On September 9, former Italian Prime Minister and former President of the European Central Bank Mario Draghi presented a 400-page report titled “The Future of European Competitiveness” to the European Commission. The paper reaches bleak conclusions regarding the current state of the European Union. According to Draghi, the EU’s economic lag behind the US and China may become critical.
It is difficult to find an economist of international standing in the EU with a reputation as strong as Mario Draghi’s. He became President of the ECB on November 1, 2011, as the Eurozone crisis worsened. Draghi’s unconventional monetary policy actions spared the EU banking industry from collapse.
On July 26, 2012, addressing a global investment conference in London, Draghi spoke the now-famous words: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” The markets believed him. Spreads fell. Not every head of the ECB has such credibility at their disposal.
Draghi has held no official appointments since his resignation as Prime Minister of Italy. The European Commission described him as “one of Europe’s greatest economic minds” and asked him to assess the EU’s competitiveness.
Draghi’s latest report is a shock, and not just because it is 400 pages lengthy. For the first time, it openly expresses concern about the future of the European Economic Community. People have already labeled the report a “new Marshall Plan for Europe,” with Draghi recommending “revolutionary measures” to save the EU.
The report focuses on the EU’s deteriorating capacity to compete with the world’s top economic powers, the United States and China. Since the early twenty-first century, the EU’s economic growth and living standards have declined dramatically. For example, since 2000, real disposable income in the United States has increased nearly twice as quickly as in the European Union. The GDP gap between the EU and the US has increased from 15% in 2002 to 30% by 2023.
Why has Europe’s “golden age” slipped into the past? Draghi is open about the reality that the EU is losing market share to foreign manufacturers, particularly those from China. Chinese products now compete directly with EU goods in 40% of the global market, compared to 25% in 2002.
Surprisingly, Europe “slept through” the digital revolution and is now behind in worker productivity as a result. The EU also lags behind in technological development. Only four of the world’s top 50 technology firms are European. Over the last decade, Europe’s global proportion of advanced technology revenues has declined from 22% to 18%, while the United States’ share has increased from 30% to 38%.
Draghi publicly said that “Europe suddenly lost its most important energy supplier—Russia.” Before the 2022 events, Russian gas represented 45% of total natural gas imports into the EU. While energy prices have lately decreased, electricity in the EU is 2-3 times more than in the United States, and natural gas is 4-5 times higher. The eurozone also spends 30% more on gas than China. This is related not only to Europe’s paucity of natural resources but also to present market regulations.
However, the EU’s concerns go beyond energy and include human resources. The Western world is quickly aging, and for the first time in history, population growth cannot sustain the EU’s economic progress. Things will become worse. By 2040, the workforce will shrink by two million people per year.
At present productivity levels, the EU will only be able to retain its current position, potentially leading to economic stagnation. According to Draghi, successful development requires Europe to invest 5% of GDP every year, like it did in the 1960s and 1970s. But where do you find such a huge sum? Even during the Marshall Plan’s execution from 1948 to 1951, investments accounted for only 1-2% of GDP.
And modern-day America is reluctant to pay to save its rival’s economy.
Europe is also dealing with large-scale investment. In the last 50 years, no truly big investment corporations have arisen in the EU, whereas the United States has seen six investment funds with capital approaching one trillion dollars.
As a result, Mario Draghi is adamant that the EU economy will suffer a “slow agony” if no immediate action is taken.
What measures are proposed to save the EU?
The first objective is to catch up with and outperform the United States in innovation. Over the last two decades, the top three US companies in research and innovation have switched away from automobile and pharmaceutical corporations and toward the digital industry. Meanwhile, car corporations continue to dominate the EU market. Draghi regards this industrially immobile and obsolete economic framework.
Draghi emphasizes Europe’s great innovation potential while noting that more than one-third of its corporate startups relocate outside, mostly to the United States. Draghi proposes several measures to combat the brain drain, including the establishment of a European Advanced Research Projects Agency (ARPA), the involvement of the European Investment Bank in encouraging “business angels” (private venture investors who support early-stage startups), reforming pension plan rules to redirect European savings into investments, and simplifying the research and development framework. Draghi also pushes for improving Europe’s “academic excellence,” investing in scientific infrastructure, expanding R&D spending, and creating a more innovative regulatory environment. His report focuses on continuous learning to improve workers’ skills.
The second element is decarbonization, also known as the “green agenda.” Draghi stopped short of explicitly stating that decarbonization is bad for Europe. Instead, he proposed “aligning decarbonization and competitiveness.” According to Draghi, decarbonization can increase competitiveness if properly managed, but it can also undermine it if poorly done, particularly if it relies on Chinese technologies.
The European Union continues to be a global leader in some green economy industries, including wind turbines, electrolyzers, and low-carbon fuels. However, China is quickly displacing Europeans in emerging clean technology markets. In 2017, the EU owned 58% of the wind turbine market, but by 2022, it had dropped to 30%, giving a substantial part to China. More production is shifting to China, where raw resources are more readily available and costs are lower. For example, photovoltaic panels in China cost 35-65% less than in Europe, while battery cells cost 20-35% less.
The third issue confronting the EU, according to Draghi, is the need to revitalize Europe’s military industry. His report is brutally honest about the status of the European defense sector. Draghi notes the “intense fragmentation” of the EU defense sector, emphasizing the importance of scale and demand aggregation. He also highlights that the EU spends 80% of its budget on weaponry and military equipment acquisitions. Analysts at the Center for Strategic and International Studies (CSIS) have underlined that Draghi’s demand for EU countries to “buy European” has already prompted concern among American defense firms.
Draghi openly supports the decolonization of the EU. His paper focuses on the need for more strategic autonomy and economic security for the EU to lessen vulnerability to economic pressure from third countries. However, this necessitates a higher defense budget, an independent defense sector, and diversification of crucial material suppliers.
Recognizing the high costs of autonomy, Draghi recommends ways to mitigate them through member-state cooperation and trade deals with non-EU countries. The paper also proposes an “external economic policy” that would include cooperative investments and procurements based on the European Union’s enormous internal market. According to CSIS analysts, Draghi opposes US protectionism and favors free trade agreements as a means for improving security and reducing threats.
Draghi believes that completing his plans to save the EU will necessitate additional annual spending of more than 800 billion euros (approximately 5% of EU GDP) per year.
However, the governments of the EU members do not wish to pay for this. Draghi’s proposal for the EU to issue joint bonds to fund vital investments has exacerbated divides in Germany’s coalition government and sparked strong criticism from the Netherlands.
Ursula von der Leyen, who ordered Mario Draghi’s report, even criticized it.