EU financial system survived “horrible prophecies” – now it faces commerce with China: EU Commissioner Gentiloni

The European Union has successfully averted the “terrible prophecies” that threatened its economy in recent years, but still has to deal with Russia's war in Ukraine and fragile trade relations with China, outgoing EU Economic Commissioner Paolo Gentiloni said on Saturday.

The bloc's economy is experiencing “weak growth overall, but none of the dire prophecies we have heard over the last two or three years: recessions, blackouts, divergence, divisions in Europe in the face of the Russian invasion,” Gentiloni said in an interview with CNBC's Steve Sedgwick at the Ambrosetti Forum in Cernobbio on the shores of Lake Como in Italy.

Gentiloni, a former prime minister of Italy, has been EU Commissioner for Economic Affairs under EU Commission President Ursula von der Leyen since December 2019. The European Commission is responsible for the economic strategy and legislation of the 20 eurozone countries – such as tariffs – while the European Central Bank oversees the region's monetary policy and interest rate decisions.

Following Von der Leyen's turbulent re-election as President, Gentiloni will not run for a second term as Commissioner, but he has already outlined the economic situation that awaits his imminent successor.

“The economy is growing, slowly, but it is growing. And the risk of disagreements within the European Union, which was very high at the time of the pandemic, is very limited,” he noted. “The bad thing is that if we do not increase our capacity in terms of competitiveness, if we do not make enormous progress on what we call the capital markets union, and if we do not rise to the challenge of defence… if we do not do that, well, then the new situation of the world will seem very difficult for Europeans.”

After recovering from the Covid-19 pandemic, Europe is battling a cost-of-living crisis and a high inflation environment, exacerbated by the Russian invasion of Ukraine in February 2022 and energy supply shortages resulting from sanctions against Moscow. The eurozone economy grew in the first half of this year, with preliminary figures showing better-than-expected gross domestic product growth of 0.3% in the three months to the end of June compared to the previous quarter.

In its spring forecasts, the European Commission predicted that EU GDP would grow by 1 percent in 2024 and by 0.8 percent in the euro area. Growth in the two regions will be 1.6 percent and 1.4 percent respectively in 2024. At the time, the Commission warned of growth due to accelerating private consumption, falling inflation and a strong labor market, but also of general geopolitical risks given the ongoing conflicts in Ukraine and the Middle East.

In view of falling inflation, the ECB took the first step to ease its monetary policy since 2019 in June, cutting the central bank's key interest rate to 3.75 percent, bringing it to a record high of 4 percent since September 2023. On Friday, markets had already priced in another rate cut by the ECB at its next meeting on September 12.

Chinese relations

Looking ahead, Europe must now weather the double storm of close elections in November with its key trading partner the US and friction in its trade relationship with China. The EU has found itself in Beijing's crosshairs after the bloc decided in June to impose higher tariffs on Chinese electric car imports, which it said “benefit heavily from unfair subsidies” and pose a “threat of economic damage” to electric car makers in Europe.

Gentiloni stressed on Saturday that trade diplomacy with China and the war in Ukraine must be at the top of the new Commission's agenda – and that these issues are more urgent than the seizure of power by a possible second US government under former President Donald Trump.

The European Union must “support Ukraine, keep the doors of international trade open,” but also “give up our ingenuity in trade relations with China. However, this does not mean that we can accept the idea that international trade and international trade rules [are] over,” Gentiloni noted.

He played down the economic consequences of a Trump victory in November, adding: “I think a change in the US administration, i.e. a Trump victory, would of course not be welcomed in Brussels. But I do not think that the change in terms of economic relations would be huge.”

Winds of change

Gentiloni has not yet announced his next steps after leaving the Commission, at a time when Europe and its lawmaker are facing a growing wave of far-right support.

“You should never plan your next role when you already have a role. 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 Fitto from her right-wing Brothers of Italy party for the new EU executive.

In the recent European elections, far-right factions gained significant ground, prompting the right-wing prime minister of Hungary – which currently holds the EU Council presidency – Viktor Orbán to question whether a Commission led by von der Leyen was appropriate given the political climate.

“The crux of the problem is that the previous Commission proved to be very unsuccessful in terms of competitiveness, the European economy, migration and ending the war. So overall it was an unsuccessful Commission,” the Hungarian leader told CNBC's Sedgwick on Friday, noting that the decision was made to “form basically the same Commission.”

He added: “So I have [a] great belief that [people] can change and perform better than before. But [is is] hard to believe. So I try to support the Commission as much as I can, but as a rational person I believe that we have neglected the voters' desire for change, and the same establishment [is] still in Brussels, and that is not good.”

— CNBC's Katrina Bishop contributed to this report.