Draghi Urges EU to Compete with Rivals or Risk ‘Slow Agony’ – Reuters

By Philip Blenkinsop

BRUSSELS – The European Union requires a significantly more coordinated industrial policy, quicker decision-making, and substantial investment if it aims to remain economically competitive with the United States and China, according to Mario Draghi in a long-awaited report.

Commissioned by the European Commission a year ago, Draghi, the former head of the European Central Bank and Italian prime minister, analyzed how the EU can maintain its competitiveness in a greener and more digital economy, particularly amid rising global tensions.

"The current situation is quite alarming," Draghi stated at a news conference in Brussels. He noted that while Europe’s growth had been slowing for an extended period, it had largely been ignored. "Now we can’t continue to overlook it; the conditions have changed."

He pointed to rising trade protectionism, the loss of affordable energy from Russia, increased defense expenditure, and a declining population as significant concerns.

In his nearly 400-page report, Draghi emphasized that the EU needs to invest between 750 to 800 billion euros annually (approximately $829 to $884 billion), representing up to 5% of its GDP. This figure surpasses the 1-2% of GDP allocated during the Marshall Plan aimed at rebuilding Europe post-World War II. He stressed that the bloc must act decisively on several fronts. "It’s ‘Do this,’ or it will be a slow decline," he warned.

Although EU countries have started to respond to these new challenges, Draghi’s report argued that their efforts are hampered by a lack of coordination. Disparities in subsidies across member states disrupt the single market, while fragmentation limits the scale necessary for global competitiveness. Additionally, the EU’s complex and sluggish decision-making process was noted as a barrier to progress.

The report proposed extending qualified majority voting to more areas to streamline decision-making. It also suggested that like-minded nations should be permitted to undertake specific projects independently if consensus is not achievable.

While existing national and EU funding sources could cover some of the necessary investments, Draghi noted that new avenues for common funding might be essential, despite resistance from countries like Germany, which have historically been hesitant to agree to joint borrowing.

German Finance Minister Christian Lindner responded by stating that shared borrowing would not resolve the EU’s issues, asserting that Germany would not support such measures.

Analysts expressed skepticism about the likelihood of progress on Draghi’s proposals, citing political challenges in Germany and France, along with ongoing divisions among EU member states. They highlighted that recent political developments in France have heightened doubts regarding the EU’s ability to implement significant fiscal initiatives.

SMARTER REGULATION

In addition to economic policies, Draghi suggested that EU antitrust regulators assess mergers not only on competition within EU borders but also on their potential to foster innovation, particularly in critical sectors like technology. He advocated for placing greater emphasis on security and resilience in these evaluations.

The report included recommendations for ten economic sectors, including energy, artificial intelligence, pharmaceuticals, and space.

Andrew Kenningham, chief economist at Capital Economics, acknowledged the report’s sensible proposals but remarked that many may be disregarded, referencing past recommendations from former Italian prime ministers that went largely unheeded.

Draghi noted that EU growth has consistently lagged behind that of the United States over the past two decades, with China rapidly gaining ground. He attributed much of this disparity to lower productivity levels.

If the EU continues on its current productivity trajectory, it would only be sufficient to maintain GDP levels by 2050, he cautioned. To effectively address challenges such as decarbonization, digital transformation, and enhanced defense, the bloc must generate greater wealth.

The publication of Draghi’s report comes at a critical time when the issues he raised—investment deficits, the withdrawal of cheap energy sources, and demographic shifts—cast doubt over Germany’s traditional role as the EU’s growth engine. Notably, Volkswagen, Europe’s leading car manufacturer, announced it is contemplating its first plant closures in Germany.

Draghi highlighted that the EU is struggling to adapt to escalating energy prices due to the absence of inexpensive Russian gas and can no longer depend on open foreign markets. He underscored the urgency for the bloc to boost innovation, lower energy costs, continue decarbonization efforts, and mitigate dependencies, particularly on China for essential minerals, while increasing investment in defense.