Mario Draghi has recently argued that, to respond to growing pressure from competitors, the European Union must focus on three challenges: developing a more competitive decarbonisation plan, closing the technological gap with China and the United States and, finally, strengthening security. In a geopolitical context of increasing uncertainty and tension among major powers, above all China and the United States, alongside the original BRICS countries (Brazil, Russia, India and South Africa) and the entry of new members into the group (Egypt, Ethiopia, Indonesia, Iran, Saudi Arabia and the United Arab Emirates), the question of Europe’s role is becoming increasingly relevant. This is not merely an abstract debate about Europe’s future, but one grounded in a fundamental economic analysis: a more integrated and federal European Union would generate lower costs and greater benefits than the current Union, which remains fragmented and constrained by its Member States. This analysis focuses on the benefits in defence, the Single Market and, finally, the European budget.

First, it is useful to start with some economic data. According to a European Union study from November 2024, the cost of an EU without a common defence amounts to between €18 and €57 billion per year. Greater defence cooperation would benefit all Member States through financial incentives and a common policy, while also providing greater security and effectiveness. Since this would necessarily need to be accompanied by a common foreign policy, it would also imply simpler decision-making processes. If developed along federal lines, it would also bring economic benefits by avoiding the dispersion of investments across 27 different national ministries and therefore allowing spending to be optimised. What prevents greater integration in defence? Mainly two factors: first, the paradoxical presence of substantial military capacity without adequate equipment because of limited cooperation among Member States (active military personnel amount to around 1.3–1.5 million in the EU and 1.3 million in the United States, but European forces operate with different systems, increasing costs and disorganisation); second, insufficient investment in technological innovation in the sector and a common market that is not truly common, generating economic waste and preventing the creation of a well-organised defence system.

The second issue is the Single Market. It was created in a much smaller context, when the European Union was still known as the European Community, with the objective of promoting greater cooperation and solidarity among Member States. Today, as Enrico Letta also stressed in his 2024 report on the Single Market, new measures are needed because what was once sufficient is no longer enough. The free market, so far based on four freedoms — the free movement of people, goods, services and capital — must take a further step by including a “fifth freedom”: free movement in research, innovation and education. This would help bring together Europe’s best minds, encourage greater cooperation among states and increase competitiveness. A European Commission study by Paolo Pasimeni (2023) concluded that the introduction of the Single Market in 1993 had an economic impact equivalent to 3–4% GDP growth and created 3.6 million jobs. If this was possible with a market that was still imperfect and in a less globalised world, how important could it become if, as Letta proposes, it also included energy, research, finance, telecommunications and defence, supported by more shared research?

Finally, consider the European budget. The current 2021–2027 EU budget amounts to around €1.2 trillion, an average of €174 billion per year, or roughly 1% of European GDP, which is around €18 trillion. The Commission proposal for 2028–2034 provides for a slight increase, but it has not yet been approved by the Member States, some of which are pressing for a reduction. Decisions continue to be shaped by the principle of “juste retour”, also because most resources making up the EU budget come from direct transfers by Member States. Comparing the EU budget with those of federal states immediately reveals the difference. The United States has a budget equal to 22–24% of GDP, while Germany’s federal budget is equal to 12–14% of GDP and its main revenues consist of own resources. What the Union needs today is a more substantial budget financed by genuine own resources rather than direct transfers from states, capable of funding European public goods and adequately addressing common challenges.

Two further elements should be added. First, unanimity is required in the Council of the European Union on fundamental issues such as foreign policy, defence and EU enlargement. This makes a coordinated response difficult because vetoes on these and other strategic issues can obstruct concrete and effective positions. Second, the European Union was built for another world and another era, when European states could afford not to be united, relying for example on their partnership with the United States. Today the situation is different: between a United States pursuing an economically isolationist policy while remaining interventionist beyond its borders, China’s continuing economic growth, Russia increasingly close to Europe’s western borders and the other BRICS countries becoming more united and cohesive, the need for greater economic and political unity has rarely appeared so urgent. The cost of disunity therefore risks being not only economic but existential. Draghi has argued that, unless Europe moves from a confederation towards a federation, the price could be permanent economic stagnation and political irrelevance. Europe’s challenge would then be facing, for the first time, the prospect of becoming increasingly marginal in global affairs.

By Tommaso Prever

Article produced in collaboration with

Sources

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European Commission / EEAS (2024). A Strategic Compass for Security and Defence

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European Commission (2024). Single Market

European Defence Agency (2023). Defence Data 2022–2023

International Monetary Fund (2024). World Economic Outlook Database

Letta, E. (2024). Much More Than a Market

NATO (2024). Defence Expenditure of NATO Countries (2014–2024)

Pasimeni, P. (2023). The Single Market and its impact on the European economy. European Commission.

Baldwin, R., & Wyplosz, C. (2022). The Economics of European Integration. McGraw-Hill Education.