Year XXXVII, Number 3, November 2024

Antonio Longo
Editor of The Ventotene Lighthouse and former editor of L’Unità Europea 

The Report that Mario Draghi presented to the European Commission on "The Future of European Competitiveness" is a long document (327 pages) that seems to be an economic text, but is in fact a highly political document. Commissioned last year by Ursula Von der Leyen (along with the one entrusted to Enrico Letta on the internal market), it already appears to be the European Union's governing programme for the next five years (and beyond). The analyses and directions it contains are important: not only for Europeans, but also for Americans, Chinese, Indians, Africans, Latin Americans, and so on. Indeed, there is a need for common political, economic, social, and cultural approaches to mature around a new spirit capable of restoring a multilateral order to global economic and security problems. The Draghi Report is also a contribution to that end.

If implemented, the Draghi Report will represent a "revolution" in the precise sense of the word, because it will make the Union stronger and more effective in decision-making. Indeed, this lengthy document does not just say "what" needs to be done, but also "how" to do it. It represents, therefore, a decisive step toward a European federal government in the field of the economy and security (in its the economic aspects.)

The starting point of Draghi's analysis is well-known. Three facts have accompanied European growth so far, but they no longer work as they did before: globalisation was driving European exports (China guaranteed the market); energy was relatively cheap (Russian gas allowed it); and political and military security was guaranteed by the U.S. and allowed Europe a higher standard of welfare than the U.S.

That world is over, Draghi says, the pandemic and then the war (Ukraine) showed that. Growth faltered at a time when it was necessary to start decarbonising the economy and the world became more insecure. The U.S., with substantial financial resources, was able to foster massive investment in technological innovation, gaining in competitiveness. The EU, with no fiscal resources of its own and weak governance, was left standing on the sidelines.

The Draghi report is not just a rallying cry. It is an action plan, setting out guidelines, with 178 concrete operational indications. Investment of up to about €800 billion a year is needed to ensure growth, decarbonisation, and security. The alternative – a dramatic choice for Europe – is between these options: either to be a leader in new technologies or to be a beacon of climate responsibility or, again, to be an independent player on the world stage, without being able, in any case, to finance its own social model. It is, therefore, an existential challenge. Europe's core values are prosperity, equity, freedom, peace, and democracy in a sustainable environment. The Union exists to ensure that Europeans can always benefit from these fundamental rights. If Europe can no longer provide them to its citizens – or if it must trade one for the other – it will have lost its raison d'être. The only way to meet this challenge is to grow and become more productive while preserving our values of equity and social inclusion. And the only way to become more productive is for Europe to radically change.

The Report indicates three areas of focus.

Growth and innovation. Europe must profoundly refocus its efforts to close the innovation gap with the U.S. and China. Europe spends € 270 billion less per year on research and innovation than the U.S. There is no EU company with a market capitalization of more than € 100 billion created from scratch in the last 50 years.  Only 4 of the top 50 technology companies in the world are European.  There is no lack of ideas or ambition in Europe. Innovation is blocked at the next stage, that of commercialization. Innovative companies are hampered at every stage by inconsistent and restrictive regulations. Many European entrepreneurs prefer to seek funding in the American market. Between 2008 and 2021, nearly 30 percent of startups with more than $1 billion moved abroad, most of them to the U.S. Europe should match the U.S. in terms of innovation, while also being able to surpass it in education, safeguarding social inclusion.

Decarbonisation and competitiveness. If Europe's ambitious climate goals are accompanied by a coherent plan, decarbonisation will be an opportunity for Europe (and the World). But if we fail, there is a risk that decarbonisation will work against competitiveness and growth.  In the medium term, decarbonisation will shift energy production to clean, secure, and low-cost energy sources, but fossil fuels will continue to play a central role in energy pricing, at least for this decade. Decarbonisation is for the good of the planet, but to also become a source of growth for Europe, there needs to be a joint plan that embraces the industries that produce clean technology and the automotive industry.

Increasing security and reducing dependencies. Security is a prerequisite for growth. Rising geopolitical risks increase uncertainty and hold back investment – it puts growth and freedom at risk. Europe is particularly exposed. We rely on a few suppliers for critical raw materials. We are hugely dependent on digital technology imports. We are vulnerable. The EU will need to coordinate preferential trade agreements and direct investment with resource-rich nations and create stockpiles in selected critical areas and industry partnerships to secure the supply chain for key technologies.

What are the obstacles?

Europe lacks focus. We define common goals, but we do not support them by setting clear priorities or following up with joint policy actions. Our Single Market is fragmented, with regulatory burdens on businesses. Without a Capital Market to finance investment, Europeans miss opportunities to increase their wealth: EU households save more than American households, but the gap in per capita income has widened.

Europe is wasting its common resources. We have a large collective spending capacity, but we dilute it in multiple national and EU instruments. We do not favour competitive European defence companies; 78 percent of total procurement spending goes to non-EU suppliers, of which 63 percent goes to the U.S. The EU public sector spends as much on R&I as the U.S. as a share of GDP, but only one-tenth of this spending occurs at the European level.

Europe is not coordinating where it matters. Industrial strategies today combine multiple policies (fiscal, trade and foreign economic) to secure supply chains. Linking them requires a high degree of coordination between national and EU efforts. Because of its slow and disaggregated decision-making process, the EU is unable to produce such responses. Decisions are made issue by issue, with multiple vetoes along the way. The result is a legislative process with an average time of 19 months, from the Commission's proposal to the signing of the adopted act, not counting the implementation phase in the member states.

Toward a European response

Europe urgently needs to accelerate its rate of innovation, and strengthen productivity growth, household incomes, and domestic demand, especially in the face of unfavorable demographics. Labour productivity in the EU was 95 percent of that in the U.S. in 1995; now it is below 80 percent. Europe still has a chance to change course if it can compete in the digital revolution (AI), remedying its shortcomings in innovation and productivity and thereby restoring its potential.

Second, Europe needs a common plan for decarbonisation and competitiveness. Transportation can play a key role, but it will depend on its planning. The automotive sector is a key example of the lack of planning (a climate policy without an industrial policy). We need, then, to address a possible trade-off between energy-producing industries, clean-technology industries, the automotive industry, and energy-intensive industries. For the energy sector, the first key objective is to lower the cost of energy for end users, passing on to them the benefits of decarbonisation. To this end, the EU should develop the governance necessary for a true Energy Union so that decisions and market functions of cross-border significance are taken centrally.

Third, Europe needs to increase security and reduce dependencies. Europe is lagging in the global race to secure supply chains: we need a genuine "foreign economic policy" that coordinates preferential trade agreements and direct investment with resource-rich countries, builds stockpiles in critical areas, and the creation of industrial partnerships to secure supply chains for key technologies. The EU will need to strengthen its industrial capacity for defence and space. The European defence industry is notoriously fragmented, which limits its size and operational effectiveness.

The EU must, in addition, overcome capital market fragmentation and aim to complete the Banking Union. Finally, the EU budget should be reformed to increase its focus and efficiency, as well as be better leveraged to support private investment. The EU should move toward the regular issuance of safe assets to enable joint investment projects among member states and to help integrate capital markets.

Strengthening governance

This is the last point of the Report. A new industrial strategy for Europe will not happen without parallel changes to the institutional set-up and functioning of the Union. "Industrial policies today require strategies that span investment, taxation, education, access to finance, regulation, trade and foreign policy, united behind an agreed strategic goal."  European decision-making norms have not evolved. The slowness of EU decision-making is well known. Results are not being produced at the level and speed that EU citizens expect. 

 To the question many are asking (should the Treaties be amended?) Draghi's answer is clear: "Strengthening the EU requires Treaty changes, but it is not a precondition for Europe to move forward: much can be done with targeted adjustments. Until the consensus for Treaty changes is in place, a renewed European partnership should be built on three overarching goals: refocusing the work of the EU, accelerating EU action and integration, and simplifying rules."

How to refocus the work? Draghi suggests a radical change, with the establishment of a "Competitiveness Coordination Framework" in priority areas, eliminating current overlaps. Policy directions would be debated, formulated, and adopted in European Council conclusions at the beginning of each policy cycle. Thereafter, all economic policies relevant to the EU’s strategic priorities would be merged into this "coordination framework", broken down into action plans for each strategic priority, with clearly defined objectives, governance, and financing. We would then have very clear guidelines and operations for each strategic policy. The Commission would obviously have a guiding role: in areas of exclusive competence (Art. 3 TFEU) it would have a mandate to act directly; in areas of shared competence (Art. 4 TFEU) it would provide the guidelines, sharing the institutional set-up for implementation with the relevant national bodies. In specific areas, an arrangement bringing together the Commission, industry, and member states, as well as the relevant sectoral agencies, could be envisaged. The consolidation of the various coordination mechanisms should be matched by that of its budgetary resources. EU resources should focus on financing public goods that are fundamental to the EU's strategic priorities.

The second point (Accelerating the work of the EU) is a consequence of the first. Here the aim is to overcome the power of the veto in the EU Council, with the extension of qualified majority voting (QMV) "in all policy areas in the Council," using the "passerelle" clause (Art.48, 7 TEU). In this case, the European Council, thanks to the “upfront agreement” on the "strategic principles" agreed on in the "Competitiveness Coordination Framework" (mentioned above) can authorize, by a unanimous vote, the EU Council of Ministers to vote by qualified majority. In other words: having outlined, upstream, the principles on which a certain policy should be based, it will then be possible, downstream, to vote by a qualified majority in the Council. Draghi indicates the working method, then the path, to make it possible to overcome the veto without changing the Treaties.

Another method is "enhanced cooperation" under Art. 20 TEU and 329 TFEU, which can (in the example Draghi gives) establish a special regime for innovative companies that harmonizes company and insolvency law, as well as some key aspects of labour law and taxation. Intergovernmental cooperation, on the other hand, has serious drawbacks due to the absence of judicial control by the CJEU, democratic legitimacy via the EP, and the Commission's involvement in preparing texts.

In conclusion, the Draghi Report on Competitiveness paves the way for the completion of the Economic and Monetary Union which was announced at Maastricht (1992), but then only partially implemented (the monetary part). The Recovery Plan opened a breach in the question of the Union's ability to plan its future, mobilizing new resources, without changing the Treaties. The Draghi Report shows that the breach can turn into a wide and safe path, again without changing the Treaties.

Von der Leyen's governing programme will undoubtedly be dictated by the "Draghi Report," which comes, not coincidentally, at a time when the European Commission has assumed not only the form but also the substance of a real European government. This is the outcome of a political process that has seen, for the first time, a clash of power between states and at the same time between European political forces, to define the parliamentary majority. This has gone beyond its traditional boundaries (EPP, S&D, Renew), to include also the Greens and a part of the Conservatives (ECR), thus configuring a majority of constitutional unity, necessary to make the Union stronger, develop the Draghi Report, and isolate the anti-European forces.

Finally, this Report shows that the process of European unification can move forward if it offers the right answers to the crises and pursues them with determination, combining the policies that need to be enacted with the expansion of the powers of the European government. We are in the presence of a possible new advance in the process of federalisation of the Union. It is up to the economic, social, and cultural forces, as well as pro-European political forces, to support it.