EU Has Crucial Opportunity to Deepen Integration, Goldman Sachs Says

(Bloomberg) -- The European Union has a crucial chance to push for further integration as a new executive taking office coincides with a favorable political backdrop, according to Goldman Sachs Group Inc.

The world’s largest trade bloc can ride the momentum provided by the incoming European Commission of Ursula von der Leyen to reinvigorate efforts to strengthen financial and economic ties and deepen cooperation, Goldman Sachs Strategist Roxane van Cleef said in a note released on Monday.

“Although political fragmentation is likely to remain an obstacle, we see a window of opportunity for a pickup in European reforms,” she wrote. “We therefore expect renewed reform efforts during the new Commission legislature, with gradual progress in advancing the banking union and capital markets union, as well as an area-wide industrial and defense policy.”

Aside from a post-crisis drive to unify supervision of banks, the euro area’s 19 member states have struggled to agree on melding other policies. Now, the Commission can benefit from the combination of a weakening economy in Germany that might erode long-held opposition to economic integration, a temporary waning in populist support, the U.K.’s imminent exit from the EU, and global political tensions, van Cleef said.

Calls by top policy makers and politicians such as Emmanuel Macron to take advantage of a more favorable economic environment and shore up the currency bloc so it can better withstand future shocks have failed to resonate with several more skeptical governments.

Deposit Insurance

After years of acrimonious talks, euro-area finance chiefs struck a deal on the design of a common budget in June, but did not put a number on its size, thus falling short of the grand vision proposed by advocates such as Macron. Similarly, leaders have yet to agree on a joint deposit insurance scheme that would underpin a Europe-wide banking union.

For Goldman, the growing geopolitical power struggle between China and the U.S. provides a strong incentive for reform in the absence of an alternative impetus to galvanize the bloc.

“Reforms are necessary to strengthen the Union, but are difficult to achieve in the absence of a crisis,” van Cleef wrote. “A challenging global geopolitical environment brings back to the fore an underappreciated purpose of the EU: only as a united trading bloc can the EU hold its own next to the U.S. and China.”

In a separate report on Monday, Moody’s Investors Service said that domestic reforms across the bloc’s nations are faltering, making it harder to boost growth and reduce substantial debt burdens. The need for labor market changes in Europe’s periphery -- most notably Italy -- is particularly acute, the ratings agency said.

“Improvements are only likely to materialize if progress, which has been patchy so far, is made across much of the EU in implementing structural economic reforms of labor markets, product and service markets, and those which support innovation,” wrote Moody’s analysts led by Sarah Carlson. “The reform challenge is significant.”

--With assistance from Viktoria Dendrinou.

To contact the reporter on this story: John Ainger in Brussels at jainger@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Craig Stirling, Lucy Meakin

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