Why should the EU federalize and expand its borders?

An inventory of the potential stifled by guild-like politics—and a case for a federation still worth building

The museum has an exit other than the front door

We concluded the previous piece with an open question: faced with an extractive architecture—in the technical sense defined by Acemoglu and Robinson—is the right response to leave or to reform from within? This text argues for the latter path—not out of institutional loyalty, but because an inventory of the status quo, country by country and sector by sector, reveals that the cost of remaining a guild is far higher than the cost of ceasing to be one. Today, the European Union is worth far less than the sum of its parts. The question is not whether a Union is worthwhile—it is whether this Union is worth keeping.

Five sectors, a scale yet to be aggregated

The pent-up dynamism of Iberia, Poland, Hungary, the Czech Republic, and Croatia has already been documented. What is missing is not another Brussels-managed fund; it is the mechanism that has always been absent: capital flowing based on merit, rather than geography or national fiscal muscle. Here is what five sectors demonstrate is possible, provided they stop competing in isolation.

Automotive and electric mobility. German engineering remains among the best in Europe; the batteries powering it need no longer come from abroad. Sines, Zaragoza, Debrecen, Szeged, and Wrocław already account for hundreds of GWh of installed capacity—currently five isolated nodes, each answering to a parent company based outside the EU. A European automotive industry that stopped squandering political capital on prolonging the internal combustion engine and instead invested that same energy in vertically integrating the supply chain—making battery decisions in Europe just as they are made in Beijing or Seoul—would not lose its historic engineering advantage; rather, it would capture the segment of the value chain that currently eludes it.

Energy sovereignty. The Czech Republic proved that one can purchase Korean nuclear technology without ceding control. Poland is building six reactors to be completed by 2043. Iberia already leads Europe in green hydrogen and solar capacity. None of these three projects currently coordinate with one another. A single energy market—free of cross-border contractual friction, with cheap solar power from the South directly fueling european industry—would transform three parallel national bets into a unified European energy backbone, possessing the collective purchasing power to negotiate for the next generation of reactors and turbines on its own terms.

Venture capital and the tech ecosystem. Estonia has retained all ten of its unicorns; Croatia has kept Rimac entirely homegrown; Tekever has grown in Portugal without ever needing to relocate its headquarters. We already know the formula works at the scale of a small nation. The €37 trillion in European household savings—currently sitting idle in low-yield accounts—proves that the capital exists; what is missing is a single market where investors can discover these companies before Silicon Valley does.

Defense and aerospace. Tekever and Beyond Vision already export more to the United States, the Middle East, and Brazil than to the rest of the EU—proof that Europe’s most dynamic defense companies are already thinking on a global scale, rather than in terms of national borders. Nearly €800 billion in defense investment is projected by the end of the decade. If coordinated as a single industrial base—rather than as 27 competing procurement systems—this investment could make the difference between continuing to import critical systems and beginning to export them.

Agrotechnology and the bioeconomy. Intensive agriculture in Almería now achieves levels of productivity per hectare and mastery of greenhouse technology that no French agricultural region can match. Treating it as a competitor to be penalized by a Common Agricultural Policy (CAP) designed in 1962 is a waste; treating it as a technological partner to a French agricultural sector—which possesses the scale and capital Almería lacks—represents the kind of complementarity any genuine federation would have established decades ago.

None of these five sectors requires a five-year plan managed from Brussels to come to fruition. They need to stop being five isolated national bets negotiating individually with Beijing, Seoul, and Washington, and instead become what they already are in reality—when one finally aggregates them: the industrial base of an economic power that has yet to decide to act like one.

The Portuguese Exclusive Economic Zone—with its untapped potential for polymetallic nodules, cobalt-rich crusts, and wind and wave energy—is not merely a Portuguese asset; more than any battery factory, it represents the kind of resource that a Europe serious about strategic autonomy can no longer treat as a matter of national maritime policy. Add in the zones of the Canary Islands, the Polish Baltic, and the Croatian Adriatic, and the aggregate of EU Member States’ EEZs—even excluding French overseas territories, which alone make the bloc’s zone one of the world’s largest—constitutes one of the planet’s vastest sovereign maritime spaces. It encompasses critical minerals, energy corridors, and surveillance capabilities that are currently managed on a country-by-country basis, lacking any common doctrine or shared investment. The drone-based maritime surveillance currently being pioneered in Portugal proves that the technology to manage this scale already exists; what is missing is the shift from a patchwork of 27 individually managed sovereign zones to a unified maritime frontier for a power possessing genuine autonomy over the very resources upon which the energy and digital transitions depend.

None of this replaces what Europe already possesses yet rarely knows how to market: no other power combines the rule of law, freedom of movement, social protection, and a cultural diversity that thrives within a shared project—all while maintaining the longest peace between former enemies the continent has ever known. It is this symbolic capital—not the next directive—that should constitute the true "Brussels Effect." Currently, as we have seen, it is used to export rules that protect the internal combustion engine; if used rationally, however, it could become the power to set global standards for batteries, data, and clean energy from a position of industrial strength rather than from a regulatory trench. The strategic autonomy advocated in this text is not isolationism—it is the difference between a Europe that spends its normative power protecting what it once had and a Europe that uses it to secure what it can still build.

What changes geopolitically with the federal model?

A Union negotiating as a bloc of 450 million consumers—rather than as 27 isolated economies—alters the calculus for the party on the other side of the table on at least three fronts. The first is negotiation, specifically with the partners identified in the first article: a federal Union would negotiate access to Australian critical minerals, cooperation on batteries and supply chains with South Korea, or the "associate member" status already proposed for Canada, all from a position where the internal market’s scale is no longer fragmented by 27 different tax and corporate regimes—the same argument we previously made regarding startups fleeing to Delaware, now applied to economic diplomacy. The second is defense: the nearly €800 billion in projected defense investment through the end of the decade would no longer translate into 27 parallel procurement systems; instead, it could fund a truly European defense industrial base with sufficient scale to reduce reliance on American suppliers for critical systems—not out of hostility toward Washington, but based on the same logic of value retention we applied to Sines and Zaragoza. The third is monetary: a euro backed by a common federal debt-issuance capacity—rather than merely by 27 national treasuries coordinating voluntarily—would finally possess the market depth and liquidity it currently lacks to rival US Treasuries as an international reserve asset. This same deep instrument would, on the supply side, resolve the root cause of the problem that the Savings and Investment Union seeks to address on the demand side: European savings that currently lack a sufficiently safe and liquid domestic asset for refuge, forcing investors to turn to American debt instead. None of these three fronts requires the Union to stop negotiating with the US or China; It merely requires ceasing to act from a position where internal fragmentation is the primary obstacle to external interests.

There is also a gain that is political rather than economic—and perhaps more decisive than any of the previous three: an end to case-by-case reactivity. Today, each national capital decides on its own, under immediate pressure, whether to accept the next Chinese or American investment and on what terms—as was the case with CALB in Sines, CATL in Debrecen, and BYD in Szeged; each decision was made in isolation, without a common doctrine, and often without the leverage to negotiate meaningful concessions. A federal union would treat these projects as what they already are in practice—economic partnerships with long-term strategic implications—rather than as mere foreign direct investment to be accepted or rejected based on the budgetary exigencies of individual governments; this shift alone alters the nature of the relationship with the two superpowers, moving from a reactive stance to a strategic one.

The second political benefit—internal stabilization—is rarely part of the conversation. Today, national populism—whether right-wing, left-wing, or outright autocratic—can seize significant elements of sovereignty at the level of a single member state. Orbán’s Hungary demonstrated this regarding the judiciary, before the electorate chose Péter Magyar and the new government began reopening what Orbán had shut down. Justice, taxation, foreign policy, and military policy: these are precisely the levers a national authoritarian leader needs to control unilaterally to entrench themselves in power. In a genuine federation, these powers would no longer be susceptible to capture by a single national government because they would cease to be exclusively national. This is not merely a side effect of federalization; it is one of its most direct safeguards against the kind of democratic backsliding we have already witnessed—and not just in Hungary.

First priority: a single capital market

European households hold €37 trillion in savings—and according to Ursula von der Leyen herself, around €10 trillion sits in accounts yielding little to no return, rather than financing the real economy. The Draghi report, presented in the autumn of 2024, estimated that Europe requires an additional €750 to €800 billion in annual investment—up to 5% of GDP—simply to remain competitive. Draghi’s own most-cited phrase encapsulates the urgency: "either we do this, or it is a slow agony." The Commission estimates that a fully realized Savings and Investment Union could mobilize up to an additional €470 billion per year.

It is worth being precise about why neither national savings nor cohesion funds can solve this problem on their own; they are two sides of the same "scale trap" we have previously documented. Financing a project of global scale using a single country's domestic savings ties its viability to that country's demographics—much like state aid linked to national budgets. Sweden or Portugal, acting in isolation, lack the depth of savings to sustain a ten-billion-euro venture, no matter how excellent the idea. Cohesion funds suffer from the opposite, yet symmetrical, flaw: they assess a country's regional convergence status rather than the merit or global scale of a project originating there—applying a geographic criterion where an economic one should prevail. A single capital market solves both problems simultaneously, precisely because neither of those factors becomes the deciding variable; it represents the fourth scenario missing from the current architecture, alongside national state aid, regional cohesion funding, and foreign capital. A concrete example illustrates how this mobilization could gain momentum without waiting for a new treaty, as the Union already possesses both the precedent and the mechanism. NextGenerationEU—through the joint issuance of approximately €800 billion in common debt starting in 2021—demonstrated that the EU can raise capital on a federal scale when political urgency warrants it; this same mechanism, if made permanent through regular Eurobond issuances—functioning as a structural line rather than a one-off emergency tool—could capitalize a development fund managed by the EIB, an institution that is already one of the Union’s largest issuers of supranational debt and possesses extensive experience in long-term infrastructure financing. The decisive difference would lie in the access rules: not the "just return" (juste retour) criterion—which currently ties a large share of European funding to the proportion of each Member State's contribution (the same geographic logic we previously identified as the symmetrical flaw of cohesion funds)—but rather a criterion based on merit and scale. This would be reserved for genuinely transnational projects involving partners in at least two Member States and demonstrating alignment with a modernization strategy defined at the European, rather than national, level.

Linking this fund with tax harmonization—specifically, a common corporate tax base that eliminates the 27 fragmented regimes currently driving startups to Delaware—would close the space where guilds, both old and new, have historically stepped in. It is precisely when rules for accessing European funding are vague or negotiable on a case-by-case basis that the political muscle of Berlin, Paris, or The Hague—or, in the future, any new coalition of entrenched interests—reasserts itself to decide who gets what. Codified eligibility criteria, independent technical assessment (following the models already proven by Horizon Europe and InvestEU, where project merit outweighs the proposer's nationality), and an external oversight mechanism like the European Court of Auditors—empowered to scrutinize political exceptions—do not offer an absolute guarantee against capture (no institutional architecture does). However, they represent the difference between an instrument designed for bilateral negotiation and one designed to resist it.

The specific mechanism for attracting the 10 trillion sitting in largely stagnant accounts still needs to be designed—though the Union already has a tested pilot, albeit one implemented at a national level. In August 2023, Belgium launched a one-year retail bond aimed directly at individuals, featuring a reduced withholding tax of 15% on interest (compared to the standard 33% rate for savings income), a 3.3% gross coupon, a minimum subscription of one hundred euros, and no requirement for a securities account. In a single week, it mobilized €21.9 billion—four times the initial target—with over 600,000 subscribers participating via both direct online channels and bank counters. The retail tranche of the federal Eurobond would replicate this design on a 27-nation scale: low minimum denominations, digital subscription using existing national electronic identification systems, and distribution through established banking and postal networks, requiring no new European-level infrastructure. The European tax incentive would utilize the same reduced withholding mechanism—applied on top of the Eurobond coupon—but would initially be administered by national treasuries rather than a non-existent common fiscal authority. There is one condition: only states adopting this reduced rate for the specific tranche would have their banks authorized to distribute it, and their countries would gain expanded access to the EIB’s development fund for their own transnational projects. This is not tax harmonization via treaty; it is harmonization through rewarded participation—following the same logic of a coalition of interests already at play in capital markets' "enhanced cooperation." If participation becomes nearly universal—a likely outcome given the incentive—this common rate would effectively become the first tangible building block of European fiscal convergence.

To be effective, the incentive must be symmetrical between the saver and the entity managing their savings; that is where the current trap lies: a bank has no commercial incentive to steer a client away from demand deposits, precisely because such deposits represent the bank's cheapest source of funding. A scheme that offers tax advantages to the saver but ignores this perverse incentive on the bank's side will underperform, no matter how attractive the proposal may be. The symmetrical solution pays the distributing bank a placement fee on every euro actually transferred. — not a subsidy, but the standard underwriting commission for any bond issuance—feasible because a permanent, large-scale federal credit line can be financed more cheaply than 27 fragmented channels, leaving room to share the savings—and, above a threshold of transferred traditional savings, preferential access to EIB refinancing lines, in the spirit of the ECB’s long-term refinancing operations, ensuring the bank does not simply lose cheap funding but gains, in exchange, an equally cheap alternative source linked to the same mobilization objective. As with any other rule governing this fund, the schedule for the tax bonus and the bank commission must be public, uniform, and automatic—never negotiated on a state-by-state or bank-by-bank basis—or else they become the very channel through which guilds, both old and new, re-enter through the door this mechanism aims to close.

And the scale of what is at stake is best measured by a ratio rather than by any single figure in isolation. The accumulated stock of foreign direct investment within the EU, originating from outside the bloc, stood at €7.038 trillion in 2024—with the United States alone accounting for €2.18 trillion, or 31% of the total. The "Cohesion, Resilience and Values" heading of the current multiannual financial framework (2021–2027) totals €377.8 billion over the seven-year period—roughly €54 billion per year for all 27 Member States combined. Comparing a stock accumulated over decades with an annual budgetary flow would be the same mistake we corrected elsewhere in this project; Yet, when converted to the same timeframe, the result remains clear: the U.S. capital stock within the EU alone is equivalent to about four full decades of the current cohesion budget, at today’s spending pace. It is not China that threatens European economic sovereignty tomorrow—it is a scale the United States has already possessed and accumulated for decades, while the Union continues to manage its own internal cohesion at the pace of an instrument designed for a world without such competition of scale.

And yet, the process drags on. As late as September 2026, the ECB Vice-President still had to publicly state that European banks need greater scale to compete with American rivals. Disagreements among the 27 member states center precisely where one would expect—given the "guild" structure—namely, on financial supervision and the transfer of powers from the national to the European level; in other words, each national financial capital protecting its own regulatory turf. Von der Leyen has already publicly admitted that the project might have to move forward without all 27 members, utilizing the "enhanced cooperation" mechanism. This reflects the same logic regarding coalitions of interests that Acemoglu identifies as a prerequisite for breaking out of an institutional vicious cycle—only, in this instance, applied in favor of integration rather than against it. A single capital market is not merely a technical whim of Brussels; it represents the difference between continuing to export Europe’s best startups to Delaware and finally managing to fund them at home.

Second urgent matter: the guild is sinking its own core.

The strongest argument against the "guild" policy is not that it harms the periphery—it is that it no longer even protects the core. In the 2026 European Innovation Scoreboard, Sweden, Denmark, and the Netherlands lead as "Innovation Leaders," performing at over 125% of the EU average; Germany sits one tier lower, in the "Strong Innovators" category, alongside Belgium and Austria. In 2025, Sweden led in eight of the index's 32 indicators, including business expenditure on research and development—precisely the metric where the "industrial core" ought to have a structural advantage, yet does not.

The clearest instance of continental shortsightedness occurred precisely when the Union's two engines attempted to solve the problem together. In February 2019, the European Commission blocked the merger between Siemens and Alstom—a European rail giant that would have generated €15 billion in annual revenue, backed by both Berlin and Paris specifically to counter China’s CRRC, which was already present in 104 countries and several times larger than any single European operator. Commissioner Margrethe Vestager justified the veto citing fears of "higher prices, less choice, and less innovation" within the internal market—the same logic of protecting domestic competition that, on a global scale, left China without an adequate European response. French Prime Minister Édouard Philippe called it "a mistake"; Economy Minister Bruno Le Maire went further, labeling it an "economic error" and a "political error" that "serves China's economic and industrial interests" (Euronews). It is the clearest portrait of this essay’s central mechanism: the guild architecture does not merely hold back the periphery—it holds back the core itself when the latter attempts, for the first time, to act as a bloc.

The second case illustrates the cost of acting alone rather than making joint decisions. In 2022, Germany pledged €10 billion in subsidies—the largest state subsidy in its history—for an Intel semiconductor plant in Magdeburg valued at €30 billion, without integrating the project into a common European strategy for semiconductor sovereignty. In July 2025, Intel permanently cancelled the project following a two-year postponement announced in 2024; CEO Lip-Bu Tan himself admitted that the company had "invested too much, too soon, without adequate demand" (Brussels Signal). Not a single euro of the subsidy was ever disbursed, but the lost time—three years spent on an isolated national gamble with no European contingency plan—cannot be recovered; it is precisely this time gap that currently separates Europe from South Korea, Taiwan, and the United States in the race for cutting-edge semiconductors.

The third case is the most revealing, as it originates neither in Brussels nor in Washington, but within German industry itself, expressed through capital allocation decisions. In 2026, BASF inaugurated its largest single global investment: an integrated chemical complex in Zhanjiang, China, valued at €8.7 billion (CGTN). At the same time, it shut down eleven production units at its historic Ludwigshafen complex—including a TDI plant that had racked up losses of up to €1 billion—as part of a cost-cutting program that has already resulted in the loss of thousands of jobs worldwide (ECHEMI). The German chemical industry association estimates that around 20% of recent investment by the country's chemical and pharmaceutical sectors has been directed toward China—not out of strategic preference, but because energy costs and the lack of a common European energy policy have made Ludwigshafen structurally less competitive than Zhanjiang. When a core industrial flagship prefers investing outside the Union to investing within it, guild-style policy has ceased to protect even its own backers.

The federation still worth building

Nothing written in this text or the previous one constitutes a list of Portuguese, Spanish, Czech, or Croatian demands. Rather, it describes what a genuine federation would do with any part of its territory: German industry—with its scale and engineering prowess—is the obvious natural partner for scaling up the cluster of renewables, green hydrogen, and drones already emerging in Sines and Zaragoza; currently, this is treated as a threat to be contained rather than a synergy to be built upon. Almería’s intensive agriculture has more to offer French agriculture as a technological partner than as a competitor to be penalized via an anachronistic CAP. Czechia’s sovereign nuclear model should be the standard exported to the entire Union, not an isolated national exception. Estonia and Croatia demonstrate that locally retained knowledge—even on the scale of a mid-sized European city—can compete at the highest global level.

A Federal Union—free of any hierarchy between core and periphery—would replace negotiated, conditional cohesion funds with financing based on project merit; it would replace 27 fragmented tax and corporate regimes with a genuine single capital market; and it would replace state aid indexed to national demographics with support scaled to the competition Europe actually faces—that of China, the United States, Japan, and South Korea. It would become the planet’s largest economic zone, competing as a single entity rather than as 27 guilds squabbling over crumbs while losing ground abroad.

It is worth stating this without irony, following two such harsh critiques: despite all the flaws documented in these two texts, the European Union remains the freest, most socially cohesive, and most prosperous model of society humanity has ever built on a continental scale.

No other region on the planet combines the rule of law, the free movement of people, social protection, cultural diversity preserved within a shared project, and lasting peace among nations that, less than a century ago, were destroying one another in total wars. It is precisely for this reason that "guild politics" represents a betrayal of the project itself, not a defense of it: a system designed to unleash the potential of all its members has been hijacked to protect the vested privileges of a few. The ultimate question is not whether the European Union deserves to survive. It is whether it is willing to finally become the federation it promised to be—before the gap between what it is and what it could be becomes irreversible.