Innovation, International Competitiveness and the Future of European Union Institutions

Recently, I attended a scenario workshop on “The Future of the EU”. The workshop was organised by one of Germany’s largest political foundations. It brought together multi-disciplinary staff of federal ministries, business groups and civil society. The seminar aimed at developing reasoned scenarios for future developments in European Union policymaking. The key question being: What could the EU look like ten years from now, considering current affairs, future events, sustained trends, and causalities?

Early remarks revealed that participants frequently disagreed on key themes, reflected by different responses to big questions: What is the point of the EU? In which areas is cooperation at EU level necessary and in which is it not? What should EU institutions be tasked with? When should sovereignty remain with individual Member States? What worked in the past, and what hasn’t?

In the beginning, participants were asked to look for STEEP (social, technology, economic, environmental, political) factors that could significantly impact on EU policymaking in the near to medium term. With a multitude of some 100 items to be on the table, more thorough thinking about the degree of certainty and the potential magnitude of impacts left us with only two determinants – impact factors that were considered by the majority of participants to be most relevant for the future of EU policymaking and EU institutions: 1) innovation and international competitiveness within the bloc and 2) Member States’ willingness to further invest political capital in EU law-making and necessary institutions. Other developments that ranked high on the certainty-impact scale were geopolitical relations with global “superpowers”, Member States’ willingness to share sovereignty in defence policy, demographic change, the state of education and citizens’ mindsets, environmental developments, and migration.

Moving ahead with innovation and competitiveness, on the one hand, and governments’ willingness to politically invest in the EU, on the other, the group was tasked to develop three scenarios for different assumptions on the development of the two impact factors. The following “pictures” emerged:

Scenario 1 was defined by a state of high innovation and competitiveness in the EU combined with only little willingness in Member States to further invest political capital in EU institutions. In this scenario, which was coined “Those who want more do more”, in line with Scenario 3 of the Juncker White Paper on the Future of the EU from 2017, the following developments were considered key impact factors. Member States return to national sovereignty/law-making in several policy areas. The Euro will remain an official means of payment in today’s Eurozone countries, but alternative currencies incl. cryptocurrencies will be allowed to serve as means of payment. Migration, defence, tax and welfare policy will remain a national competence of Member States. The European Single Market will become the strongest pillar of cooperation at EU level. A menu approach will allow for stronger cooperation of like-minded countries, including countries outside Europe, in several policy areas including commercial, social and labour market policy as well as taxation (open clubs). Member states will preserve minimum standards in trade policy, while some Member States move forward with EU plus liberalisation initiatives. Member States will increasingly rely on private and internationally applicable standards for goods and services trade. Education services are liberalised and further digitalised across the EU. Member States’ economies are expected to thrive on the heels of these developments. An unprecedented number of technology-driven and internationally competitive companies will be headquartered in the EU. Structural economic change and renewal is fuelled by a better educated, more market-oriented labour force.

Scenario 2 was defined by a perpetuated state of low innovation and competitiveness in the EU combined with little willingness of EU governments to further invest political capital in EU laws and institutions. This scenario was coined “At odds, left behind and unable to defend”. In this scenario, EU scepticism thrives everywhere in the EU27. Member State governments reject most calls from Brussels to intensify cooperation under the umbrella of traditional EU institutions. Member States also fail to find alternative forms of cooperation, such as coalitions willing countries in certain policy areas. Single Market integration and trade liberalisation comes to a halt. EU Member States experience economic and technological demise, while the US and China continue to expand global technological and economic leadership. Many non-EU countries surpass EU Member States in terms of economic development. Member States’ economic and technological dependencies from other parts of the word increase, while military capabilities decrease. Some Member States experience severe economic decline, with impoverishment becoming a root of protests, upheaval and persistent ideological divide. The availability of skilled labour in the EU shrinks as the ‘brain drain’ becomes a reality for most EU Member States. 

Scenario 3 was defined by low innovation and competitiveness in the EU combined with a much stronger willingness of EU governments to further invest political capital in EU institutions. This scenario was coined “The EU – Museum of the World 2030”. In this scenario, the recognition and acceptance of common European values improves across the 27. A common European identity is shared by most Europeans. As a result, governments expand cooperation in several policy areas including tax, welfare, environmental and defence policy. Political efforts aim at securing the status quo, with high levels of redistribution, sustainable agriculture as well as high-quality culinary and tourism services. The EU’s new socio-economic model becomes a role model for only few countries outside the EU (cohabitation à la EU). Innovation and competitiveness are not policy priorities anymore and dropped from EU law. EU Member States experience economic and technological demise, while non-EU countries benefit from technological and economic progress. Member States’ economic and technological dependencies on other parts of the word increase. The EU economy shrinks and so does the EU’s global geopolitical influence. As a geopolitical dwarf, the EU relies on soft power in foreign affairs. Brussels becomes a well-recognised arbiter mediating in international conflicts. 

Obviously, the appeal of such scenarios lies in the eye of the beholder. In each case, the causalities and outcomes are debatable, and need to be put into perspective. In my view, any political and private-sector initiatives that further liberalise education and commerce while improving innovation and competitiveness (scenario 1) serve the highly diverse bloc better than political experiments towards economic disintegration and decline (scenario 2) or greater redistribution and a European welfare state (scenario 3). 

With its 2017 White Paper on the Future of the EU, the Juncker Commission launched a phoney debate about potential reforms: it showed style over substance. The paper, which was presented ahead of the Union’s 60th anniversary, is long forgotten in Brussels. Covid-19 and carbon dioxide gloss over internal conflicts and the need to react to economic and geopolitical developments in the EU neighbourhood and beyond. 

Internally, Member States are nearly insurmountably divided on matters of taxation, migration, economic liberalisation, industrial policy (largely protection), climate action, and the Green Deal. Externally, ambiguities and passivity related to China, the US and Europe’s own geographic proximity reveal vexing lack of vision and ambition. It is already obvious that the Commission of Ursula von der Leyen cannot live up to expectations regarding its self-imposed purpose of being a “Geopolitical Commission”, beyond “speaking and listening more to one another.” Too salient is the lack of ambition regarding the advancement of the Single Market, too few the proposals for how to connect better with growing markets outside the EU27, and too little the substance of economic partnership and proposed trade agreements. 

In the meantime, growth in innovation and competitiveness within the EU is lagging further and further behind China and the US, where any business, small or large, can benefit from a large and more complete Single Market, with the US leading in wage bills and productivity in most and key economic industries. These indicators should ring the alarm bells of civil servants and politicians in Brussels and Member State capitals. EU Member States poor performance is a plain reflection of broken promises for EU Membership including those made by the Lisbon strategy from early 2000 to achieve “the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth”, or, likewise, the Europe 2020 strategy from 2010.

I take three lessons from the above: the first is that innovation and international competitiveness in EU Member States will likely remain important for EU policymaking, determining EU governments’ willingness to further invest in cooperation under the auspices of traditional – or novel – EU institutions. The second lesson is that the current model of economic integration is outdated. Compared to many non-EU countries, the EU policymaking failed in many respects ranging from technological developments, the diffusion of technology-driven business models, the quality of education, and, more generally, unleashing economic opportunities. The third lesson is that some EU (and Eurozone) institutions bar the way for many Member States’ socio-economic progress, depriving them of flexibility regarding further economic liberalisation (e.g. intra-EU services trade, competitive and effective taxation of sales and corporate income), cooperation with non-EU countries (e.g. the elimination of tariffs, services trade liberalisation, common technology standards), or competition for the best currency. After all, as was outlined by Germany’s famous post-WWII economist Wilhelm Röpke, internationalism cannot be created from above, it must, like charity, “begin at home”.  

Now, the EU’s key institutions will hardly disappear at any time soon. But they will have to change. It will become increasingly difficult to find political majorities for bold EU initiatives that might change life in Member States for the better or the worse. Forest Gump once said “I don’t know if we each have a destiny, or if we’re all just floatin’ around accidental-like on a breeze, but I, I think maybe it’s both.” In my book, the fate of Member States lies outside the EU as we know it. In the UK, Norway and, more recently, Switzerland policymakers show a great awareness and consensus of what worked in the past and what didn’t. It is a logical consequence that the governments of these countries are advocating alternative and less restrictive modes of cooperation with and beyond the EU. Covid-19 has helped EU institutions, above all the European Commission, to escape an honest debate about the need for bold institutional reforms, but those who want to do more – or less – together will soon hit the headlines again.