Agencies
The European Union requires a much more coordinated industrial policy, quicker decision-making and substantial investment to stay economically competitive with the United States and China, Mario Draghi stated on Monday in a highly anticipated report.
The European Commission asked the former European Central Bank chief and Italian prime minister a year ago to write a report on how the 27-country bloc should keep its greening and more digital economy competitive at a time of increased global friction.”Europe is the most open economy in the world, so when our partners don’t play according to the rules, we are more vulnerable than others,” Draghi said at a news conference alongside EU chief Ursula von der Leyen in Brussels.
“For the first time since the Cold War, we must genuinely fear for our self-preservation, and the reason for a unified response has never been so compelling,” Draghi said.
In the opening section of a report set to run to some 400 pages, Draghi said the bloc needed additional investment of 750 billion-800 billion euros ($829 billion-884 billion) per year, up to 5% of gross domestic product (GDP) – far higher even than the 1%-2% in the Marshall Plan for rebuilding Europe after World War II.
His blueprint for a “new industrial strategy” is based on some 170 proposals. Draghi said, “The investment needs that all this entails are massive” but that “radical change” was needed.“Growth has been slowing down for a long time in Europe, but we’ve ignored (it),” he noted.
“Now, we cannot ignore it any longer. Now conditions have changed: World trade is slowing, China is actually slowing very much and is becoming much less open to us ... we’ve lost our main supplier of cheap energy, Russia.”EU countries had already responded to the new realities, Draghi’s report said, but it added that their effectiveness was limited by a lack of coordination.
Differing levels of subsidies between countries were disturbing the single market, fragmentation limited the scale required to compete on a global level, and the EU’s decision-making process was complex and sluggish.
“It will require refocusing the work of the EU on the most pressing issues, ensuring efficient policy coordination behind common goals, and using existing governance procedures in a new way that allow member states who want to move faster to do so,” the report said.
It suggested so-called qualified majority voting – where an absolute majority of member states need not be in favor – should be extended to more areas and, as a last resort, that like-minded nations be allowed to go it alone on some projects.
While existing national or EU funding sources will cover some of the massive investment sums needed, Draghi said new sources of common funding – which countries led by Germany have in the past been reluctant to agree to – might be required.
“If the political and institutional conditions are met, these projects would also call for common funding,” the report said, citing defense and energy grid investments as examples.
Citing the bloc’s historic COVID-19 recovery fund, Draghi argued it should issue new “common debt instruments to finance joint investment projects that will increase the EU’s competitiveness and security.” The EU resorted to joint borrowing for 800 billion euros to support member states’ economies hit hard by the pandemic – but the concept remains controversial.
The idea’s biggest supporter is France, but other countries, including Germany and the Netherlands, oppose such action, fearing they will be forced to contribute more money to make up for southern European countries.
Aware of the difficulties of his proposal, Draghi said common loans would only be possible if “the political and institutional conditions are met.” Another solution, he said, was to better mobilize private capital in the bloc, advocating for progress on the long-stalled push for an EU “capital markets union.” Von der Leyen won a second five-year at the helm of the bloc’s executive arm in July and hopes to use the report to shape her next mandate.
In his report, Draghi warns Europe was entering a new era, confronted by more competition from abroad but with reduced access to foreign markets as rivals increasingly throw up barriers to free trade.
He pointed to the “wide gap” in economic growth that has “opened up between the EU and the U.S., driven mainly by a more pronounced slowdown in productivity growth in Europe.” Draghi’s report pointed to the EU’s weakness in the emerging technologies that will drive future growth – with only four European companies among the world’s top 50 tech firms.
“Europe must become a place where innovation flourishes,” Draghi told reporters, saying the bloc was “punching under our power.” “We could do much more if all these things were done as if we acted as a community.
“But we lack focus on key priorities. We don’t combine our resources to generate scale. And we do not coordinate the policies that matter.” EU growth had been persistently slower than that of the United States in the past two decades, and China was rapidly catching up. Much of the gap was down to lower productivity.
Draghi’s report comes as doubts emerge over the economic model of Germany, once the EU’s motor, as Volkswagen weighs its first-ever plant closures there.Draghi said the EU was struggling to cope with higher energy prices after losing access to cheap Russian gas and could no longer rely on open foreign markets.
The former central banker said the bloc needed to boost innovation and bring down energy prices while continuing to decarbonize and both reduce its dependencies on others, notably China, for essential minerals and increase defense investment.
