- Draghi’s report on the ailing European economy contains hard truths for EU leaders, who have long failed to confront Europe’s declining growth rate head-on.
- The report’s diagnosis is hard to argue with: Europe’s innovative capacity is declining, compared with other major advanced economies, as is its business dynamism. Intensifying state-led Chinese competition, geopolitical tensions and continued reliance on imported energy mean that policy procrastination could lead to permanent stagnation, or worse.
- Some of Draghi’s proposed fixes are new, even ground-breaking. Others have been in the EU debate for a long time. The report’s vital contribution is that it brings them together into a coherent growth agenda and that it tries to recognise the trade-offs involved in delivering it. In five areas, Draghi’s proposals will spark especially fierce debates about the direction of EU economic policy.
- First, Draghi rightly identifies Europe’s competitiveness challenge as being about improving productivity, including by closing an annual private and public investment gap of around €800 billion. He implicitly rejects boosting exports through wage repression and overly tight budgets, a strategy which served Europe poorly during the eurozone debt crisis and would backfire even more in a protectionist era.
- But Germany and many frugal member-states are still wedded to the export-led model of growth. And the EU policy framework is poorly equipped to run an economy ‘hot’ with internal demand: fiscal rules remain quite strict and the EU’s pandemic recovery fund will run out in 2026.
- Second, Draghi shifts away from a yes-or-no debate on industrial policy to a nuanced when-and-how discussion considering the characteristics of each industry, its prospects and its strategic value. He distinguishes between sectors where the EU has lost its comparative advantage entirely, those that are employment-rich, those that are critical for security, and infant industries: they all require a different mix of trade and industrial policies ranging from accepting imports to bringing in foreign technology to setting up trade protections.
- In practice, the EU will find it challenging to be hard-nosed in responding to demands by EU firms for aid and protection, to avoid wasting taxpayer money and to avoid helping incumbents over younger and more innovative firms. Draghi also advocates a tougher EU line on Chinese mercantilism and closer alignment with the US, which will prove controversial. Critics will fret that the EU taking a more hawkish line on China could be the final nail in the coffin of the frail rules-based trade system, on which the EU itself remains deeply reliant, and it could undermine developing countries.
- Third, Draghi suggests that competition authorities take more account of innovation and common continental interests like security. These are sound ideas in principle and Draghi’s approach is hardly an unconditional endorsement of ‘European champions’. However, his reform proposals still carry risks which are not fully acknowledged and are not always consistent with each other.
- Fourth, the report calls for more joint decision-making in key economic policy areas. More majority voting and common regulatory frameworks to escape the patchwork of national ones would strengthen the EU’s economic capacity to act. But member-state reluctance to cede sovereignty will make this politically difficult, leaving the EU vulnerable to ill-coordinated policies and pressure from external powers on individual member-states.
- Fifth, the EU will need money to achieve some of these objectives. Draghi suggests scaling up the EU budget and redirecting spending to strategic priorities. But fundamental reform of the EU budget has repeatedly proved impossible, while national budgets in many member-states are stretched. Draghi’s suggestion for some common debt may be unavoidable but it is controversial, even if it is only used for productivity-increasing investments in EU public goods such as breakthrough innovations, defence and cross-border energy infrastructure.
- Immediate outcries from some German politicians stumbling over Draghi’s reference to common debt do not bode well, even though Germany, as the EU’s stagnant industrial powerhouse, would be a major beneficiary from an EU growth agenda.
- Draghi’s sectoral proposals for innovation, energy and defence should be more uncontroversial. He suggests more funding for research and rolling back excessive regulation and cross-border barriers in the single market, all of which hamper the efforts of innovative European firms to scale up. Like Enrico Letta in his single market report, Draghi stresses that unlocking more high-risk investment through deeper and more liquid capital markets is critical.
- As ways of lowering energy prices, the report advocates improved collective gas procurement, stronger regulation of gas trading practices and accelerating technology-neutral energy decarbonisation. Draghi also rightly advocates for more funding, industry consolidation and enhanced EU co-ordination to counteract the EU’s fragmented defence sector.
- Implementing these plans will still be difficult: member-states have so far been reluctant to give additional powers to Brussels in these areas, for example over defence policies and procurement.
- Draghi poses the right challenge to EU policy-makers in an age of increased geopolitical competition and burgeoning investment needs. But will EU member-states rise to meet it? Or succumb to the narcissism of their differences and face a ‘slow agony’ of fading growth, economic heft and global influence?
On September 9th 2024, Mario Draghi launched his report ‘The future of EU competitiveness’, which European policy-makers had eagerly anticipated. Commission President Ursula von der Leyen had tasked the former president of the European Central Bank (ECB) and former Italian prime minister with producing a plan to jolt the stalling European economy into a higher gear. Draghi’s report follows an April report to the European Council, on completing the EU single market, by another former Italian prime minister, Enrico Letta.
Such reports often lack punch, because the outside expert is not free to speak their mind, internalises too many different perspectives, or is not clear about what their main message is. The Draghi report does not suffer from these drawbacks. It provides a sober and downbeat assessment of the European economy’s woes, a series of ambitions which are more realistic than those usually trumpeted by EU leaders and a clear-eyed set of reform proposals to achieve those ambitions. Draghi’s overriding message is that the European economy has lost dynamism and slow economic growth is accelerating Europe’s relative decline, while the surrounding political environment is becoming more hostile. Member-states will need to coalesce around a coherent plan to boost growth and rescue the European economy if they want to keep the continent prosperous enough to defend its social and political model.
The report advances three priorities: first, Europe must refocus its collective efforts on closing the innovation gap with the US and China so that it can remain a player in emerging technologies, having already lost the battle for many existing technologies. Second, the EU needs to blend decarbonisation objectives with retaining competitiveness, including by building a competitive green industry of its own rather than relying solely on Chinese imports. And third, the EU should increase its security and reduce external dependencies, by pursuing access to critical raw materials, developing its own digital services and strengthening its defence industry. Draghi’s report contains many proposals addressing these three priorities, calibrated to be implementable over the next few years.
This policy brief assesses the key themes of Draghi’s report, notably its diagnosis and proposals to boost innovation, reform industrial and trade policy, strengthen energy independence, accelerate decarbonisation and foster common defence capabilities. We also look at Draghi’s suggestions on how to finance investment – the most controversial of his proposals in EU capitals.
About the Authors
Sander Tordoir is chief economist at CER.
Aslak Berg is a research fellow at CER.
Elisabetta Cornago is a senior research fellow at CER.
Zach Meyers is assistant director at CER.
Luigi Scazzieri is a senior research fellow at the CER.