By Eric Vandenbroeck and co-workers

Europe Is Missing Its Moment

For years, European officials have known exactly what reforms are necessary to strengthen the European Union’s economic foundations and enable it to act as a global power. But they have also conceded that political realities within member states and the EU’s consensus-based decision-making process make substantial reforms all but impossible except in moments of crisis. European officials made a dangerous bet, effectively waiting for a crisis to force themselves to fix widely acknowledged problems. Now, they risk doing something worse: wasting a crisis by failing to act as it unfolds.

This crisis comes as the United States casts doubt on its role as Europe’s security and strategic guarantor, a malign and militarized Russia presents a growing existential threat, and Europe’s inability to harness its collective economic resources undermines its collective defense. The shock began in Munich in February, when U.S. Vice President JD Vance openly questioned the premises of the transatlantic relationship and suggested a rethinking of the United States’ role in Europe. The new U.S. National Security Strategy, released this month, goes further, stating that Washington should prioritize “cultivating resistance to Europe’s current trajectory” within the EU. An earlier, leaked version of the document that circulated in the media was even more explicit. It proposed that the United States divide Europe by supporting right-wing governments “to pull them away” from the EU. It also proposed the formation of a “Core 5” to replace the G-7; the new group would be comprised of China, India, Japan, Russia, and the United States, excluding Europe entirely. Then, in an interview with Politico last week, U.S. President Donald Trump disparaged European leaders as “weak” and said they “don’t know what to do.” These are not mere rhetorical jabs and insults. The Trump administration’s hostility calls into question the stability of the transatlantic alliance and Europe’s ability to defend itself—and seeks to undermine Europe’s place in global decision-making. 

Europe needs to recognize this as the crisis it has been waiting for. The continent is in real danger of being sidelined by its most important ally, and its ability to defend itself and secure its future role in the world hinges on its ability to mobilize resources and act collectively. The EU’s decision last week to extend sanctions on Russian central bank assets—made without unanimous consent—is a good start. At the European Council meeting on December 18, leaders must be similarly ambitious as they decide whether and how to use those Russian assets to support Ukraine. Europe should also use this moment to undertake larger reforms to Europe’s economic model, including the establishment of a capital markets union, a complete banking union, and permanent mechanisms for common borrowing. Such reforms are not merely technocratic adjustments; they are the foundation of the economic heft Europe needs to build up its defenses, strengthen its energy and digital systems, and act as a global power. If Europe does not take advantage of this crisis and continues to drift, it will leave itself vulnerable to Trump and other foreign actors who seek to divide it, putting the EU’s security and geopolitical relevance at risk.

At the European Central Bank in Frankfurt, Germany.

 

Europe Is Missing Its Moment

For years, European officials have known exactly what reforms are necessary to strengthen the European Union’s economic foundations and enable it to act as a global power. But they have also conceded that political realities within member states and the EU’s consensus-based decision-making process make substantial reforms all but impossible except in moments of crisis. European officials made a dangerous bet, effectively waiting for a crisis to force themselves to fix widely acknowledged problems. Now, they risk doing something worse: wasting a crisis by failing to act as it unfolds.

This crisis comes as the United States casts doubt on its role as Europe’s security and strategic guarantor, a malign and militarized Russia presents a growing existential threat, and Europe’s inability to harness its collective economic resources undermines its collective defense. The shock began in Munich in February, when U.S. Vice President JD Vance openly questioned the premises of the transatlantic relationship and suggested a rethinking of the United States’ role in Europe. The new U.S. National Security Strategy, released this month, goes further, stating that Washington should prioritize “cultivating resistance to Europe’s current trajectory” within the EU. An earlier, leaked version of the document that circulated in the media was even more explicit. It proposed that the United States divide Europe by supporting right-wing governments “to pull them away” from the EU. It also proposed the formation of a “Core 5” to replace the G-7; the new group would be comprised of China, India, Japan, Russia, and the United States, excluding Europe entirely. Then, in an interview with Politico last week, U.S. President Donald Trump disparaged European leaders as “weak” and said they “don’t know what to do.” These are not mere rhetorical jabs and insults. The Trump administration’s hostility calls into question the stability of the transatlantic alliance and Europe’s ability to defend itself—and seeks to undermine Europe’s place in global decision-making. 

Europe needs to recognize this as the crisis it has been waiting for. The continent is in real danger of being sidelined by its most important ally, and its ability to defend itself and secure its future role in the world hinges on its ability to mobilize resources and act collectively. The EU’s decision last week to extend sanctions on Russian central bank assets—made without unanimous consent—is a good start. At the European Council meeting on December 18, leaders must be similarly ambitious as they decide whether and how to use those Russian assets to support Ukraine. Europe should also use this moment to undertake larger reforms to Europe’s economic model, including the establishment of a capital markets union, a complete banking union, and permanent mechanisms for common borrowing. Such reforms are not merely technocratic adjustments; they are the foundation of the economic heft Europe needs to build up its defenses, strengthen its energy and digital systems, and act as a global power. If Europe does not take advantage of this crisis and continues to drift, it will leave itself vulnerable to Trump and other foreign actors who seek to divide it, putting the EU’s security and geopolitical relevance at risk.

 

Slow-Motion Reform

Europe’s problem is not a shortage of ideas but an inability to implement them. The EU’s consensus-driven machinery is based on rules, procedures, and checks and balances that are designed to respect minority perspectives among its member states and demonstrate its commitment to democratic principles. It is a strength. But it has also led to paralysis. Jean-Claude Juncker, then the prime minister of Luxembourg, described the EU’s political dilemma in 2007: “We all know what to do, but we don’t know how to get reelected once we have done it.” This dilemma has not gone away. Indeed, the gap between what is necessary and what is politically palatable keeps widening. 

In an attempt to provide a roadmap, Brussels periodically commissions grand reports on Europe’s economic future. Most recently, Mario Draghi, a former president of the European Central Bank and prime minister of Italy, and Enrico Letta, another former prime minister of Italy, authored reports in 2024 on how to improve European competitiveness and reform the single market, respectively. Both laid out in detail what Europe ought to do: deepen its capital markets, complete its banking union, and embrace common borrowing to finance joint projects and attract global investment. These recommendations have been widely accepted in Europe, yet very few have been implemented.

Take capital markets. Europe has been trying to build a single capital market for a quarter of a century. Completing this project would enable Europe to put its own savings to work, channeling the trillions of euros now sitting in low-yield bank deposits or flowing to U.S. markets into European businesses, infrastructure, and defense. This would lower borrowing costs, increase investment, and make it easier for European firms to grow, innovate, and compete globally. An economy that can finance itself at scale can act strategically. But for now, the continent’s capital markets are small and fragmented, with each country maintaining its own rules about everything from insolvency to tax to pensions.

The European Commission has begun to chip away at some of the regulatory barriers to cross-border capital flows. Its latest proposals include the creation of a new “pan-European market operator” status, which would allow certain institutions that run trading venues such as stock exchanges or electronic bond markets to work across the EU under a single license, reducing regulatory friction. It also aims to strengthen the European Securities and Markets Authority, the EU’s investment watchdog, by expanding its coordination and supervisory role in cross-border markets. These changes are welcome but insufficient: ESMA would still lack the authority to set binding rules, supervise most major market participants directly, or create the deep, unified markets required to mobilize capital at scale. Without progress on these fronts, Europe will continue to struggle to finance the defense, clean energy, and technology investments it knows are essential.

The integration of the EU’s banking system follows a similar pattern. Two components of the banking union—the Single Supervisory Mechanism, in which the European Central Bank directly supervises the largest banks in the eurozone, and the Single Resolution Mechanism and Single Resolution Fund, which provide a centralized system for winding down failing banks at limited taxpayer cost—are already in place and functioning. But the third pillar, the European Deposit Insurance Scheme, which would provide a common backstop that protects deposits regardless of where in the eurozone a bank is located, remains unfinished, leaving the entire banking union structurally incomplete. Officials have been unable to agree on how to design the insurance scheme because of concerns about sharing risk across countries of different credit quality and banking systems; Germany, among other countries, has been reluctant to assume the risks of other countries’ potentially bad loans. What is less publicly acknowledged is the fact that some national banks also sit at the heart of party and patronage networks, providing political incentives to slow-walk reforms. As a result, serious progress toward completing the banking union has been mired in negotiations for more than a decade. 

Common European borrowing is the last, most crucial component of Europe’s necessary reforms. A 2023 International Monetary Fund paper estimated that, given the “convenience yield” investors attach to safe, liquid assets, the eurozone could issue common debt of around 15 percent of GDP without crowding out national government bonds or increasing average interest rates across the eurozone. Properly designed EU common borrowing could make roughly $2.5 trillion available to support national finances and provide a pool of capital for defense investments. It would increase overall demand for European debt as investors are attracted to the newly expanded supply of safe, highly liquid euro-denominated assets.

And yet, traditionally frugal countries such as Germany, the Netherlands, and the Nordic states still oppose common debt, fearing backlash from voters who see such a measure as being asked to subsidize partners they consider more profligate. This sentiment is deeply ingrained and persists despite the continent’s urgent need to raise funds to rearm, replenish stocks, and modernize its defense industrial base since the onset of Russia’s war in Ukraine. The war has compelled Europe to take a few meaningful steps in the right direction: since 2022, the EU has adopted its first-ever European Defense Industrial Strategy, created mechanisms for joint ammunition production, and established structures for joint procurement. The new Security Action for Europe (SAFE) scheme also allows some limited EU-level borrowing to provide long-term, low-cost loans for collaborative defense projects. 

But these initiatives remain limited. SAFE is composed of loans, not grants, and it is not designed to become permanent. This month, the European Defense Industry Program, an initiative to strengthen Europe’s defense industrial base and support joint procurement, is expected to be formally adopted, making roughly $1.75 billion in grants available between 2025 and 2027. But this program, too, was deliberately designed to promote only modest cooperation at the EU level, stopping far short of creating a permanent, large-scale EU defense budget or a centralized defense authority. Europe’s defense funding tools, therefore, still depend on 27 national budgets, 27 national procurement authorities, and 27 countries with highly variable threat perceptions. The countries that perceive the threat from Russia most acutely or that have the greatest fiscal capacity—including Finland, Germany, Poland, and the Baltic states—are pursuing large procurement plans on their own, rather than as part of a shared strategy. Keeping these efforts at the national level is financially and strategically inefficient. Common borrowing for common defense, whether through large-scale dedicated defense bonds or embedded within a broader borrowing structure, would enable Europe to fund its security initiatives in a way that is economically efficient, fiscally sustainable, and commensurate with its strategic ambitions.

 

Just Do It

Even as the war in Ukraine drags on and the United States walks back its support, EU-wide economic and financial reforms have still been incremental, with what limited progress has been made sold to domestic publics as temporary, one-off crisis responses. Europe must make better use of the crisis at hand and push necessary reforms further. Timing may even be on the EU’s side, as a more unified Europe could be in a strong position to capitalize on global financial anxieties. Finance ministries and central banks around the world openly worry about over-reliance on the U.S. dollar. They watch Washington deploy sanctions and export controls with increasing assertiveness and ask what will happen if the U.S. administration continues—or, worse, intensifies—this strategy of economic coercion. If Europe, with its large economy and credible central bank, can also offer deep capital markets and a sizable stock of safe euro-denominated assets, many major investors would gladly diversify away from U.S. Treasuries. Some might be even more inclined to do so if those assets were clearly linked to financing European public goods, including collective defense, energy security, and digital infrastructure.

Europe took an important first step last week when the Council of the EU, acting on a proposal from the European Commission, declared an economic emergency, invoking Article 122 of the Treaty on the Functioning of the EU to bypass the unanimity requirement to extend the freeze on Russian assets held in Europe. This move was controversial, but it was a necessary acknowledgment that Europe cannot be held hostage by one or two countries’ vetoes when the stakes are existential. The European Council meeting on December 18 could build on this progress. It could consider using similar procedural tools to advance other elements of EU integration, perhaps even fundamental reforms that have long been blocked by unanimity requirements. see Europe as capable of acting cohesively. Following its own experts’ recommendations to build the capital markets union, the banking union, and common borrowing tools, including a sustainable defense financing mechanism, can go a long way to remedying this situation. But pushing these projects forward requires that Europe recognize the gravity of the current crisis. A delay is too risky when the United States is becoming an unreliable partner, and Russia is not hiding its revanchist, aggressive aims. The continent needs to step up now to strengthen its defenses and regain its competitiveness. Otherwise, Europe risks reinforcing the perception that it can be divided and managed rather than treated as a global economic and strategic player.

 

 

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