The Letta report proposes a financial instrument with contributions from EU countries to compete with the US

The EU needs to boost its competitiveness so as not to lose the race against the United States and China. To guide the debate, EU Council President Charles Michel entrusted former Italian Prime Minister Ernico Letta with a report on the single market. A document that will guide this week’s debate at the EU Leaders’ Summit and that defends the need to complete integration into the single market. Furthermore, the text proposes creating a State aid contribution mechanismin order to mobilize financing from EU countries for the industry.

“The next steps involve addressing the debate on State aid,” indicates the analysis of the internal market, which, while recognizing the need to mobilize resources for the industry, also shows the risk of fragmentation of the single market due to the different fiscal muscles of the Member States, which would put equal conditions at risk.

“One way to overcome this dilemma could be a stricter application of state aid at national level and the progressive extension of financial support at EU level. In particular, we could provide for a mechanism for contributing state aid obliging Member States to allocate a portion of their national funds to finance pan-European initiatives and investments,” the report proposes.

Although the progressive relaxation of state aid in response to the recent crises has contributed to limiting the negative effects on the real economy “it has also produced distortions of competition”, the report states. That is why it calls for “developing innovative solutions” to “rapidly mobilize specific national public aid for the industry”, while considering it necessary to address “market deficiencies” and “avoid fragmentation of the single market.”

The Italian calls for promoting a new single market, more integrated as a way to compete with the United States and China. One that is based on equal rules of the game, in which a dynamic and effective European industrial policy is established. For which they are required “sufficient financial resources.” That is why he believes that the priority is to mobilize private capital: “The European Union houses the astonishing figure of 33 trillion euros of private savings, mainly in cash and deposits,” analyzes Letta.

However, the Italian believes that this wealth is not being used to redirect to the strategic needs of the bloc. In fact, he warns of a worrying trend: the annual diversion of around 300 billion euros from the savings of European families from EU markets abroad, mainly to the US economy, “due to the fragmentation of our financial markets”. A situation that the former Italian prime minister believes highlights “a significant inefficiency in the use of the EU’s economic assets.”

That is why the report advocates the creation of a Savings and Investment Union, developed from the incomplete union of capital markets. Integrating financial services into the single market would keep European private savings within the EU and attract additional resources from abroad.

The single market was conceived to ensure fair competition, to promote cooperation and solidarity between Member States, Letta recalls in his report. However, the profound changes in the international panorama have highlighted the need to develop a new single market. In fact, the report recalls that, although in 1993 the European and American economic markets were of similar size, the EU has been falling behind in registering a growth of less than 30% between 1993 and 2022, compared to the 60% increase in the American economy.

The document also points out that the single market was born at a time when both the bloc and the world were less integrated. “When Jaques Delors presented the single market to the world in 1985, he did so in a context that differs from today. The number of EU member states was halved, Germany was divided in two and the Soviet Union still existed. In this moment, China and India together accounted for less than 5% of the economy. and no one had heard of the BRICS, reflects the former Italian prime minister. A time when the United States and the EU were not only the center of the world’s economies, but harbored great growth potential.