The European Union has managed to avoid the “dire prophecies” that have threatened its economy in recent years, but it still has to deal with Russia's war in Ukraine and fragile trade relations with China, European Economy Commissioner Paolo Gentiloni said on Saturday.
“The bloc’s economy has seen weak growth overall, but none of the dire prophecies we’ve heard in the last two or three years have happened: recession, blackouts, disunity, divisions in Europe in the face of a Russian invasion,” Gentiloni told CNBC’s Steve Sedgwick at the Ambrosetti Forum in Cernobbio on the shores of Lake Como, Italy.
Gentiloni, a former prime minister of Italy, has served as European Commissioner for the Economy under European Commission President Ursula von der Leyen since December 2019. The European Commission is responsible for the economic and legislative strategy of the 20-nation eurozone — such as tariffs — while the European Central Bank oversees monetary policy and interest rate decisions in the region.
Gentiloni will not return for a second term as commissioner after von der Leyen was re-elected as EU president in a turbulent election – but he has laid out the economic picture awaiting his imminent successor.
“The economy is growing slowly, but it is growing. The risk of disagreements between EU countries, which were very high when the pandemic happened, is very limited,” he noted. “The bad part of the story is that if we don’t raise the bar in terms of competitiveness, if we don’t make huge progress in what we call the capital markets union, if we don’t address the defence challenge… if we don’t do that, well, the new normal of the world is going to look very difficult for Europeans.”
After Europe’s economy recovered from the Covid-19 pandemic, it was struggling with a cost-of-living crisis and high inflation that was exacerbated by Russia’s invasion of Ukraine in February 2022 and energy shortages following sanctions against Moscow. The eurozone economy expanded in the first half of the year, with preliminary figures showing GDP growth of a better-than-expected 0.3% in the three months to the end of June, compared with the previous quarter.
In its spring forecasts, the European Commission forecast that EU GDP would grow by 1% in 2024 and by 0.8% in the euro area, with growth of 1.6% and 1.4% in the two areas respectively in 2024. At the time, the Commission cited growth on the back of accelerating private consumption, low inflation and a strong labour market, but also broader geopolitical risks amid ongoing conflicts in Ukraine and the Middle East.
Amid falling inflation, the European Central Bank in June took its first step to ease monetary policy since 2019, cutting its main interest rate to 3.75%, down from a record low of 4% since September 2023. Until Friday, markets had fully priced in another ECB rate cut at its next meeting on September 12.
Chinese relationship
Looking ahead, Europe must now weather the twin storms of a close election in the United States, a key trading partner, in November and frictions in its trade relations with China. The EU has been caught in Beijing’s crosshairs following the bloc’s decision in June to impose higher tariffs on Chinese electric car imports that were found to benefit “significantly from unfair subsidies” and pose a “threat of economic harm” to European EV producers.
Gentiloni stressed on Saturday that trade diplomacy with China and the war in Ukraine should top the agenda of challenges facing the new commission – and that they are more pressing concerns than the emergence of a possible second US administration under former President Donald Trump.
Gentiloni noted that the EU must “support Ukraine, keep the doors of international trade open,” but also “give up our prowess in trade relations with China. But that does not mean that we can accept the idea that international trade and international trade rules are over.”
He downplayed the economic impact of Trump's victory in November, adding: “I think the change in the US administration, that is, Trump's election victory, will not be welcomed in Brussels of course, but I don't think the change will be huge in terms of economic relations.”
Winds of change
Gentiloni has yet to announce his next steps after leaving the commission, at a time when Europe and its legislature are facing a growing wave of far-right support.
“You should never organise your next role when you have one. But of course I will make my contribution to European affairs and perhaps also to Italian politics and Italian affairs,” he said on Saturday.
The left-wing politician is unlikely to win the support of Italian Prime Minister Giorgia Meloni, who has nominated European Affairs Minister Raffaele Vito from her right-wing Brothers of Italy party to join the EU's new executive.
Far-right factions gained substantial ground in the recent European elections, prompting Hungary’s right-wing prime minister, Viktor Orban, who currently holds the EU Council presidency, to question whether the Van der Leyen Commission was appropriate, given political sentiment.
“The essence of the difficulty is this: the previous commission proved to be largely unsuccessful, on the competitiveness of the European economy, on migration, on stopping the war. So overall, the commission was unsuccessful,” the Hungarian leader told CNBC on Friday, noting that a decision was made “to create the same commission, basically.”
“So I firmly believe that people can change and do better than they did before. But it’s hard to think about that. So I try to support the Commission as much as we can, but as a rational man, I think we have neglected the voters’ desire for change, and we still have the same institution in Brussels, and that’s not good,” he added.
CNBC's Katrina Bishop contributed to this report.
