SUPER MARIO RINGS THE ALARM BELLS

 

By Drakoulis Goudis

15/09/2024

On September 9^th, Mario Draghi’s long-awaited report “The future of European competitiveness” was released to the public. The 77-years old former ECB president (and former Italian Prime Minister), a well-respected figure amongst European financial and political circles, was tasked by the Commission to diagnose the issues the EU is facing regarding competitiveness on the global stage and recommend courses of action to remediate them.

Diagnosis

Draghi’s report is long, detailed, and crystal clear: the EU is heading towards “slow death” caused by slow growth. "We should abandon the illusion that only procrastination can preserve consensus," Draghi says. "We have reached the point where, without action, we will have to either compromise our welfare, our environment or our freedom." But how did Europe reach the point of needing sweeping reforms and unprecedented investment to retain its place in the world?

The causes are structural and societal: the demographic trend (shrinking of workforce because of the ratio of working people to pensioners gravitating more and more towards pensioners) working against the European social model (which spends a considerable percentage of GDP in pensions and social welfare) and the fragmentation of leadership, legislation and frameworks in almost every sector of industry, due to national interests, short-sightedness and unwillingness to risk.

 

Innovation and Technology

As Draghi pointed out, if you remove its tech sector, US productivity growth has been similar to Europe. "The problem is not that Europe lacks ideas or ambition (...) but that innovation is blocked at the next stage: we are failing to translate innovation into commercialization," he says. EU firms cannot grow because of the lack of an adequately unified European legal and financial framework. They do not get enough funding because they cannot grow enough, and either leave for the USA or get sold to the American tech giants. In the last 50 years, no EU company worth more than €100 billion has been created from scratch - and 30% of Europe's unicorns have left the bloc since 2008 because they could not scale up on the continent. “With the world on the brink of an AI revolution, Europe cannot afford to remain stuck in the "middle technologies and industries" of the last century. We must unleash our innovative potential," the Italian professor added - including investing in people's skills to match these ambitions.    

The big EU countries don’t want to hear about it, but they simply cannot go head-to-head with USA and China by themselves in the tech sector. But together? We won’t know until we try, and we’re not trying because of petty national interests, protectionism and a mentality that belongs to the past. Draghi advocates for a much more integrated EU market for tech firms to scale quickly.

Industrial Strategy

Draghi repeatedly refers to the need for Europe to have an industrial strategy—and criticizes Europe's inability to coordinate around one. “Industrial strategies today–as seen in the US and China–combine multiple policies, including tax, trade and foreign policy,” he says. “Owing to its slow and disaggregated policymaking process, the EU is less able to produce such a response.” A major case study is the automobile industry, a sector in which Europe is struggling. The EU's ambitious regulations wish to see conventional petrol and diesel vehicles start to be phased out a decade—but domestic manufacturers factories are struggling to compete with heavily subsidized Chinese electric cars.  “A comprehensive approach is needed covering all stages of car production, from research and mining to data, manufacturing and recycling” Draghi says. “The EU must avoid the "pitfalls of protectionism” and shouldn't impose tariffs systematically —but state-sponsored competition costs European jobs” he adds. Draghi advocates for pursuing common access to critical raw materials, digital services, and common spending on the defense industry because the more EU countries collaborate, the lower the procurement cost and the better the negotiating position will be.

Green Transition and the China Problem

At the core of Europe’s economic woes, Draghi states, is the cost of energy for industry, which is currently 158% higher for electricity than in the USA, and 345% more for natural gas.

The causes are a lack of access to cheap raw materials, the unfortunate reality that Russia, former main energy partner, is a rogue state and de facto enemy of Europe, price-setting mechanisms which are not optimized for minimum cost but for minimum risk, and lack of grid unification due to (you guessed it) national governments dragging their feet. The EU is trying to reduce its energy cost disadvantage by accelerating its energy mix transition to renewable-based sources and investing in green tech, but it is not enough, because the marriage between decarbonization and competitiveness hasn’t been achieved yet. According to Draghi, this requires investing in grid connectors, reducing energy taxes and an even higher integration of the European grid, energy market and regulatory authorities.

Directly linked is the relationship between EU and China, and the overreliance of Europeans on the low-cost Chinese supply chain. China is a strategic enemy of the West, an authoritarian regime whose political interests directly clash with European ones. They are also so entrenched in the global industrial and trade network and have a near monopoly in several raw materials’ mining and processing, that they are impossible to decouple from (unlike Russia) even if we wanted to.

 

Draghi is advocating for a case-by-case strategy by differentiating between sectors like the solar industry where the EU has entirely lost its competitive advantage and should accept Chinese imports, sectors like the automobile industry which are employment and require a level playing field towards which the EU should work, security-relevant sectors where the EU needs to own the know-how, and infant industries where China’s overcapacity and protectionism could help EU innovation.

“Increased reliance on China could offer a faster and cheaper way to meet Europe's decarbonization goals,” Draghi notes in the report, adding that “China's state-backed competition poses a threat to the Europe's clean-tech and automotive industries.”

Funding

The report tackles more sectors in the same spirit: the EU needs more investment, a common strategy, and a common regulatory framework. Draghi has many proposals, carefully designed to be doable, and implementable in a reasonable amount of time, and we finally reach the big point of contention: the cost. The report outlines 750-800 billion needed in additional annual investment, a surge of 4.5-5% of EU GDP.

The report is stressing the need for common EU borrowing alongside private investment to raise this amount: “Joint EU borrowing should be regularly used to meet the bloc's ambitions for digital and green transformation, as well as for the much-needed boost to defense capabilities”, Draghi says. “If public goods such as grids and interconnections, defense equipment and defense R&I are not jointly financed and planned, they risk being under-supplied”.   

Decision-making

Cutting red tape and rendering the decision-making rules more efficient will allow it to act more quickly, the report said. “Europe does not coordinate where it matters, and Europe's decision-making rules have not substantially evolved as the EU has enlarged and the global environment, we face has become more hostile and complex,” Draghi says. The Italian is proposing urgent action and asks for a closer coordination of policies, to speed up decision-making (one of his proposals is replacing the veto by qualified majority), reduce EU overregulation, and equip the EU with a genuine foreign economic policy.

Reactions

While the reactions from the majority of MEPs and European business leaders have been positive, the obstacle remains the EU governments themselves: first and foremost, Germany, allergic as always to the idea of common debt. Both minor government party FDP and opposition CDU vehemently reject the idea of sharing debt with non-frugal member states. But Germany isn’t the only obstacle: France and Italy also often engage in protectionist national policies and object more pan-European approaches. Ireland and the Netherlands refuse to end their tax policies, which effectively sabotage the European approach by offering loopholes to various entities.

Conclusion

Draghi did his job, and he did it well: he proved with hard facts and raw data that the current model is mathematically leading to a weaker, less independent Europe, and he suggested ways to alter that course. Whether European leaders will listen to him or bury their heads in the sand is up to them–and to the voters who they represent after all.