Boxnote: Draghi Report on the future of European competitiveness
Audley Director Rolf Merchant analyses Mario Draghi’s report the “Future of European Competitiveness,” to understand the former Italian PM’s priorities for unlocking European economic growth.
Summary
This Boxnote summarises the “Future of European Competitiveness” report authored by Mario Draghi, former Prime Minister of Italy and former President of the European Central Bank. The report was requested by President of the European Commission, Ursula Von Der Leyen, with the aim of providing a strategic outlook on improving the European Union’s competitiveness in the global economy.
The report outlines the major challenges facing Europe’s economic performance and proposes a broad strategy to restore its global competitiveness. It focuses on three main areas for action - technological innovation, energy and decarbonisation, and economic security – and addresses internal structural barriers holding the EU back. Draghi discusses this in existential terms: without competitive growth, Europe will fail to deliver on its promises of freedom, prosperity, peace and democracy.
Key challenges and shifting context
The report highlights how Europe’s economic growth has slowed significantly since the early 2000s, primarily driven by a productivity lag. This has resulted in reduced living standards for EU citizens compared to other advanced economies, especially the USA. Draghi notes the EU-US gap in the level of GDP has gradually widened from slightly more than 15% in 2002 to 30% in 2023. He argues that it is only by dramatically raising productivity that the EU can become more competitive and regain this lost ground.
With this context, Draghi looks at three upcoming transformations or ‘strategic imperatives’ for Europe: accelerate innovation, reduce energy costs and decarbonise, and react to unstable geopolitics.
Accelerating innovation
Draghi demonstrates how Europe lags in the digital revolution, pointing out the EU is home to only four of the top 50 global tech firms. US and Chinese companies are dominating strategically significant areas such as AI and quantum computing. He highlights European companies invest significantly less in R&D than their US counterparts, and there is a notable lack of disruptive companies emerging from the EU.
Similarly, public investment in research and innovation is low in Europe compared to the US. The report recommends that the EU’s Framework Programme for Research and Innovation be refocused on fewer, high-priority projects, with a greater emphasis on disruptive innovation. It proposes the creation of a Research and Innovation Union to coordinate a cohesive strategy across EU Member States, encouraging collaboration between governments, academia, and the private sector to enhance the EU's innovation capabilities. It further recommends the creation of an EU version of the US Advanced Research and Projects Agency (ARPA) – which receives roughly $6 billion of funding annually to develop high-risk, high-reward innovation projects including on AI, cybersecurity, biotechnology and advanced materials. This was called for by leading EU think tank Bruegel earlier this year.
The report emphasises the need for regulatory reforms to help innovative companies scale and compete on a global level. Proposals include establishing EU-wide legal status for innovative companies to simplify cross-border operations and lowering intellectual property management costs for young businesses. The report also highlights the importance of improving financing conditions, particularly through encouraging angel investments and facilitating better access to capital to support the growth of high-risk ventures.
Draghi addresses the skills shortages hindering innovation. Although the EU produces high-quality STEM talent, it lags the US in graduates and suffers from ‘brain drain’. EU investments in skills development have yielded limited results, attributed to ineffective coordination and lack of industry involvement. To address these challenges, the report suggests a strategic overhaul of skills policies, improved use of data, curriculum reforms, a common certification system, and targeted interventions, including a new tech skills acquisition program.
Reducing energy costs and decarbonising
Draghi underlines how high energy costs in Europe have become a major barrier to economic growth, affecting both corporate investment sentiment and industrial output, especially for energy-intensive industries. Production in these sectors has dropped significantly since 2021 due to rising energy prices, which are also more volatile, adding further uncertainty to investment decisions. Simultaneously, Europe’s ambitious decarbonisation goals create significant near-term costs for industries. The report outlines two goals for the energy sector in Europe: reducing energy costs for end users and accelerating decarbonisation in a cost-efficient manner.
To lower energy costs, the EU must stabilise natural gas prices by reinforcing joint procurement and establishing long-term partnerships with reliable trade partners. Draghi suggests technical market reforms to lower the cost of energy for end users by transferring the benefits of decarbonisation to consumers, and reducing energy taxation.
To accelerate decarbonisation, the report advocates for a technology-neutral approach that leverages various clean energy sources such as renewables, nuclear, hydrogen, and carbon capture technologies. Speeding up the permitting process for energy projects is essential, and the EU should focus on grid infrastructure, including the rapid deployment of interconnectors and the creation of a streamlined legal framework for projects of common European interest.
Draghi argues decarbonisation efforts should be supported by mobilising public and private financing, with funds directed towards green technologies, including clean tech manufacturing and energy-intensive industries. To remain competitive globally, the EU must continue supporting clean technology manufacturing, while ensuring that ‘hard-to-abate’ industries and transport sectors receive the necessary financial resources to meet decarbonisation targets.
Reacting to unstable geopolitics
The report stresses the importance of securing access to critical raw materials for the clean energy and automotive industries, as global demand for minerals like lithium, cobalt, and nickel has surged. However, supply chains for these materials are highly concentrated, particularly in countries like China, posing risks such as price volatility and geopolitical manipulation. The EU faces challenges in keeping up with global competitors like the US and China, which have implemented robust strategies to secure supply chains.
The EU’s reliance on non-EU countries extends to critical technologies, including semiconductors and digital infrastructure. To address these vulnerabilities, the report argues the EU needs to adopt a comprehensive strategy that includes accelerating domestic mining, enhancing recycling, fostering innovation, and coordinating efforts across member states to strengthen its position in critical supply chains. Proposals include establishing strategic stockpiles, deepening international partnerships, and supporting innovation in semiconductors and other advanced technologies to reduce dependency on foreign suppliers.
Given the risks of confrontation and even war, the report states Europe needs much greater defence spending, especially given potential reduced US focus on the region. Despite having high-quality defence products, the EU defence sector suffers from lower overall demand and R&D spending compared to the US. Fragmentation within the EU leads to inefficiencies in standardisation and interoperability, as seen in the Ukraine conflict, and hampers the industry’s ability to scale. The space sector, while possessing world-class capabilities like Galileo, is losing ground due to reduced investment and reliance on non-EU partners, such as SpaceX, for launches.
The report recommends strengthening EU defence and space policies by consolidating resources, enhancing industrial cooperation, and updating governance structures to foster innovation, increase efficiency, and better compete globally.
Tackling EU structural issues
Financing investments
Draghi calculates the EU requires an additional €750 to €800 billion annually, to meet the goals detailed in the report. The EU’s investment share must rise from 22% to 27% of GDP, requiring public sector support to reduce private sector financing costs.
Draghi highlights the long-standing issue of Europe’s fragmented capital markets. The EU relies heavily on bank financing, which is less effective for innovative projects, and banks face lower profitability compared to the US. To unlock private capital, Draghi calls on the EU to build a genuine Capital Markets Union by transforming the European Securities and Markets Authority into a single regulator akin to the US SEC, harmonising insolvency and tax frameworks, and consolidating clearing and settlement systems into single platforms. A Capital Markets Union would bring the added benefit of encouraging household investment through stronger pension and investment schemes. Draghi backs reviving securitisation and completing the Banking Union by adjusting prudential requirements to increase bank lending.
Draghi argues the EU budget is too small and risk-averse and should be formed to focus on strategic projects. The report argues issuing a common safe asset could standardise financial products, lower capital costs, and enhance the euro’s role as a reserve currency, but this would require stronger fiscal rules.
Strengthening EU governance
Draghi acknowledges a successful industrial strategy for Europe requires coordinated efforts across multiple policy areas, but this is hampered by the EU’s slow and complex decision-making process He calls for targeted adjustments to refocus EU efforts, accelerate integration, and simplify rules.
The report recommends establishing a “Competitiveness Coordination Framework” to focus on EU-wide strategic priorities set by the European Council. This framework would streamline policy coordination through Competitiveness Action Plans, with clear objectives and governance, and align EU resources to fund public goods critical to its strategic goals while encouraging national parliaments to exercise greater scrutiny over EU legislative activity to ensure subsidiarity and reduce bureaucracy.
The report highlights that European companies face a growing regulatory burden. While the European Commission has attempted to reduce regulation through its Better Regulation agenda, the stock of regulation remains high, and new legislation continues to grow faster than in other comparable economies. This regulatory complexity particularly affects SMEs, as they bear a proportionally higher burden than larger companies. The report recommends appointing a Commission Vice President for Simplification, adopting a single methodology to assess new legislation, streamlining the legislative process, and implementing a 25% cut in reporting obligations, with a 50% reduction for SMEs. It also suggests leveraging AI and harmonised reporting tools to lower compliance costs, while ensuring that new laws undergo thorough impact assessments to avoid stifling innovation and competitiveness.
From proposals to action
Draghi highlights that Europe is at a crossroads: either it undertakes deep reforms to boost productivity and competitiveness, or risks being left behind in the global economy. A unified, coordinated European response is essential to ensure that Europe remains a global leader in innovation, decarbonization, and security, while preserving its social model of equity and inclusion.
But the question that hangs over the report’s publication is if Draghi’s recommendations will turn into action. The report did receive praise – even Elon Musk agreed with Draghi’s views on regulation. But criticism has already emerged from European politicians, particularly relating to proposals on common borrowing.
Draghi’s report comes during challenging political context. It is populists, not technocrats like Draghi, on the rise. With France and Germany, Europe’s prime players, gripped by domestic political turmoil, the analysis and ideas of this report may ultimately fall on deaf ears.
By Rolf Merchant, Director at Audley.