The mother of all pyrrhic victories

The recently announced EU-US trade deal, while presented as a diplomatic success, is in reality a profound strategic defeat for the European Union. By accepting a 15% tariff on a vast swathe of its exports to the United States while eliminating its own, it really feels that the EU has capitulated to American protectionism. This lopsided agreement is more than just a bad deal; it is a clear symptom of Europe’s declining economic relevance and a direct consequence of its failure to implement the robust, forward-looking strategy so urgently detailed in Mario Draghi’s competitiveness report. This deal is the painful proof that the status quo is no longer an option.

Beyond the external challenges posed by the EU-US trade deal, a more insidious threat is festering within the Union itself. The rise of nationalist and far-right parties, which have long championed a strong, sovereign Europe, are now performing a delicate and contradictory political dance. On one hand, many of these parties openly laud the US President as a political role model and admire his “America First” strategy. They see his populist rhetoric and protectionist policies as a template for their own nations. On the other hand, they are now forced to publicly condemn the very real and damaging consequences of his trade policy, which has directly resulted in a capitulation that harms European industries and exposes the EU’s weakness. This duplicity reveals a profound hypocrisy, as they simultaneously cheer on the architect of Europe’s humiliation while using the outcome to fuel their anti-EU narratives. Instead of uniting to forge a stronger European response, they exploit the crisis for political gain, proving themselves to be an “enemy from within” that undermines the very unity and strategic autonomy the continent so desperately needs.

To regain its footing and become a relevant global player, the EU must move beyond its current reactive and defensive posture. The path to relevance and prosperity is meticulously laid out in Draghi’s report, which must be elevated to the highest priority and become the core principle guiding all EU policy decisions. Draghi’s vision is not a menu of options but a roadmap for survival, arguing that the EU can no longer rely on past glories or fragmented national interests. Instead, it must act with the urgency and unity of a continent facing an existential threat. This will require critical, interconnected transformations.

First of all, the EU’s long-term relevance hinges on its economic dynamism. Draghi’s report highlights the urgent need to accelerate efforts to create a true single market for digital services and capital, cutting through bureaucratic red tape and fostering a more innovation-friendly environment. It calls for massive, coordinated investment—an estimated €750-800 billion annually—in strategic sectors like renewable energy, semiconductors, and artificial intelligence, recognising that this is not just an economic imperative but a geopolitical necessity.

On the other hand, while the transatlantic relationship remains important, the EU cannot afford to be dependent on a single partner. It must diversify its trade relationships and forge stronger, more strategic partnerships with like-minded countries in Asia, Latin America, and Africa. This includes moving forward with stalled trade agreements and actively engaging in new ones to create a network of allies that can counterbalance the influence of larger powers.

There are obviously some difficult decisions that need to be taken collectively.Draghi’s call for an additional €750-800 billion in annual investment is a staggering figure, but it is the necessary cost of ensuring Europe’s future. The report acknowledges that this cannot be financed through national budgets alone, and the EU must develop new, innovative financing mechanisms. The debate on how to fund this ambitious agenda is central to its success. Ideas for financing include a  new wave of common borrowing, inspired by the success of the NextGenerationEU recovery fund. This means that the EU could issue a new, permanent form of common debt. This would allow the EU to pool resources and finance strategic investments in areas like defence, energy infrastructure and digital technologies. This approach would leverage the EU’s collective credit rating to raise capital at a lower cost than individual member states could.

A core recommendation of the Draghi report is to finally complete the Capital Markets Union. This would involve breaking down national barriers to investment, harmonising regulations, and creating a more integrated European financial market. The goal is to unlock the continent’s vast pool of private savings and redirect them toward productive investments in a more efficient manner, particularly for innovative start-ups and scale-ups that require risk capital.

The EU could also explore new streams of revenue for its budget, known as “own resources.” Potential sources include revenues from the Emissions Trading System (ETS), the Carbon Border Adjustment Mechanism (CBAM), or a new digital services tax. These resources would provide a stable and predictable funding source for the EU budget, reducing the reliance on national contributions and giving the EU a greater fiscal capacity to act strategically. Obviously this carries some political risks. 

Maybe less politically contentious, than the “own resources” system, but still a rather challenging option, is to reallocate existing EU funds. This would involve a major reform of the EU’s Multiannual Financial Framework (MFF), potentially shifting resources away from traditional areas like cohesion and agriculture towards the strategic priorities outlined by Draghi, such as innovation and skills development.

For a small, open economy like Malta, the implementation of Draghi’s report would be a transformative shift, demanding a fundamental realignment of national policy. The future of Malta’s economy is inextricably linked to the EU’s ability to execute this vision, which means that there are benefits for Malta from having the EU adopt the vision outlined in Draghi’s report . On one hand, Malta’s economic security is dependent on a strong and unified EU. A more integrated single market, as advocated by Draghi, would provide Maltese businesses with a larger, less fragmented platform for growth and resilience. The needed coordinated investment in innovation and strategic sectors presents a significant opportunity for Malta, as Malta can position itself to benefit from this new European industrial policy by attracting investment in high-tech startups and participating in the EU-wide push for strategic autonomy. The focus on digital and clean energy innovation could be a powerful catalyst for diversifying Malta’s economy. Moreover, Draghi’s emphasis on cutting bureaucratic red tape and simplifying regulations could lead to a more efficient and business-friendly environment across the EU. Malta, which has its own regulatory complexities, all this could translate into a more streamlined process for businesses, reducing compliance costs and fostering greater competitiveness.

However, nothing comes with just advantages. Adopting Draghi’s report also presents challenges for Malta. A more integrated and competitive single market, while offering opportunities, will also intensify competition for Maltese businesses. Local companies, particularly smaller ones, may find it challenging to compete with larger, well-funded “European champions” that Draghi’s report aims to create. Furthermore, the call for greater EU-wide policy coordination in areas like energy, innovation and trade could reduce the national government’s ability to set its own policies. While this could lead to a more coherent European approach, it could also limit Malta’s flexibility to tailor policies to its unique needs as a small island nation. One also has to consider that the significant investment required to fund Draghi’s vision—hundreds of billions of euros annually—will likely necessitate new financing mechanisms, possibly including joint borrowing. This could place a greater financial burden on member states, and it is unclear how the costs would be distributed and what the long-term fiscal implications for Malta would be.

Having said all this, one thing is crystal clear. The EU-US trade deal is a painful reminder of the price of inaction. The path forward is not a mystery; it is meticulously laid out in the Draghi report. The EU must now have the political will to make competitiveness the singular, non-negotiable priority across all policy decisions. This is the only way to avoid a “slow agony” for the EU and secure a future of prosperity and relevance for its European citizens.