“An existential challenge”. That is how Mario Draghi, former president of the European Central Bank from 2011 to 2019 and prime minister of Italy from 2021 to 2022, described what awaits Europe, while presenting his report on the future of European competitiveness[1] on 9 September. He is not the first to warn of the risks relating to the recent economic trajectory of the European Union. But because of his status, experience, expertise, and the quality of the analysis work that he provided, his words resonated particularly intensely. “Existential”. I invite each of us to be aware of the significance of this adjective. It is not Europe as a geographic entity that is under threat, but rather its social, political, and perhaps even civilisational models, with their values of liberty, peace, democracy and equality. From this perspective, Draghi’s report reaches a clear conclusion: our children’s quality of life tomorrow depends on nothing less than our ability to restore European competitiveness today.
Productivity is a critical issue
The main thing that should be remembered about this report is the lucidity with which it analyses the European economic situation and its recent evolution. The facts are undeniable: since the start of the 21st century, Europe has experienced a stagnation of its economic growth. And it has lost ground on its international competitors. At constant prices, the GDP gap between the European Union and the United States increased from -17% in 2002 to -30% in 2023[2]. The main cause of this uncoupling lies in the widening productivity gap between the two powers. In 2023, productivity accounted for 72% of the gap in GDP per capita between the two powers, compared with 28% for work[3]. Mario Draghi provides a detailed analysis of this gap. The cause of this divergence in productivity, which began in the mid-1990s, is Europe’s failure to capitalise on the digital revolution brought about by the Internet (excluding the technology sector, Europe is actually more productive than the United States). This failure is characterised both by the inability to create leaders in these technologies (of the 50 largest technology companies in the world, only four are European), and by the difficulty in disseminating these innovations throughout the economy. This “slowdown in productivity” that is undermining growth, and which we are fully aware of in Luxembourg, could get worse. At a time when a new digital revolution is beginning with the advent of artificial intelligence, we can imagine with anguish the consequences that this could have if the same conditions were to lead to a further widening of the productivity gap between the two continents…
And if Mario Draghi is urging us to act with such vigour, it is because he is demonstrating that everything is at stake today. Indeed the European Union is entering an unpredictable period in its recent history wherein the working age population has begun to decline. By 2040, it is expected to lose nearly two million workers every year[4]. Without a significant increase in productivity, there is a risk that European GDP will stagnate or even fall, while the need for investment, like social spending induced by an ageing population, will continue to grow.
So what can be done? Mario Draghi puts forward a number of proposals, which he classifies into three areas that must become political priorities: “closing the innovation gap”, “coupling decarbonisation with competitiveness” and lastly “increasing security and reducing dependencies”.
Innovation, a crucial criterion
The first area of action is innovation. It is an absolutely crucial criterion. In 2021, European businesses invested 270 billion euros less than their American counterparts into research and innovation[5]. While the key automotive and pharmaceutical sectors still dominate investment in “old Europe”, breakthrough technologies are at the heart of priorities across the Atlantic. This applies to the digital and space sectors in particular. Nonetheless, Europe has leading-edge university and research institutes. However, the report highlights Europe’s weaknesses in technology transfer, i.e. the ability to commercialise academic innovations.
To overcome this, Mario Draghi confirms what the Chamber of Commerce and other economic players have been saying for years: Europe needs to reduce the regulatory barriers holding back innovation and make its market more attractive to entrepreneurs and investors. It is disheartening to note that of the 147 “unicorns” founded in Europe between 2008 and 2021, 40 have relocated their headquarters outside Europe, the majority to the United States[6]. Like his compatriot Enrico Letta[7] before him, the former President of the European Central Bank is calling for the completion of the single market, which is still far too imperfect, so as to offer our start-ups a market big enough for them to grow rapidly. In Luxembourg, at a time when young companies need to internationalise very quickly in order to grow, we have long been fighting the obstacles that prevent European companies from taking full advantage of the single market and advocating the need to simplify procedures. The single market will also need to be consolidated, in particular to give start-ups easier access to the funding they need to innovate and grow. However, we can not support the proposal which seeks to transform the European Securities and Markets Authority (ESMA) into a single regulatory body for European financial markets. This is a not a good idea, because this necessary regulatory mission must be carried out as close as possible to the markets, with perfect knowledge of national regulations. A closer collaboration between ESMA and the national regulators would constitute a better response to the fragmentation of the financial markets. Finally, Mario Draghi mentions the need to revise European competition regulations. On this point, he implicitly asks a simple question: why impose on our companies restrictive rules to which their global challengers are not exposed?
Climate targets to boost competitiveness
The second strategic area is decarbonisation. Mario Draghi defends a method that should never have ceased to be abundantly clear: the fight against climate change is essential, but it must be aligned with the need for competitiveness. It’s not a question of pitting the two objectives against each other, but of making them converge. The report stresses the economic opportunities that will come with energy transition. This is while Europe still has a technological lead in this area, particularly in wind power and hydrogen. But this lead is fragile, as illustrated by Europe’s rapid loss of leadership in electric cars. As a result of climate ambitions that are not coordinated with industrial policies, the market share of Europe’s car manufacturers has fallen from 80% to 60% between 2015 and 2023. At the same time, the market share of Chinese electric vehicles has risen from 5% to 15%[8], and this has largely contributed to the massive deterioration in the EU’s trade balance with China (-214 billion euros between 2020 and 2022[9]). Our environmental ambitions should therefore be backed up by the development of a genuine common industrial policy. This policy will have to ensure that the benefits of decarbonisation are shared by society as a whole, by lowering energy costs for households and businesses. It’s a demand we’ve been making for a long time in Luxembourg.
European companies are heavily penalised by energy prices that are much higher than in the United States, which reduces their profitability and hence their ability to invest and innovate. According to Mario Draghi, the low availability of natural resources in Europe is not the only cause of this competitive disadvantage. He also highlights the gaps in Europe’s energy markets and calls for ambitious and urgent reforms.
Regaining strategic autonomy
Lastly, Mario Draghi believes that Europe should increase its security and reduce it’s strategic dependencies. The European Union has benefitted from a relatively stable economic environment and geopolitical situation for a long time. World trade flourished and defence spending remained limited thanks to the protection provided by the United States. Those days are over. The world has changed in just a few years, and Europe has not changed with it fast enough. The COVID-19 pandemic, the war between Russia and Ukraine and now the return of protectionism have revealed Europe’s vulnerabilities to external shocks. Europe depends on a few suppliers, particularly for a number of vital materials and products. Of course, Mario Draghi points out that these dependencies are often reciprocal, arguing that, for example, the European market is essential to China to guarantee the survival of its industrial overcapacity system. But reducing these dependencies is nonetheless essential to guarantee Europe’s strategic autonomy. This means diversifying supply chains and strengthening industrial partnerships. Draghi therefore argues for the development of a genuine “economic foreign policy”, the purpose of which would be to secure the supplies necessary for the functioning and development of the European economy. This proposal is perfectly in line with the ‘trade agenda’ that we called for during the European elections.
Finally, in this rapidly changing world, Mario Draghi also looked at the defence spending of EU countries. To gain strategic autonomy, the European Union must rebuild its defence industrial capabilities. There is a lot at stake: Between June 2022 and June 2023, the countries of the European Union spent 75 billion euros, 63% of it in the United States and 78% outside Europe According to the European Commission, an additional defence investment of 500 billion euros will be required over the next decade. Luxembourg will be making a major contribution to this, as its defence spending is set to double over the next six years. It is vital that European companies are in a position to meet the equipment, services and innovation needs of member countries, whether in the land-sea-air sectors or in the cyber or space sectors. Regarding the space sector, a field in which Europe had developed a cutting-edge industry, Mario Draghi notes that the Union is losing ground. This is something we need to keep a very close eye on, particularly in Luxembourg, where space is at the heart of the country’s economic diversification strategy.
Overcoming obstacles
To confront these challenges, the former ECB President believes that the Union needs to move forward on two fronts: governance and investment. In terms of governance, he suggests creating a framework for coordinating competitiveness policy, as well as a methodology for (finally!) combating the burden of over-regulation. To do this, he proposes appointing a commission vice president for simplification. The challenge is even greater on the investment front. According to Draghi, the need to create a framework conducive to restoring European competitiveness is colossal. It represents an additional spend of 750 to 800 billion per year, or 4.4 to 4.7% of GDP in 2023. By way of comparison, the Marshall Plan, which enabled the reconstruction of Europe after the Second World War, represented only 1 to 2% of GDP per year.
The question is how to finance this essential investment. Among the possibilities mentioned by Mario Draghi is a new joint loan, along the lines of what was done to finance the Next Generation EU plan. Some member states, such as Germany, have already expressed their opposition to this. It is understandable that countries that have demonstrated good budgetary management are reluctant to borrow jointly with other less rigorous member countries. But it is imperative that this point of contention does not cause us to deviate from the course set out by the Draghi report. It is imperative that the 27 Member States overcome the political and financial obstacles to finally put competitiveness back at the heart of the European project. It is imperative to kick-start a new productive momentum to give our economy a future and ensure the sustainability of our social and societal model. It is now up to Europe’s leaders to rise to this “existential challenge”.
[1] https://commission.europa.eu/topics/strengthening-european-competitiveness/eu-competitiveness-looking-ahead_en
[2] Source: OECD.
[3] Source: AMECO.
[4] Source: United Nations World Population Prospects, 2022.
[5] Source: European Investment Bank
[6] Testa, G., Compano, R., Correia, A. and Rückert, E., ‘In search of EU unicorns: What do we know about them’, EUR 30978 EN, Publications Office of the European Union, Luxembourg, 2022.
[7] Report ‘Much more than a market’, April 2024, https://www.consilium.europa.eu/media/ny3j24sm/much-more-than-a-market-report-by-enrico-letta.pdf
[8] Source: International Energy Agency.
[9] Source: Eurostat.