ECB Banking Supervision, which already oversees the operational and cyber risks of the largest banking groups in the euro area, should be placed in the front line. What is needed is an ad hoc project: one-off, but with consequences for the SREP — the annual supervisory review that determines prudential requirements — conducted within a short deadline and with external technical support, if possible from Anthropic itself

Ignazio Angeloni

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We are smart enough to invent artificial intelligence, but not smart enough to know how to use it. The aphorism now circulating widely is well suited to Mythos, the latest software created by Anthropic, the company founded by Dario Amodei, who with his sister Daniela is among the sector’s founders and leading innovators.

It could also serve as a summary of the essay Amodei recently published on his website, The Urgency of Interpretability, in which he sets out the nature of the dilemma.

Humans have created artificial brains of extraordinary power without fully understanding how they work or being able to predict their consequences. It is essential, Amodei argues, that before these tools are made even more powerful, progress is made in understanding — “interpretability” — the internal mechanisms that generate artificial thought. What is needed is an “MRI scan” of artificial brains. Without it, their use is blind and entails serious risks.

One of the most concrete and immediate risks concerns the information systems that, often with little or no human intervention, govern the functioning of large public and private organisations, while defending them from malicious external intrusions.

A few weeks ago, Anthropic startled the technology world by announcing that Mythos was able successfully to bypass most of the cyber defences used by large corporations. To contain the danger, Anthropic said it would restrict access, for the time being, to a small number of large organisations. All were American, and only one was a bank: JPMorgan.

Some caution is needed in assessing such announcements. In the software market, “dangerous” means effective, and effectiveness creates commercial appeal.

Communications of this sort can also be a marketing strategy. Perhaps not by chance, Anthropic overtook OpenAI in sales in April.

In this case, however, several pieces of evidence suggest that the information is genuine and that the alarm is justified. Action must be taken to limit the risks that Mythos has brought to light.

The problem, of course, is that to do so one must have access to the software. To discover the vulnerabilities of a computer system, nothing works better than a hacker — whether a piece of software or a human being.

More than a month ago, Andrew Bailey, governor of the Bank of England, raised the alarm about the dangers facing the financial sector. Banks are more exposed to cyber risks than any other sector, with the sole exception of defence.

As the nerve centre of the economy and the vault in which our money is kept, they are an attractive target in equal measure for terrorists and robbers. Bailey complained that British banks did not yet have access to Mythos.

Since then, however, things have changed. The Trump administration, which had initially blacklisted Anthropic, accusing it of restricting the use of its software for political — read: humanitarian — reasons, soon realised that it could not do without Claude, the best AI programme currently available. In one of its customary U-turns, it authorised the use of Claude by US government agencies.

The details of the agreement are not known. But the result, announced a few days ago, is that Anthropic has decided to extend the availability of Mythos to 150 international organisations in more than 15 countries, including France, Germany, Italy, Spain, the Netherlands, Belgium, Switzerland, Sweden, India, Japan, South Korea, as well as NATO and the European Union.

That last detail is encouraging: these are the traditional allies of the United States, and we would like to think the list was approved by the White House. The signal is clear, and it concerns governments, European and national supervisory authorities, as well as the banks themselves.

The American opening makes controls possible, but also more urgent, because with wider circulation comes a greater risk that the new software may fall into the wrong hands. It is no exaggeration to call this a race against time.

An expression of alarm, in the usual veiled language, can also be found in the speech given by the governor of the Bank of Italy on May 29. Speed and the correct method of action are essential.

First, checks must be European, not merely national. Nothing would be worse than proceeding in an uncoordinated way in the face of a threat to the European system as a whole.

ECB Banking Supervision, which already oversees the operational and cyber risks of the largest banking groups in the euro area, should be placed in the front line.

What is needed is an ad hoc project: one-off, but with consequences for the SREP — the annual supervisory review that determines prudential requirements — conducted within a short deadline and with external technical support, if possible from Anthropic itself.

Second, the checks should be conducted in a “positive”, not a “negative”, manner. The aim should not be merely to identify vulnerabilities in existing systems and remove them, but to use Mythos and AI technologies to build a superior cybersecurity system. These are not necessarily the same thing.

Finally, the exercise must be co-operative, not competitive. The experience and solutions developed by individual banks should be shared, not used to gain a competitive advantage. In a system that is highly integrated in some markets, even if fragmented in others, the vulnerability of a single bank is a systemic vulnerability. This is another reason why the presence of European supervision is essential.

As almost always happens, this danger too can generate greater awareness and stronger security. But only if action is taken quickly, and in the right way.

A previous version of this article was published by Affari e Finanza - La Repubblica

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Ignazio Angeloni

Ignazio Angeloni is a IEP@BU fellow. In 2019-2022 he was a Senior Research Fellow in the Harvard Kennedy School’s Mossavar-Rahmani Center for Business and Government. From 2014 to 2019, he was a member of the ECB Supervisory Board.

In 2012-2013, Ignazio was Director General for Financial Stability at the ECB; in that capacity, he coordinated the establishment of the new banking supervision at the ECB.

He is the leading author of the IEP Bocconi report Feasible Steps to Finance Innovation in Europe: Six Proposals to Strengthen EU Capital Markets

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Founded by Bocconi University and the Institute Javotte Bocconi, the Institute for European Policymaking @ Bocconi University combines the analytic rigor of a research institute, the policy impact of a think tank, and the facts-based effort of raising public opinion’s awareness about Europe through outreach activities.

The Institute, fully interdisciplinary, intends to address the multi-fold obstacles that usually stand between the design of appropriate policies and their adoption, with particular attention to consensus-building and effective enforcement.

The Institute’s mission is to conduct, debate, and disseminate high-quality research on the major policy issues facing Europe, and the EU in particular, its Member States, and its citizens, in a rapidly changing world.

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Nathalie Tocci

Writing for the Institute for European Policymaking at Bocconi University, Nathalie Tocci says “while Europeans recognize the threats they face, neither Nato nor the EU have fully lived up to the quest of securing Europe”.

Ben Hall (Financial Times)

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In her IEP Bocconi Policy Brief Towards a European Security Council, Nathalie Tocci, Senior Fellow at IEP Bocconi, argued that Europe needs a permanent framework to sustain strategic coordination in the face of Russian aggression and US disengagement.

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That proposal is now gaining traction. In a recent and detailed article, Financial Times Europe Editor Ben Hall writes that the idea of a European Security Council is acquiring fresh momentum as Europe confronts two structural shifts: increasing US disengagement from the conventional defence of Europe, and the growing centrality of Ukraine to the continent’s security architecture.

The article notes that the proposal is no longer only a matter for think-tank discussion. Figures such as Michel Barnier and European Defence Commissioner Andrius Kubilius have brought versions of the idea back onto the policy agenda, while analysts including Luigi Scazzieri and Nathalie Tocci have explored why existing formats are no longer sufficient.

The point is not that Europe lacks institutions. It has many of them. The EU has taken once-unthinkable steps on defence, sanctions, energy security and support for Ukraine. NATO has reinforced deterrence on its eastern flank and has become more European in some operational respects.

Yet Tocci’s argument is that neither framework has been able to solve the political problem at the core of European security: how to act decisively when the United States is less willing, or perhaps no longer willing, to provide political and strategic leadership.

The experience of recent crises has been revealing. Some of the most significant European action has not taken place inside formal EU or NATO structures, but through coalitions of willing and able countries.

This has been true for Ukraine, where groups of European states have coordinated military and diplomatic responses to the changing US position.

It has also been true in the case of Greenland, where European countries acted in solidarity with Denmark in a way that would have been difficult inside NATO, given the role of the United States, and cumbersome inside the EU. The Nordic-Baltic countries have also deepened their defence cooperation in response to the Russian threat.

These coalitions show that there is political energy in Europe. But they also reveal a weakness. Ad hoc formats work when leaders are focused on an immediate crisis. They are less effective in sustaining momentum between summits, preparing decisions, coordinating policy, and building habits of strategic cooperation. Tocci’s proposal starts precisely from this gap.

A European Security Council would not replace the EU or NATO. It would not by itself create a European defence union. Nor would it be a panacea.

It would instead provide a permanent, light but structured framework for those European countries that share a convergent threat assessment and a commitment to defending Europe against Russia with much less American support, or perhaps even without it.

Its core membership would probably include large and medium-sized countries such as France, Germany, the United Kingdom and Poland, alongside smaller but strategically central countries such as Sweden, Finland, Norway, Denmark, the Netherlands, Romania and the Baltic states. Italy and Spain would be involved because of their size and capabilities.

EU institutions would also need to be present, including the Commission, the president of the European Council and the rotating presidency of the Council of the EU. Larger and more capable countries could have permanent seats, while smaller countries could participate on a rotational basis.

The crucial criterion, however, would not simply be size. It would be political alignment. Participants would need to share a serious assessment of the Russian threat and of the consequences of US disengagement.

This would distinguish a European Security Council from existing institutions in which internal veto players can slow or dilute action.

It would also allow Europe to include essential non-EU actors, above all the United Kingdom and Norway, and potentially to create a meaningful place for Ukraine short of EU membership.

The Financial Times article captures why the idea is gaining traction now: Europe needs a framework able to bridge institutional divides between the EU, NATO and non-EU European countries, while also accelerating strategic coordination.

Tocci’s Policy Brief provides the underlying rationale. The issue is not to invent another talking shop. It is to institutionalize the political energy that has emerged in moments of crisis and make it durable.

A European Security Council would still face difficult questions: how its decisions would connect to EU and NATO structures; what role Turkey could play; how to balance permanent and rotating membership; and whether consensus would remain the default rule. But the direction of travel is increasingly clear.

If the Russian threat and US disengagement are structural phenomena, Europe needs a structure of its own capable of responding to them.

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Nathalie Tocci

Nathalie Tocci is a senior fellow of the Institute for European Policymaking at Bocconi University. She has been Director of the Istituto Affari Internazionali from 2017 to 2026. She has been Special Advisor to EU High Representatives Federica Mogherini and Josep Borrell. In that capacity, she wrote the European Global Strategy and worked on its implementation. She is also Professor of the Practice at SAIS Europe.

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Founded by Bocconi University and the Institute Javotte Bocconi, the Institute for European Policymaking @ Bocconi University combines the analytic rigor of a research institute, the policy impact of a think tank, and the facts-based effort of raising public opinion’s awareness about Europe through outreach activities.

The Institute, fully interdisciplinary, intends to address the multi-fold obstacles that usually stand between the design of appropriate policies and their adoption, with particular attention to consensus-building and effective enforcement.

The Institute’s mission is to conduct, debate, and disseminate high-quality research on the major policy issues facing Europe, and the EU in particular, its Member States, and its citizens, in a rapidly changing world.

It is independent of any business or political influence.

The IEP Bocconi Management Council

Marta Cartabia

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Sylvie Goulard

Vice-President

Paloma Lopez-Garcia

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Silvia Colombo

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Carlo Altomonte

Arnstein Aassve

Valentina Bosetti

Elena Carletti

Daniel Gros

Eleanor Spaventa

Nathalie Tocci

European economy, shows that the central bank does not need to react today as drastically as it did four years ago. But nor can it stand by without intervening, keeping interest rates unchanged while inflation continues to rise

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IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the author

In recent weeks, the European Central Bank has prepared the ground for the decision, to be taken on June 11, to raise its key monetary policy interest rate by 25 basis points. Financial market expectations have gradually adjusted to the sequence of statements, more or less explicit and more or less appropriate, by several members of the Bank’s Governing Council.

Financial markets now price in the increase with a probability close to 100 per cent. The following hike, of the same magnitude, is also taken for granted at the September meeting.

The central bank has accommodated these expectations by making clear that this is not, in any case, a monetary tightening comparable to the one implemented in 2022, which raised rates by 450 basis points in 14 months in response to the inflation triggered by the energy shock after the invasion of Ukraine.

The situation today is very different, in several respects.

First, compared with 2022, the impact of the energy shock is concentrated on oil, while the price of gas has so far remained contained, thanks to the diversification of supply undertaken by European countries. Electricity prices, which benefit from the investments made in recent years in renewable sources, are currently less than half their 2022 level.

The cyclical conditions are also different. Before the invasion of Ukraine, the euro area was expected to grow by about 3 per cent, due to the recovery in consumption linked to the rapid decline in the savings accumulated during the pandemic.

Inflation had been rising for months from the very low levels of the previous decade. The labour market remained tight because of the slow recovery in supply after lockdown.

In the current phase, by contrast, European growth is much weaker. Before the outbreak of the conflict, it was expected to be around 1 per cent. The labour market is not under the same pressure as in the post-pandemic phase and inflation was until recently around 2 per cent, in line with the central bank’s target.

In short, the inflationary shock of 2022 hit an economy that was already overheating. That is not the case today.

Another substantial difference concerns the economic policies that preceded the two energy shocks.

Before the invasion of Ukraine, monetary and fiscal policies were strongly expansionary. The central bank was still pursuing its asset purchase policy, or quantitative easing, with expansionary effects on liquidity and downward pressure on long-term interest rates. Monetary policy rates had remained negative since 2014.

In 2022, European countries’ public finances were being adjusted, but mainly as a result of the improvement in the economic cycle.

In short, the inflationary shock of 2022 occurred during a phase of expansionary economic policy, which amplified its impact. For this reason, a particularly drastic reversal was necessary.

Before the closure of the Strait of Hormuz, by contrast, monetary policy was in a position of broad neutrality, with short-term rates at 2 per cent, against inflation more or less at the same level. The reduction of the central bank’s balance sheet was gradually tightening financial conditions.

As for fiscal policy, the room for manoeuvre to support economic activity is now more limited than in 2022.

The comparison between the two energy shocks, and the different conditions facing the European economy, shows that the central bank does not need to react today as drastically as it did four years ago. But nor can it stand by without intervening, keeping interest rates unchanged while inflation continues to rise.

The forecasts that the ECB will publish in a few days will probably show that price dynamics will remain above 2 per cent over the next two years.

The decision to raise rates gradually therefore appears inevitable. It is reassuring, however, that this increase, fully anticipated by markets, is accompanied by a substantial stabilisation of long-term rates.

In other words, raising rates at shorter maturities makes it possible to avoid an increase in rates at longer maturities, which affect the cost of borrowing for both the private sector, households and companies, and public debt, and ultimately have a greater impact on economic growth.

A previous version of this article was published in the Italian daily Il Foglio

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Lorenzo Bini Smaghi

Lorenzo Bini Smaghi holds a degree in Economic Sciences from the Université Catholique de Louvain (Belgium) and a Ph.D in Economic Sciences from the University of Chicago. He has been Chairman of the Board of Directors of Société Générale since 2015. He is an IEP@BU non-resident fellow

IEP@BU Publications

The IEP@BU Mission

Founded by Bocconi University and Institute Javotte Bocconi, the Institute for European Policymaking @ Bocconi University combines the analytic rigor of a research institute, the policy impact of a think tank, and the facts-based effort of raising public opinion’s awareness about Europe through outreach activities. The Institute, fully interdisciplinary, intends to address the multi-fold obstacles that usually stand between the design of appropriate policies and their adoption, with particular attention to consensus building and effective enforcement.

The Institute’s mission is to conduct, debate, and disseminate high-quality research on the major policy issues facing Europe, and the EU in particular, its Member States and its citizens, in a rapidly changing world.

It is independent of any business or political influence.

The IEP Bocconi Management Council

Marta Cartabia

President

Sylvie Goulard

Vice-President

Paloma Lopez-Garcia

Director

Silvia Colombo

Deputy Director

Carlo Altomonte

Arnstein Aassve

Valentina Bosetti

Elena Carletti

Daniel Gros

Eleanor Spaventa

Nathalie Tocci

What Europe gives, and can still give, to Ukraine remains vital: military and economic support, sanctions against Russia, and the prospect of EU membership. But the lessons Ukraine can teach the rest of Europe are becoming just as important: military, technological, energy and psychological resilience

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IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors

Ukrainian president Volodymyr Zelensky’s open letter to his Russian counterpart, duly rejected by Vladimir Putin, and the subsequent meeting in London between the leaders of France, Germany, the United Kingdom and Ukraine are not merely renewed attempts at peace.

They are also, and above all, an expression of Ukraine’s and Europe’s resilience in wartime.

Zelensky did not write to Putin because he believed the Russian president would accept his proposal for direct negotiations, especially with US mediators already entangled in talks with Iran.

The Ukrainian president knew perfectly well that Putin would reject the offer.

He moved first, pre-empting the predictable Russian counterproposal that negotiations should take place not in a third country, such as Switzerland or Turkey, but in Moscow.

In his letter, Zelensky made clear that just as Russians are not welcome in Kyiv, Moscow is not a safe place for Ukrainians.

If Zelensky anticipated Putin’s response, which came during the St Petersburg Economic Forum while an oil terminal hit by Ukrainian drones burned nearby, why did he send the open letter at all?

The reason lies less in the search for a fair and sustainable compromise, to which Kyiv remains open while knowing that Moscow is not, than in the cognitive dimension of the war.

The war in Ukraine is multidimensional.

It is a military war. In the early years of the conflict, men, tanks and ammunition dominated the battlefield. Today, the war is increasingly shaped by missiles, air defence systems and, above all, drones.

It is an energy war. Russia tried, and failed, to weaponise the gas it exported to Europe. It continues to target Ukraine’s energy infrastructure every winter. Europe, meanwhile, sanctions Moscow, while Kyiv strikes Russian oil capabilities, eroding the resources the Kremlin can pour into its war machine.

But it is also a cognitive war.

Russia is trying to break Ukraine’s will to resist by attacking cities, civilians and the country’s energy system, driven by the crude assumption that civilian deaths and winters at minus 20 degrees Celsius, assisted by disinformation designed to sow mistrust and division, will push Ukrainians to give up.

Putin still fails to see that his war has only strengthened Ukraine’s identity, spirit and resilience.

Kyiv, too, is fighting a cognitive war. Through drone attacks on the front line, on military supply routes and on Russian oil infrastructure, it raises the economic and human costs of the war for Russia. It does so not because it expects Putin to change his mind, but because it seeks to affect Russian public opinion.

In the military and energy dimensions of the war, Ukraine starts from a position of disadvantage because of Russia’s size and resources. In the cognitive war, however, it enjoys a major advantage: this is Putin’s invasion. If Moscow wanted to, it could withdraw tomorrow. Ukrainians do not have the luxury of ceasing to defend themselves, unless they are prepared to give up their freedom.

With every passing day, as the costs of war rise, the cognitive impact on Russia and Ukraine moves in opposite directions. Ukrainian determination strengthens. Russian determination weakens.

This is where the London summit between European leaders and the Ukrainian president fits in.

The point of the meeting was not so much to make another futile attempt to restart a peace process with Moscow. Putin has made clear that he is not interested. Rather, the purpose was to take stock of a war whose direction has begun to shift. In both April and May, Ukrainian forces liberated more territory than they lost, while the Russian economy is showing growing signs of strain.

European leaders met to discuss how to strengthen a Ukrainian strategy that is proving effective by further increasing pressure on Moscow.

Yet between the lines of the summit, a new reality emerges.

What Europe gives, and can still give, to Ukraine remains vital: military and economic support, sanctions against Russia, and the prospect of EU membership. But the lessons Ukraine can teach the rest of Europe are becoming just as important: military, technological, energy and psychological resilience.

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Nathalie Tocci

Nathalie Tocci is a senior fellow of the Institute for European Policymaking at Bocconi University. She has been Director of the Istituto Affari Internazionali from 2017 to 2026. She has been Special Advisor to EU High Representatives Federica Mogherini and Josep Borrell. In that capacity, she wrote the European Global Strategy and worked on its implementation. She is also Professor of the Practice at SAIS Europe.

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The IEP Bocconi Mission

Founded by Bocconi University and the Institute Javotte Bocconi, the Institute for European Policymaking @ Bocconi University combines the analytic rigor of a research institute, the policy impact of a think tank, and the facts-based effort of raising public opinion’s awareness about Europe through outreach activities.

The Institute, fully interdisciplinary, intends to address the multi-fold obstacles that usually stand between the design of appropriate policies and their adoption, with particular attention to consensus-building and effective enforcement.

The Institute’s mission is to conduct, debate, and disseminate high-quality research on the major policy issues facing Europe, and the EU in particular, its Member States, and its citizens, in a rapidly changing world.

It is independent of any business or political influence.

The IEP Bocconi Management Council

Marta Cartabia

President

Sylvie Goulard

Vice-President

Paloma Lopez-Garcia

Director

Silvia Colombo

Deputy Director

Carlo Altomonte

Arnstein Aassve

Valentina Bosetti

Elena Carletti

Daniel Gros

Eleanor Spaventa

Nathalie Tocci

I am not going to predict that Putin will be toppled by a popular revolt. That would be premature. But it is not premature to say that he is genuinely afraid, and that he has lost control of the story he spent twenty-five years writing

Bill Browder

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by Bill Browder

I have spent twenty-six years studying Vladimir Putin, as his number one foreign enemy, and in that time I have learned one thing about him above all others: whenever he is in trouble at home, he starts a war abroad. It has worked every time. It is not working now, and a frightened Putin is a far more dangerous, and far more revealing, creature than a confident one.

Look at the polling. The Levada Center has tracked Putin’s approval ratings since the day he appeared on the scene. I would not put much faith in the honesty of ordinary Russians answering a pollster in a police state, but the shape of the chart tells a story you cannot ignore.

In 1999, when Putin became prime minister, nobody had heard of him and his ratings were close to zero. So he launched a full-scale war in Chechnya, after a series of apartment bombings he conveniently blamed on the Chechens, and his numbers shot past fifty per cent. He was elected president.

He has run the same play ever since. When his popularity sagged around the 2008 financial crisis, he invaded Georgia, and his ratings jumped. When they sagged again in 2014, he annexed Crimea and marched into eastern Ukraine.

And when the political hangover from Covid set in, he launched the full-scale invasion of Ukraine. There is no question in my mind. Putin uses war as a tool. It keeps his own people from looking too closely at his failures.

But for the trick to work, one rule has always applied. The war has to be far away. It must never touch the ordinary Russian. His first three wars passed that test easily. The fourth was a much bigger gamble, and Putin knew it, so he went to extraordinary lengths to keep it at a distance.

He refused even to call it a war. It was a “special military operation,” and he was so insistent on the phrase that any Russian who called it a war could be jailed for eight years.

He made sure the men doing the fighting were not the ones who mattered to him.

He offered prisoners amnesty in return for the front line. He handed the hardest battles to mercenaries like the Wagner Group.

He paid hundreds of thousands of poor men from Russia’s poorest regions to go and die.

He even shipped in North Korean soldiers and African mercenaries. The point was always the same: make sure the average Russian feels no sacrifice at all.

Why does this matter so much to him? Because the Russian people are, I would argue, among the most selfish on the planet. I do not say that as an insult. I say it as a description of what the system has done to them.

For decades under communism, and for decades since, anyone who was civic-minded, who cared about the common good, who thought beyond his own front door, was punished for it. Under the Soviets they were sent to the gulag. Under Putin they are jailed and ostracised.

Train a population for two generations to care about nothing but itself, and you get a country that is easy to rule, right up to the moment its own narrow self-interest is touched.

We are now four years into this war, and every wall Putin built to keep it away from his people is coming down.

The cost has been staggering. Western intelligence services and think tanks now put total Russian casualties, killed and wounded, at somewhere between 1.2 and 1.5 million men. Ukraine is killing Russian soldiers faster than Russia can replace them. And the Kremlin is running out of money to pay the mercenaries and contract soldiers it depends on.

Most important of all, Ukraine has worked out how to bring the war home to Russia. Ukrainian drones now hit Russian oil refineries and export terminals, military bases, and targets inside Moscow itself.

They have built drones that reach more than six hundred miles into Russian territory, something Ukraine could not dream of in 2022. The insulation Putin spent four years building is being torn away, one refinery at a time.

You could see how rattled he is at this year’s Victory Day parade. The Kremlin was so worried about Ukrainian drones over Red Square that a ceasefire had to be arranged first. The man who casts himself as the heir to the Soviet victory over Hitler could not guarantee the safety of his own parade.

The signs of a cornered man are everywhere. Putin spends much of his time in a bunker, terrified of being assassinated by a Ukrainian drone. He has cut mobile internet in Moscow and St Petersburg.

He has even moved against Telegram, the app every Russian uses to talk to every other Russian, because he is afraid it could light the fuse of an uprising. But here is his problem.

Every one of these moves drags the war closer to home. In a society he has built where nobody looks past his own interests, the moment those interests are threatened, everybody is affected at once.

I am not going to predict that Putin will be toppled by a popular revolt. That would be premature. But it is not premature to say that he is genuinely afraid, and that he has lost control of the story he spent twenty-five years writing.

Which is exactly why this is the worst possible moment to push Ukraine towards a peace deal. With Putin backed into a corner, the pressure belongs on Russia, not on Kyiv. Our job is to help Ukraine make him more frightened, more isolated and more beleaguered, not to hand him a lifeline just as his oldest trick finally fails.

Previous versions of this article were published by the British daily The Independent and by the Italian daily Il Foglio

This commentary is based on an edited version of Bill Browder’s remarks at the IEP Bocconi digital event “How Can Europe Confront the Russian Threat in a Post-American World Order? Russia’s war economy, sanctions, Ukraine, and Europe’s deterrence challenge”, held online on 27 May 2026, with Bill Browder and Nathalie Tocci, moderated by Stefano Feltri.

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William Browder

IEP Bocconi Non-Resident Fellow

Sir William Browder, KCMG is a financier and political activist. He is the CEO and co-founder of Hermitage Capital Management, the investment adviser to the Hermitage Fund, formerly the largest foreign portfolio investor in Russia until he was declared “a threat to national security” in 2005 for exposing corruption in Russian state-owned companies.

He graduated in Economics from the University of Chicago and earned an MBA from the Stanford Graduate School of Business and received an honorary doctorate from Colgate University. He is also a Visiting Fellow at the Oxford Saïd School of Business (University of Oxford).

Browder began his career in the Eastern European practice of the Boston Consulting Group in London, then worked for Robert Maxwell’s Maxwell Communication Corporation, and subsequently managed the Russian proprietary investments desk at Salomon Brothers.

Browder and Edmond Safra (1932–1999) founded Hermitage Capital Management in 1996, investing an initial seed capital of $25 million in Russia during the mass privatization period following the fall of the Soviet Union.

In 2008, Browder’s lawyer, Sergei Magnitsky, uncovered a massive fraud committed by Russian government officials involving the theft of $230 million in state taxes. Magnitsky was subsequently arrested, imprisoned without trial, and systematically tortured.

Sergei Magnitsky died in prison on November 16, 2009. Ever since, Sir William has led the Global Magnitsky Campaign for governments around the world to impose targeted visa bans and asset freezes on human rights abusers and highly corrupt officials, introducing the passage of the Sergei Magnitsky Accountability Act in 2012 and the Global Magnitsky Human Rights Accountability Act in 2016. This legislation has since been adopted by 35 countries, including the USA, the UK, the EU, Canada and Australia.

For his exceptional service to the UK abroad and internationally, in recognition of his significant and sustained contribution to human rights and anti-corruption, he was appointed a Knight Commander of the Order of St Michael and St George (KCMG) by King Charles III in the 2024 Birthday Honours List.

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IEP Bocconi Recent Publications

The IEP Bocconi Mission

Founded by Bocconi University and the Institute Javotte Bocconi, the Institute for European Policymaking @ Bocconi University combines the analytic rigor of a research institute, the policy impact of a think tank, and the facts-based effort of raising public opinion’s awareness about Europe through outreach activities.

The Institute, fully interdisciplinary, intends to address the multi-fold obstacles that usually stand between the design of appropriate policies and their adoption, with particular attention to consensus-building and effective enforcement.

The Institute’s mission is to conduct, debate, and disseminate high-quality research on the major policy issues facing Europe, and the EU in particular, its Member States, and its citizens, in a rapidly changing world.

The IEP Bocconi Management Council

Marta Cartabia
President

Sylvie Goulard
Vice-President

Paloma Lopez-Garcia
Director

Silvia Colombo
Deputy Director

Carlo Altomonte

Arnstein Aassve

Valentina Bosetti

Elena Carletti

Daniel Gros

Eleanor Spaventa

Nathalie Tocci

The 28th regime aims to overcome these problems by offering a new, EU-wide corporate form. But when it comes to templates, it only goes halfway. The first limitation is templates’ narrow scope. The proposal provides for model articles of association, but not for model agreements among shareholders. This is a serious gap

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IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors

by Luca Enriques, Casimiro Nigro, and Tobias Tröger

The European Commission’s proposal for a new optional company form—the “EU Inc.”—contains some elements intended to convey a high-tech image.

Registration should be possible purely online, cost less than 100 euros and be completed in less than 48 hours. But these procedural improvements will not be enough to make EU Inc. the first choice for high-tech startups.

Founders and venture capitalists need a coordinated set of arrangements that allocate economic and control rights in a flexible and often asymmetric way. The current proposal does not seem to offer this.

The key mechanism proposed to reduce legal fragmentation is the introduction of standardised templates for the articles of association.

These templates could, in principle, become the regime’s main operational lever. But, as we argue in our recent paper, the proposal turns that promise into a missed opportunity.

The choices it makes on the scope, design, and legal effects of templates are unlikely to support the firms that motivated the initiative—those relying on external investors to scale quickly.

Consider that firms that rely on external investors operate under conditions of deep uncertainty and information asymmetry.

Investors face the risk that founders may take actions that are not aligned with their interests. Founders, in turn, risk losing control of their company if things go wrong. Contracts are used to manage these tensions.

In more developed markets, like the US, these contracts follow a well-established pattern. They allocate economic returns and control rights in a flexible and often uneven way.

Investors may gain strong control rights if the company underperforms, and a large share of the value if it is sold under unfavourable conditions. These arrangements are not accidental. They are designed to make investment possible in situations where risk is high and information is limited.

Crucially, these arrangements are not contained in a single document. They are spread across the company’s articles of association and separate agreements among shareholders. The two sets of documents are tightly coordinated and work together as a single structure.

This is precisely where European corporate law creates difficulties. In several jurisdictions, including Italy and Germany, many of these arrangements are either not allowed or are subject to significant uncertainty.

Legal professionals may refuse to include them in company documents, and courts may later reinterpret or invalidate them. The result is a weaker contractual framework and, ultimately, more expensive or less available funding.

The 28th regime aims to overcome these problems by offering a new, EU-wide corporate form. But when it comes to templates, it only goes halfway.

The first limitation is templates’ narrow scope. The proposal provides for model articles of association, but not for model agreements among shareholders. This is a serious gap.

If the relevant contractual structure depends on the interaction between the two, standardising only one of them cannot reproduce the intended effect. The missing piece is left to national law, with all its constraints and uncertainties.

The second limitation lies in the underlying approach to fairness. The proposal places strong emphasis on balancing the interests of different shareholders and protecting minorities. While these are important goals, they sit uneasily with the logic of venture capital-backed firms.

In those settings, contracts often rely on asymmetric allocations of rights and returns. Trying to impose a notion of balance risks undermining the very mechanisms that make investment viable.

The third limitation concerns legal certainty. The proposal offers some procedural advantages to firms that adopt the standard articles, such as faster incorporation. But it is unclear whether the content of those articles will be protected from later challenges. If courts or other authorities remain free to reinterpret or invalidate key provisions, the benefits of standardisation are limited.

One final limit concerns how the templates will be drafted. The proposal assigns this task to the European Commission through a broad consultation process. That process gives weak incentives to track and update market practice, and is unlikely to mobilise the specialised expertise required.

The contractual arrangements used in investor-backed firms are a tightly coordinated, continuously refined architecture.

In the US, comparable templates emerged from sustained practitioner investment and repeated real-world use. A generalist, Commission-led process raises both an incentive problem and a competence problem in replicating that outcome.

Taken together, these shortcomings suggest that the proposal does not yet provide a reliable framework for the firms it is meant to support. What would a more effective approach look like?

First, the regime should include not only model articles of association but also model agreements among shareholders. The goal is not formal symmetry, but functional completeness. The two sets of documents must be designed together.

Second, the drafting process should involve those with direct experience in structuring venture capital deals: investors, founders, and specialised lawyers. Without that input, the templates risk being too generic. (One of us suggested a more radical solution: delegating the task of issuing templates to private bodies authorised by the European Commission, in line with the New Legislative Framework.)

Third, policymakers should avoid building the templates around an abstract notion of fairness. The focus should instead be on enabling informed parties to adopt arrangements that reflect their economic objectives, even if those arrangements are uneven in their outcomes.

Finally, the regime should provide stronger legal protection for firms that adopt the templates. This means not only simplifying incorporation but also limiting the scope for later challenges and reinterpretations. Without such protection, the benefits of standardisation will remain uncertain.

The broader point is that innovative startups need not only lower administrative burdens. They also need a legal framework that supports, rather than constrains, the contractual tools on which those firms depend.

To conclude, the 28th regime is a step in that direction. But in its current form, as the provision on templates illustrates, it risks being a missed opportunity.

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Luca Enriques

Luca Enriques is Professor of Business Law at Bocconi University. From 2014 to early 2025 he was the Professor of Corporate Law at the University of Oxford Faculty of Law. He is also a Research Fellow and Research Member at the European Corporate Governance Institute (where he is also a member of the board), a Fellow Academic Member of the European Banking Institute (where he also co-chairs the Fintech Working Group) and a Visiting Research Fellow at the Institute of European and Comparative Law at the University of Oxford. He has published widely in the fields of corporate law and financial regulation from a comparative and EU perspective.

He has held visiting positions, among others, at Cornell, Harvard, LUISS, IDC Herzliya, Cambridge, and Sydney Law School.

He is a IEP Bocconi fellow.

Casimiro Nigro

Casimiro Nigro is a Lecturer in Business Law at the University of Leeds, where he teaches courses in corporate finance, corporate law, and corporate governance, and leads the module on Corporate Finance and Securities Law.

Before joining Leeds, he was at the LawFin Center of Goethe University Frankfurt, where he taught Comparative Corporate Governance and Law, The Law & Finance of Start-up Financing and Governance, and The Law & Economics of Private Equity & Venture Capital Contracting.

Tobias Tröger

Tobias Tröger holds the SAFE Chair of Private Law, Trade and Business Law, Jurisprudence at Goethe University Frankfurt am Main. He is Director of the Law and Finance Cluster at the Leibniz Institute for Sustainable Architecture for Finance in Europe SAFE, Director of the Center for Advanced Studies on the Foundations of Law and Finance LawFin, and a research member of the ECGI.

His research interests include corporate law (particularly, comparative corporate governance and corporate finance), banking regulation and the economic analysis of law. Tobias Tröger aspires to connect the methods of quantitative analysis with an in-depth understanding of institutions and their evolution to achieve an innovative cross-pollination of law and finance.

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A IEP@BU Report

The IEP@BU Mission

Founded by Bocconi University and the Institute Javotte Bocconi, the Institute for European Policymaking @ Bocconi University combines the analytic rigor of a research institute, the policy impact of a think tank, and the facts-based effort of raising public opinion’s awareness about Europe through outreach activities. The Institute, fully interdisciplinary, intends to address the multi-fold obstacles that usually stand between the design of appropriate policies and their adoption, with particular attention to consensus-building and effective enforcement.

The Institute’s mission is to conduct, debate, and disseminate high-quality research on the major policy issues facing Europe, and the EU in particular, its Member States, and its citizens, in a rapidly changing world.

It is independent of any business or political influence.

The IEP@BU Management Council

• Marta Cartabia, IEP@BU President

• Daniel Gros, IEP@BU Director

• Sylvie Goulard, IEP@BU vice-President, Professor of Practice in Global Affairs at SDA Bocconi School of Management

• Silvia Colombo, IEP@BU Deputy Director

• Carlo Altomonte, Associate Professor at Bocconi University and Associate Dean for Stakeholder Engagement Programs at SDA Bocconi School of Management

• Arnstein Aassve, Professor in Demography at Bocconi University

• Valentina Bosetti, professor of Environmental and Climate Change Economics at Bocconi University

• Elena Carletti, Dean for Research and Professor of Finance at Bocconi University

• Eleanor Spaventa, Professor of European Union Law at Bocconi Law School

• Nathalie Tocci, IEP@BU Senior Fellow

The Russian war machine will stop only when it collapses.This is the strategic reality Europe has to absorb. The aim is not to design a new accommodation with Putin’s Russia. The aim is to ensure that Ukraine can keep holding the line, that Europe can keep financing and supporting that effort, and that Russia’s war economy is forced to bear the accumulated weight of its own failure

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IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors

The real goal of supporting Ukraine is not to prepare an unlikely negotiation with Vladimir Putin’s Russia. It is to make the Russian war machine collapse.

This does not mean waiting passively for Moscow to implode. It means helping Ukraine hold the line, deny Russia further territorial gains, and force the Kremlin to bear the accumulated military, economic and political cost of a war that it cannot win but doesn’t want to stop.

It may sound strange to say this about a war, but this is a relatively good moment for Ukraine. Not because the conflict is close to ending. It is not. Not because a meaningful negotiation is in sight. It is not. But because Ukraine’s expectations have lowered and its confidence in increased.

Since the failed counteroffensive of 2023, the war has been a grind. Russia has been gaining ground, but only very slowly. There was a time, particularly after the very successful first counteroffensive in the autumn of 2022, when Ukrainians felt they could repeat what they had done in Kharkiv and Kherson and liberate more occupied land. Back then, they were still supported very significantly by the United States, even if there were hesitations and caution in Washington and in Europe.

That is not where Ukraine is today.

If there was ever an expectation that Ukraine could retake all occupied territory militarily in the context of war, that expectation has now been lowered. Ukrainians may no longer believe they can recover everything they have lost by force in the short term. But this lowering of expectations has not produced defeatism. It has produced clarity.

A second trauma has also been internalised: the betrayal of the United States. It was pretty tough. Ukraine was stabbed in the back — or rather stabbed right in the face — in the Oval Office. And it was not a one-stab show. There were repeated stabs, culminating in the 28-point plan presented by the US that was essentially drafted in Moscow.

Ukrainians have absorbed this loss. They no longer expect the United States to be the actor it was at the beginning of the war. They assume that the temporary suspension of US oil sanctions on Russia will become permanent. They know that Washington is no longer the anchor on which they can base their war effort.

Yet this, too, has produced a different kind of confidence.

Ukraine has proved that it can hold the line despite the betrayal of the United States. It may not be able to regain what it has lost, but it is increasingly confident that it will not lose more. It may even regain a little ground while the war continues.

This confidence is based on facts. Four and a half years ago, when the large-scale invasion began, Ukraine was almost entirely dependent on military support from abroad, primarily from the United States and Europe. Today, between two-thirds and three-quarters of its military capacities are produced inside Ukraine. Even if the lower estimate is more realistic, this remains an extraordinary achievement in the midst of war.

Ukraine is holding the line primarily through capacities it produces itself.

At the same time, Russia’s situation is not improving. The Russian economy has been deindustrialised, with the exception of the war economy. Russia has suffered between 1.3mn and 1.5mn casualties over four and a half years. In that time, having already occupied about 14 per cent of Ukraine in 2014, it has taken only another 6 per cent. The cost has been enormous. The gains have been limited.

Ukraine’s second source of confidence is Europe.

This is broader than Viktor Orbán, though Orbán’s removal from the equation matters. Ukrainians understand that Europeans support them not out of the goodness of their hearts, but because there is an increasing recognition in Europe that European security passes through Ukraine. It starts in Ukraine, even if it does not end there.

This is not simply a war in Ukraine. It is a war between Russia — and Putin’s regime — and Europe as a whole. That is what gives Ukrainians confidence that, whatever happens, Europeans will have their back. Europe is in this because its own security is in this.

That does not mean Europe is acting only out of values. It is acting out of interest. But that is precisely why the commitment can be durable. As long as Europeans understand that Ukraine is the front line of European security, they will have a reason to remain engaged.

Precisely because of all this, this is also a moment of danger.

If this is visible from Kyiv and from Europe, something along these lines must also be reaching the Kremlin. Putin may listen only to what he wants to hear, but he cannot be entirely unaware of the direction of travel.

Russia has paid a huge price, has gained little, faces a worsening economic position, and has seen the Trump betrayal of Europe largely consume itself. In Trumpian language, the United States no longer has the cards on Ukraine.

This is why the level of alarm in the Baltic states is increasing. If you are desperate, you do desperate things.

There are no prospects whatsoever of a meaningful negotiation over Ukraine. This is what makes the conversation about European envoys so abstract and frankly pointless. The only interesting thing about it is that it implicitly acknowledges that the United States is out of the picture.

Nor would a hypothetical ceasefire necessarily be sustainable. This is not a war that is likely to end in compromise. Even if there were a ceasefire, there is little reason to believe it would hold. The Russian war bicycle will keep pedalling until it falls.

The Russian war machine will stop only when it collapses.

This is the strategic reality Europe has to absorb. The aim is not to design a new accommodation with Putin’s Russia. The aim is to ensure that Ukraine can keep holding the line, that Europe can keep financing and supporting that effort, and that Russia’s war economy is forced to bear the accumulated weight of its own failure.

Ukraine’s victory is the ability to deny Russia further gains. It is the capacity to survive the loss of American reliability and turn European support, domestic production and battlefield innovation into sustainable resistance.

Putin’s system cannot live without war. But it may not be able to live with this war forever.

This commentary is based on an edited version of Nathalie Tocci’s remarks at the IEP Bocconi digital event “How Can Europe Confront the Russian Threat in a Post-American World Order? Russia’s war economy, sanctions, Ukraine, and Europe’s deterrence challenge”, held online on 27 May 2026, with Bill Browder and Nathalie Tocci, moderated by Stefano Feltri.

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Nathalie Tocci

Nathalie Tocci is a senior fellow of the Institute for European Policymaking at Bocconi University. She has been Director of the Istituto Affari Internazionali from 2017 to 2026. She has been Special Advisor to EU High Representatives Federica Mogherini and Josep Borrell. In that capacity, she wrote the European Global Strategy and worked on its implementation. She is also Professor of the Practice at SAIS Europe.

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A IEP@BU Report

The IEP@BU Mission

Founded by Bocconi University and the Institute Javotte Bocconi, the Institute for European Policymaking @ Bocconi University combines the analytic rigor of a research institute, the policy impact of a think tank, and the facts-based effort of raising public opinion’s awareness about Europe through outreach activities. The Institute, fully interdisciplinary, intends to address the multi-fold obstacles that usually stand between the design of appropriate policies and their adoption, with particular attention to consensus-building and effective enforcement.

The Institute’s mission is to conduct, debate, and disseminate high-quality research on the major policy issues facing Europe, and the EU in particular, its Member States, and its citizens, in a rapidly changing world.

It is independent of any business or political influence.

The IEP@BU Management Council

• Marta Cartabia, IEP@BU President

• Daniel Gros, IEP@BU Director

• Sylvie Goulard, IEP@BU vice-President, Professor of Practice in Global Affairs at SDA Bocconi School of Management

• Silvia Colombo, IEP@BU Deputy Director

• Carlo Altomonte, Associate Professor at Bocconi University and Associate Dean for Stakeholder Engagement Programs at SDA Bocconi School of Management

• Arnstein Aassve, Professor in Demography at Bocconi University

• Valentina Bosetti, professor of Environmental and Climate Change Economics at Bocconi University

• Elena Carletti, Dean for Research and Professor of Finance at Bocconi University

• Eleanor Spaventa, Professor of European Union Law at Bocconi Law School

• Nathalie Tocci, IEP@BU Senior Fellow

The current Chips Act is nearing the end of its implementation phase, and calls for a second round are already emerging. It is no surprise that Europe’s car industry, in particular, has advocated a follow-up. But the objective of a Chips Act 2.0 should be to strengthen Europe’s strategic autonomy — not simply to expand mature-chip production through subsidies

IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the author

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Semiconductors have become the emblem of global technological competition. Policymakers speak of a “chip war”, digital sovereignty and strategic autonomy. To follow the public debate is to gain the impression that control over microprocessors will determine the fate of advanced economies.

Yet a glance at the data tempers this perception. The entire global semiconductor industry — across all stages of production — accounts for roughly 0.5 per cent of world GDP, a share that has remained broadly unchanged over the past two decades.

The gap between geopolitical attention and direct economic weight is therefore striking. That does not mean chips are unimportant. They are — but indirectly. Not because they employ vast workforces or generate a large share of global income, but because they are a critical input into a vast range of products.

Without semiconductors there would be no cars, industrial machinery, medical devices, household appliances or smartphones. Their importance lies in their systemic role within global value chains.

The economic weight of semiconductors

For some countries, however, the sector carries far greater macroeconomic significance. Taiwan represents the extreme case: semiconductor value added accounts for around 15 per cent of its economy, and exports of electronic circuits exceeded $220bn in 2024 — more than a quarter of GDP.

Such specialisation makes the sector a structural pillar of the national economy. For the European Union or the United States, by contrast, the picture is markedly different.

In international trade, too, European dependence is often overstated. Annual EU chip imports amount to €40bn–€50bn — roughly 2 per cent of total imports. The US records similar figures. China, by contrast, is by far the world’s largest net importer, with a deficit exceeding €250bn.

The EU runs a small deficit in chips; the US a modest surplus. But Europe posts a significant surplus — more than €20bn — in machinery used to manufacture semiconductors. In that segment, the bloc exports more than it imports.

Taking the full value chain together — chips plus manufacturing equipment — the EU records an overall surplus. This fact is frequently overlooked in political debate.

Two very different industries

To understand the sector’s structure, it is essential to distinguish between fundamentally different markets. There is no single “chip market”, but at least two broad segments with distinct technical, economic and geopolitical characteristics.

The first consists of advanced logic chips, now produced at nodes of 5 nanometres or below. (Nodes refer to the minimum feature size etched on a chip — effectively the distance between transistors: the smaller the number, the more miniaturised, powerful and energy-efficient the chip.)

These devices perform billions of operations per second and are indispensable for data centres, artificial intelligence and sophisticated military applications.

The second segment comprises so-called “mature” chips, typically produced at nodes between 20 and 90 nanometres or above. They regulate electrical currents, control sensors and manage motors. They are essential for the automotive and manufacturing industries.

Technical differences translate into distinct economic models. Advanced chips require vast research and development outlays and are produced in highly concentrated markets. Mature chips are less R&D-intensive and operate in more competitive markets with many differentiated products.

Public and geoeconomic debate focuses almost exclusively on advanced chips — those required to run AI models. This segment has undergone a profound transformation. In the past, value added derived primarily from fabrication. Today, an increasing share of value lies in design and software.

As transistor density has risen, design complexity has become the decisive competitive frontier.

The case of NVIDIA is emblematic. The company owns no fabrication plants yet dominates the AI chip segment thanks to superior architecture design. Its chips are manufactured in Taiwan.

The chip war

The so-called “chip war” between the US and China centres almost entirely on advanced semiconductors.

Washington has imposed export controls to deny Beijing access to cutting-edge technologies, marking a shift from the previous strategy of simply maintaining a generational lead. The declared aim is to protect national security by preventing China from closing the technological gap.

If the most advanced chips are produced in Taiwan, how can the US block their export to China? The answer reveals a crucial detail.

The US applies its export control regime to products based on American technology, regardless of where they are manufactured. A Taiwanese producer manufacturing for NVIDIA must therefore obtain US authorisation before exporting to China.

Europe is not a leader in advanced chip design or mass fabrication. Yet it occupies a pivotal position in the global supply chain thanks to ASML, the Dutch company that holds a near-monopoly in the lithography equipment required to produce the most advanced chips.

Without these European machines, Asian producers could not fabricate cutting-edge chips based on American designs. This is Europe’s true strategic leverage.

Yet ASML sells very little within Europe, because such equipment is scarcely demanded there.

According to a 2022 European Commission survey, roughly three-quarters of anticipated demand from European chipmakers concerned the 65–90 nanometre range. In other words, Europe largely produces and uses mature chips. This fact is central when assessing policy coherence.

The EU Chips Act

Europe has long sought to close the semiconductor gap. In 1990, one early initiative — the Joint European Submicron Silicon Initiative — aimed at achieving micrometre-scale nodes, a thousand times larger than today’s nanometre technologies. None of these efforts proved transformative.

Semiconductors returned to the forefront during the Covid crisis, when demand for microelectronics surged. In 2021, chip prices spiked and shortages disrupted several industries.

Major economies responded with subsidy programmes — from the US CHIPS and Science Act to initiatives in Japan, South Korea and Taiwan — often committing tens of billions of dollars.

The EU sought not to be left behind. The result was the European Chips Act. But unlike the US and other countries, the EU lacks a sufficiently large and flexible central budget to allocate comparable sums. The European Chips Act therefore contains limited new funding.

Its most consequential feature is the introduction of state-aid exemptions allowing member states to subsidise “first-of-a-kind” projects. The term was intended to signal highly innovative investments. In practice, it has been interpreted to mean facilities or technologies new to Europe, even if not globally novel.

So far, the largest supported projects concern chips for the automotive sector, with subsidies in some cases covering 40–50 per cent of investment costs.

Large advanced-chip projects — such as the planned Intel plant in Germany — have not materialised.

The effect is that substantial public resources have flowed into a segment characterised by relatively low margins. In advanced chips, by contrast, margins are high: around 50 per cent for NVIDIA, 40 per cent for TSMC and 30 per cent for ASML.

In automotive chips, margins for European players such as Infineon are closer to 14 per cent.

Margin differentials reflect differences in geopolitical relevance. Sectors dominated by a few high-profit actors tend to be more strategic. Highly competitive segments are less likely to generate critical dependencies.

Towards a Chips Act 2.0?

The current Chips Act is nearing the end of its implementation phase, and calls for a second round are already emerging. It is no surprise that Europe’s car industry, in particular, has advocated a follow-up.

But the objective of a Chips Act 2.0 should be to strengthen Europe’s strategic autonomy — not simply to expand mature-chip production through subsidies.

The focus should instead be on consolidating Europe’s comparative advantage in advanced equipment and specialised technological niches where European firms remain globally competitive. Investing in research, development and skills along the semiconductor equipment supply chain would do far more to enhance the EU’s geopolitical bargaining power.

The temptation to replicate the US or Asian model through large subsidised fabs risks misallocating public resources. A niche strategy, grounded in existing strengths, would be economically more rational and geopolitically more effective.

Global competition in semiconductors is not necessarily won by producing more chips, but by controlling the critical nodes of the value chain. Thanks to its leadership in equipment, Europe already occupies such a node. A coherent industrial policy should start from this reality — rather than from the illusion that manufacturing self-sufficiency is the only path to technological sovereignty.

A previous version of this article was published in the Italian monthly magazine ECO

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Daniel Gros

Daniel Gros is the Director of the Institute for European Policymaking @ Bocconi University.

Between 2020 and 2022 he was Distinguished Fellow and Member of the Board of the Centre for European Policy Studies (CEPS). Before that, was the director of CEPS from 2000. In 2020, he held a Fulbright fellowship and was a visiting professor at the University of California, Berkeley. In March-June, 2022 he was visiting Research Fellow at the Robert Schuman Centre of the European University Institute, Florence.

IEP@BU Publications

The IEP@BU Mission

Founded by Bocconi University and Institute Javotte Bocconi, the Institute for European Policymaking @ Bocconi University combines the analytic rigor of a research institute, the policy impact of a think tank, and the facts-based effort of raising public opinion’s awareness about Europe through outreach activities. The Institute, fully interdisciplinary, intends to address the multi-fold obstacles that usually stand between the design of appropriate policies and their adoption, with particular attention to consensus building and effective enforcement.

The Institute’s mission is to conduct, debate, and disseminate high-quality research on the major policy issues facing Europe, and the EU in particular, its Member States and its citizens, in a rapidly changing world.

It is independent of any business or political influence.

The IEP@BU Management Council

• Catherine De Vries, IEP@BU President

• Daniel Gros, IEP@BU Director

• Sylvie Goulard, IEP@BU vice-President, Professor of Practice in Global Affairs at SDA Bocconi School of Management

• Silvia Colombo, IEP@BU Deputy Director

• Carlo Altomonte, Associate Professor at Bocconi University and Associate Dean for Stakeholder Engagement Programs at SDA Bocconi School of Management

• Arnstein Aassve, Professor in Demography at Bocconi University

• Valentina Bosetti, professor of Environmental and Climate Change Economics at Bocconi University

• Elena Carletti, Dean for Research and Professor of Finance at Bocconi University

• Eleanor Spaventa, Professor of European Union Law at Bocconi Law School

• Nathalie Tocci, IEP@BU Senior Fellow

Chinese industry’s capacity to penetrate markets now extends across a wide range of sectors, especially higher-technology ones, from cars to chemicals and renewable energy. This is displacing European production, not only in the domestic market but also in other global markets. Industrial production has been falling for more than two years, particularly in Germany and Italy. Millions of jobs across the continent are at risk

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IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the author

More than a year after “Liberation Day”, when President Donald Trump announced tariffs against the rest of the world, most European politicians, business leaders and commentators still have not understood that the real challenge for the European economy comes from the other side of the world: China.

The tensions that have developed with the United States should certainly not be underestimated. Nor are they easy to resolve. There is, however, an institutional framework — from Nato to the OECD and the G7 — within which at least some of the main problems can be addressed.

With China, by contrast, imbalances continue to widen, while relations remain essentially bilateral, conducted mainly with individual countries.

China’s trade surplus with the European Union exceeded €350bn last year, up from €160bn in 2019. According to European Commission estimates, it could reach €500bn in 2027. Chinese exports to Europe have been rising since the pre-Covid years, while European exports to China stagnated.

Chinese industry’s capacity to penetrate markets now extends across a wide range of sectors, especially higher-technology ones, from cars to chemicals and renewable energy.

This is displacing European production, not only in the domestic market but also in other global markets. Industrial production has been falling for more than two years, particularly in Germany and Italy. Millions of jobs across the continent are at risk.

Given the global scale that China’s economy has now reached, around 20 per cent of world output, continuing to grow on the back of exports generates deflation, both domestically and for the rest of the world.

The worrying aspect is the absence of any strategy to correct this imbalance.

The classic adjustment mechanism would involve an appreciation of the Chinese currency against the euro, which would make European exports cheaper relative to Chinese ones.

This, however, is countered by the exchange-rate policy pursued by the authorities in Beijing. Controls on inward capital movements further prevent the yuan from appreciating.

In reality, the export surplus is the product of the industrial policy pursued for years by the Chinese government and local authorities, based on the provision of subsidies to sectors deemed strategic.

This creates excess production capacity and keeps alive companies that compete with one another by cutting costs and prices. The excess output is dumped on foreign markets at bargain prices.

There is extensive evidence of a negative relationship between the increase in public subsidies and the decline in the operating margins of the companies that receive them.

This policy penalises domestic consumption, which suffers from pressure on employment and wages, and has a negative impact on imports from the rest of the world. It also produces substantial public-sector indebtedness, running at around 8 per cent of GDP a year.

China’s public debt has reached 100 per cent of GDP, according to the IMF, more than double the level of 10 years ago. It is expected to rise to 120 per cent over the next five years.

This debt is financed largely by the banking system, which benefits from zero-rate deposits. The absence of alternative opportunities for savers, especially after the collapse of the property market, which has not yet stabilised, pushes households to save even more. This comes at the expense of consumption and imports.

Despite the unsustainability of this policy, reducing subsidies appears difficult, because it would trigger the failure of many uncompetitive companies, including state-owned ones, with severe repercussions for the banking sector and a recessionary effect on the economy.

Europe has still failed to find a common position to address the problem, even though the European market is vital for the Chinese economy, especially after the restrictions imposed by the United States.

The decision not to react a year ago, either to US tariffs or to Chinese restrictions on rare-earth exports, was interpreted by counterparts as a symptom of Europe’s political weakness.

Beijing has also managed to convince European governments — from Spain to Germany, without exception — that bilateral relations are more effective than relations with the Union as a whole, as European Commissioner Stéphane Séjourné recalled in a recent interview with Le Monde.

Political fragmentation, driven by the illusion among individual countries that they can negotiate with China on equal terms, has instead increased Europe’s economic dependence.

The photograph of a handshake with Chinese President Xi Jinping may, perhaps, make it into the pages of national newspapers. But it does not help solve the problem.

A previous version of this article was published in the Italian daily Il Foglio

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Lorenzo Bini Smaghi

Lorenzo Bini Smaghi holds a degree in Economic Sciences from the Université Catholique de Louvain (Belgium) and a Ph.D in Economic Sciences from the University of Chicago. He has been Chairman of the Board of Directors of Société Générale since 2015. He is an IEP@BU non-resident fellow

IEP@BU Publications

The IEP@BU Mission

Founded by Bocconi University and Institute Javotte Bocconi, the Institute for European Policymaking @ Bocconi University combines the analytic rigor of a research institute, the policy impact of a think tank, and the facts-based effort of raising public opinion’s awareness about Europe through outreach activities. The Institute, fully interdisciplinary, intends to address the multi-fold obstacles that usually stand between the design of appropriate policies and their adoption, with particular attention to consensus building and effective enforcement.

The Institute’s mission is to conduct, debate, and disseminate high-quality research on the major policy issues facing Europe, and the EU in particular, its Member States and its citizens, in a rapidly changing world.

It is independent of any business or political influence.

The IEP@BU Management Council

• Marta Cartabia, IEP@BU President

• Daniel Gros, IEP@BU Director

• Sylvie Goulard, IEP@BU vice-President, Professor of Practice in Global affairs at SDA Bocconi School of Management

• Silvia Colombo, IEP@BU Deputy Director

• Carlo Altomonte, Associate Professor at Bocconi University and Associate Dean for Stakeholder Engagement Programs at SDA Bocconi School of Management

• Arnstein Aassve, Professor in Demography at Bocconi University

• Valentina Bosetti, professor of Environmental and Climate Change Economics at Bocconi University

• Elena Carletti, Dean for Research and Professor of Finance at Bocconi University

• Eleanor Spaventa, Professor of European Union Law at Bocconi Law School

There are two ways to avoid double standards. One is the Trump way: remove the standards. Trump is not hypocritical because he has no standards. The other is to try to live up to one’s standards and narrow the gap between norms and power

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IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors

This article is an edited transcript of the keynote speech delivered by Nathalie Tocci at European Security in an Age of Rupture – Event in Memory of Achille Boroli, held at Bocconi University on 4 May 2026. Nathalie Tocci will also speak at the IEP Bocconi webinar How Can Europe Confront the Russian Threat in a Post-American World Order?, with Bill Browder, on 27 May 2026, 14:00–15:30 CEST, online on Zoom. Please join us. Registration link:
https://forms.unibocconi.it/index.php?rif_quest=4171

There was a time when Europe was swimming with the tide.

It was an age of multilateral institutions, international law, regional cooperation and globalization. In that world, the European Union was not necessarily a superpower. It did not even aspire to be one in the conventional sense. Yet it was, in a deeper way, a superpower, because the spirit of the age worked in its favour. The EU was the gold standard of regional integration. Southeast Asia, Africa, Latin America and others looked to Europe as the model of what deeper regional cooperation could become.

That world has gone.

This is not a revelation Europe discovered yesterday. For more than a decade, European leaders, documents and debates have increasingly used the language of strategy, power, pragmatism and transactionalism. These words entered the European public domain because Europeans gradually realised that the world in which the EU was born and developed no longer existed.

Sometimes this language of power has been turned into action. The most obvious example is Ukraine.

Europe often complains about its own slowness and inadequacy. Yet if one looks at the trajectory since 2014, after Russia’s annexation of Crimea, European defence spending began to rise. Donald Trump likes to think this happened because of him. It did not. It happened because of Vladimir Putin. After Russia’s full-scale invasion of Ukraine in 2022, this trend accelerated dramatically.

Germany is the most striking case. By 2030, it is likely to become the third-largest military spender in the world. One may debate whether this is good or bad, wise or dangerous. But if that does not show a Europe that has woken up and smelled the coffee, it is hard to imagine what would.

The same is true on the battlefield. In 2022, Ukraine was almost entirely dependent on external military assistance, most of it from the United States. Today, more than two-thirds of Ukraine’s military capabilities are produced inside Ukraine. Of the capabilities that still come from outside, the funding is overwhelmingly European. Since the second Trump administration entered office, U.S. military assistance has fallen from roughly $16bn a year to less than half a billion. Europe has stepped in.

Ukraine is thus the clearest case in which Europe’s language of power has been substantiated in practice.

Other cases are more partial. Take Africa. In recent years, Europeans have looked at Russia’s role in the Sahel, China’s presence in sub-Saharan Africa, and U.S. competition, and concluded that development policy could no longer remain what it was.

The Global Gateway is still wrapped in the language of development and sustainable development, but many of its projects reveal a more transactional European identity. The Lobito Corridor is a clear example: an infrastructure project aimed at transporting critical minerals from the Democratic Republic of Congo to Angola and on to Europe.

This shift in development policy has its supporters and critics. The aim here is not to say whether it’s good or bad, simply to point out the partial change in the making.

The Middle East tells a darker story. There, Europe has mostly failed to translate awareness of a changing world into action.

In the old world, Europeans could play a supporting role to the United States: financing development and supporting Israeli-Arab peace efforts. But as U.S. policy changed, Washington increasingly turned directly to Gulf states as its second fiddle. Europeans, meanwhile, struggled to find an autonomous role.

So Europe has reacted differently in different theatres. In Ukraine, it has acted. In Africa, it has partially adapted. In the Middle East, it has often been absent.

But the deeper question is not simply whether Europe can act in a harsher world. It is whether, in adapting to that world, Europe risks losing itself.

The EU is constitutionally constrained in foreign, security and defence policy. These remain national competences. For that reason, when people speak about Europe’s role in the world, the first word that usually comes to mind is division. And of course Europe is often divided. If foreign policy remains largely national, there will always be differences between European countries, and divisions will therefore exist.

But to stop there is intellectually lazy. Divisions are frequent, yet they reveal only part of the story.

European divisions have often produced paralysis, but they have also generated later moments of collective action.

In the 1990s, the wars in the Western Balkans exposed Europe’s impotence. Europeans had to wait for U.S. intervention in Bosnia and later in Kosovo. Yet that shame helped produce a more active European role in the Balkans in the 2000s: the EU accession process, the peaceful dissolution of the Serbia-Montenegro union, conflict prevention in North Macedonia, and eventually the resolution of the name dispute between Greece and North Macedonia.

The Iraq war was another moment of profound division. France and Germany opposed the war; the United Kingdom, Italy and Spain supported it; Donald Rumsfeld spoke of “old Europe” and “new Europe”. Yet that rupture helped produce one of Europe’s most successful collective diplomatic efforts: the Iran nuclear negotiation.

Javier Solana, then EU high representative, understood that Europe needed to rebuild bridges internally and across the Atlantic. Together with France, Germany and the United Kingdom, he created a format that reached out to Russia and China and kept the door open to the United States.

After 13 years of negotiation, that effort produced the 2015 Iran nuclear deal. Without the Iraq division, there might not have been that European diplomatic initiative.

Ukraine offers a more recent example. At the beginning of Russia’s full-scale war, many predicted that Europe would split between a “peace camp” and a “justice camp”: between those wanting compromise at almost any price and those insisting on a just peace.

When Trump returned to office, many expected paralysis. Some countries, especially those friendlier to Washington, were expected to drift toward compromise. Others would hold the line. Yet the feared split did not materialise. Viktor Orbán’s obstruction in Hungary was eventually overcome, and the EU’s €90bn support package for Ukraine moved forward.

European division is therefore real. But it is often not the deepest problem.

The deeper problem is identity.

The European project was exceptional because, unlike most states, it did not define itself against an external other. It defined itself against its own past. The Europe of the present and future would not be the Europe of nationalism, colonialism, fascism, Nazism and war. It would be an Europe of law, norms, institutions, liberal democracy and rules. It might sometimes be grey, bureaucratic and procedural. But beneath that institutional language lay a powerful political message: Europe would turn the page on itself.

After the Cold War, however, identities began to shift. More traditional ways of defining the self against an external other returned. Samuel Huntington’s “clash of civilizations” entered European debates.

Turkey, which during the Cold War had been treated as part of “us”, increasingly became part of “them”. This change affected enlargement, migration policy, attitudes toward the Muslim world and the Middle East.

At the same time, as the world became tougher, Europeans began to say they had to become harder too. They had to become strategic, transactional, pragmatic. This is necessary. Europe cannot live in a world of power while pretending power does not exist. But there is a danger. In hardening itself, Europe may become less hypocritical by lowering its standards.

This distinction matters. Double standards presuppose standards. Hypocrisy in international relations can be understood as the gap between the affirmation of norms and the exercise of power.

There are two ways to avoid double standards. One is the Trump way: remove the standards. Trump is not hypocritical because he has no standards. The other is to try to live up to one’s standards and narrow the gap between norms and power.

Europe must not drift toward the first path.

The danger became visible in the recent war in the Middle East. European leaders recognised that there had been violations of international law, but initially many refused clearly to condemn them.

Some said, in effect: yes, there is a violation of the international order, but we neither condemn nor support. This is more dangerous than hypocrisy. If there is condemnation but no action, one can speak of double standards. But when recognition of a violation is not followed by condemnation, the standards themselves begin to disappear.

This does not mean that Europe is condemned to cynical transactionalism. In the Middle East itself, European positions gradually shifted. At one extreme stood Mark Rutte, strongly aligned with Trump’s war. At the other stood Pedro Sánchez, probably the clearest European voice against what he saw as an illegal war in Iran. The European mainstream began closer to Rutte but moved, gradually, closer to Sánchez.

This matters because Europe did not support norms and law because Europeans were morally superior. They were never especially good people. They supported norms because they understood their interests. For Europe, international law, rules and institutions are not decoration. They are conditions of survival.

The future now divides into two possible ideal types.

The first is a world of empires. This is the world imagined by Trump and Putin, and perhaps in a more ambiguous way by Xi Jinping. It is a world in which the foundations of international law — sovereignty and territorial integrity — are discarded. Empires may compete, but they may also collude. The movement coming from Washington today is not only toward imperial competition, but also toward possible collusion with Moscow and Beijing.

In that world, Europe is on the colonial menu: on Russia’s menu, on America’s menu, and potentially on others’. An Europe of nations, returning to the demons of its past, would be easy to colonise.

The second model is the world described by Mark Carney in Davos: a world of middle powers. Carney’s speech was powerful because he said openly what many had known for some time: the liberal international order has become a fiction. It was not always a fiction, but it is one now.

Once the fiction is over, however, there are two possible futures. One is empire. The other is a coalition of middle and small powers seeking to rebuild a world still based on norms, rules and institutions.

Some signs of this second future already exist. Trade is the clearest. Without U.S. protectionism, there is no way Europe would have moved so quickly on agreements with Mercosur, India, Indonesia and Australia. Some had been under negotiation for years, even decades. Their conclusion shows that rules and institutions still matter.

Climate may be another field. Europe was once a climate leader, then lost confidence and allowed the Green Deal to be described as an ideological project. The war in the Middle East is a reminder that the ideological project was not the Green Deal; it was the attempt to destroy it. Around climate, a coalition of the willing may return.

Security is more tentative, but not impossible. Europe cannot end the war in Iran. It is not Europe’s war. But once it ends, Europeans — perhaps led by France and the United Kingdom — could help keep Hormuz open and work on Gulf security, in a broader global coalition.

Europe’s future is not settled. But one thing is clear: in a world of empires, Europe can survive only if it remains united and remembers why it was built. Power is now necessary. But if Europe learns the language of power by forgetting the language of rules, it will have lost the very thing that makes it worth defending.

The Webinar - How Can Europe Confront the Russian Threat in a Post-American World Order?

Russia’s war economy, sanctions, Ukraine, and Europe’s deterrence challenge

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Russia’s war against Ukraine is entering a new and uncertain phase. The conflict is no longer shaped only by military developments on the ground, but also by wider geopolitical dynamics: the course of the war with Iran, its repercussions on oil prices and energy markets, sanctions enforcement, political uncertainty within Europe, and growing strains in transatlantic relations.

As Russia adapts to a prolonged war economy, a key question is whether Vladimir Putin is politically and financially stronger today than in earlier phases of the conflict. Higher oil prices, loopholes in sanctions enforcement, and divisions within the West could all affect Moscow’s ability to sustain the war.

At the same time, Europe faces a difficult strategic dilemma. How can the EU sustain pressure on Moscow while preparing for a potentially less predictable United States? What would a more autonomous European strategy towards Ukraine and Russia require?

The upcoming IEP Bocconi digital event will address these questions with Bill Browder, recently appointed IEP Bocconi Non-Resident Fellow, CEO of Hermitage Capital Management and Head of the Global Magnitsky Justice Campaign, and Nathalie Tocci, IEP Bocconi Senior Fellow.

The discussion will explore the future of Western pressure on Russia, the effectiveness of economic sanctions, the implications of global energy and geopolitical shocks, the impact of European rearmament as a tool of deterrence, and Europe’s role in sustaining Ukraine while strengthening its own security posture.

SPEAKERS

Bill Browder: IEP Bocconi Non-Resident Fellow; CEO, Hermitage Capital Management; Head of the Global Magnitsky Justice Campaign

Nathalie Tocci: IEP Bocconi Senior Fellow

MODERATOR

Stefano Feltri: IEP Bocconi Communication Advisor

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Nathalie Tocci

Nathalie Tocci is a senior fellow of the Institute for European Policymaking at Bocconi University. She has been Director of the Istituto Affari Internazionali from 2017 to 2026. She has been Special Advisor to EU High Representatives Federica Mogherini and Josep Borrell. In that capacity, she wrote the European Global Strategy and worked on its implementation. She is also Professor of the Practice at SAIS Europe.

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A IEP@BU Report

The IEP@BU Mission

Founded by Bocconi University and the Institute Javotte Bocconi, the Institute for European Policymaking @ Bocconi University combines the analytic rigor of a research institute, the policy impact of a think tank, and the facts-based effort of raising public opinion’s awareness about Europe through outreach activities. The Institute, fully interdisciplinary, intends to address the multi-fold obstacles that usually stand between the design of appropriate policies and their adoption, with particular attention to consensus-building and effective enforcement.

The Institute’s mission is to conduct, debate, and disseminate high-quality research on the major policy issues facing Europe, and the EU in particular, its Member States, and its citizens, in a rapidly changing world.

It is independent of any business or political influence.

The IEP@BU Management Council

• Marta Cartabia, IEP@BU President

• Daniel Gros, IEP@BU Director

• Sylvie Goulard, IEP@BU vice-President, Professor of Practice in Global Affairs at SDA Bocconi School of Management

• Silvia Colombo, IEP@BU Deputy Director

• Carlo Altomonte, Associate Professor at Bocconi University and Associate Dean for Stakeholder Engagement Programs at SDA Bocconi School of Management

• Arnstein Aassve, Professor in Demography at Bocconi University

• Valentina Bosetti, professor of Environmental and Climate Change Economics at Bocconi University

• Elena Carletti, Dean for Research and Professor of Finance at Bocconi University

• Eleanor Spaventa, Professor of European Union Law at Bocconi Law School

• Nathalie Tocci, IEP@BU Senior Fellow

Central banks’ mistake was not to intervene in moments of crisis. It was to keep emergency tools in place for too long after the emergency had passed

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IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the author

For the past week, the US Federal Reserve has had a new chair. Kevin Warsh, a former financier with magazine-cover looks and a reputation for opportunism and political proximity, is the opposite of his predecessor, Jerome Powell: a solid former lawyer who was the first in history to openly accuse a sitting president in order to defend the institution he served, even at the risk of criminal prosecution.

These differences alone would be enough to define the two men. But that would be reductive. This succession is about much more than two contrasting personalities. It calls into question decades of thinking about how central banking should be conducted and how its role should be understood. It may mark a turning point, in the US and beyond. But a turning point from what?

Central banks acquired the reputation and independence they still enjoy today in the 1980s, after bringing under control the inflation unleashed by the energy crises.

Their prestige then rose immensely, and partly undeservedly, over the following two decades, when structural factors made price stability and economic growth almost foregone conclusions: contained energy prices, rising productivity driven by technological revolutions, and low labour costs resulting from demographic and trade dynamics.

In central banking, as in other fields, reputation increases the margins for flexibility, including the freedom to depart from orthodoxy.

After the financial crisis, central banks used those margins to avert a new Great Depression, which their predecessors had failed to prevent in 1929-33. The Fed acted through large-scale asset purchases and other “unconventional” measures. The ECB followed its example. The words spoken on July 26 2012 — “whatever it takes” — prevented the dissolution of the euro and elevated Mario Draghi into the pantheon of the greatest central bankers in history.

But subsequent experiences — pandemic measures, the new inflation surge, and the current crisis itself — now cast doubt not only on the way that flexibility was used, but also on central bank independence itself.

The appointment of Kevin Warsh, who believes central banks’ freedom of action should be limited, is a consequence of this rethinking.

A growing school of opinion holds that central banks have strayed beyond their institutional tracks, encroaching on the field of politics and ultimately betraying their own objective: price stability.

Isabel Schnabel, one of the most eloquent and influential voices on the ECB’s executive board, took up these themes in a recent speech, closing with a passage worth quoting: “The conditions under which asset purchases should be used as a stimulus tool should be more limited in the future, with their use more targeted and parsimonious.”

Taken literally, this view embraces the line that would indiscriminately put on trial everything done since 2012.

It is right to reflect on that experience. But Schnabel’s revisionism goes too far. The reasons are already known, but they are worth recalling.

History shows that, in crisis situations, only credible, decisive and potentially unlimited central bank intervention can stabilise the financial system and the economy.

Future economics textbooks will in all likelihood cite 2012 as a paradigmatic case of that experience.

The euro’s particular conditions — a monetary union without fiscal and legal union — make the structure fragile and extend the ECB’s responsibility, requiring it also to counter fragmentation and disintegration within the area.

Formulated by Jean-Claude Trichet and Draghi and confirmed by Christine Lagarde, this “doctrine” — anomalous compared with other central banks — has become a fixed point of the Frankfurt institution.

The crucial distinction that Schnabel overlooks is between anti-crisis intervention and the subsequent “exit strategy”. The first presupposes the second. In the final analysis, it cannot take place without the second, because the exit strategy reloads the instruments and makes them available for a new intervention. This, it seems to me, is the lesson to draw from that experience.

The absence of an exit strategy after the euro crisis and the pandemic, and the excessive prolongation of asset purchases after the emergencies had ended, meant that the ECB found itself unprepared for the crises that followed.

If these reconsiderations concern us closely, those now taking shape at the Fed may have far more immediate consequences.

Warsh has hinted that he wants to overturn Powell’s approach, cutting interest rates while inflation rises and reducing the central bank’s scope for action across the board. Until now, these ideas have served to get him appointed. Now they must be put into practice. How? We will soon find out.

A previous versioin of this article was published by La Repubblica - Affari e Finanza

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Ignazio Angeloni

Ignazio Angeloni is a IEP@BU fellow. In 2019-2022 he was a Senior Research Fellow in the Harvard Kennedy School’s Mossavar-Rahmani Center for Business and Government. From 2014 to 2019, he was a member of the ECB Supervisory Board.

In 2012-2013, Ignazio was Director General for Financial Stability at the ECB; in that capacity, he coordinated the establishment of the new banking supervision at the ECB.

He is the leading author of the IEP Bocconi report Feasible Steps to Finance Innovation in Europe: Six Proposals to Strengthen EU Capital Markets

Report Chair: Ignazio Angeloni

Rapporteur: Andrea Cavallini

IEP Bocconi Publications

The IEP@BU Mission

Founded by Bocconi University and Institute Javotte Bocconi, the Institute for European Policymaking @ Bocconi University combines the analytic rigor of a research institute, the policy impact of a think tank, and the facts-based effort of raising public opinion’s awareness about Europe through outreach activities. The Institute, fully interdisciplinary, intends to address the multi-fold obstacles that usually stand between the design of appropriate policies and their adoption, with particular attention to consensus building and effective enforcement.

The Institute’s mission is to conduct, debate, and disseminate high-quality research on the major policy issues facing Europe, and the EU in particular, its Member States and its citizens, in a rapidly changing world.

It is independent of any business or political influence.

The IEP@BU Management Council

• Catherine De Vries, IEP@BU President

• Daniel Gros, IEP@BU Director

• Sylvie Goulard, IEP@BU vice-President, Professor of Practice in Global affairs at SDA Bocconi School of Management

• Silvia Colombo, IEP@BU Deputy Director

• Carlo Altomonte, Associate Professor at Bocconi University and Associate Dean for Stakeholder Engagement Programs at SDA Bocconi School of Management

• Arnstein Aassve, Professor in Demography at Bocconi University

• Valentina Bosetti, professor of Environmental and Climate Change Economics at Bocconi University

• Elena Carletti, Dean for Research and Professor of Finance at Bocconi University

• Eleanor Spaventa, Professor of European Union Law at Bocconi Law School

If a central bank acts by looking in the rear-view mirror, waiting until inflation has already risen and become embedded in the behaviour of economic agents, it risks acting too late. To catch up, it would then have to raise rates sharply, with even more costly effects on economic activity. This is precisely the mistake central banks made in 2022

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IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the author

The moment of decision is approaching for central banks. The next meeting of the Governing Council of the European Central Bank will take place on June 11. The following week will see meetings of the US Federal Reserve, the Bank of England and the Bank of Japan.

The issue will be the same everywhere: whether and when to raise interest rates to confront inflation caused by higher energy prices, following the outbreak of the war in Iran and the closure of the Strait of Hormuz.

The case for a wait-and-see approach rests on the fact that, at least for now, inflation is due only to supply-side factors: the fall in the production of raw materials, especially gas and oil.

Price increases have not yet been passed through to other costs, nor to other consumer prices. In economic terminology, second-round effects have not yet materialised — the kind that could turn increases in the prices of some goods into a generalised inflationary phenomenon.

In this context, an increase in interest rates could produce an excessive monetary tightening, further slowing economic growth. The central bank should therefore wait until it sees inflation rising in non-energy sectors as well before taking any decision.

The problem is that monetary policy affects inflation with an average lag estimated at around 12 to 18 months.

If a central bank acts by looking in the rear-view mirror, waiting until inflation has already risen and become embedded in the behaviour of economic agents, it risks acting too late. To catch up, it would then have to raise rates sharply, with even more costly effects on economic activity. This is precisely the mistake central banks made in 2022.

What matters in deciding whether or not to raise interest rates is not the latest available data point, but the inflation forecast over the next two years. In producing these forecasts — the next ones will be published on June 11 — the central bank must take into account a whole range of indicators.

One of these concerns the intensity and duration of the rise in raw material prices.

Oil prices have been above $100 for more than two months, an increase of around 30 per cent compared with the first months of the year, and are expected to remain above that level at least until the end of the summer.

Even if the Strait of Hormuz were reopened soon, it would take a long time to restore prewar production capacity.

The longer the energy shock lasts, the greater the likelihood that it will affect other cost components and be transmitted to the headline price index.

Another indicator concerns the inflation expectations of economic agents. The latest figure, dating back to March, shows a jump to 4 per cent in the euro area, the sharpest increase since 2021. This signals that economic agents are already incorporating higher inflation into their behaviour.

Inflation expectations can also be inferred from developments in medium- and long-term interest rates. Since the start of the war in Iran, three-year rates on the most liquid securities have risen by around 60 basis points; five-year rates by around 40.

This development also reflects the expectation that fiscal policies will become more expansionary, in order to offset the effects of higher energy prices, as confirmed by recent calls for greater flexibility in the interpretation of the Stability Pact. If these requests were granted, the supply shock would be accompanied by an equivalent demand stimulus, accentuating the inflationary shock.

Finally, keeping the interest rates set by the European Central Bank at their current level, at a time when inflation is expected to rise well above 2 per cent, would create increasingly accommodative monetary conditions, fuelling price pressures on goods and services.

Therefore, if the forecasts do not indicate a rapid absorption of inflation over the next 12 months, a moderate increase in interest rates would become inevitable.

It is harder, however, to justify, in the current context, the ECB’s insistence on continuing to reduce the size of its balance sheet through quantitative tightening — the policy of not reinvesting the securities in its portfolio as they mature — which puts pressure on long-term interest rates.

It would be wiser to take a pause, as all the other central banks have already decided to do.

A previous version of this article was published in the Italian daily Il Foglio

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Lorenzo Bini Smaghi

Lorenzo Bini Smaghi holds a degree in Economic Sciences from the Université Catholique de Louvain (Belgium) and a Ph.D in Economic Sciences from the University of Chicago. He has been Chairman of the Board of Directors of Société Générale since 2015. He is an IEP@BU non-resident fellow

IEP@BU Publications

The IEP@BU Mission

Founded by Bocconi University and Institute Javotte Bocconi, the Institute for European Policymaking @ Bocconi University combines the analytic rigor of a research institute, the policy impact of a think tank, and the facts-based effort of raising public opinion’s awareness about Europe through outreach activities. The Institute, fully interdisciplinary, intends to address the multi-fold obstacles that usually stand between the design of appropriate policies and their adoption, with particular attention to consensus building and effective enforcement.

The Institute’s mission is to conduct, debate, and disseminate high-quality research on the major policy issues facing Europe, and the EU in particular, its Member States and its citizens, in a rapidly changing world.

It is independent of any business or political influence.

The IEP@BU Management Council

• Marta Cartabia, IEP@BU President

• Daniel Gros, IEP@BU Director

• Sylvie Goulard, IEP@BU vice-President, Professor of Practice in Global affairs at SDA Bocconi School of Management

• Silvia Colombo, IEP@BU Deputy Director

• Carlo Altomonte, Associate Professor at Bocconi University and Associate Dean for Stakeholder Engagement Programs at SDA Bocconi School of Management

• Arnstein Aassve, Professor in Demography at Bocconi University

• Valentina Bosetti, professor of Environmental and Climate Change Economics at Bocconi University

• Elena Carletti, Dean for Research and Professor of Finance at Bocconi University

• Eleanor Spaventa, Professor of European Union Law at Bocconi Law School

The problem is not that Ben-Gvir posted that disgusting video. It is that what the video shows is what the State of Israel systematically does to international activists — and in any case it is little compared with what Palestinians in Gaza and the West Bank have endured for decades

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IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors

Italian President Sergio Mattarella has condemned the uncivilised treatment inflicted on the Flotilla activists, who were illegally stopped in international waters and deported to Israel — treatment he rightly described as “base” on the part of the Israeli government.

Prime Minister Giorgia Meloni echoed the president, calling what happened “unacceptable”. But it is now up to the Italian government to respond concretely to this unacceptability. So far, there is still no sign of any concrete response, only gestures for show.

Let us start with the facts. At European level, Italy opposes any measure against Israel that would entail an economic cost — and therefore a political impact — and that would concern the State of Israel as a whole, rather than individual Israeli citizens.

After Viktor Orbán’s exit in Hungary, where he had imposed a veto, Italy agreed to EU sanctions against a number of violent Israeli settlers. This was a symbolic measure, certainly correct, but largely useless and partly misleading.

It was useless because the individuals concerned have no economic interests or ties with Europe: sanctioning them produces no real effect. It was misleading because targeting violent settlers underlines an artificial distinction, separating the settlers from the State of Israel.

Settlements are now an integral part of Israeli society and institutions, starting with the army. And settler violence against Palestinian civilians is no longer merely tolerated, but actively supported by the Israeli government and army.

Until the latest disgraceful episode involving the treatment of the Flotilla protesters, Italy had been hesitating over the next step along the same path: sanctioning extremist ministers in the Israeli government.

After the latest outrage by the National security minister, Itamar Ben-Gvir, towards the protesters, Italian foreign minister Antonio Tajani said he was in favour of individual European sanctions against him. This is a step forward, but it remains flawed and inconsistent.

It is flawed because, once again, it tends to stress a non-existent distinction between the minister and the government — and therefore the state — he represents.

The problem is not that Ben-Gvir posted that disgusting video. It is that what the video shows is what the State of Israel systematically does to international activists — and in any case it is little compared with what Palestinians in Gaza and the West Bank have endured for decades.

It is inconsistent because the Italian government knows full well that European sanctions, including individual sanctions, require unanimity. And even without Orbán, other rightwing governments in Europe — starting with the Czech Republic — have already said they would oppose sanctions against Israeli ministers.

The crucial point, however, is not these individual measures, symbolically important but institutionally difficult — because they require unanimity — and economically, and therefore politically, irrelevant.

The crucial point is that Italy, together with Germany and a few others, continues to oppose the suspension of the economic benefits granted to Israel under the EU-Israel Association Agreement.

Removing these benefits would not amount to a sanction, but would fall within European trade policy. That is why suspending them would not require unanimity, only a qualified majority of member states.

A majority of European countries now supports suspending the agreement, but that majority remains insufficient as long as both Italy and Germany oppose it, given the demographic weight of the two countries.

Even more disconcerting is that Italy has actively discouraged the European Commission from putting before the Council a proposal to ban EU trade with Israeli settlements. Unlike individual sanctions, both the suspension of trade preferences and a ban on trade with illegal settlements would have a significant impact.

Conservative estimates put the figure at several hundred million euros, but in all likelihood the real economic impact would be much higher. A measure of that scale against a country for which the EU is the leading trading partner would have a considerable political impact.

It is tragic that, without the actions of the Flotilla, the crimes Israel commits every day in the occupied Palestinian territories, in Lebanon and through its illegal attack on Iran would not have returned to the centre of public debate.

But it is good that the issue has returned there. It will be better still if the Italian government’s verbal declarations that all this is unacceptable finally begin to be followed by concrete action rather than window-dressing.

It has now become unacceptable that this is not happening.

A previous version of this article was published by the Italian daily La Stampa

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Nathalie Tocci

Nathalie Tocci is a senior fellow of the Institute for European Policymaking at Bocconi University. She has been Director of the Istituto Affari Internazionali from 2017 to 2026. She has been Special Advisor to EU High Representatives Federica Mogherini and Josep Borrell. In that capacity, she wrote the European Global Strategy and worked on its implementation. She is also Professor of the Practice at SAIS Europe.

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A IEP@BU Report

The IEP@BU Mission

Founded by Bocconi University and the Institute Javotte Bocconi, the Institute for European Policymaking @ Bocconi University combines the analytic rigor of a research institute, the policy impact of a think tank, and the facts-based effort of raising public opinion’s awareness about Europe through outreach activities. The Institute, fully interdisciplinary, intends to address the multi-fold obstacles that usually stand between the design of appropriate policies and their adoption, with particular attention to consensus-building and effective enforcement.

The Institute’s mission is to conduct, debate, and disseminate high-quality research on the major policy issues facing Europe, and the EU in particular, its Member States, and its citizens, in a rapidly changing world.

It is independent of any business or political influence.

The IEP@BU Management Council

• Marta Cartabia, IEP@BU President

• Daniel Gros, IEP@BU Director

• Sylvie Goulard, IEP@BU vice-President, Professor of Practice in Global Affairs at SDA Bocconi School of Management

• Silvia Colombo, IEP@BU Deputy Director

• Carlo Altomonte, Associate Professor at Bocconi University and Associate Dean for Stakeholder Engagement Programs at SDA Bocconi School of Management

• Arnstein Aassve, Professor in Demography at Bocconi University

• Valentina Bosetti, professor of Environmental and Climate Change Economics at Bocconi University

• Elena Carletti, Dean for Research and Professor of Finance at Bocconi University

• Eleanor Spaventa, Professor of European Union Law at Bocconi Law School

• Nathalie Tocci, IEP@BU Senior Fellow

Neither of the two superpowers is ready to shoulder the burden of providing global commons. Europe, if it promotes the formation of new coalitions among middle powers, can play a stabilising role that, in the medium term, rebuilds shared governance. Or, if it fails to do so, it will deepen the power vacuum at the heart of the global economy — while becoming its first victim

IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the author

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“Can China and the United States overcome the Thucydides Trap and create a new paradigm for relations between great powers?” The question posed by Xi Jinping in his opening speech at the summit with Donald Trump caught the attention of many commentators.

The Thucydides Trap refers to the possible inevitability of conflict between a dominant power — Sparta, or the United States — and a rising power — Athens, or China.

To avoid that trap and avert such a conflict, Xi proposed to Trump during the summit a relationship of “constructive strategic stability” between the two superpowers, skilfully combining elements of co-operation and competition.

Yet in the same speech, Xi Jinping also invoked another important concept, one that passed almost unnoticed: “A transformation unseen in a century is accelerating across the world, and the international situation is fluid and turbulent.”

Xi often uses this concept in his speeches to highlight the decline of the long-standing hegemonic role played by the United States and, in parallel, the rise of China, since “time and momentum are on our side”.

It is therefore worth noting that Xi mentioned — albeit obliquely, but not accidentally — the ongoing shift in the balance of power between the two superpowers.

For China, Trump presents both a risk and an opportunity. On the one hand, Trump is the first American president to have adopted a strongly anti-Chinese rhetoric, launched sweeping trade wars against the Asian giant and, on national security grounds, introduced significant restrictions on exports of American technology to China.

He is also the president who, more recently, has sought to impose regime change in three countries — Venezuela, Iran and Cuba — with which China has close political and economic ties.

Finally, the war in the Middle East and the closure of the Strait of Hormuz have created an economically costly situation for China, both because of the increase in energy prices and because the slowdown in the global economy risks limiting outlets for Chinese exports at a time of weak domestic demand.

All these elements would seem to tilt the balance in favour of a firmer and more confrontational Chinese approach towards the American administration.

On the other hand, Trump 2.0 offers Beijing a strategic opportunity, because it is accelerating the “transformation unseen in a century”. His erratic policies are in fact undermining the alliances that, since the end of the second world war, had strengthened and consolidated US global hegemony.

As a result, while from a tactical point of view the Trump presidency presents considerable headaches for the Chinese leadership, from a strategic point of view it is moving in the direction Beijing desires.

For China’s leaders, the task is therefore to walk a narrow path that allows them to manage the political and economic conflicts under way while avoiding the ruin of the parties involved.

Hence Xi’s proposal to create with the United States a form of “constructive strategic stability”, in order to circumvent the Thucydides Trap while enabling China to continue its rise.

The fact that the United States and China are acting as a G2 may perhaps avoid the Thucydides Trap, but it risks pushing us into the “Kindleberger Trap”: global chaos caused by the absence of a hegemonic power or, alternatively, of a broad grouping of countries capable of providing global public goods such as security, the climate transition, financial stability and a rules-based multilateral system.

Trump, with “America First”, aims at the vassalisation of his allies and, more generally, at extracting economic resources from the rest of the world.

Xi, for his part, is counting precisely on these strategic mistakes by the United States to accelerate the transformation of the world order, strengthening China’s role as a superpower that creates dependencies.

Neither of the two superpowers is ready to shoulder the burden of providing global commons. Europe, if it promotes the formation of new coalitions among middle powers, can play a stabilising role that, in the medium term, rebuilds shared governance.

Or, if it fails to do so, it will deepen the power vacuum at the heart of the global economy — while becoming its first victim.

A previous version of this article was published by Il Sole 24 Ore

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Moreno Bertoldi

Moreno Bertoldi is Senior Associate Research Fellow at the Italian Institute for International Political Studies (ISPI).

Marco Buti

Since April 2023, Marco Buti has held the Tommaso Padoa-Schioppa Chair at the Robert Schuman Centre. Before joining the EUI, Buti was Chief of Staff of the Commissioner for the economy, Paolo Gentiloni. Between 2008 and 2019, he was Director-General for Economic and Financial Affairs at the European Commission. Moreover, he has been the Commission Finance Deputy at G7 and G20.

He is an IEP@BU fellow.

IEP@BU Publications

The IEP@BU Mission

Founded by Bocconi University and Institute Javotte Bocconi, the Institute for European Policymaking @ Bocconi University combines the analytic rigor of a research institute, the policy impact of a think tank, and the facts-based effort of raising public opinion’s awareness about Europe through outreach activities. The Institute, fully interdisciplinary, intends to address the multi-fold obstacles that usually stand between the design of appropriate policies and their adoption, with particular attention to consensus building and effective enforcement.

The Institute’s mission is to conduct, debate, and disseminate high-quality research on the major policy issues facing Europe, and the EU in particular, its Member States and its citizens, in a rapidly changing world.

It is independent of any business or political influence.

The IEP@BU Management Council

• Marta Cartabia, IEP@BU President

• Daniel Gros, IEP@BU Director

• Sylvie Goulard, IEP@BU vice-President, Professor of Practice in Global Affairs at SDA Bocconi School of Management

• Silvia Colombo, IEP@BU Deputy Director

• Carlo Altomonte, Associate Professor at Bocconi University and Associate Dean for Stakeholder Engagement Programs at SDA Bocconi School of Management

• Arnstein Aassve, Professor in Demography at Bocconi University

• Valentina Bosetti, professor of Environmental and Climate Change Economics at Bocconi University

• Elena Carletti, Dean for Research and Professor of Finance at Bocconi University

• Eleanor Spaventa, Professor of European Union Law at Bocconi Law School

• Nathalie Tocci, IEP@BU Senior Fellow

The Beijing summit between Trump and Xi produced no significant results: no agreement on trade, technology or the major questions of war and peace. Not to mention the issues that once featured on the bilateral agenda, such as discrimination against the Uyghurs or the status of Hong Kong.

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IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors

The US-China summit has been presented to us through the lens of two superpowers, led by strongmen, deciding the fate of the world, with Europe powerless and excluded.

It is the dominant reading in Italy, common among declared eurosceptics and others, which seeks to pass itself off as neutral analysis but is little more than a self-harming wish — given that, as Italians, we are Europeans. Above all, it is a superficial and misleading reading.

The summit between US president Donald Trump and his Chinese counterpart Xi Jinping brought together the world’s two largest powers, and indeed all the major international issues of the moment were on the agenda: from the Middle East to Taiwan, from trade to artificial intelligence.

It was a summit that highlighted the mutual recognition and respect between the two leaders. Xi undoubtedly appreciated Trump’s flattery, and did not fail to flatter his ego in return.

It was also a summit without surprises.

In sharp contrast with Trump’s usual ramblings and late-night posts, the US president behaved almost like any of his predecessors, sticking scrupulously to the briefing material he had been given. Trump knows full well that a slip-up in China — with inadvertent concessions to Beijing — would have caused him further trouble at home, especially in Congress, and he already has enough of that.

But to stop there and claim that Trump and Xi hold the fate of the world in their hands, with Europe kept on the sidelines, is to miss both what happened in Beijing and the direction in which Europe and the world are moving. It was a summit without concrete outcomes, at least publicly declared ones. There was no trade agreement.

Trump had hoped for a new, spectacular deal made up of Chinese purchases of American Boeing aircraft, soyabeans and gas. Vague promises, yes, but no agreements.

Only a preliminary commitment to launch a Board of Trade between the two countries which, like the imaginary Board of Peace, amounts to little more than Trump’s desire to dismantle the multilateral system.

The fact that these boards are empty and vacuous is irrelevant: what matters is not the pars construens, but the pars destruens of the multilateral system.

It was also a summit that exposed the dramatic relative weakness of the United States. Trump surrounded himself with Silicon Valley tech bros almost as if to underline America’s power — and above all its wealth — compared with China.

But faced with Xi alone, he paradoxically achieved the opposite effect.

Compared with the Trump-Xi summit of his first administration in 2017, we are now in a condition of substantial equilibrium between the two countries, with Trump’s self-harm giving an unexpected acceleration to China’s rise.

Trump obtained no favours on the Middle East. Here too, there were vague Chinese statements on the importance of reopening the Strait of Hormuz, but no concrete commitments.

It is true, conversely, that Trump did not officially give ground on Taiwan: during the summit he announced neither the suspension of two arms sales packages — worth a combined $25bn — to Taipei, nor his own opposition to Taiwanese independence. We do not know, however, whether in private Trump reassured Xi about a possible delay to those orders — if only because those weapons are needed by the US in the Middle East.

What we do know is that, on his return from Beijing, Trump repeated his conviction that Taiwan is too far from America and too close to China to be defended, and that it would not deserve it anyway, having “stolen” the advanced microchip industry from the US. All in all, Xi has little reason to complain about the summit.

In short, nothing came of it: no agreement on trade, technology or the major questions of war and peace. Not to mention the issues that once featured on the bilateral agenda, such as discrimination against the Uyghurs or the status of Hong Kong.

The good news is that the world’s two largest powers know that a direct clash is not in their interests. The bad news is that the G2 is proving incapable of governing the great issues of our time.

Not that Europe is succeeding in doing so, certainly. And yet it is not correct to conclude that it is simply powerless and passive. In Russia’s war against Ukraine, it is Europe that is supporting Kyiv, which by now is largely able to defend itself.

The fear of a collapse of the Ukrainian front has diminished significantly, and this has happened precisely as the US has been disengaging: Washington no longer holds the cards in that conflict.

Unlike in Ukraine, in the Middle East Europeans have certainly not covered themselves in glory in recent years.

And yet, at least now, they are working on a multilateral plan for Hormuz, with a view to a possible end to the conflict. And in the rest of the world, the trade agreements reached with the Latin American countries of Mercosur, as well as with Mexico, India, Indonesia and Australia, offer a picture of Europe different from the impotence so often described.

We are moving neither exclusively in a G2 that governs the world from the top down, nor in a world of middle powers redefining the rules by creating checks and balances. We are navigating both these worlds, which compete and coexist.

A previous version of this article was published by the Italian daily La Stampa

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Nathalie Tocci

Nathalie Tocci is a senior fellow of the Institute for European Policymaking at Bocconi University. She has been Director of the Istituto Affari Internazionali from 2017 to 2026. She has been Special Advisor to EU High Representatives Federica Mogherini and Josep Borrell. In that capacity, she wrote the European Global Strategy and worked on its implementation. She is also Professor of the Practice at SAIS Europe.

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A IEP@BU Report

The IEP@BU Mission

Founded by Bocconi University and the Institute Javotte Bocconi, the Institute for European Policymaking @ Bocconi University combines the analytic rigor of a research institute, the policy impact of a think tank, and the facts-based effort of raising public opinion’s awareness about Europe through outreach activities. The Institute, fully interdisciplinary, intends to address the multi-fold obstacles that usually stand between the design of appropriate policies and their adoption, with particular attention to consensus-building and effective enforcement.

The Institute’s mission is to conduct, debate, and disseminate high-quality research on the major policy issues facing Europe, and the EU in particular, its Member States, and its citizens, in a rapidly changing world.

It is independent of any business or political influence.

The IEP@BU Management Council

• Marta Cartabia, IEP@BU President

• Daniel Gros, IEP@BU Director

• Sylvie Goulard, IEP@BU vice-President, Professor of Practice in Global Affairs at SDA Bocconi School of Management

• Silvia Colombo, IEP@BU Deputy Director

• Carlo Altomonte, Associate Professor at Bocconi University and Associate Dean for Stakeholder Engagement Programs at SDA Bocconi School of Management

• Arnstein Aassve, Professor in Demography at Bocconi University

• Valentina Bosetti, professor of Environmental and Climate Change Economics at Bocconi University

• Elena Carletti, Dean for Research and Professor of Finance at Bocconi University

• Eleanor Spaventa, Professor of European Union Law at Bocconi Law School

• Nathalie Tocci, IEP@BU Senior Fellow

The future of Europe’s payment systems is open and the opportunities are significant. What is needed is pragmatism and a firm focus on Europe’s overriding priorities: strengthening competitiveness and upholding monetary sovereignty. Success on both fronts may also increase the attractiveness of the euro internationally

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IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the author

Download the Working Paper

Executive Summary

Stablecoins have attracted a lot of attention in recent economic debates. Opinions are divided: according to some, they are the frontrunners of a new monetary system, freer, efficient and inclusive.

For others, they are another example of financial madness, unnecessary and dangerous. This somewhat overstates the debate, but not by much.

Framed in these terms, however, the debate misses the point. The issue is not only whether stablecoins or crypto tokens improve the monetary system or not, performing a useful role from a technical viewpoint: it is fundamentally about who controls those instruments. Who sets the rules, governs the supply, controls and uses the information they generate. The matter is political at least as much as it is economic and financial.

As such, it cannot be separated from the broader geopolitical question of the day, namely, what new arrangements will emerge from the crisis of the rule-based international order that we have seen unfolding – gradually, then suddenly, as Hemingway would say – in recent years. Monetary developments are a sideshow to the main act and cannot be understood except in relation to it.

This essay discusses technical and political factors that shape the future of stablecoins as means of payment.

We start (section 2) by looking at the initiatives by the Trump administration which, at the outset, promoted stablecoins as an entirely new private form of money, potentially complementing, or even replacing, traditional payment means.

In section 3 we examine whether stablecoins can be a “good” monetary instrument, in light of monetary theory and practice. We conclude that stablecoins perform this function only imperfectly, and only if properly regulated.

Section 4 compares stablecoin regulation in three jurisdictions: the US, the EU and the UK, highlighting their “regulatory philosophies”, strengths and weaknesses. Section 5 discusses political and economic influences driving current US policymaking in this domain, and their implications.

Section 6 concludes with a focus on Europe. After building advanced payment infrastructures in the early years of the ECB, more recently the EU has largely been a follower in digital payments.

This may now change: new projects such as Pontes and Appia may result in another leap forward. While upholding its principles, the EU’s priorities are to strengthen its competitiveness and defend its monetary sovereignty. In this way it can also enhance the euro’s attractiveness as an international currency.

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Ignazio Angeloni

Ignazio Angeloni is a IEP@BU fellow. In 2019-2022 he was a Senior Research Fellow in the Harvard Kennedy School’s Mossavar-Rahmani Center for Business and Government. From 2014 to 2019, he was a member of the ECB Supervisory Board.

In 2012-2013, Ignazio was Director General for Financial Stability at the ECB; in that capacity, he coordinated the establishment of the new banking supervision at the ECB.

He is the leading author of the IEP Bocconi report Feasible Steps to Finance Innovation in Europe: Six Proposals to Strengthen EU Capital Markets

Report Chair: Ignazio Angeloni

Rapporteur: Andrea Cavallini

IEP Bocconi Publications

The IEP@BU Mission

Founded by Bocconi University and Institute Javotte Bocconi, the Institute for European Policymaking @ Bocconi University combines the analytic rigor of a research institute, the policy impact of a think tank, and the facts-based effort of raising public opinion’s awareness about Europe through outreach activities. The Institute, fully interdisciplinary, intends to address the multi-fold obstacles that usually stand between the design of appropriate policies and their adoption, with particular attention to consensus building and effective enforcement.

The Institute’s mission is to conduct, debate, and disseminate high-quality research on the major policy issues facing Europe, and the EU in particular, its Member States and its citizens, in a rapidly changing world.

It is independent of any business or political influence.

The IEP@BU Management Council

• Catherine De Vries, IEP@BU President

• Daniel Gros, IEP@BU Director

• Sylvie Goulard, IEP@BU vice-President, Professor of Practice in Global affairs at SDA Bocconi School of Management

• Silvia Colombo, IEP@BU Deputy Director

• Carlo Altomonte, Associate Professor at Bocconi University and Associate Dean for Stakeholder Engagement Programs at SDA Bocconi School of Management

• Arnstein Aassve, Professor in Demography at Bocconi University

• Valentina Bosetti, professor of Environmental and Climate Change Economics at Bocconi University

• Elena Carletti, Dean for Research and Professor of Finance at Bocconi University

• Eleanor Spaventa, Professor of European Union Law at Bocconi Law School

Even with clear strengths in pharmaceuticals and aerospace, the EU’s growth model will be harder to sustain as its mid-tech base becomes more contested, and its high-tech strengths remain narrow. The challenge is not only to defend existing advantages, but to build broad competitiveness in the sectors where future demand and technological competition are likely to concentrate

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IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the author

The EU’s trade relationship with China is usually framed around dependence, de-risking, and market access. An accompanying IEP Policy Brief shows that an additional structural problem deserves closer attention: the EU’s export strengths are increasingly misaligned with where China’s import demand is most significant.

Nowhere is that gap clearer than in electronics, the sector that accounts for more than half of global high-tech trade and in which China is now the world’s largest importer in value-added terms.¹ Since 2008, however, the EU has faced a deepening comparative disadvantage in this sector.

Recent years have also brought accelerated erosion in the EU’s mid-tech dominance. China has gained ground in key sectors such as motor vehicles, machinery, and electrical equipment, with its share of global mid-tech exported value added now slightly exceeding the EU’s 23% as of 2022.²

Meanwhile, the EU’s share in global high-tech exports has stagnated at about 16%, dragged down by its performance in electronics while its strengths concentrate in pharmaceuticals and aerospace.

This two-sided pressure gives new urgency to the EU’s mid-tech/high-tech problem. From the perspective of future growth and industrial dynamism, the EU may simply be concentrated in the wrong sectors.

At the same time, trade with China reinforces the EU’s mid-tech dependence. Since China’s WTO accession, the EU has remained under-represented in China’s high-tech imports relative to its global high-tech export share, while being over-represented in China’s mid-tech imports.

In 2022, the EU accounted for 32% of China’s mid-tech imports but just 13% of its high-tech imports.

Yet China accounted for only 10% of global mid-tech imports, compared with 15% of global high-tech imports, and its imported value added in high-tech was also larger in absolute terms.

Within high-tech, the challenge is most visible in the contrast between electronics and pharmaceuticals. Unlike electronics, the EU supplies more than half of China’s pharmaceutical imports, but China is not a major importer in that sector.

The accompanying IEP Policy Brief‘s trade complementarity analysis shows that this pattern reflects a structural mismatch. While China’s export mix has become more closely aligned with EU import demand, the EU’s export mix has diverged from China’s import demand.

This gap extends to the product level, and a relative mismatch in electronics remains even after removing chips from the equation.

EU Representation in World Exports and China’s Imports, by Technology Group, 2000–2022

EU Representation in World Exports and China’s Imports: Electronics and Pharmaceuticals, 2000–2022

The implication is that better market access in China, while still important, is not sufficient to resolve the EU’s weaker performance in China’s tech imports. Any meaningful reorientation would require rebuilding capabilities.

If the EU’s export structure does not match the sectors where Chinese demand is expanding most strongly, improved access can only deliver limited results.

That points to a more specific policy agenda than generic calls for reciprocity. First, Europe should rebuild a broader electronics base, not only at the technological frontier, but also in components, intermediates, and production capabilities that support advanced manufacturing and reduce critical dependencies.

While improving competitiveness in advanced chips is crucial, this also requires attention beyond the European Chips Act toward a full electronics industrial strategy, reinforced by stronger anchor demand from lead customers and coordinated demand-side and supply-side policies.

Second, the EU should deepen engagement with China in large, commercially important parts of the electronics ecosystem.

Areas where the EU already has a sizeable export base and Chinese import demand is significant include computing hardware (units, parts, and accessories), telecom equipment, industrial automation and precision equipment, medical instruments and lab equipment, and mature-node chips and related components.

In parallel, the EU can leverage Chinese demand to build up key segments where its exports have lagged, not only in the broader semiconductor value chain but also in foundational inputs such as printed circuit boards and capacitors.

Third, trade diplomacy should be made more concrete, targeting standards and conformity assessment, certification procedures, and procurement practices. This should be paired with expanded export finance, regulatory support, and cooperation with European business intermediaries in China to better connect firms with Europe’s domestic tech clusters.

Even with clear strengths in pharmaceuticals and aerospace, the EU’s growth model will be harder to sustain as its mid-tech base becomes more contested, and its high-tech strengths remain narrow.

The challenge is not only to defend existing advantages, but to build broad competitiveness in the sectors where future demand and technological competition are likely to concentrate.

China can still offer an opportunity for the EU to broaden its technology base, but only if the EU addresses this misalignment through targeted reindustrialization and sector-specific engagement.

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Thomas Rowley

Thomas Rowley is a researcher at the Institute for European Policymaking at Bocconi University. He obtained his PhD in Economics at ESSEC Business School and CY Cergy Paris Université. His research focuses on international trade, productivity, competition, and the intersection of trade, industrial, and environmental policies.

IEP@BU Publications

The IEP@BU Mission

Founded by Bocconi University and Institute Javotte Bocconi, the Institute for European Policymaking @ Bocconi University combines the analytic rigor of a research institute, the policy impact of a think tank, and the facts-based effort of raising public opinion’s awareness about Europe through outreach activities. The Institute, fully interdisciplinary, intends to address the multi-fold obstacles that usually stand between the design of appropriate policies and their adoption, with particular attention to consensus building and effective enforcement.

The Institute’s mission is to conduct, debate, and disseminate high-quality research on the major policy issues facing Europe, and the EU in particular, its Member States and its citizens, in a rapidly changing world.

It is independent of any business or political influence.

The IEP@BU Management Council

• Marta Cartabia, IEP@BU President

• Daniel Gros, IEP@BU Director

• Sylvie Goulard, IEP@BU vice-President, Professor of Practice in Global affairs at SDA Bocconi School of Management

• Silvia Colombo, IEP@BU Deputy Director

• Carlo Altomonte, Associate Professor at Bocconi University and Associate Dean for Stakeholder Engagement Programs at SDA Bocconi School of Management

• Arnstein Aassve, Professor in Demography at Bocconi University

• Valentina Bosetti, professor of Environmental and Climate Change Economics at Bocconi University

• Elena Carletti, Dean for Research and Professor of Finance at Bocconi University

• Eleanor Spaventa, Professor of European Union Law at Bocconi Law School

Competition between the United States and China, in technology and military spending, is pushing the leaderships of both countries to defer the repair of their public finances. Public debt therefore continues to rise, reaching unprecedented levels. This increases the risk of financial instability, with potential repercussions for the rest of the world

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IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the author

In their bilateral summit, Donald Trump and Xi Jinping addressed many issues concerning the relationship between the two global powers, but not the most important one: the unsustainability of their growth models, both based on public debt, and the consequences of that unsustainability for their own economies and for the international financial system.

In the United States, public debt has doubled over the past 20 years, reaching 124 per cent of gross domestic product, as a result of highly expansionary fiscal policies, with an average deficit of 6 per cent of GDP a year.

According to the International Monetary Fund, US debt will continue to rise in the coming years, exceeding 140 per cent by the end of the decade. Interest payments on the debt exceed 4 per cent of GDP, more than military spending. According to Niall Ferguson, a historian at the Hoover Institution, this trend is a source of vulnerability for a military power.

China’s situation is no better. Public debt has doubled in less than 10 years, rising to 100 per cent of GDP in 2025. By the end of this decade, it is projected to exceed 123 per cent, as a result of public deficits of more than 8 per cent a year.

Interest payments on Chinese debt are lower than in the United States, because the debt is held mainly by the banking system. This, however, creates other distortions in the economy.

In short, in both countries public debt is on an unsustainable trajectory. The budgetary correction is postponed year after year, but it is unavoidable if a financial crisis is to be avoided.

The difficulty of such an adjustment is mainly political, because it calls into question the development model of recent years.

In the United States, stabilising the debt would require, even with growth above 3 per cent a year, driven by investment in artificial intelligence, achieving a primary budget balance — that is, a balance excluding interest payments on government bonds.

On current projections, this means reducing the deficit by more than 3 per cent of GDP.

It is hard to imagine this being achieved solely through cuts in public spending, which is already below the average for advanced economies. An increase in revenues therefore seems inevitable.

Yet it is politically difficult to raise taxes on the middle class, which represent the main electoral constituency. That leaves taxation of the profits of the most profitable companies, particularly technology groups.

Such a measure would amount to a drastic reversal of the stimulus policies pursued in recent years, which have underpinned the extraordinary stock market performance of the large US technology companies.

In other words, raising taxes would call into question America’s competitive strategy.

In China, too, fiscal consolidation can hardly come from the spending side, since public expenditure amounts to little more than 30 per cent of GDP. On the other hand, an increase in revenues could not fall on consumption, which is already low, nor on household incomes.

It would instead have to aim at reducing the public subsidies provided by the state, which have supported the development of companies in the sectors identified in successive five-year plans: technology, defence and the energy transition.

These subsidies, provided mainly by local authorities competing with one another to attract investment, have generated excess production capacity and pushed companies to cut costs, and therefore wages, in order to export to third markets, mainly Europe and the United States.

A reduction in subsidies would lead many companies to go bankrupt, with a severe impact not only on employment but also on banks’ balance sheets, which are heavily exposed to loans granted above all to large state-owned enterprises.

Banks would then have less room to refinance public debt, which would have to be sold on the market at higher interest rates.

In short, competition between the United States and China, in technology and military spending, is pushing the leaderships of both countries to defer the repair of their public finances. Public debt therefore continues to rise, reaching unprecedented levels.

This increases the risk of financial instability, with potential repercussions for the rest of the world. This is especially true for Europe, whose savings — largely managed by US financial institutions, thanks to the short-sightedness of European governments — are heavily exposed to US public debt.

Perhaps the time has come for Europe to do something concrete to protect itself from these risks.

A previous version of this article was published in the Italian daily Il Foglio

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Lorenzo Bini Smaghi

Lorenzo Bini Smaghi holds a degree in Economic Sciences from the Université Catholique de Louvain (Belgium) and a Ph.D in Economic Sciences from the University of Chicago. He has been Chairman of the Board of Directors of Société Générale since 2015. He is an IEP@BU non-resident fellow

IEP@BU Publications

The IEP@BU Mission

Founded by Bocconi University and Institute Javotte Bocconi, the Institute for European Policymaking @ Bocconi University combines the analytic rigor of a research institute, the policy impact of a think tank, and the facts-based effort of raising public opinion’s awareness about Europe through outreach activities. The Institute, fully interdisciplinary, intends to address the multi-fold obstacles that usually stand between the design of appropriate policies and their adoption, with particular attention to consensus building and effective enforcement.

The Institute’s mission is to conduct, debate, and disseminate high-quality research on the major policy issues facing Europe, and the EU in particular, its Member States and its citizens, in a rapidly changing world.

It is independent of any business or political influence.

The IEP@BU Management Council

• Marta Cartabia, IEP@BU President

• Daniel Gros, IEP@BU Director

• Sylvie Goulard, IEP@BU vice-President, Professor of Practice in Global affairs at SDA Bocconi School of Management

• Silvia Colombo, IEP@BU Deputy Director

• Carlo Altomonte, Associate Professor at Bocconi University and Associate Dean for Stakeholder Engagement Programs at SDA Bocconi School of Management

• Arnstein Aassve, Professor in Demography at Bocconi University

• Valentina Bosetti, professor of Environmental and Climate Change Economics at Bocconi University

• Elena Carletti, Dean for Research and Professor of Finance at Bocconi University

• Eleanor Spaventa, Professor of European Union Law at Bocconi Law School

The challenge is to reconcile the three sides of the trilemma: protecting the most vulnerable parts of society, minimising the impact on the deficit, and avoiding the complete neutralisation of price signals on energy demand

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IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the author

The debate in Italy over how to respond to the energy crisis triggered by the war in Iran is currently marked by a striking lack of realism — on both sides of the political spectrum. While some degree of distortion is inevitable in a pre-election phase, the fact remains that ignoring the underlying data and the limited set of available options risks making an already difficult situation even worse.

The opposition has used the breach of the public deficit target by one-tenth of a percentage point — first revealed by Istat in early April and confirmed by Eurostat later that month — as a pretext to attack the government’s entire fiscal policy.

That is a mistake.

The fact that the deficit ultimately stopped at 3.1 per cent rather than just below the threshold does nothing to diminish the achievement of economy minister Giancarlo Giorgetti, backed by prime minister Giorgia Meloni, in defending fiscal prudence over the past three and a half years, often against pressure from factions within their own governing coalition.

If in April — the month in which markets progressively realised that Italy would not exit the excessive deficit procedure — the spread on Italian government bonds remained broadly stable, it was entirely due to that prudence.

The opposition would do better to reflect on why the National Recovery and Resilience Plan (PNRR), launched under its own political sponsorship, failed to deliver, leaving Italy wearing the black jersey both for growth and debt. It should also reflect on the role its own policies played in producing the fiscal slippage, artificially boosting demand in 2022 while burdening the public finances in subsequent years.

There are legitimate criticisms that can be directed at this government: the composition of the budget, the absence of a genuine reform agenda, and its shared responsibility for the management of the PNRR during most of its implementation. But those criticisms do not concern the government’s efforts to keep the fiscal accounts under control — an area in which this administration has been more coherent and determined than its predecessors.

At the same time, some forces within the government appear determined to worsen the situation.

Their reaction oscillates between “we decide alone” — which would effectively mean excluding Italy from the new fiscal rules, something not permitted under the very framework the government itself signed and committed to respect — and “suspend the pact for everyone”, an equally unrealistic proposition given that the difficulties currently concern above all Italy, and largely for reasons of our own making.

Under such conditions, it is difficult to expect sympathy or alignment from European partners.

Until international conditions improve again — whenever that may be — the path ahead resembles an obstacle course far more than an open road. That requires proceeding more by exclusion than by free choice.

The most credible course, as far as one can tell, is the one chosen by the economy minister: finding, within the existing rules, a shared solution with Europe capable of softening the impact of the crisis on the Italian economy.

On this front, Brussels is likely to be receptive. For the European Commission, it is now a priority to demonstrate that the new fiscal framework works and does not collapse at the first serious shock. When the main objectives converge, a compromise can usually be found.

The challenge is to reconcile the three sides of the trilemma: protecting the most vulnerable parts of society, minimising the impact on the deficit, and avoiding the complete neutralisation of price signals on energy demand.

Italy can advance some legitimate arguments. For example, while fuel prices at the pump are currently lower in Italy than in Germany or France, this is no longer true when measured relative to consumer prices.

Yet the unpredictable nature of the international situation makes it impossible to ignore more adverse scenarios, in which the energy crisis intensifies with consequences for the entire European economy.

During last Thursday’s press conference, European Central Bank president Christine Lagarde carefully avoided answering questions about which of the “adverse scenarios” contained in the ECB’s latest forecasts most closely resembled reality. But two figures are enough to grasp the situation.

As international signals continue to deteriorate, energy prices have moved close to those underpinning the ECB’s worst-case scenario, in which European growth slows to only a few tenths of a percentage point.

A useful comparison is 2023, when euro area growth stalled at 0.4 per cent and inflation reached 5.4 per cent. At that time, the Stability Pact was still suspended.

Would those be the conditions under which a new suspension of the pact might become reasonable? It is not unrealistic to imagine such an outcome — even if it would not be wise for Italy to be the country raising the issue at this stage.

Behind all this lies the larger question of whether the current system of fiscal constraints remains suited to the world that has emerged after 2024.

Europe is now being forced by geopolitics to take control of its own destiny on every front, which inevitably requires greater room for manoeuvre not only in strategic policy but also in economic policy.

The Stability Pact was conceived — and repeatedly reformed — during a period in which Europe was deepening integration under a framework of external protections and rules that no longer exist.

Today Europe must stand on its own, in an environment where weakness and self-imposed limitations risk carrying a very high cost.

In such a world, a stronger Europe at the centre — and one less constrained by its own rigidities — may well become a necessity rather than a choice.be different. If that is the case, further rate adjustments will be unavoidable. Better to recognise it sooner rather than later.

A previous version of this article was published in the Italian daily Il Foglio

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Ignazio Angeloni

Ignazio Angeloni is a IEP@BU fellow. In 2019-2022 he was a Senior Research Fellow in the Harvard Kennedy School’s Mossavar-Rahmani Center for Business and Government. From 2014 to 2019, he was a member of the ECB Supervisory Board.

In 2012-2013, Ignazio was Director General for Financial Stability at the ECB; in that capacity, he coordinated the establishment of the new banking supervision at the ECB.

He is the leading author of the IEP Bocconi report Feasible Steps to Finance Innovation in Europe: Six Proposals to Strengthen EU Capital Markets

Report Chair: Ignazio Angeloni

Rapporteur: Andrea Cavallini

IEP Bocconi Publications

The IEP@BU Mission

Founded by Bocconi University and Institute Javotte Bocconi, the Institute for European Policymaking @ Bocconi University combines the analytic rigor of a research institute, the policy impact of a think tank, and the facts-based effort of raising public opinion’s awareness about Europe through outreach activities. The Institute, fully interdisciplinary, intends to address the multi-fold obstacles that usually stand between the design of appropriate policies and their adoption, with particular attention to consensus building and effective enforcement.

The Institute’s mission is to conduct, debate, and disseminate high-quality research on the major policy issues facing Europe, and the EU in particular, its Member States and its citizens, in a rapidly changing world.

It is independent of any business or political influence.

The IEP@BU Management Council

• Catherine De Vries, IEP@BU President

• Daniel Gros, IEP@BU Director

• Sylvie Goulard, IEP@BU vice-President, Professor of Practice in Global affairs at SDA Bocconi School of Management

• Silvia Colombo, IEP@BU Deputy Director

• Carlo Altomonte, Associate Professor at Bocconi University and Associate Dean for Stakeholder Engagement Programs at SDA Bocconi School of Management

• Arnstein Aassve, Professor in Demography at Bocconi University

• Valentina Bosetti, professor of Environmental and Climate Change Economics at Bocconi University

• Elena Carletti, Dean for Research and Professor of Finance at Bocconi University

• Eleanor Spaventa, Professor of European Union Law at Bocconi Law School

CEPS, RUSI, Clingendael and IEP Bocconi have joined forces to substantiate what politicians often casually refer to as a European pillar of NATO – though few can say what this means in practice or whether it would offer a credible deterrent. This report outlines three possible pathways to shore up Europe’s defences: a more European NATO; a new European multilateralism; and EU-led defence cooperation

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IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors

A report by a task force including CEPS, Clingendael, RUSI and IEP Bocconi. Chair: Sauli Niinistö; Rapporteur: Steven Blockmans; Contributors: Edward Arnold, Bob Deen, Daniel Gros

Download the Task Force Report

Executive Summary

Russia’s war of aggression against Ukraine and destabilising actions by the second Trump administration have sent geopolitics into a tailspin. As turmoil in the Middle East and around the world grows, the US is reviewing its approach to NATO and is considering deploying its assets away from Europe. These and other factors have pushed Europe towards an inflection point in considering how to safeguard its own security.

Public support for defence has never been greater. This solidifies a trend that has accelerated since Russia’s full-scale invasion of Ukraine in February 2022. Most political parties across Europe agree on the need to address public anxiety by moving from words to deeds and implementing an agenda that gives them more security and agency in the defence of the European theatre by 2030.

The European policy response so far has consisted primarily of committing more money to defence at the national level and developing instruments to boost joint production and procurement mostly at the EU level.

Yet concerns remain about the uneven nature of defence spending, countries’ ability to follow through on the needed capability ramp-ups and the limitations of existing measures for driving the needed defragmentation of Europe’s defence industry.

Meanwhile, concerns have grown about the possibility of a Russian kinetic or hybrid attack against one or more European allies, along with uncertainties about public willingness to take up arms. So too have doubts about the timing and nature of support that the US would be willing or able to provide in an Article 5 situation.

Despite the return of full-scale war on the European continent with Russia’s renewed invasion of Ukraine, Europe still appears to be treating this existential security crisis like a regular bureaucratic undertaking that it can address at its leisure.

It is at this critical juncture that CEPS, RUSI, Clingendael and IEP Bocconi have joined forces to substantiate what politicians often casually refer to as a European pillar of NATO – though few can say what this means in practice or whether it would offer a credible deterrent. This report outlines three possible pathways to shore up Europe’s defences: a more European NATO; a new European multilateralism; and EU-led defence cooperation.

The report argues that European policymakers are at present in no position to discard any of these options. But given the lack of viable alternatives to NATO as well as dependencies on American arms manufacturers, software and strategic enablers until at least the end of the decade, the report recommends that Europeans continue with the Europeanisation of NATO as a matter of priority (Pathway 1).

This would rebalance the transatlantic contribution to the Alliance and enable them to take it over if the US were to leave NATO. This effort should consist not just of Europeans gradually assuming leadership positions from US generals and replacing American officers at lower levels.

It should also entail reconstituting the ‘Eurogroup’ for political coordination within the Alliance. A geographical redistribution of joint command centres should be explored so they could be led and operated by European allies should the US decide to be less or no longer involved.

Pathway 2 – a new European multilateralism – provides additional means for preparation and action by subsets of allies should the US, or any other ally, render NATO dysfunctional from within, for example by slow-rolling or blocking political decision-making or frustrating operational command in an Article 5 situation.

Europeans should already be taking steps to strengthen, connect and consolidate existing minilateral arrangements for security and considering how they could be knitted together into a more coherent whole.

Enhanced minilateralism should include a political consultation and decision-making body akin to NATO’s North Atlantic Council, such as a European Security Council (ESC), to enable a coalition of the willing to act1. Such an ESC should include the secretary general of NATO and presidents of the European Council and Commission, each acting within their own prerogatives.

This ESC would have to be supported by the appropriate command structures, operational capacities and dedicated budget. Placing such a body for European security on the footing of an intergovernmental agreement would connect decision-making to a national democratic backstop that works for a membership of both militarily powerful and less powerful European states.

Pathway 3 concerns EU-led defence cooperation. In terms of capability development, the EU has a comparative advantage in supporting not just those 23 Member States allied to NATO, but also its associated, candidate and like-minded countries (e.g. Norway, Ukraine and the UK) in translating defence spending targets into concrete investments and deployable military assets. Obstacles preventing NATO and the EU from creating maximum synergies in capability development should be removed. Furthermore, NATO should share the necessary information with the corresponding EU structures.

For its part, the EU should rebalance defence industrial relationships with the UK and other non-EU members of NATO to serve mutual strategic interests.

This entails, among others, opening up the EU’s loan instrument, Security for Action in Europe (SAFE), to a wider group of like-minded countries, such as the UK, to finance priority capabilities; accelerating the integration of Ukraine’s defence industry into the single market; and instilling more reciprocity in the transatlantic industrial alliance.

EU Treaty reform is not on the cards anytime soon. Progress towards a genuine European Defence Union will therefore be incremental and partial.

Priority should nevertheless be given to operationalising the EU’s mutual defence clause within the present institutional configuration. Existing command structures and EU force packages should be readied accordingly to supplement tasks performed by national armies.

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Sauli Niinistö

Sauli Niinistö served as the 12th President of the Republic of Finland from 2012 to 2024. A former Minister of Finance and Speaker of Parliament, he oversaw Finland’s accession to NATO in 2023.

Steven Blockmans

Steven Blockmans is Associate Senior Research Fellow at CEPS, where he previously served as Director of Research. He is also Senior Fellow at ICDS, Visiting Professor at the College of Europe, and Editor-in-Chief of the European Foreign Affairs Review.

Edward Arnold

Edward Arnold is a defence and security expert associated with RUSI, focusing on European security and defence. He previously served as a British Army infantry officer, including deployments to Afghanistan and East Africa and a posting at NATO’s Supreme Headquarters Allied Powers Europe.

Bob Deen

Bob Deen is Head of the Security Unit, Senior Research Fellow and Coordinator of the Russia and Eastern Europe Centre at the Clingendael Institute. His work focuses on international security, geopolitics, Eastern Europe, Russia and the Caucasus.

Daniel Gros

Daniel Gros is Director of the Institute for European Policymaking @ Bocconi University.

Gros is also currently an adviser to the European Parliament. Previously he worked at the International Monetary Fund and collaborated with the European Commission as economic adviser to the Delors Committee, which developed plans for the euro.

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IEP Bocconi Publications

The IEP@BU Mission

Founded by Bocconi University and the Institute Javotte Bocconi, the Institute for European Policymaking @ Bocconi University combines the analytic rigor of a research institute, the policy impact of a think tank, and the facts-based effort of raising public opinion’s awareness about Europe through outreach activities. The Institute, fully interdisciplinary, intends to address the multi-fold obstacles that usually stand between the design of appropriate policies and their adoption, with particular attention to consensus-building and effective enforcement.

The Institute’s mission is to conduct, debate, and disseminate high-quality research on the major policy issues facing Europe, and the EU in particular, its Member States, and its citizens, in a rapidly changing world.

It is independent of any business or political influence.

The IEP@BU Management Council

• Marta Cartabia, IEP@BU President

• Daniel Gros, IEP@BU Director

• Sylvie Goulard, IEP@BU vice-President, Professor of Practice in Global Affairs at SDA Bocconi School of Management

• Silvia Colombo, IEP@BU Deputy Director

• Carlo Altomonte, Associate Professor at Bocconi University and Associate Dean for Stakeholder Engagement Programs at SDA Bocconi School of Management

• Arnstein Aassve, Professor in Demography at Bocconi University

• Valentina Bosetti, professor of Environmental and Climate Change Economics at Bocconi University

• Elena Carletti, Dean for Research and Professor of Finance at Bocconi University

• Eleanor Spaventa, Professor of European Union Law at Bocconi Law School

• Nathalie Tocci, IEP@BU Senior Fellow