Chiara Fratto (EIB): In a World of Uncertainty, Europe is Your Reliable Partner

Europe’s export powerhouse, Germany, found itself amidst economic turbulence last year, primarily due to the costs that the (delayed) green transition brought to the automotive industry, and then this spring came a new shock: tariffs on imports of European goods imposed by the administration of President Donald Trump shocked the entire economy of the Old Continent.

Is there a way out of this situation – partially alleviated by the August agreement between Washington and Brussels – and what is the perspective of the European economy facing both fragile energy security and war on its borders? We discussed this with Chiara Fratto, an economist from the Economic Department of the European Investment Bank (EIB). She joined this institution in 2023, after a career at the International Monetary Fund, where she was responsible for the fiscal assessment in the approval of an 18 billion dollar credit line to Chile. She has also worked at the World Bank. More about her views on the macroeconomic situation will be shared by participants at the Lider Conference ‘Day of Big Plans’ which will be held on September 24 in Zagreb.

The trade agreement between the US and Japan has shown that the world is facing elevated tariff rates, which would have been shocking until recently. How will this affect global trade and the largest economies in the world?

– The economy of the European Union is based on international trade; approximately 45 percent of the Union’s GDP comes from international exchange. Therefore, the impact of US tariffs could be significant, especially for sectors of the economy that are directly affected. It is important to note that the EU is in a good position to cope with challenges and minimize potential negative consequences for its economy. Our main advantages are the single market and the fact that we successfully maintain and develop trade relations around the world. However, there is still room for improvement. The EIB’s latest survey on the investment climate in the EU showed that as many as 74 percent of European innovative companies cite the fragmentation of the EU market as an obstacle to their strengthening and development. Addressing these barriers will strengthen resilience to global shocks and further enhance Europe’s competitiveness. The EIB Group is ready to assist here, initially within the framework of new global partnerships. For example, we are exploring a new pan-European instrument to promote trade and investment and are discussing opportunities for cooperation with the World Trade Organization in the context of current geopolitical challenges.

Can Europe maintain its role as a global trading partner if the trend of concluding bilateral trade agreements instead of multilateral ones continues?

– Yes, Europe is a reliable global trading partner in times when reliability is a rare commodity. Our priorities and values remain unchanged. The European Union acts calmly and decisively and is committed to dialogue, stability, and constructive global partnerships. This is why Europe and our single market are a safe haven for investors and a beacon of stability not only for member states but also for all other countries seeking reliable allies and trading partners. In today’s geopolitical context, this provides Europe with a good opportunity to attract capital, investment, and talent. After all, the EU is a bloc with the most extensive network of free trade agreements among all major economies in the world, and this network is constantly evolving. This can also partially mitigate the impact of tariffs as it opens new markets to the European economy. To maintain our competitive advantage, we need to continue investing in innovations and mechanisms that strengthen the resilience of our economy and nurture our business ecosystem, including the development of the green economy, and strengthen our rich source of talent and educational excellence.

Can the German automotive industry, which is going through a turbulent period, maintain its competitiveness with higher US tariffs on European products?

– Tariffs are a significant challenge for the industry. That is why it is even more important for the European automotive industry to continue its transformation and modernization. The European automotive industry is today a global leader in research and development. If it wants to remain globally competitive under new conditions, it must continue to apply technological innovations such as automation and robotics. The EIB Group strongly supports this sector. From 2020 to 2024, we have invested 11.5 billion euros in projects across Europe, mainly in areas that guarantee global competitiveness: research, development, production, and supply chains related to battery cells. The public sector can, of course, help by prioritizing innovation, simplifying regulations, and investing in infrastructure, all within the broader EU framework. This multi-level approach is crucial for strengthening the global position and adaptability of the sector in a rapidly changing market environment.

What do you consider to be the biggest challenges for the European economy and its competitiveness in the next two years?

– We have already mentioned that the EU has a very good starting position to tackle even the most complex challenges thanks to its unity and reliability as a trading partner. We need to keep our focus on financing innovation and supporting European innovative companies that struggle to find sources of financing, which often forces them to seek opportunities outside the EU. The European Commission and the EIB are actively working to address this strategic issue. Our research shows that European innovative companies, after ten years of existence, manage to raise only half the capital that their competitors from San Francisco raise. Therefore, they are often forced to seek opportunities abroad, most often in the US. To enable such companies to grow and achieve global competitiveness, the EIB Group recently launched ‘TechEU’, the largest innovation financing program in Europe, aimed at mobilizing 250 billion euros in investments by 2027 in digitalization and technological innovations. The EU has a strong industrial, research, and trade base, clear climate leadership, and a strong social model. On these foundations, we can continue to develop sustainably, protect jobs, and lead efforts to prevent the climate crisis. It is crucial, therefore, that we continue to transform our shared understanding of priorities in the Union into concrete actions.

How will geopolitical tensions and the need for energy independence affect European energy costs and industrial competitiveness in the medium term?

– Geopolitical tensions and the drive for energy independence will fundamentally affect European energy costs and industrial competitiveness in the medium term. Europe remains a leader in green technologies, with a 65 percent increase in the export of green technologies compared to 2017. While renewable energy sources may have lost popularity in some parts of the world, they remain a strategic solution for Europe to address challenges of competitiveness and resilience. These energy sources accounted for nearly half, or 48 percent, of European electricity consumption in 2024, with a 13 percent reduction in emissions from electricity generation. However, the continent remains heavily dependent on LNG and gasoline imports. Accelerating the adoption of renewable sources, which are already more cost-effective than gas, will be crucial for reducing energy costs for businesses and households and strengthening the economic resilience of the European Union. This is also one of the main areas of action for the EIB Group, which is a major financier of energy transition projects as it reduces Europe’s dependence on fossil fuel imports and supports the Union’s strategic autonomy. The EIB has provided around 62 billion euros for energy infrastructure in the last five years, of which more than 56 billion for renewable sources, energy efficiency, and electricity grids in Europe and worldwide.

How will the fragmentation of global supply chains affect European manufacturing and what are the opportunities for nearshoring and reshoring industries?

– In recent years, a large number of European companies have faced serious business obstacles, supply chain challenges, and restrictions on free trade. However, European companies have successfully responded to supply chain disruptions: they have increased inventories, invested in digital tracking of inventories and input materials, and diversified or increased the number of countries from which they import. The EU has also responded to new challenges by adopting various policies to reduce strategic dependencies, as part of the policy of open strategic autonomy. For example, the Critical Raw Materials Act will improve access to key raw materials, which, according to EIB research, is a step in the right direction as 37 percent of European companies identify it as their main challenge.

What fiscal situation do you expect for EU member states in the coming years considering the announced significant increase in defense spending to five percent of GDP?

– The security of Europe depends on our ability to adapt to new circumstances and maintain our strategic autonomy and leadership. We at the EIB see a clear link between security and defense and the broader goal of climate action and social progress: without the ability to defend our values, Europe cannot make significant progress in other areas. The EIB Group has therefore significantly expanded its activities in security and defense and increased its investments in this area to record levels to ensure support for projects that contribute to the security of our citizens. The commitment to increase defense spending requires a balanced approach that combines medium-term investments in innovation and resilience with broader reforms to stimulate growth and increase fiscal space. It is important to know that many European priorities do not require significant additional fiscal resources, and some may even open new sources of revenue by stimulating growth. For example, EIB researchers estimate that a return to financial integration at pre-crisis levels could increase EU GDP by one percent. Maintaining a focus on structural reforms and a unified response to global challenges will be crucial to achieving these goals without compromising fiscal sustainability. In this regard, the EIB Group is a key instrument for supporting the competitiveness and security of Europe. From 2024, it has further directed its activities towards mobilizing green financing for climate action, expanding support for digitalization, technological innovations, the capital markets union, and social infrastructure to maintain competitiveness and support growth.

Can European countries maintain the current level of social rights and public services while simultaneously increasing defense spending?

– In short, yes. The sustainability of the European social model and public services in the context of increasing defense spending depends less on budgetary constraints and more on progress in key structural reforms that support growth, productivity, and innovation. With a strong commitment to addressing these fundamental issues, we can continue to preserve the European way of life and ensure both physical and social security.

Can the reduction of the European welfare state become additional fertile ground for the strengthening of right-wing populist parties in Europe?

– The European welfare state is the foundation of our social fabric. The social model of the European Union has already brought greater social inclusion, welfare, and equal opportunities. In the last decade, incomes in the EU have grown, and the number of working hours needed to achieve those incomes has decreased; inequalities have also diminished. The share of people at risk of poverty or social exclusion is steadily declining. Preserving a highly skilled workforce and high social investments remains a priority, not only as a social necessity but also as a strategic advantage that allows Europe to harness its full potential in education, skills development, and welfare. Any weakening of the welfare state would jeopardize these advantages and reduce our capacity for sustainable development, job protection, and ensuring a peaceful future for citizens.

The European Commission recently proposed the ‘EU Omnibus’, a package of regulatory relief. How do you assess the potential effects of this proposal and is it ambitious enough?

– According to our research, European companies spend 1.8 percent of their revenue on employees engaged in regulatory compliance. With the ‘Clean Industrial Deal’ and proposals for simplification in the ‘Omnibus’, the European Commission is taking a step in the right direction to simplify the regulatory environment of the Union. This significantly eases the business operations of companies. For example, simplifying sustainability reporting rules will stimulate climate investments and innovations in European clean technology, reduce bureaucracy and administrative burdens. If further regulation remains effective and efficient, and we continue to simplify the regulatory framework without compromising the fundamental goals and scope of the basic rules, we will be able to continue to promote a more dynamic and competitive European economy. The EIB Group will support these initiatives, including additional investments to reduce energy costs for small and medium-sized enterprises and energy-intensive industries.