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With his three-word promise to do “whatever it takes,” former European Central Bank President Mario Draghi is said to have averted the eurozone’s sovereign debt crisis in 2012. At 400 pages, his solution to boosting the EU’s flagging economic competitiveness is far more wordy, but the general principle, to do whatever it takes, is similar. The bloc, He arguesneeds a “new industrial strategy” and must increase investment by 800 billion euros a year to boost its growth. The 4.7% of GDP is more than double the scale of the Marshall Plan in relation to the size of the economy.
Draghi is right about the scale of the challenge. The bloc needs an ambitious agenda to revive its long-subdued productivity growth. The economy has persistently grown at a slower pace than the United States over the past two decades.
It has also become clearer that Europe’s economic model is in urgent need of renewal. The US is investing heavily to attract clean technology industries. Imports of cheap green technology from China have also raised fears of deindustrialisation, particularly in Germany, the EU’s largest economy. Last weekThe chief financial officer of Volkswagen, Europe’s largest carmaker, has warned that the company has “a year, maybe two” to adjust to lower sales. The ongoing trade war with China and the possibility of a second, more protectionist Donald Trump presidency also threaten its exports.
Draghi blames the bloc’s failure to take advantage of its huge single market for many of its economic problems. Indeed, Europe could unlock trillions of euros in deep, liquid funds of financing for investment and business growth if its hodgepodge of exchanges, clearinghouses and national securities laws were combined. As the Financial Times notes, reported on mondayEuropean productivity is also held back by excessive red tape and varying regulatory requirements. Easing existing trade frictions between member states could also support EU economic growth.
The report makes a number of sensible, yet novel, recommendations to help Europe seize the opportunities for digital and green growth. These include integrating capital markets by centralising market oversight, developing new funding pools and harmonising and streamlining industrial, competition and trade regulations. A further push for closer cooperation on energy, innovation and national security is also welcome.
Draghi’s recommendations The reforms should give the newly re-elected European Commission president, Ursula von der Leyen (who commissioned the report), a valuable framework for a new term in office. But the real challenge will be to act on them. First, the bloc’s two largest economies, France and Germany, are grappling with unstable coalition governments that may hamper any progress on EU-wide issues. Second, strategic cooperation is easier said than done. Frugal northern European countries are still wary of increasing spending or issuing joint debt. Plans for a capital markets union have long been thwarted by national interests.
Von der Leyen needs to build a team of competent policymakers. Reducing regulation and clearly defining areas of strategic cooperation is a difficult task. A recommendation by Draghi that European rules on mergers take into account the objectives of the industrial strategy has already raised concerns that it could undermine competition in the internal market.
Europe has shown that it can adapt under pressure. It has weaned itself off Russian gas and raised €750 billion for its post-pandemic recovery package. The threats at the time were rising energy prices and an economic crisis. Weakening competitiveness may seem less imminent, but it is no less important. The further Europe falls behind, the harder it will be to make up for lost ground. Draghi’s timely report should give us pause.