Draghi report recommends new European industrial strategy
THE landmark Draghi report released on Monday (Sep 9) calls for a new European industrial strategy to address an “existential” competitiveness challenge. Yet, while this project has the endorsement of European Commission (EC) President Ursula von der Leyen, it remains unclear exactly how influential it will prove, including who might pay the full mammoth cost of the approximately 170 recommendations.
That said, despite these caveats, there is no question of the growing acceptance that Europe has an urgent competitiveness problem. This is not just an economic challenge, but also a political one. This led Dr von der Leyen to ask Mario Draghi – president of the European Central Bank between 2011 and 2019, the leading central banker of his generation and also a former Italian prime minister – to write his major report.
Draghi, nicknamed “Super Mario” after the hero in the Nintendo video game, made his reputation in 2012 at a time when it appeared as though the future of the European single currency was in peril. In seven simple words – “whatever it takes to save the euro” – he changed market sentiment by pledging massive intervention to defend the single currency in what was perhaps the decisive moment of the then economic crisis.
Today, the economic competitiveness problem facing the European Union is significantly more complicated than even the 2012 financial crisis. This calls for big, bold thinking, and the 328-page report advocates nothing less than a “new industrial strategy for Europe”.
Draghi asserted that “we should abandon the illusion that only procrastination can preserve consensus”, adding: “Procrastination has only produced slower growth, and it has certainly achieved no more consensus. We have reached the point where without action, we will have to either compromise our welfare, our environment or our freedom.”
He recommends the EU to raise investment by 800 billion euros (S$1.2 trillion) a year to fund huge, fast changes to stop the 27-member bloc from falling further behind key competitors, especially the United States, and key emerging markets too. This additional annual investment, equivalent to around 4.5 per cent of the EU’S gross domestic product, would bring investment to a level not seen since the 1970s.
Draghi explained that his report does not start from zero. For instance, Europe has key advantages, including a generally strong education and healthcare system, and this inclusivity of the European social model must be maintained, he asserted, including through reskilling for the digital and green transitions.
However, he noted that three macro themes must be tackled.
First, closing the innovation gap with the US and other key economies with special emphasis on commercialising and scaling up innovation, including in digital technology. Draghi perceived artificial intelligence as an opportunity “to redress these failings in innovation and productivity, and to restore its manufacturing potential”.
A second major theme is combining decarbonisation with growth to boost competitiveness.
Draghi and Dr von der Leyen want a continued shift from fossil fuels to a cleaner, circular economy, but assert this must ultimately be accompanied by a lowering of energy costs to translate the benefits into economic gains for industry and consumers. The report highlighted that the cost of energy for industry is 158 per cent more for electricity than in the US, and 345 per cent more for natural gas.
Third, in the face of a deteriorating geopolitical context, there is a growing need to de-risk supply chains, including for raw materials and wider critical minerals. This is to build resilience to future shocks, after the pandemic and Russia’s invasion of Ukraine. Simultaneously, European defence industrial capacity needs an urgent boost.
Among the recommendations are: relaxing competition rules to drive market consolidation, especially in industries such as telecoms; capital market integration; greater use of joint procurement in defence; and a new trade agenda to increase the EU’S economic independence, including the conclusion of the deal with the Mercosur bloc (consisting of Brazil, Argentina, Uruguay and Paraguay).
Perhaps the two key questions now surrounding the report, following its political endorsement by Dr von der Leyen on Monday, are how much of it will now get translated into fast political action, and who will pay for the proposals.
On the first point, Draghi is a respected thinker and his views carry weight in Brussels as perhaps the only Italian technocrat or politician with a genuine global standing. Moreover, the report comes at a pivotal point in the EU’S political cycle, and echoes views given earlier this year by Enrico Letta, another former Italian prime minister who released a report focused on boosting the EU’S single market.
Draghi’s report has already got some traction in influencing the political guidelines that Dr von der Leyen issued several weeks ago for her second term in Brussels. Moreover, she will use the report’s conclusions to frame the mission letters she will soon give to her new commissioners to help define their new mandates.
However, beyond this, it is unclear exactly how much long-term significance the study will have.
In the past, other landmark reports have led to major change, including the 1970 Davignon report that helped guide the European Economic Community away from its original steel and coal dependencies. Moreover, the Delors report, published in 1989, catalysed the European Economic and Monetary Union.
However, macro-scale reform may be more difficult today given growing economic and political challenges. These include, but are not limited to, the national leadership vacuum in key economies such as France and Germany, growing protectionism, the possibility of Donald Trump winning a second presidential term in the US, and a growing authoritarian alliance between China and Russia.
As for who will pay for the report’s recommendations, Draghi suggested the issuance of common safe assets, joint funding to back “European public goods” such as energy infrastructure, as well as new EU levies to fund more effective spending via common budgets. Yet, it may not only be traditionally austere nations in Northern Europe, including the Netherlands and Germany, that may push back on ambitious plans to raise new joint EU debt or raise taxes for more public funding.
In April, Letta suggested using part of national subsidies for EU projects, or creating a specialised credit line under the European Stability Mechanism, originally meant to safeguard financial stability, for defence spending.
Taken together, the report has the potential to become an economic lodestar for Dr von der Leyen’s second term as EC president. But much will now depend upon the political traction the report can generate, and how the cost will be paid for.
While Draghi has formidable technocratic and financial expertise and Dr von der Leyen’s support, this may not be enough to ensure that it changes the pathway of the EU economy.