Europe’s economy is “geared towards a world that is gradually disappearing”, according to a warning from Christine Lagarde that the EU needs reforms to spur growth.
The president of the European Central Bank (ECB) said the EU’s dependence on international trade had left it vulnerable, as major partners had turned away from the trade that made the bloc’s exporters wealthy.
Donald Trump has led a global turn towards protectionism and against globalisation, with steep tariffs imposed on almost every trading partner. At the same time, China has used its dominance of production of certain critical materials and products to exert pressure.
Lagarde argued that Europe was vulnerable because of a “dependency on third countries for our security and the supply of critical raw materials”. She cited China’s control of the supply of rare earth metals that are crucial in electric motors and wind turbines, as well as the “choke point” of power chips made by Nexperia in China that threatened to shut down production across the global car industry.
Speaking at the European Banking Congress in Frankfurt, Germany, Lagarde said Europe had failed to address its own problems. Policymakers had instead allowed its weaknesses to “erode growth quietly, as each new shock nudges us onto a slightly lower trajectory”.
“Our internal market has stood still, especially in the areas that will shape future growth, like digital technology and artificial intelligence, as well as the areas that will finance it, such as capital markets,” she said.
Europe also faced a “vicious circle” of its own savers allocating money to US stocks, helping the American economy to advance faster than the EU and leaving “stagnating productivity at home and growing dependence on others”, she said.
Lagarde did highlight some European strengths as well, including a resilient labour market, increasing digital investment, and government spending, particularly on defence in response to Russia’s invasion of Ukraine, that has counteracted economic slowdown.
Part of Lagarde’s prescription for recovery was lowering barriers to services and goods trade between EU countries. Those barriers are equivalent to a 100% tariff on services and 65% on goods, according to ECB analysis. Lowering those barriers to the same level as the Netherlands – a relatively open economy – would fully make up for the hit from US tariffs, she said.
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She called for mutual recognition of regulated companies, allowing them to sell across Europe when authorised by any one country. She also said the EU should adopt qualified majority voting on tax, preventing any single member state from vetoing changes.
She argued that benefits would include allowing the harmonisation of VAT, making it easier for smaller European companies to gain access to the whole EU market without having to comply with 27 different tax regimes.