WHY THIS MATTERS IN BRIEF
Europe’s attitude to unification, investment, and technological progress has been hampered at every level, and now the EU faces increasingly rapid decline on the world stage if it doesn’t change course.
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It’s no secret that Europe’s overall rate of innovation and economic growth is far behind that of the US, which is increasingly far behind that of China who a while ago announced that they would invest over $1.4 Trillion to develop cutting edge new technologies. And that has some people in Europe worried with some, such as Mario Draghi, now saying that Europe must invest twice as much as it did rebuilding after World War II, allow more tech and telecoms companies to merge and take drastic measures on defense spending.
In a landmark report on how to stem the Continent’s economic decline, the former European Central Bank (ECB) president said Europe needed to invest an additional €800 billion a year to drag itself out of a trough of low productivity and feeble growth that’s pushing it behind the United States and China in the international pecking order. He called it an “existential challenge.”
As the bloc gears up for the next five years under a newly constituted European Commission, Draghi’s 400-page report is meant to guide the work for Commission President Ursula von der Leyen and her revamped team. Many of his recommendations will need buy-in from all the bloc’s 27 governments, something that may prove elusive.
And it comes as the European Union is buffeted by forces that make radical change look impossible. In its two biggest countries, an enfeebled German chancellor presides over an economy on it knees, and France, burdened by huge public debt, has a new parliament fractured between opposing extremes.
Draghi, who is credited with bringing the eurozone back from the brink at the height of the Greek debt crisis in 2011, said there was no option but to push through dramatic reforms.
“We should abandon the illusion that only procrastination can preserve consensus,” Draghi said. “We have reached the point where, without action, we will have to either compromise our welfare, our environment, or our freedom.”
At the heart of Draghi’s report is a demand for a massive private and public investment, the like of which has not been seen in Europe since the 1960s and 1970s. It would add up approximately to an additional €800 billion per year.
The increase in investment would be “unprecedented,” he said. “If Europe cannot become more productive, we will be forced to choose. We will not be able to become, at once, a leader in new technologies, a beacon of climate responsibility and an independent player on the world stage. We will not be able to finance our social model. We will have to scale back some, if not all, of our ambitions.”
The report argues for changes in competition rules that could see some tech and defense deals get EU approval more easily. Telecoms should face lighter regulation and be helped to scale up by defining the market as EU-wide, he said.
Reviews into mergers should also take into account the “innovation part of a merger” and economic security, Draghi said.
That would be a far cry from the Commission’s decision in 2019 to block the merger of train-builders Siemens and Alstom, German and French companies, that would have created a European champion and global market leader.
“The Chinese now could probably export [high-speed] trains to Europe,” Draghi said, signalling how far and fast Europe was falling behind.
Draghi is pushing for the EU to issue new common debt to fund its industrial and defense needs, something that is opposed by several governments, and which already seemed to put him at odds with von der Leyen when the pair appeared at a press conference in Brussels to launch the report. He admitted the topic was “very sensitive.”
But there seems to be increasing agreement on the need to reform the EU’s €1.2 trillion budget, diverting funds away from Europe’s poorer regions toward industrial, digitalization and innovation policies. This would align Draghi with the plans the Commission is already putting forward and is looked upon favorably in Berlin.
The report contains many sector-specific recommendations. Draghi noted that Europe’s goal to whittle its greenhouse gas emissions down to zero by the middle of the century offers the bloc the chance to build and export clean technologies around the world.
And he sees Artificial Intelligence (AI) as an opportunity for Europe “to redress its failings in innovation and productivity and to restore its manufacturing potential.”
He called for AI to be integrated “into our existing industries so that they can stay at the front.”
At the core of Europe’s economic woes, the report argues, is the cost of energy for industry, which is currently forced to pay 158 percent more for electricity than in the US, and 345 percent more for natural gas.
The EU will not be able to secure enough copper, lithium and other raw materials if it does not emulate China’s powerful mining-to-shipping vertical integration, Draghi implied in his recommendations on finding the metals needed for the digital and energy transitions: “Europe needs coordinated strategy covering the entire value chain, from raw materials to final products.”
Europe’s pharma sector is also losing ground to the US thanks to low investment and patchy regulations, Draghi said. The US private sector spends 0.45 percent of GDP on pharma research compared to 0.11 percent in the EU. The US is also much quicker at getting new drugs approved with some projects aiming to achieve approval in real time which would be an unprecedented accomplishment, with a median approval time of 334 days compared to 430 days in Europe.
Draghi sees lessons to be learned from research hubs like California – he says the EU should focus funding on developing a limited number of “world-class innovation hubs” focused on advanced therapies based on genes, cells, or tissue engineering.
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