality is a bit more complicated. political obstacles within member states and the EU's reliance on consensus have historically hindered significant progress, except during crises. Now, there's a risk of squandering the current crisis by failing to act decisively.

This crisis unfolds as the United States reconsiders its role as Europe's security guarantor. Simultaneously, a resurgent and aggressive Russia poses a growing threat, while Europe's fragmented economic resources weaken its collective defense capabilities. The unease began with U.S. officials questioning the transatlantic alliance and suggesting a revised U.S. role in Europe. Subsequent strategic documents from Washington indicated a desire to cultivate opposition to the EU's current path, even proposing support for right-wing governments to weaken the bloc. Furthermore, proposals emerged to create a new global forum excluding Europe, comprised of China, India, Japan, Russia, and the United States. Public criticisms from U.S. leaders have further strained relations, raising concerns about the stability of the transatlantic alliance and Europe's ability to defend itself and maintain its global standing.

Europe must recognize the gravity of the situation. Its most important ally is questioning its commitment, and its ability to defend itself and secure its future depends on mobilizing resources and acting collectively. The EU's recent decision to extend sanctions on Russian central bank assets, achieved without unanimous consent, is a positive step. At an upcoming European Council meeting, leaders must demonstrate similar ambition in deciding how to utilize those assets to support Ukraine. Moreover, Europe should seize this opportunity to implement broader economic reforms, including establishing a capital markets union, completing a banking union, and creating permanent mechanisms for common borrowing. These reforms are not mere technical adjustments; they are essential for building the economic strength needed to bolster Europe's defenses, strengthen its energy and digital infrastructure, and assert itself as a global power. Failure to act decisively will leave Europe vulnerable to external actors seeking to divide it, thereby jeopardizing the EU's security and geopolitical relevance.

The Challenge of Slow Reform

Europe's primary obstacle is not a lack of ideas, but the inability to implement them. The EU's decision-making processes, designed to ensure inclusivity and democratic principles, often lead to paralysis. The challenge lies in bridging the gap between necessary actions and politically palatable choices.

To address this, expert reports are periodically commissioned to chart Europe's economic future. Recent reports have detailed recommendations for enhancing European competitiveness and reforming the single market, emphasizing the need to deepen capital markets, complete the banking union, and embrace common borrowing to finance joint projects and attract global investment. While these recommendations are widely accepted, implementation remains limited.

Capital Markets Union: A Stalled Project

The creation of a single capital market in Europe has been an ongoing effort for a quarter-century. Its completion would enable Europe to utilize its own savings, directing trillions of euros from low-yield accounts and U.S. markets into European businesses, infrastructure, and defense. This would reduce borrowing costs, stimulate investment, and enhance the global competitiveness of European firms. That said, the reality is a bit more complicated. Europe's capital markets remain fragmented, with individual countries maintaining their own regulations.

The European Commission has initiated efforts to reduce regulatory barriers to cross-border capital flows, including proposals for a new "pan-European market operator" status and strengthening the European Securities and Markets Authority (ESMA). That said, the reality is a bit more complicated. these changes are insufficient, as ESMA lacks the authority to set binding rules, directly supervise major market participants, or create the unified markets needed to mobilize capital at scale. Without further progress, Europe will struggle to finance essential investments in defense, clean energy, and technology.

Banking Union: An Incomplete Structure

The integration of the EU's banking system faces similar challenges. While the Single Supervisory Mechanism and the Single Resolution Mechanism are in place, the European Deposit Insurance Scheme remains unfinished, leaving the banking union incomplete. Disagreements persist over risk-sharing among countries with varying credit quality and banking systems, hindering progress on the insurance scheme. Political factors, such as the influence of national banks within party networks, further impede reforms. Consequently, progress toward completing the banking union has been stalled for over a decade.

Common Borrowing: A Contentious Issue

Common European borrowing is a crucial component of Europe's reform agenda. Properly structured EU common debt could provide substantial financial support and capital for defense investments. It would also increase demand for European debt, attracting investors seeking safe, liquid euro-denominated assets.

That said, the reality is a bit more complicated. countries traditionally cautious about spending remain opposed to common debt, fearing voter backlash. This opposition persists despite the urgent need to fund rearmament and modernize the defense industrial base in response to the war in Ukraine. While Europe has taken some steps, such as adopting a European Defense Industrial Strategy and creating mechanisms for joint ammunition production, these initiatives remain limited. Current defense funding tools rely on national budgets and procurement authorities, leading to inefficiencies. Common borrowing for common defense would enable Europe to fund its security initiatives in a more efficient and sustainable manner.

A Call to Action

Despite the ongoing war in Ukraine and shifting U.S. support, EU-wide economic and financial reforms remain incremental. Europe must leverage the current crisis to accelerate necessary reforms. A more unified Europe could capitalize on global financial anxieties, as countries seek to diversify away from the U.S. dollar. If Europe can offer deep capital markets and a sizable stock of safe euro-denominated assets, it could attract significant investment, particularly if those assets are linked to financing European public goods.

Europe took a significant step by extending the freeze on Russian assets, bypassing the unanimity requirement. The upcoming European Council meeting could build on this progress by using similar procedures to advance other elements of EU integration. Europe's reluctance to act decisively has left it vulnerable. By implementing expert recommendations to build the capital markets union, banking union, and common borrowing tools, Europe can strengthen its defenses and regain its competitiveness. Delaying action is too risky, given the changing geopolitical landscape. Europe must act now to reinforce its position as a global economic and strategic player.