Brussels finally unveiled its long-awaited “Report on the Future of European Competitiveness,” written by former European Central Bank (ECB) chief Mario Draghi at the request of the European Commission. Although the document calls for “urgently” pouring up to €800 billion into the EU’s economy to avoid being left behind by the likes of the U.S. and China, there is little to no political appetite for it in member states.
The report was originally planned to be published last spring in the hope that it would generate public debate during the EU election campaign period. However, as the publication of the 400-page report was delayed over and over, enthusiasm in EU capitals diminished. Brussels may have one of the most ambitious economic reform plans in its history on the table, but very few countries have the means to foot the bill right now.
‘Genuine’ concerns
Despite member states generally lacking this sense of urgency, the situation is “really worrisome,” Draghi said during his press conference with EU Commission President Ursula von der Leyen on Monday, September 9th.
“For the first time since the Cold War, we must genuinely fear for our self-preservation,” Draghi said as a conclusion of his year-long analysis, adding, “The reason for a unified response had never been so compelling.”
The report identified three main areas of focus to help raise Europe’s lagging economic competitiveness and three main barriers to achieving it.
The first main “area for action,” as the document calls it, is about closing the “innovation gap” between the EU and other parts of the developed world, primarily the U.S. and China. American companies have spent €270 billion more on research and innovation (R&I) than their EU counterparts in 2021, while “inconsistent and restrictive” overregulation in Europe drove 30% of the most valuable European startups to relocate to the U.S.
The second area concerns finding an effective joint action plan for long-term decarbonization that not only saves the planet but also makes European energy prices affordable to increase competitiveness. Despite Europe pouring billions into “clean and cheap” energy sources, electricity still costs 2-3 times more in the EU than in the U.S., Draghi pointed out, largely because of the highest energy taxes in the world.
Continuing with the green transformation without structural reforms, therefore, will run “contrary” to economic growth, he explained. So to be clear, Draghi believes decarbonization is the solution to Europe’s energy price crisis, but only if it’s done in an even more centralized way.
Finally, the third area focuses on increasing Europe’s security and reducing its dependencies on foreign defense, energy, and resources. A leaked chapter on defense made headlines last week, but the other two dimensions are just as important. Europe must bring home its production lines and build up its own trading network with resource-rich nations or risk being at the mercy of a China-dominated world.
The “barriers” standing in Europe’s way are all portrayed as stemming from the common market not being sufficiently integrated, so the report calls for more economic and political centralization. These problems—overregulation and administrative burden; a fragmented common market that dilutes collective spending power; and the lack of efficient political coordination among so many governments—could all be solved with fewer but more focused legislative processes. This, the report suggests, could be achieved by planning for just one economy instead of 27.
Europe says ‘no’
While the enormous document deals with a lot of economic technicalities, it does not go into detail about the only thing that lawmakers were looking forward to: finances. There are very ambitious target figures, and Draghi said creating a common fund is “instrumental” to achieving the goal, but also refrained from giving too concrete recommendations about how to raise it due to the topic being “sensitive.”
But first, numbers. The report identifies the primary objective of injecting €750-800 billion “minimum annual additional investment”—from both private and public sources—into the bloc’s competitiveness based on the above-mentioned goals. This amount corresponds to about 4.5% of the EU’s GDP last year, roughly three times as much as the Marshall Plan which was the equivalent of 1-2% between 1948-51. This additional investment, the report claims, would “reverse a multi-decade decline across most large EU economies.”
Traditionally, four-fifths of productive investment in Europe has been undertaken by the private sector, and one-fifth by governments. That level of private sector investment is not realistic on such a massive scale as around 5% of the GDP, so the public sector will need to step up its game significantly, both by footing much more than its usual share and by financing fiscal incentives to raise the private sector’s willingness to invest in innovation.
As to how to raise this common fund of a few hundred billion euros, there are very few suggestions in the report. It’s clear, however, that the project is unimaginable without going into further joint debt—as in the case of the pandemic relief funds—and increasing the common EU budget, something that Draghi also called for. This could be done through several means, including massively increasing member states’ contributions and even creating the EU’s “own revenue sources,” such as direct EU taxes.
But as many diplomats familiar with the report noted in advance of its publication, there is very little chance that most of this plan will be implemented simply because Europe has no money, nor the will to spend more at this time.
“We keep hearing about this call for multi-hundreds of billions of euros. But how feasible is that in an environment where the Germans have a budget crisis, the Dutch have said they want to lower their contribution to the EU, and the French lack a government?” an unnamed diplomat told Politico.
Sven Giegold, the German state secretary for climate and economy, shared this opinion a few days ago when he talked about the content of the report. “We will not get this budget. So therefore we have to think more creatively, how to make use of existing pots of money,” he told the Brussels-based economic think tank Bruegel.
Nonetheless, until the EU Commission presents concrete legislative proposals based on Draghi’s recommendations—something Ursula von der Leyen has promised to do in the first one hundred days of her new administration—we won’t know the real support for a plan around the capitals.
