A Conversation With Valdis Dombrovskis

European Commissioner, Valdis Dombrovskis, discusses macroeconomic trends, the impact of universal tariffs on the global trading system, and the state of transatlantic relations. 

The C. Peter McColough Series on International Economics brings the world’s foremost economic policymakers and scholars to address members on current topics in international economics. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

This meeting is presented by RealEcon: Reimagining American Economic Leadership, a CFR initiative of the Maurice R. Greenberg Center for Geoeconomic Studies.

CARUSO-CABRERA: Hi, everyone. Thanks for coming. Welcome to today’s Council on Foreign Relations meeting, “A Conversation with European Commissioner Valdis Dombrovskis.” Good to have you here.

DOMBROVSKIS: Good afternoon.

CARUSO-CABRERA: He is the commissioner for economy and productivity, for implementation and simplification, and former commissioner for trade from the European Commission. My name is Michelle Caruso-Cabrera. I’m the chief executive officer of MCC Global Enterprises. I’m presiding over this. We’re going to chat for thirty minutes and then we’re going to take questions from the audience. And we’re happy to see you all here.

Let’s start. You were in town last week for the IMF/World Bank meetings. And now you’re here in New York to speak with investors. Europe’s a lot of countries, but generally speaking tell us what’s the mood in Europe in the midst of all of this?

DOMBROVSKIS: Well, first of all, thank you for this invitation and opportunity to have this conversation. On general mood in Europe, well, it’s clear that the world and geopolitical situation is becoming more complicated and more conflictual. And in this more conflictual situation, it’s clear that Europe needs to do more to strengthen its position. So when this European Commission was taking office late last year, we set two main priorities to deal with. One was to strengthen the competitiveness of European economy. And another was to strengthen defense and security. And now, well, less than half a year since the Commission took office, it clearly shows that, if anything, those priorities have become more urgent, So we have to double down on those priorities.

On defense also, with less commitment of Trump administration to global security and security in Europe, it’s clear that we need to do more ourselves. So we recently announced what we called ReArm Europe Initiative for spending another 800 billion euros over the next four years on strengthening our defense capabilities and defense industry. One of the first initiatives which we put forward was so-called competitiveness compass, outlining the more main directions of work to strengthen the competitiveness of European economy. And I would say, in current unstable environment, also the predictability, stability, and respect for rule of law in the European Union, we also see as our advantages in current situation.

CARUSO-CABRERA: So I’ve seen a strain of thought coming out of Europe that, yes, they’re very upset with the situation with the tariffs and what President Trump is doing, but other—but that there is a silver lining within it, which is that things that need to be done for a very long time—increase defense spending, talked about it for a long time, didn’t happen. Improve competitiveness, reduce regulation. Draghi put out a report—did an op-ed for the FT soon after, Trump talked about tariffs, saying Europe has to deal with its own internal barriers to trade which lead to the equivalent of 110 percent of internal tariffs, on services, for example. Is this finally a moment where those things—are they going to really happen finally?

DOMBROVSKIS: Well, indeed. It’s true that Europe strengthening its defense capacities is long overdue. And with this 800 billion euros package, we expect to increase on average defense expenditure from current 2 percent of GDP to more than 3 percent of GDP. And actually, countries on the front line with Russia—like Poland, like Baltic states, like Finland—are already doing much more, and will increase defense spending further. Also, we’re looking how to strengthen and streamline European defense industry, because historically military in Europe has developed as twenty-seven different militaries. So in terms of fragmentation of all kind of weapons systems and so on we are in entirely different territory than U.S. So it’s not only how much you spend, but also how effectively you spend. So we need to streamline the standards, interoperability, and work lots of those things to have less of fragmentation of which we are having across different European militaries.

And on competitiveness, I would say that it’s something, as I was saying also, already from the very beginning of this Commission really very clearly set as a priority because, on one hand, while we had to deal with a number of short-term shocks, including the economic implications of Russia’s aggression against Ukraine was more pronounced in Europe than elsewhere, but there are also many structural challenges we need to deal with. Productivity growth in Europe already for decades is slower than in other major economies, population aging, relatively high energy prices. So there are a number of things which we need to address for our competitiveness.

CARUSO-CABRERA: So you’re optimistic?

DOMBROVSKIS: Well, we are working on this. And I think, indeed, we’ll make a difference. And, as I said, also now, having the stability and predictability amidst this turmoil is also our strength.

CARUSO-CABRERA: Did you meet with members of the White House, U.S. administration last week?

DOMBROVSKIS: Well, I had a meeting with Scott Bessent, so—

CARUSO-CABRERA: How’d that go?

DOMBROVSKIS: Well, we had a good meeting. We obviously covered quite a bit of ground on our bilateral relations, where we were not directly negotiating the tariffs. There are other colleagues who are directly involved in this, and this is quite an extensive engagement. But also discussing with its economic implications and, in a sense, having a clear understanding that we need to work towards reaching agreement on this tariff issue.

And since we had this conversation just before the Ukraine roundtable, which was taking place also on the sides of IMF/World Bank meetings, so we discussed also the situation in Ukraine, the peace process, where the main point is that we need to arrive at a just and lasting peace in Ukraine, not just at something which allows Russia to restock, to regroup, and to continue its aggressive wars. Because Russia is openly talking about invading other European countries. Russia is spending a third of its budget now on military. Just when this peace process was supposedly starting, Putin announced mobilization of another 160,000 people in the army. So the question is where this army will march. In a situation if Putin will feel kind of being halfway validated and halfway getting away with his war in Ukraine.

CARUSO-CABRERA: You had that conversation with Bessent?

DOMBROVSKIS: Well, we definitely touched upon this Ukraine peace process, and this—

CARUSO-CABRERA: Because he’s been involved in that conversation.

DOMBROVSKIS: Absolutely.

CARUSO-CABRERA: I just want to button up the Washington angle here before we definitely want to spend a lot of time in Ukraine. But your general approach to the Trump administration and your meetings last week, where do you see that going? Is that going—they seem much more focused on Asia at the moment, India, the Indo-Pacific, Japan, et cetera, and less focused on Europe. Is that a correct perception, or?

DOMBROVSKIS: Well, indeed. If we talk about those tariff negotiations, there is still lots of ground to cover. So maybe that indeed they are more advanced with some countries in Asia. OK, where is our general approach? Well, first of all, we continue to see U.S. as strategic ally. And we had many decades of this strategic cooperation. We have the largest trade and investment relationships in the world. So there’s a lot at stake also economically. And so we want to preserve this relationship. So we clearly prefer negotiated solution as regards those tariffs. As you know, we also have prepared our first set of counter-tariffs against steel and aluminum tariffs, which were the first ones to be imposed by Trump. But now we also put them on ninety days pause to give those negotiations a chance, because we really prefer a negotiated solution, but we are also ready to defend our companies and our economy if it was necessary. And that’s what we did also under Trump one, when Trump was also imposing tariffs on steel and aluminum.

But generally speaking, we want to preserve this cooperation. We also are signaling to Trump administration that during the previous administration we had EU-U.S. Trade and Technology Council, which gave us a good platform to discuss many different things, developments in the area of technologies, including digital technologies and its regulations, which is obviously a topic of great importance for U.S., discussing our trade relations, possible trade facilitation measures. Discussing also issues like China’s nonmarket policies and practices. And basically what we are signaling that we would see similar resource, similar type of format, like we had in this Trade and Technology Council, useful also going forward. Because we have many things to discuss, and having a structured way of engagement allows us to understand each other’s positions better and to avoid a number of unnecessary problems.

CARUSO-CABRERA: Ukraine. U.S. clearly, under this administration, isn’t giving more help to Ukraine. They’re trying to strike a deal. Europeans are not at the table. Can Europe help Ukraine fill the gap when it comes to the shortfall in funding?

DOMBROVSKIS: Well, as regards funding, as regards at least this year and early next year, Ukraine’s funding need is covered. So it’s thanks to Europe’s Ukraine facility and thanks to the G-7 loan initiative. So for this year early next year we are covered. We have also signaled to Ukraine—I had also some engagements in Washington with Finance Minister Marchenko, that we are ready also to frontload some of this funding, if it’s necessary for Ukraine to purchase certain military equipment and so on. And then towards the middle of the next year, we will have conversations on this funding going forward. Well, they part of the financing need also for next year will be covered because our Ukraine facility goes to 2027. G-7 loans, part of those loans are also going to be disbursed also in 2026.

But still, we’ll have to see what is the assessment of the funding gap for next year. And then we’ll have to have this discussion, as international donors, how to cover this funding gap. And obviously, without U.S., it’s going to be more difficult. But from European side, we are ready to do this. And in any case, as European Union, we are already the largest contributor to Ukraine by far. So far we have provided something like 144 billion euros in support to Ukraine, and counting. And also we are stepping up our military supplies. But there, obviously, there are certain capacity gaps left by U.S.

CARUSO-CABRERA: I was going to ask about that, yeah. I mean, we’re struggling to produce munitions here, and we’re the biggest in the world. So how does that supply chain work here?

DOMBROVSKIS: Well, in terms of certain ammunitions, it looks like we are finally getting there, like production of 155-millimeter shells. But there are probably some capacity gaps on more advanced weaponry, which would be needed for Ukraine. But so we’re looking what are those capacity gaps, how to cover them. And also, I was mentioning earlier, this ReArm Europe Initiative. In this ReArm Europe Initiative, we are already fully involving Ukraine as a partner, so Ukrainian military industry can fully participate both in our contracts and also Ukraine can fully participate in joint purchases of EU member states in the weaponry. So we are already integrating Ukraine also from that point of view in this effort.

But, of course, there are certain issues. When we hear from the Trump administration that they are likely not even, for example, selling Patriot missiles, not even giving them to Ukraine, not even selling them to Ukraine, and then they have those batteries, but they cannot use them for absence of missiles. So there’s even problems like this emerging. So on military side, it’s obviously going to be more challenging without U.S. EU member states are now pledging new support packages for Ukraine. But, yes, it’s going to be a struggle.

CARUSO-CABRERA: This is water under the bridge but I’m going to ask it anyways. Which is, you know, the Russians first took Crimea under Obama in 2014. There were other examples of how expansionist they wanted to be. And yet, there was no movement in the defense budgets there. There was ever more reliance on Russia for natural gas, for energy, et cetera. Do you think there’s been enough, you know, soul searching there and realization of that mistake? I mean, have people come to grips with that? Because that’s going to be the first step in order to really step up for the commitments. I mean, if that had happened it’s possible that Russia could have been deterred, if—

DOMBROVSKIS: Well, I would say it all started much earlier. If you look at this, Russia’s expansionism already in early 1990s they created this frozen conflict in Moldova. In 2008 it invaded Georgia. In 2014, invaded Crimea and Donbas. In 2022, it started full-scale war against Ukraine. And, indeed, it was not until this 2022 when the West, so to say, really woke up and understood that it’s serious and that we need to deal with this Russian threat. But I think by now we are well awake. And right now it’s clear, with less U.S. commitment to security in Europe and Ukraine, it’s clear that Europe will have to do even more. And that’s exactly what we are doing.

CARUSO-CABRERA: When it comes back—when it comes to potential adversaries in the world, the other big one, of course, is China. And a lot of the discussions that we hear, the commentary coming out of the White House and the people around the president, is that it’s becoming very much, choose China or us. That, you know, Bessent has talked repeatedly about creating a group of likeminded nations that trade together and trade less with China. What’s your viewpoint on that? And where do you think the various European countries are going to come down on that?

DOMBROVSKIS: Well, first of all, throwing tariffs at your allies is not best conversation opener for that. (Laughs.) So currently we have big problems to sort with our bilateral tariffs. And remains to be seen how it will play out. And second, in a sense, we don’t want to be dragged into this conversation, us against them, or us with whom against whom. That’s why we are so much emphasizing the need for rules-based multilateral trading system, because at the end of the day that is what works better for everyone. If it kind of—you know, this becomes just a raw power politics, I think at the end of the day it’s not going to be for benefit of anyone. So that’s why we are committed and willing to preserve this rules-based international trading system.

As regards our trade relations, as I was mentioning U.S. is our number-our trading partner. China is our number-two trading partner. So also there there’s a lot at stake economically So, but at the same time, in case of China we’re pursuing this policy of de-risking, because we see the China is dominant in number of strategic value chains as regards critical minerals, rare earths, where China, in many areas, is dominating 80, 90, more than 90 percent of global supply. So that’s where we are seeking the diversification and not to have strategic dependencies. And right now the most imminent concern is with U.S. market basically closed for China’s goods. Question is where all those goods will go.

And if they go to Europe or other markets, they are likely to cause disruptions to those markets. So how to defend our markets, our companies, our jobs. And if this is what is happening, it will just—those dominoes of trade fragmentation will just continue to fall. And that has been also our message to our Chinese counterparts. I also had some meetings with Chinese counterparts, including finance minister. And that’s our message, that it’s very important now that China is showing some restraint and it’s not starting to dump this—all this production in other markets. Because China is probably the biggest beneficiary from this multilateral rules-based trading system. So it should be in their interest to preserve it as well. And while they showed some, you know, acknowledgement of those concerns, but didn’t enter into any specific commitments. So still also have to see how it will play out with all this Chinese overcapacity in this specific juncture.

CARUSO-CABRERA: You’re talking about the multilateral rules-based order when it comes to trade. It’s believed here in the United States by many that China didn’t actually follow that. And that’s a lot of why we’re here today. Did they—when you have that conversation with them about them showing restraint, does it go beyond that? Do you think that they have followed that rules-based international order?

DOMBROVSKIS: Well, certainly there are issues and challenges with China. That’s why I was mentioning this. EU-U.S. Trade and Technology Council. One of the topics of our conversation there was also China’s nonmarket policies and practices, which are certainly there. And we are sharing this concern. And I think it’s important that we are also working together as allies to address this concern.

CARUSO-CABRERA: You’re here in New York to speak with investors. Tell us what you plan on telling them about when—and what conversations you’re having relative to European debt versus U.S. debt, et cetera.

DOMBROVSKIS: Well, in any case, obviously—(laughs)—my task is to promote Europe as a good investment destination. And in current turmoil and instability, first, Europe can provide this stability, can provide predictability, can provide respect for the rule of law. And those are all, I would say, the positives in our conversation with investors. Then, obviously, there are challenges which we need to deal with concerning our competitiveness, concerning the administrative burden.

So I’m going to present also the work we are doing on Competitiveness Compass, to address our competitiveness issues, on simplification to reduce administrative burdens. I’d say there are all the very ambitious proposals, legislative proposals on the table, with co-legislators. And there’s a whole pipeline of further simplification measures coming. And already now actually we see that there is a stronger investor interest in euro-denominated papers. It’s something which you’re seeing already. And I think that’s a good opportunity, in a sense, to present and to promote it.

CARUSO-CABRERA: Is that country specific or some kind of collective bond that happens? Or how do you—how do you fill that desire in the market? What product do you give them?

DOMBROVSKIS: Well, in terms of products, if we talk about bonds, they’re having quite a—quite a pipeline. So currently we are issuing collective EU debt under Recovery and Resilience facility. And there is close to 300 billion euros in pipeline over the next few years—next two years, basically. I was mentioning this ReArm Europe Initiative. Part of this is, again, common European borrowing program, 150 billion euros SAFE loans which are going to be there. Germany has announced recently 500 billion euros investment package to strengthen the infrastructure and strengthen the defense. So it’s also going to add a supply to this euro-dominated bonds. And even if you talk with countries outside eurozone—for example, I had a conversation with the Polish finance minister. He is also saying that investors are showing interest in, for example, Polish euro bonds, if Poland were to issue in euros. So the interest is there.

Then, of course, we also need to look at the equity side. And there, we are also working quite a bit to promote what we call our Savings and Investments Union, including Capital Markets Union, to have—well, better opportunities to invest also in European savings. Because currently, like, European households are having, like, 10 trillion euros of savings. But they are not—often not invested in the best possible way. And so to allow for both investment of those savings and facilitate also the listing of European companies, or using other ways of raising capital outside bank loans. Because if you look also at the structure of financing of European companies, it’s much more dominated by bank loans than in U.S., where it’s much more diverse and capital markets play much more significant control. So we’re also working the Capital Markets Union to address this. So there also may be more interest on the equity side.

CARUSO-CABRERA: Yeah, for those of you not in the finance world, here in the U.S. a big company just goes to the bond market, announces, and buyers step up. Whereas, in Europe you have to go to a bank and get a loan. It’s extremely different. We have very, very deep capital markets here.

My last question, then we’re going to take audience questions. You were famous in Latvia for turning around the financial situation there. The country was on the verge of bankruptcy and you managed to rein in the budget, cut it, et cetera. And you were lauded and applauded for that. What do you think of DOGE? (Laughter.)

DOMBROVSKIS: (Laughs.) Well, I think it’s acknowledged also in U.S. it’s going to account just for a tiny fraction of the spending.

CARUSO-CABRERA: So he’s not doing enough? (Laughs.)

DOMBROVSKIS: No, it’s that the structure of expenditure, it’s—there’s not so much discretionary expenditure. And especially discretionary expenditure outside the fence to cut, to have a meaningful macroeconomic impact. So in terms of substantial reduction of budget deficit—and we know that U.S. is running quite substantial budget deficit—that will require something entirely different, both looking at revenue side and expenditure side, besides discretionary expenditure. So it’s not just something one can do with exercises like DOGE.

CARUSO-CABRERA: All right. Audience questions. Right here in the front. Let’s get you a microphone. Hold on one second. Here it comes.

Q: Thank you. I’m Lucy Komisar. I’m a journalist.

I have a question. When you were talking about Ukraine, and you talked—and about Russia. And this is true for basically, people from Europe talking about this. You never seem to mention that in 2014 there was a U.S.-supported coup against an elected government, which is why—and this was against a person who was supported by the Russian—ethnic Russians. But there was a coup, partly because he wanted—was trying to get an economic deal going either with Europe or with Russia. So Russia offered him a better opportunity. And so he took it. And therefore, there was a coup promoted. And that’s why Crimea left, because they were almost 90 percent Russian. And that’s why they voted to join Russia. But this coup, why do you never mention, in a long litany of what has happened in that area, you, and others too, never mentioned this coup?

DOMBROVSKIS: Well, what I can say on this, this looks like straight from Russian propaganda textbook. (Laugher.) First of all—first of all the more or less only country which is not recognizing Zelensky government as legitimate government is Russia. U.S. is recognizing, for example, Zelensky government as legitimate government. All European countries are recognizing. And pretty much entire world is recognizing the legitimate government in Ukraine, which was elected following legitimate free and fair elections.

It’s true that in 2014 there was so-called Dignity Revolution. And how it started? Well, first of all, it’s known that the regime of Yanukovych, yes, he was also a democratically elected president. No question about that. But that was truly very corrupt regime. And corruption was rampant. And people were obviously protesting against this corruption. And then the question was, indeed, of signing the ascension agreement with the European Union. And we were in those discussions. But at the last moment, indeed, Yanukovych decided to back away from this agreement, at the insistence of Putin.

And that is what really brought people to the street. It was their European choice not to stay in this gray zone between Russia and democratic world but really be a free nation and decide its own destiny, which they saw together with European Union. And that is what happened. And to mention even this quote/unquote “referendum” in Crimea under Russian occupation and with clearly falsified results, it’s not even worth talking to. And if you now look what Russia is doing in eastern Ukraine, which is indeed there is predominantly Russian-speaking population, and Russia is killing that Russian-speaking population on industrial scale.

CARUSO-CABRERA: I was in Ukraine when that happened, covering it for CNBC. And then when I came back from that coverage Henry Kissinger gave a talk at the Asia Society. And I was surprised to hear him say—and it wasn’t—it’s not a Democratic attitude on his part. But what he said about that situation was, he said, the EU sent a bunch of bureaucrats to negotiate with Ukraine. And that was the mistake. Ukraine is Russia’s sphere of influence. And what they needed to do was send much more senior people to talk with Putin. And that was the mistake from day one. I mean, I was very surprised to hear that, but there was a sense that mistakes were—happened back then, and that the situation could have been avoided.

DOMBROVSKIS: Well, frankly, we are not accepting this logic, which is, like, imperialist logic of spheres of interest. We hope that we are beyond the stage when, you know, the world is ruled by empires and imperialism and territorial expansion. And therefore we treat countries as free and sovereign countries, which are free to choose their destiny. And they don’t need to go to ask permission to Putin whomever whether they can do this or that.

CARUSO-CABRERA: Yeah.

Q: Hi. Dan Tawfik, GeoQuant, part of Fitch Group.

I was wondering if you can say a few words on the fiscal unity of Europe, and any progress made, and what your forecast would be for that in the next few years.

DOMBROVSKIS: OK. On fiscal situation. Fiscal situation is obviously complex, because on one hand we exited now, say, two crises—the COVID-19 pandemic, the economic implications of Russia’s invasion in Ukraine, and the related energy crisis. So we exited those with elevated levels of deficit and debt. So correspondingly we also, last year, revamped our economic and fiscal governance framework in the EU. And all in all we were expecting to have slightly contractionary fiscal stance in eurozone and roughly EU as a whole of 0.25 percent.

So now this is changing because we announced this additional fiscal flexibility for defense. So this is framed to additional defense expenditure of 1 ½ percent of GDP for a four years period. So it’s contained both in terms of volumes and in terms of timing and, correspondingly and otherwise, the normal EU fiscal rules will continue to apply. So EU member states are having their medium-term fiscal structural plans agreed, and also confirmed by European Commission, so they help to continue to comply with those plans with this exception of up to 1 ½ percent of GDP increase in defense expenditure.

And to receive this fiscal flexibility, they need to apply for this flexibility, for what’s called National Escape Clause. For example, just today Germany has applied to this fiscal flexibility to increase defense expenditure. Also to be seen in the context of their additional 500 billion euros investment package which they have announced. And they will have now this more fiscal flexibility to do so. But in general, well, we need to balance this need to stay prudent on fiscal policy, but also needs for additional investments, including for green and digital transitions, for defense, and a number of other areas. So as always on fiscal, it’s a careful balancing act.

CARUSO-CABRERA: Germany’s spending on defense in a way that they haven’t wanted to for a very long time. Is this as much a watershed moment as some people are reading into it?

DOMBROVSKIS: Well, it’s certainly a quite substantial shift. And indeed Germany, until recently, had this, what they called Schuldenbremse, or debt brake. In a sense, they had their own fiscal rules much more—or, not much more—but more strict than EU fiscal rules. So they now moved away from the Schuldenbremse, and are ready to spend and invest more. And actually, this has been also a longstanding recommendation of European Commission that Germany needs to invest more, also for the global macroeconomic balance in the European Union. Because Germany is the EU’s largest economy.

CARUSO-CABRERA: Brooke. Let’s get you the mic.

Q: Good afternoon. I’m Brooke Harlow, with Balyasny Asset Management. Thank you so much for joining us here today. Appreciate your comments.

I wanted to shift back a little bit to the trade side of things. I think, by all accounts, you’re part of a Herculean effort with a customs union and trying to, you know, negotiate with the—with the Trump administration on some sort of framework where the Trump administration apparently seems to be asking for concessions around digital services tax, some of the, you know, nontariff barriers that have been raised in discussions. I’m curious if you could comment on sort of the way you’re thinking about that, how—you know, thinking about even just some of the things, like, you know, food, and just all sorts of different things that I know are on the list. So would love your thoughts on that.

DOMBROVSKIS: Well indeed. So we’re also exploring options now with Trump administration on possibilities to have this agreement. So we have put on table couple of things, like, for example, more LNG purchases from U.S. We have offered zero for zero tariffs on industrial goods. Ready to explore certain trade facilitation measures, industrial standard alignment. So we’re ready to have those discussions. I was even flagging before that we found also this Trade and Technology Council, which allowed us to have structured discussions on those topics, as a very useful format. And would be willing to continue this kind of format also with Trump administration.

So then on—specifically you asked about digital services taxes. Well, on digital services taxes, or in general, we would be in favor and are committed to this OECD global tax deal, which deals basically with two topics—on effective minimum taxation and on fair allocation of taxation rights. And on effective minimum taxation, we are already—this is already part of EU law. So we have implemented this part of the OECD framework. On fair allocation of taxation rights, right now—well, indeed, the indications of Trump administration is that they may be walking away from that agreement.

And that globally we may have difficulties on this, but we think that it’s important to maintain this agreement and to have this conversation also on fair allocation of taxation rights globally, because currently we do not have any digital services taxes. Or even those countries which had something have suspended it. But it was also suspended exactly in a context of this OECD tax deal. So in absence of the OECD tax deal, it’s likely those conversations will come back because this problem, has not disappeared. And interestingly, it was also very much U.S. which was championing this OECD global tax deal. So we think—still think it’s something which we can better achieve if we work together at the global level, through OECD, through G-20, and so on.

Then there are some elements which, frankly, do not belong to trade discussions. For example, there hadn’t been actually much insistence recently, but you know or you have heard about discussions about EU’s value added tax, or VAT. Well, that’s clearly not a trade discussion.

CARUSO-CABRERA: It is now. (Laughter.)

DOMBROVSKIS: Yes. Because value added tax is consumption tax, which is not trade distorted. It’s applied both on imported and domestic goods. It’s like U.S. states are having sales taxes. And those are also—those are consumption taxes. They are not trade distorted. We are not complaining, oh my god, this state is putting 10 percent sales tax. Now that’s a huge trade barrier. No, it is not. (Laughs.) And we know—we know it, and everyone knows it. And is exactly the same with our VAT. So there are certain things which just do not belong to the discussion.

CARUSO-CABRERA: Back here.

Q: Thank you very much. I’m Marshall Sonenshine with Sonenshine Partners in New York and Harvard Law School.

I wonder if in this signal—in discerning a signal in all the noise, whether you and maybe others in the European leadership believe that all of this stuff about tariffs and Ukraine is a grand bargain in the making, that in exchange for much greater investment in defense we will get a return to normalcy in trade and investment relations between Europe and the United States? Or did I just say something that is so reductionist is to be naïve? (Laughter.)

DOMBROVSKIS: Well, I would say time will show. But from our side—from our side, we are obviously willing to have this normalization on trade relations. And that’s why we are engaged in those discussions. And that’s why we also now suspended our own content tariffs to have those discussions. So that’s where we want to eventually land this discussion because, with the largest trade and investment relationship in the world, with deeply integrated transatlantic value chains, obviously that’s also of large both strategic and economic importance. And on defense, what can I say? Yes, we have got the message. And defense expenditure is going up.

CARUSO-CABRERA: But do you get any reading from your time in Washington last week that that may be a possibility? That in exchange for that, you might get some better negotiating—no views? You haven’t gotten that far?

DOMBROVSKIS: Well, I don’t think we had a conversation exactly in those terms. And, you know, not that I can read it or interpret. We also see that Trump seems to be also quite a bit generally attached to tariffs, and saying that tariffs is the most beautiful world in vocabulary. (Laughter.) So I don’t—so, frankly, I don’t know how much it’s tactical, and how much is general attachment to the tariffs.

CARUSO-CABRERA: That might be part of it, too. Back there, on the last row.

Q: Thank you. Larry Dworkin, JPMorgan.

You’ve talked a lot about, broad brush, some of the efforts that are happening with things like the ReArm Europe effort. Could you help us understand a bit of the timing around that as well? We have the 500 billion euro that Germany talks about. How quickly do you expect that to be deployed, number one? And, number two, in your conversations with member states, are there things that you’re looking for individually for them to help accelerate the deployment of these funds?

DOMBROVSKIS: OK. In terms of time frame, well, we are talking basically starting this year. So we discuss the additional—this defense spending—additional 800 billion euros. We are talking four years’ timeframe starting this year. On Germany, they are also starting to roll out this additional investment this year. So we expect that this additional fiscal flexibility for member states will be operational somewhere in the middle of the year. So in these days exactly we expect member states to apply for this additional flexibility by June. Early July, we would have decided. So countries will have, effectively, a half a year already to start rolling out.

Rest is then depending on, you know, what kind of—what type of expenditure exactly we are talking. If we talk, obviously, some advanced military equipment it takes time to produce, to do the procurement, to do the production cycle. So therefore, we expect that it’s a bit of a curve over those four years. There may be things which may go faster, like restocking of certain ammunitions and things like this, but closing more important capacity gaps may require, you know, some years by the time this equipment can be procured and produced. But in any case, we are talking basically as of now. So we understand that the situation is urgent, that we need to strengthen our defense capabilities, that we need to deter Putin for military adventurism. And that’s why we need to invest now.

CARUSO-CABRERA: Right here. Lady there.

Q: Hi. Thank you very much, Commissioner, for sharing your insight with us. And thank you, Michelle, for the opportunity to ask a question.

I wanted to ask you about EU-Central Asia recent summit. I think this is—if I remember correctly, this is the first time EU and Central Asia had a high-level summit, and the two region established a strategic partnership. Could you help us understand if this is—this fit into EU’s broader strategic autonomy, or this is more reactive to the Trump administration’s policy? And does this mean the European Union going forward is going to invest more in Central Asia? Or is it more about anti-sanction evasions or critical minerals? Thank you very much.

DOMBROVSKIS: Yes. I would say this fits into this broader work which we are undertaking already for some years of, as you mentioned, EU strategic autonomy and also of diversifying our trade and investment relationships. So we had had over the last years a couple of economic—high-level economic summits with Central Asia. Myself, I was representing European Commission in those summits. We have entered in enhanced partnership and cooperation agreements with some of the Central Asian countries. So already, for a couple of years we are working to step up our engagement with Central Asia. Also working on critical minerals partnerships with those countries.

And the point is that Central Asia is also looking for diversification of their both economic and political relations. Maybe not all of them are putting it exactly in this term, but there is in that region something which they tend to call third neighbor policy. So they are in search of this third neighbor. Otherwise, they are between China and Russia. And so they are looking to diversify. And European Union is also obvious direction for them to go. So I’ll say this summit was already a next step after a couple of years of efforts and engagement at high-level with Central Asia. And we’ll continue this work.

CARUSO-CABRERA: Paul.

Q: Thank you very much. Paul Sheard.

Commissioner, you talked before about the fiscal situation and the various things that are happening around the fiscal rules, et cetera. But can you tell us a little bit about where the moves towards further fiscal union are? Are there further plans, or is the fiscal union as it operates in the European Union today, the euro area in particular, is that essentially the final state that we should expect to prevail?

DOMBROVSKIS: Well, as regards fiscal union, it’s certainly not the final stage. We already had some, for European Union, quite groundbreaking moments, with this Next Generation EU Initiative and setting up Recovery and Resilience facility, which was finance—that is financed by common European borrowing. We just now announced this 150 billion euros SAFE initiative which, again, is going to be financed by common European borrowing. So in a sense, we are moving towards also more fiscal union. But now I would say important moment to watch is negotiations on our next multiannual financial framework.

So European Commission is expected to put forward a proposal on this somewhere towards middle of the year. And that will be a kind of framework for EU budget after 2027. So we have currently multiannual financial framework till 2027. So it’s going to be after 2027. And it’s typically for a period of seven years. And that’s obviously a thing to watch, to also to which size of European budget we’ll be agreeing. Because clearly there are very heated discussions in Europe. Some are saying, you know, 1 percent of GDP and not a cent more. Others are saying, no, no, we need substantially more, given the situation. So part of this answer will be what will come out of the discussions on next multiannual financial framework.

CARUSO-CABRERA: And it wasn’t that long ago that common European borrowing was verboten and nobody ever thought it was going to happen. So here we are.

You had a question, right? Let’s get you the mic.

Q: Thanks. Brendan Kelly, Federal Reserve Bank of Dallas.

Related to your performance portfolio also, there was reporting recently that China was considering removing sanctions on certain European Parliament members as a bid to restart China Europe comprehensive trade agreement—investment agreement talks. Is that something that would still be meaningful? Or, you know, has the trade—sort of the trade imbalances grown in sort of structural issues more significantly that, you know, the kind of things that Europe would need or look for from China to address those trade issues become, you know, more difficult and more substantial at this point?

DOMBROVSKIS: Yeah. On this, indeed, we concluded this comprehensive agreement on investment with China a couple of years ago. When was it? In 2020 or in 2021? I’ve forgotten now.

CARUSO-CABRERA: It was in the middle of COVID. It was—(laughs)—

DOMBROVSKIS: OK. But it’s already some years ago. But it was never ratified. And one of the reasons why it was not ratified was that—maybe not the only reason—but it requires certification of European Parliaments. And then for unrelated, for different reasons, China put a number of members of European Parliament under sanctions. And then European Parliament obviously said, look, we are not even going to look at this agreement as long as they are members of European Parliament under sanctions. And that’s where it has been staying there.

So, OK. So what is changing now? Obviously, if China is removing those sanctions, that’s a signal they are sending to European Union. Look, we are ready to reengage or engage more intensely. OK. On the agreement itself, that I think will require a fresh look because a couple of years have passed. So that would require, in any case, also discussion among EU member states, so how we position on this right now. But clearly, it’s a signal which China is sending.

CARUSO-CABRERA: Here we go. Let’s get you the mic.

Q: Thank you. Mona Aboelnaga with K6 Investments.

There’s been a lot of talk over the past couple of weeks over the loss of value of the American brand. Curious what your thoughts are. Assuming optimistically we get to a great resolution for all on tariffs, what is the long-term impact to the American brand, whether it’s what you do specifically in your portfolio or how the European consumer acts in the future with American brands?

DOMBROVSKIS: OK. You know, it’s obviously difficult to predict how it will evolve, but, you know, U.S. used to be, for many years and decades as a—what one could sell a champion of the free world. That is certainly now being rolled back by more isolationist, one could say, administration. So clearly that has implications on the global landscape and also on the perception of the U.S. globally. Clearly, you know, putting those tariffs to almost entire world, except maybe, you know, Russia, North Korea, Belarus, Cuba, countries like this—(laughs)—is also not adding to this—to this, you know, positive image. And those are the issues we need now to resolve. But that said, exactly for the fact that U.S. had been for decades champion of the free world, and that U.S. is actually very large and very diverse country, I think also in many quarters of the world people will still see value in engagement with U.S. and cooperation with U.S.

CARUSO-CABRERA: Last question. Do I keep saying the last question? He’s very efficient, that’s why. (Laughter.)

Q: Good afternoon. Thank you for being here. Rich Buery from the Robin Hood Foundation.

Maybe a related question. I’m curious whether you see any impact, or expect any impact, in tourism—America to Europe or Europe to America—as a result of the current political situation.

DOMBROVSKIS: Well, what we see from the latest tourism figures, tourism from Europe to U.S. is right now declining. OK, how strong, how persistent it’s going to be difficult to predict. I can give, like, also some anecdotes. Like a week or two ago there was a story which generated quite a bit of headlines in EU, that there were two German girls which were arrested and deported and not allowed into U.S., and so on and so forth. Of course, stories like this are not, you know, facilitating this tourism and engagement. But I cannot tell how long-lasting those tendencies are going to be, because, well, generally speaking U.S. is a great tourism destination. I have myself done a bit of tourism in the U.S. here and there. And it’s certainly a country worth visiting. And I think also, with a bit of signaling about tourists being welcome, not running into accidents at the border and so on, I think these things can move up again.

CARUSO-CABRERA: Commissioner Dombrovskis, thank you so much for spending an hour of your very valuable time with the Council on Foreign Relations. Much appreciated. (Applause.)

DOMBROVSKIS: Thank you.

(END)

This is an uncorrected transcript.