The Draghi report on EU competitiveness

On 9 September this year the former head of the European Central Bank (ECB) and former Italian prime minister Mario Draghi presented the European Commission with a report on the future of the European economy over the next five years. The report is called “The Future of European Competitiveness” and was drawn up at the Commission’s request. It is a wide-ranging study of the economy’s problems and of how the single European market must adapt to a more complex geopolitical situation, to subsidy wars, tariffs and sanctions; it also covers the development of a joint EU defence industry with enormous funding behind it.

The global order built by the West after the collapse of the USSR in 1991 is falling apart, and macro zones with separate economic and political systems are gradually taking shape. Within BRICS three quite different civilisations with their own emerging macro zones are already visible — China, Russia and India. Russia and Iran are building theirs. The picture in the West is the same: two civilisations, the US and Britain, are actively building their zones. Europe, as a separate civilisation, is in the process of a possible break-up of its union, the EU. Giving up cheap energy supplies from Russia has made Europe, and Germany in particular, significantly dependent on the US and its energy supplies. A colossal blow to the EU economy!

In the view of experts, the war in Ukraine is the settlement of the German question — the destruction of German industry as the EU’s industrial core and a competitor to the Anglo-Saxon world, together with the weakening of Russia and Europe (the EU) by severing all ties, including trade, between the two sides. Mackinder said in his Heartland concept that under no circumstances should Europe (Germany) and Russia be allowed to unite in Eurasia. Many European companies are now preparing to move, or are already moving, their production mainly to the US because of high electricity and gas prices. The European economy is in a very difficult position, practically stagnant for several years. The US and China are fighting over the pie called the EU. In this context, Mario Draghi’s report can be described as Europe’s answer to the geopolitical and geo-economic challenges from the US, China and Russia that Europe faces.

Presenting the report, Mario Draghi said: “Two years ago we were not having conversations like this, because things seemed to be going well. But the conditions have changed. World trade is slowing. China has become much less open to us, and in fact it is competing with us in world markets across the board. We have lost our main supplier of cheap energy, Russia. And now we need to start defending ourselves again, for the first time since the Second World War.”

The report’s central message is that Europe must move to action immediately, having slowed its growth since the start of the century. Draghi warns: “We have reached the point where, without urgent measures, we will have to jeopardise either our prosperity, or our environment, or our freedom.”

The Draghi report on EU competitiveness

Draghi proposes the following measures in his report to the European Commission:

Europe must urgently adopt an EU industrial strategy and mobilise at least €750–800 billion a year (4.4–4.7% of EU GDP. Enormous investment!), including private investment, in order to keep up with competitors such as the US and China.

The report says the EU needs new investment to preserve its social model and its ability to promote European values, including prosperity, equality and market freedom. “If Europe loses the ability to promote these values, it will lose its reason for existing,” Draghi concludes.

Draghi stressed the need to increase joint EU investment in the defence industry as quickly as possible and to wind down purchases of weapons systems from suppliers in third countries. He notes that the need for additional defence spending is growing because of geopolitical tensions, including wars on the eastern border and hybrid wars everywhere.

The reason is that the focus of US strategic doctrine is shifting from Europe to the Pacific region in a future war against China, since the US cannot fight several wars at once against two or more strong land powers in Eurasia. Europe therefore understands that the US will not guarantee Europe’s military security in future and that Europe must provide for its own security by its own efforts. It also understands that it lags behind Russia in putting its economy on a war footing. Russia began reforming its military-industrial complex before the West realised it.

Draghi believes the EU defence industry needs enormous investment to restore lost capabilities and replenish stocks depleted by support for Ukraine. In June the European Commission also estimated that an additional €500 billion would be needed for defence over the next decade.

He notes that joint European defence procurement accounted for only 18% of total spending in 2022, well below the 35% benchmark set by the European Defence Agency (EDA). As a result, between June 2022 and June 2023, 78% of EU defence procurement spending went to suppliers from non-EU countries, 63% of it to American companies. In other words, Draghi proposes building an independent military-industrial complex and forming Europe’s own capable army — something the US and Britain have always opposed, doing everything to prevent it while guaranteeing Europe’s security within NATO.

The report notes: “The choice to ‘buy American’ is part of the legacy of the Second World War and the Cold War. Yet even today, with defence investment rising and a growing awareness of how important it is to own and protect critical technologies, member states continue to buy military products from non-EU countries.”

Draghi also proposes merging European defence companies to make the most of the largest arms manufacturers’ potential. He proposes strengthening military R&D, particularly in drones, hypersonic missiles and military AI systems.

As for the difficulties in the EU’s car industry, he proposed a comprehensive approach covering every stage of car production, from research and the extraction of rare earth metals to data processing, manufacturing and recycling.

Draghi also noted that the EU must keep reducing its dependence on a small number of suppliers of critical raw materials and digital technologies. On microprocessors, he noted that 75–90% of the world’s chip manufacturing capacity is concentrated in Asia.

The Draghi report on EU competitiveness

European companies must not flee Europe. Europe must urgently redirect its collective efforts to closing the innovation gap with the US and China, especially in high technology.

According to him, the EU economy grows almost a third more slowly than the US, and China poses a growing threat to the EU because it now competes in 40% of industries, up from 25% in 2022. Energy security is identified in the report as a priority problem for the competitiveness of the EU economy. Draghi points out that with electricity prices two to three times higher than in the US, it is impossible to stay competitive. Industrial gas prices in the EU have risen by 345% as well. Draghi proposes continuing to pursue the “green agenda” and raising productivity to address energy security and competitiveness.

The British economist Philip Pilkington says of this: “Every economist, Draghi included, knows that high energy prices caused by the blowing up of the Nord Stream pipelines and the sanctions (against Russia) are the main reason for the death of EU competitiveness. But no one will say it, so they distract themselves with nonsense. Europe will die of lies, like the USSR.”

It should be noted here that the second string of Nord Stream 2 is still intact (two strings of Nord Stream 1 and one string of Nord Stream 2 were blown up), but the EU is not yet willing to take gas through it, despite the substantial rise in energy prices. It also seems to me that, besides high energy prices, there are other reasons for the loss of competitiveness, since Europe began losing ground not in the last two years, after giving up cheap Russian gas, but in the mid-1990s (I looked at this in earlier pieces).

Other reasons for Europe’s falling competitiveness are excessive bureaucratisation of management structures, which prevents political and economic decisions from being taken efficiently and on time — that is, weak political will; a substantial decline in the quality and calibre of Europe’s governing elite, whose representatives long ago ceased to be of even de Gaulle’s level; a chronic lack of funding and the problem of further commercialising innovation; falling fertility and a growing share of the older generation, which affect economic indicators and the productivity of labour — that is, Europe’s population is not a young population; the inefficient spending of funds on the countries that became new EU members (the countries of Eastern Europe) instead of investing in a concentrated way in developing its own economies (this applies to Germany, France, Italy and other major EU economies); the fall in the EU’s volume of trade because of the loss of markets in other important parts of the world such as China and Southeast Asia, given the growth of the productive forces of those economies and the availability of cheap labour there, and so on.

The problem is not only energy, although that is the most important part of it. The US prepared for this by developing its gas industry and building gas-fired thermal power plants, which allows it to generate cheap electricity. It is converting its energy sector to gas as its main primary energy source. The US already produces twice as much gas as Russia — more than 1 trillion cubic metres. Frankly, it prepared for what would happen in Europe and is actively pushing European corporations to move their production chains to the US.

Returning to Draghi, he says: “The problem is not that Europe lacks ideas or ambition, but that innovation is blocked at the next stage: we fail to translate innovation into commercial terms.”

Over the past five decades, not a single EU company worth more than €100 billion has been created from scratch, and 30% of European private start-ups valued at more than $1 billion have left the bloc since 2008 because they could not scale up on the continent. In Draghi’s view, Europe cannot afford to get stuck in intermediate technologies and the industries of the last century, and must unlock its innovative potential at a time when the world stands on the threshold of an AI revolution. He calls on Europeans to invest in people so that their skills match their ambitions.

The Draghi report on EU competitiveness

Raw material security and protective measures for Europe’s market.

Draghi notes in his report that EU countries have become dependent on supplies of critical raw materials and advanced technologies from countries with half of which the bloc has no strategic ties, that this dependence cannot be overcome in the medium term, and that it is being used as a geopolitical weapon. In China, for example, the largest producer of nickel, copper, lithium and cobalt (accounting for 35% to 70% of their processing), export restrictions multiplied ninefold between 2009 and 2020. Draghi points out that the EU market has faced a shortage of natural resources. Pipeline gas imports from Russia fell from 40% in 2021 to 8% in 2023, while the bloc’s annual spending on fossil fuel imports rose from €341 billion to €416 billion in 2023 (about 2.7% of EU GDP). Spending that much on gas is of course a serious blow to the EU economy, because with low-cost imported energy the freed-up funds could have been redirected into R&D, the productive forces of the economy and the creation of new high-tech jobs in the EU.

Draghi says: “The source of relatively cheap energy has disappeared, and that has cost Europe dearly. The EU has lost more than a year of GDP growth, while having to redirect enormous resources to energy subsidies and the construction of new infrastructure for LNG imports.” In his view, the EU needs to develop a genuine foreign economic policy as soon as possible, one that provides for securing critical resources (I will look at the critical resources the EU needs later), and to develop “resource diplomacy” based on investing in third countries that have mineral deposits.

Because the EU faces aggressive competition from the US and China, it needs radical measures, Draghi says. He stresses that the era of an open world economy managed by multilateral institutions is coming to an end, and therefore proposes protectionist measures, including defensive and restrictive trade measures to “level the global playing field and offset state-sponsored competition abroad” (by which he means US and Chinese state subsidies for their companies, including support for their export potential) and thereby improve the EU’s competitiveness.

The Draghi report on EU competitiveness

De-bureaucratisation of EU management structures. Draghi proposes cutting bureaucratic red tape and making the bloc’s decision-making rules more efficient, which would allow it to act faster.

Draghi notes: “Europe does not coordinate its actions where it matters; European decision-making rules have not changed substantially as the EU has enlarged and the global environment we face has become more complex.” In his view, one of the stumbling blocks in Europe is its complex and slow decision-making process, which takes an average of 19 months.

In his view, it is time to consider moving to qualified majority voting in the European Council and thus abandoning a system that allows individual governments to veto the bloc’s key economic or foreign policy decisions. The EU, for example, was unable to agree a €50 billion aid package for Kyiv for several months because of Hungary’s position on the war in Ukraine.

As of 2019 the EU had adopted about 13,000 legislative acts, while in the US the figure was only 3,000. Draghi noted: “This fact makes you wonder whether we could pass slightly fewer laws and not fritter away our attention on trifles.”

Friends, I hope I have managed to broaden your knowledge a little on the situation in Europe and its response to the geopolitical challenges it faces. Mario Draghi’s report is very important because it answers the question: “Can Europe survive in its present form, or will it fall apart in the next few years?” Many factors argue in favour of the latter.