The Future of European Competitiveness: Six takeaways from Draghi's major EU report

In a long-awaited and comprehensive report, former Italian prime minister and European Central Bank president, Mario Draghi, issued a series of suggestions to help the EU remain competitive with the rest of the world.

Commissioned by European Commission (EC) president Ursula von der Leyen, ‘The Future of European Competitiveness’ sets out the current state of the European economy and includes a number of suggestions and recommendations for how to fix the many issues.

Scale of problem

For decades, the EU has been falling behind its major competitors, the US and China, in many economic areas.

While the EU has the “foundation” to be a highly competitive economy, since 2002 it has fallen behind both nations in terms of GDP growth, productivity growth, wage equality and purchasing power parity (PPP).

Additionally, its share of world trade has fallen since the early 2000s in both goods and services.

“Europe has been worrying about slowing growth since the start of this century. Various strategies to raise growth rates have come and gone, but the trend has remained unchanged.”

The big issue identified in Draghi’s report is productivity:

“If the EU were to maintain its average productivity growth rate since 2015, it would only be enough to keep GDP constant until 2050 – at a time when the EU is facing a series of new investment needs that will have to be financed through higher growth.”

Money needed

The headline solution? More money and investment needed.

“To maximise productivity, some joint funding for investment in key European public goods, such as breakthrough innovation, will be necessary.”

Areas such as defence, critical minerals and borders all need funding. Draghi identifies common funding and “massive investments” as key for transforming the European economy.

The lack of both public and private funding is impacting the tech industry, an issue which Draghi is urging member governments to take seriously.

“The lack of growth potential in Europe is particularly relevant for tech-based innovative ventures, and even more so for deep tech ones,” the report states, noting that only 6% of funding for AI companies and 5% for quantum computing goes to EU companies, compared to 61% and 50% for their American counterparts.

Digital innovation

On the topic of digital and tech, Draghi’s report identifies various technology sectors as being key drivers of productivity growth. In fact, without the tech sector, US and EU productivity would broadly be on par, according to research cited in the document.

However, since the mid-90s, Europe has been lagging behind in tech and this trend is continuing in many ‘hot topic’ areas like AI, cloud and quantum computing.

While some digital sectors remain ‘lost’, areas like generative AI as well as security and encryption could be future sources of growth for the EU, as could autonomous robotics.

However, aside from funding, European startups face problems with skills, regulation and vertical integration into various industries.

“At the root of Europe’s weak position in digital tech is a static industrial structure which produces a vicious circle of low investment and low innovation.”

Supply chain exposure

Another problem to be solved is supply chains and trade.

Draghi’s report says that, due to both the “trade openness” of Europe and its over-reliance on China for critical minerals, it remains particularly exposed to supply chain shocks and geopolitical turmoil.

“China is striving for technological autarchy and vertical supply chain integration, from mining of raw materials to processing, and from manufacturing to shipping.”

The issue is not just one of economics, but defence. The European defence industry is suffering from underinvestment and depleted stocks at a time when the EU’s borders face pressure from abroad, chiefly along the Eastern section, closest to Russia.

Growing EU capacity and shortening its supply chains, as well as developing an industrial strategy, are some of the recommendations of Draghi’s report to reduce this exposure.

The paper pointed to the relative success of the EU’s lithium-ion battery sector, which has enjoyed rises in both funding and in patent applications over the last decade, as an example of how this could be achieved.

End of an era?

Adding another voice to the chorus of those saying that the era of free trade is over, Draghi’s report says that EU trade policy is already adapting to this new reality:

“The global trading order based on multilateral institutions is in deep crisis, and it remains uncertain whether it can be brought back on track.”

The Global Trade Alert has found that, since 2010, ‘trade policy interventions’ have increased drastically, with export controls, tariffs, subsidies and other measures skyrocketing from less than 200 in 2010 to over 600 in 2022.

Draghi says that a clear set of principles is needed to avoid protectionism while still maintaining an open system of trade.

These principles include ‘pragmatic’ trade measures that help raise EU productivity, non-systematic application of defensive measures, and application of tariffs in a way that avoids creating “perverse incentives” that undermine EU industry.

Additionally, even when the EU is the victim of foreign subsidies in industries where domestic producers have fallen so far behind, it might be better to fund higher EU investment rather than applying sanctions.

Reality bites

Von der Leyen commissioned Draghi, nicknamed Super Mario by some after his actions in stabilising the European economy after the Eurozone crisis in the early 2010s, to write the report before she was re-elected as EC president.

Speaking at the launch of the report, von der Leyen said:

"I think no one was better placed than you, dear Mario, to carry out a thorough analysis of Europe's competitiveness – and how to improve it.

“Now there is wide consensus that it must be at the top of our agenda, and at the heart of our action."

However, the Italian banker has identified a number of problems around the structure of the EU that could hinder attempts to solve the economic issues.

A lack of focus, a lack of co-ordination between members and diluted spending power all remain issues that could get in the way of any attempt to boost the EU economy.

Even one idea, that of ‘joint borrowing’ where countries pool their GDP to secure better terms, was shot down by Germany’s finance minister,  Christian Lindner, only hours after being announced.

Early on in the report, Draghi notes that the EU decision-making process has not substantially changed since it was enlarged, with legislation taking an average of 19 months before an act is adopted.