Economic competitiveness challenges cut through EU domestic agenda

AMID the twin shocks of the pandemic and Russia’s invasion of Ukraine, the Green New Deal became the signature initiative of Ursula von der Leyen’s first term as European Commission president from 2019 to 2024. However, her second half-decade in power is likely to be defined by much wider, growing global competitiveness challenges now facing the EU bloc.

Only two weeks into its first 100 days in power, the new Commission has already been buoyed – economically – by the agreement earlier this month of a trade deal with the Mercosur bloc in South America. However, the impact of that agreement will not be felt for some time given that a potentially very difficult ratification process now lies ahead with France seeking to build a blocking minority within the EU-27.

On the competitiveness agenda, what von der Leyen hopes to signal in the first 100 days is the EU’s determination to try to realise its climate and environmental commitment, and restore its economic vitality. Her ability to navigate these challenges will be pivotal in determining whether the EU can fulfil its visions of industrial resurgence and strategic autonomy. Key areas of specific focus include the new Clean Industrial Deal; delivering a comprehensive agriculture and food strategy; fostering greater cohesion in EU defence strategy and spending; and expanding access to EU supercomputing resources for AI startups.

The Clean Industrial Deal, a flagship initiative, will be unveiled in more detail during the first 100 days which began on Dec 1. The new scheme will develop in the form of a comprehensive strategy aimed at revitalising Europe’s industrial sector while adhering to climate commitments.

The new package will seek to bolster industrial competitiveness, foster sustainable growth, and better position the EU in the global transition to a clean energy economy. The deal’s strategic framework and concrete measures are still taking shape, but are being influenced, significantly, by the report of former European Central Bank chief (and ex-Italian prime minister) Mario Draghi.

The emerging details are also being tailored to align with political realities and appetite of the diversity of the 27 member states. Early signals suggest the deal will prioritise simplifying regulations in key sectors, advancing market integration, and optimising existing funding mechanisms. However, it is unlikely to feature significant new financial resources, as many national governments remain cautious in the face of subdued economic growth and competing, expensive policy demands.

The stakes are high, with Europe’s industrial competitiveness facing mounting challenges. For instance, the significant strain that the automotive sector is under has been highlighted by recent plant closures and layoffs at Volkswagen and Ford, as well as battery maker Northvolt’s bankruptcy. At the same time, external pressures, including the uncertain US policy towards the EU and China’s dominance in high-tech manufacturing, further underscore the urgency for decisive intervention.

Agriculture is also a priority for the new Commission which has pledged to present a comprehensive vision for agriculture and food within its first 100 days. New Commissioner for Agriculture and Food, Christophe Hansen, will build upon the findings of the recent strategic dialogue on the future of EU agriculture.

This dialogue emphasised key areas such as generational renewal, organic farming, and food security, and addressing concerns of farmers who have been vocal about their grievances. A significant challenge will be to reconcile sustainability measures domestically and internationally, including in the context of the new trade agreement with the Mercosur bloc in South America.

One recent signal of increased pragmatism is the institutional agreement for a one-year delay to implement the new EU Deforestation Regulation. That was advocated not only by political leaders, but also business too.

Defence and technology are also among the areas for early deliverables. The Commission plans to start a process for defining a common EU defence policy with a forthcoming White Paper.

This initiative is expected to address investment needs, enhance competitiveness of Europe’s defence industry, and promote cooperative procurement. It will set out strategies to reduce external dependencies, improve intra-EU collaboration in innovation and production, and achieve economies of scale.

Additionally, the policy will include financing mechanisms and closer coordination with Nato to bolster Europe’s overall defence capabilities. The EU’s budget in this area amounts to only around 1.5 billion euros (S$2.1 billion) from 2025 to 2027, a small fraction of the annual military Nato expenditure.

The healthcare sector will see a targeted action plan to bolster cybersecurity in hospitals. In the technology area, the so-called AI Factories initiative will provide startups with access to supercomputing power, as part of the bloc’s broader artificial intelligence ambition, which so far have mainly resulted in regulation.

The new Commission will also try to give a push to delayed projects. This includes beginning to lay foundations for a European Biotech Act, and intent to develop a new approach to Important Projects of Common European Interest (IPCEIs).

As the name suggests, IPCEIs are cross-border, cutting-edge innovation and infrastructure projects. They aim to bring together the public and private sectors to undertake large-scale transnational projects of strategic significance for the EU, and achieve common European objectives. In December 2020, for instance, 22 member states and Norway committed to launch IPCEIs in the hydrogen sector.

Much of von der Leyen’s 100-day planning will be influenced by shifting internal and external dynamics in Europe, and beyond. During her first term from 2019 to 2024, she navigated several crises which reshaped priorities.

The start of Donald Trump’s second presidential term on Jan 20 adds another layer of potential complexity. This development alone may compel von der Leyen to demonstrate a new level of decisive leadership. This includes potentially by preparing a response to any early, new Trump administration trade tariffs. Compounding these challenges are uncertainties in France and Germany, the bloc’s two largest economies, with national legislative elections in both countries anticipated in 2025.

In France, for instance, new Prime Minister Francois Bayrou faces an uncertain future in 2025 following the collapse of the government of Michel Barnier after the first vote of no confidence in a French administration since 1962. At the time of writing, it remains unclear if Bayrou can even last as long in power as Barnier, the shortest-serving prime minister in the Fifth Republic who held office for just around 90 days.

Taken together, all this underlines why the next five years are so important to reboot the EU economy. Barring new, major shocks, the success, or failure, of the second-term von der Leyen administration will be largely defined by its success on this competitiveness agenda.

The writer is an associate at LSE Ideas at the London School of Economics