The EU faces little choice but to act on recommendations from a high level report that it needs to invest €750m to €800m a year to head off economic “decline” in the trading bloc, according to a leading economist.

George Lagarias, the chief economist at professional services firm Forvis Mazars, says there will be difficulties negotiating the investment funds as a “common” pot of borrowing, particularly against claims that it could threaten the national sovereignty of EU member states. But, Lagarias warns, European leaders have no choice, despite the downside risks.

“Will Europe get there? As an economist, I don’t think it has any other choice. Eventually, that’s where things lead us,” Lagarias said.

Lagarias makes his comments in the latest episode of The Macro Memo, a Board Agenda podcast exploring global economic developments.

The investment and borrowing proposals were aired in September in a report, from former European Central Bank president Mario Draghi, which was commissioned by Ursula von der Leyen, president of the European Commission.

The report warns that unless the EU changes course, it will “inexorably become less prosperous, less equal, less secure and, as a result, less free to choose our destiny”.

Draghi notes: “The core problem in Europe is that new companies with new technologies are not rising in our economy.”

Innovation and decarbonisation

The report argues the EU must act to address innovation, decarbonisation and boost independence and security of the bloc by increasing production at home.

The report has faced criticism, particularly for the idea that “common” borrowing is the solution to investment funds.

Mark Kennedy, partner at Forvis Mazars and a regular on the podcast, challenged the idea that the EU is in decline. “One of my questions is always: who says it’s in decline? And it tends to be the same cohort of commentators who don’t really like the European model.”

He said Draghi’s track record would mean the report would get taken seriously. He also said the EU was “capable” of negotiating the challenges of coming to agreement on investment funding. For many countries in the EU, including Ireland, Kennedy said this was “much higher on the agenda, and there is much more openness now than five years ago about shared funding and shared solutions”.

The podcast also reflected on the coming budget—the UK’s first under the new Labour government—due to take place on 30 October.

Lagarias noted that the chancellor Rachel Reeves would need one eye on “extremely jittery bond markets” which “definitely raises the level of difficulty”.

The Reeves budget faces having to address budget black holes, sluggish growth and the need to repair public services.

Mark Kennedy noted Reeves would not be attempting to solve all problems at once. He warned there might be difficult news for some, observing: “The time to make really hard calls and impose a bit of pain where it’s needed is going to be in the first year.”

Tune in to the latest episode of The Macro Memo podcast for analysis and insight about the impact of upcoming events on business and the economy, in partnership with Forvis Mazars.

 

Listen to the full podcast here.

Watch the podcast video here.