On 9 September 2024, the European Commission published the highly anticipated report by Mario Draghi, ‘The Future of European Competitiveness’. A year ago, Commission President Ursula von der Leyen had tasked Draghi with writing the report. Draghi comes with impeccable credentials: a little over a decade ago, the then-European Central Bank President was widely credited with saving the single currency, then in the throes of an existential crisis, thanks to his vow that the ECB stood ready to do ‘whatever it takes’ to save the euro. Could he pull off another economic miracle in the face of what Draghi terms ‘an existential challenge’ (part A, p1)? This contribution briefly summarizes the main elements of the Draghi report, notes some of the policy and governance changes that such proposals would entail and concludes with a reflection on how the current political climate differs from the one in 2012 that had permitted Draghi to save the euro.
The Draghi report pulls no punches and bluntly speaks truth to power. Internally, chronic low economic growth will make it harder for the EU and its member states to provide citizens with the goods and services to which they are accustomed. Externally, it diminishes the EU’s influence and relegates the EU to a second-rank player in geopolitics, well behind the United States and China.
The economic and geopolitical circumstances that had contributed to European economic growth have shifted profoundly. The liberal multilateral trading system has given way to growing protectionism and ‘friendshoring’. Russia’s invasion of Ukraine upended the EU’s cheap energy supply. The stable security guarantee from the US that allowed many European countries to neglect defense spending has been replaced by rising European defense spending to meet NATO agreements in the face of US criticism. Indeed, ideas emphasizing the efficiency of open markets have ceded to concerns over nurturing key industries, protecting critical supply chains, and reducing the vulnerability that economic openness delivers in exchange for that efficiency.
Draghi’s report identifies three main areas for action:
Draghi makes a compelling case for all three. The EU failed ‘to translate innovation into commercialization, and innovative companies that want to scale up in Europe are hindered at every stage’ (part A, p2). Although decarbonization may present an opportunity to European industries, it also poses a threat to European clean technology when China’s state-sponsored economic model makes it impossible for European producers to compete with heavily subsidized Chinese companies. Finally, the EU stands increasingly vulnerable, both economically and militarily, giving rise to the need for a ‘foreign economic policy’ that includes more coordinated defense procurement.
The Draghi report notes the changes in both policy and governance required to execute the envisaged reforms. Generally, it requires more money and more integration to make the needed investments, reduce inefficiencies, and benefit from the unrealized economies of scale in Europe. Indeed, the EU’s political and institutional architecture have followed a path dependent logic that has responded slowly to the rising complexity of the EU itself and its geopolitical environment, leading to unnecessary economic duplication across member states, a decision-making process averaging 19 months from Commission proposal to EU legislation (not to mention the implementation of new laws by member states), and a very limited European budget of which the biggest beneficiaries or agricultural and cohesion policies.
The Draghi report proposes the creation of a new European industrial strategy created from the following ‘building blocks’:
Draghi’s proposals require substantial resources, estimated at an additional €800 billion annually, which constitutes close to 5 percent of EU GDP. For context, the scale is on par to the EU’s Recovery and Resilience Facility, for which the funds were to be stretched over a period of six years, not annually. The EU budget amounts to close to 1 percent of GDP. Nevertheless, the Draghi report is confident that ‘the EU can meet these investment needs without overstretching the resources of the European economy (part A, p59) by better harnessing private money in addition to providing public support. Like the April 2024 Letta report, the Draghi report emphasizes the importance of completing capital markets union to unblock European savings that exceed the levels of the US but have fewer efficient (and less lucrative) investment outlets. In any case, there will be the need for public money and for fiscal investments to induce private actors. Interestingly, Draghi cites the Next Generation EU Budget (NGEU) as a possible model for the creation of a European asset that would deepen further EU capital markets. Given the propensity of the report to take big swings, this is a more modest proposal (though still politically challenging) than one might expect, as the NGEU debt had higher interest rates than debt issued by member states like Germany due to its liability structure. The NGEU model, however, enjoys the advantage of being an existing precedent and is perhaps more palatable politically as a result.
In addition to more money, Draghi’s plan requires better/less regulation that has implications for governance as well as policy. This includes moving to more qualified majority voting to allow subsets of member states to engage in more cooperation. Moreover, he proposes creating a ‘Competitiveness Coordination Framework’ to develop EU-wide coordination in priority areas in place of other coordination instruments like the European Semester. A new Commission Vice President for Simplification could reduce the morass of EU legislation that has constrained innovation, especially in the tech sector, and contributed to the innovation flight from Europe to the US.
The fate of such reports depends on the will of political leaders to enact the ideas contained within. While the 1989 Delors Report laid out the path towards economic and monetary union, other reports (containing excellent ideas) gather dust. What are the chances of the Draghi report becoming a blueprint? Is this another ‘whatever it takes’ moment for Mario Draghi?
The Draghi report differs substantially from his 2012 ‘whatever it takes’ moment in that all of the policy levers are under the control of different actors. While many agree that Draghi would not have made such a bold promise in 2012 without the implicit backing of other actors (particularly the EU member states), he did head the institution that would operationalize that promise. Another difference is the cost: whereas the ‘whatever it takes’ promise potentially had very high costs, in reality the promise alone sufficiently quelled market speculation and required no additional spending. In contrast, the Draghi report promises very high levels of EU spending, both public and private. It is not just a confidence game; it requires serious investment. Finally, the 2012 promise came at a time of extreme economic duress as speculation against Greek, Spanish and Italian debt threatened the integrity of the euro itself. As noted by Jean Monnet, Europe is forged in crisis. Is the competitiveness crisis sufficient to launch a substantial institutional and economic effort to combat it? Will EU leaders be swayed by the urgency of the Draghi report?
Though Draghi writes of the existential nature of the EU’s competitiveness crisis, it is one of a ‘slow agony’. A slow-moving crisis differs from the shock of a crisis like the ones relating to the Covid pandemic or the euro crisis that may be insufficient to focus the minds of EU policymakers to engage in such far-reaching reforms. German Finance Minister Christian Lindner already rejected the possibility of joint borrowing, for example.
In addition, the current crisis lacks a figure akin to Angela Merkel who could take a leadership role and unblock some of the current political challenges preventing reform. Both Germany and France, the traditional countries that spearhead bold new European initiatives, find themselves mired in domestic political battles that sap their willingness and ability to deal with European questions that could inflame domestic tensions and benefit political rivals.
Finally, the funding requirements would require substantial policy changes that have been in the pipeline for some time. Capital markets union has languished for nearly a decade and banking union remains similarly unfinished. Ideas for a single safe European asset have proliferated since the euro crisis, and the NGEU precedent was put in place under extraordinary economic pressure and was deliberately time limited. These plans for deepening banking and capital markets have stagnated due to the reluctance of member states to lose the benefits afforded by the status quo, despite the longer-term economic benefits that would accrue. For example, recent efforts to revive capital markets union through centralized supervision and more regulatory powers quickly stalled; as Estonian Prime Minister Kaja Kallas explained, ‘We don’t have many competitive advantages…so please don’t take it away from us’. The Draghi report alone will not alter these political calculations.
Despite these rather pessimistic observations, the debates that reports like the one written by Draghi remain essential. Some elements may gain political traction. Today’s red lines could change with a new election result of government coming into power. Draghi has done Europe a great service in laying out the stakes of inaction and in providing a potential road map to restore competitiveness.
Michelle CHANG is the Director of the Transatlantic Affairs Programme at the College of Europe in Bruges, where she is also a permanent Professor in the European Political and Governance Studies Department.
Dr. Chang’s academic journey includes a Ph.D. from the University of California, San Diego, and a B.A. from Smith College. Before joining the College of Europe, she held positions at Boston University, the Centre for European Policy Studies, Cornell University, and Colgate University.
Her professional affiliations reflect her deep engagement with EU affairs; Dr. Chang’s research interests include the Economic and Monetary Union, euro area governance, the European Central Bank, fiscal policy coordination, the Banking Union, and financial crises.
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