The report commissioned by the European Commission from former ECB president Mario Draghi proposes an 800 billion euro investment and tax cuts to improve the EU’s competitiveness with the US and China. Is it feasible?

In his long-awaited report commissioned by the European Commission on how to improve European competitiveness, former European Central Bank President Mario Draghi details a strategic plan to cope with growing global competition. Although the report identifies Europe’s main challenges, it includes some questionable and difficult-to-implement recommendations.

Draghi presents an ambitious proposal that touches on strategic sectors such as energy, telecommunications, defence, and automotive through structural reform in European economies. Aiming to close the gap with China and the US, Draghi warns that the EU faces an ‘existential challenge’ and the threat of ‘losing its raison d’être’ if it does not significantly increase investment and reform its industrial policy.

The former banker points out that Europe has fallen behind the US and China in the productivity and innovation race, and argues that the European continent needs investments twice the size of the Marshall Plan and much more innovation. In this context, the paper calls for large public debt-financed investments of up to 800 billion per year in key areas such as the green transition, digital transformation and general reindustrialisation.

Main objectives of the Draghi plan

The 300+ page document focuses on four core pillars: decarbonisation, innovation, competitiveness and security, warning that Europe is failing to take advantage of its breadth and scale because of fragmentation and lack of coordination. In this regard, it puts forward several proposals to reduce regulation and improve decision-making, as well as to exponentially increase cooperation between national governments that has so far proved difficult for member states to agree on.

In the energy sector, it proposes lowering and equalising energy taxes in different EU countries, setting a common cap on electricity and gas surcharges, as well as granting tax credits to industries linked to the use of clean energy solutions to decarbonise the sector.

This means massively increasing investments in infrastructure and green energy while reducing regulation, to return to solid and steady growth. Similarly, the document calls for diversifying natural gas supply arrangements and developing new strategic natural gas supply infrastructure, while coordinating storage between member states.

While the report supports the reduction of CO₂ emissions, it questions the setting of ambitious decarbonisation targets without it being backed up by a solid supply chain transformation strategy, as has been the case for the car industry, and criticises Brussels’ failure to back it up with a strategy to boost battery and recharging point manufacturing to a sufficient extent. The automotive sector is a key example of the lack of planning in the EU, which implements a climate policy without an industrial policy’, it says.

On the other hand, the study promotes the creation of robust digital infrastructures, as well as investment in artificial intelligence and emerging technologies, as the competitiveness of the European economy will increasingly depend on digitisation and the development of new technologies.

In this regard, he warns of the current dependence on imports of these technologies and the lack of European companies with the capacity to compete with their US and Asian rivals. It argues that a paradigm shift in this sector will necessarily involve institutional support for emerging technology companies and mergers between telecoms companies to avoid fragmentation and boost EU autonomy.

Similarly, according to the report, EU countries buy too much defence equipment abroad, almost two-thirds from the United States, and do not invest enough in joint military projects. Therefore, in order to reduce dependence on third countries, it will be imperative to develop an EU defence industrial policy that improves funding and incentive mechanisms to boost European industrial solutions.

Criticisms and challenges ahead

Divisions among some countries over the viability of the Italian technocrat’s plan have not been long in coming. Germany and the Netherlands have expressed concern about the impact of some proposed reforms, as a first warning that some recommendations may not be politically feasible.

‘Joint EU indebtedness will not solve the structural problems: companies are not lacking in subsidies,’ German finance minister Christian Lindner, leader of the liberal FDP party, wrote in X. ’They are bound by bureaucracy and a planned economy. ‘They are bound by bureaucracy and a planned economy. And they have difficulties in accessing private capital. We have to work on this.

‘More money is not always the solution,’ Dutch Finance Minister Eelco Heinen, a member of the conservative People’s Party for Freedom, was quoted as saying by Dutch news agency ANP. Finance Minister Dirk Beljaarts of the far-right Party for Freedom (PVV) made a similar assessment: ‘Additional public investments are not an end in themselves, they are only necessary in case of unfair competition or market failure’.

Other critical voices argue that the report lacks a fundamental economic justification for the role of the state as an active investor, especially in terms of transferring high entrepreneurial risks to taxpayers. On the other hand, protectionist measures that make it easier for European firms to grow in isolation from non-EU competitors are likely to conflict with other objectives and neuter innovation.

Implementing these reforms in an institutional framework as complex as the EU’s can be difficult and slow, and it is clear that some Member States are better placed to take advantage of the opportunities detailed in the report than others with less infrastructure, industry, or reliance on more traditional sectors, others, which could be left behind.

Given the massive investment required, it will not be easy to raise the necessary finance. Particularly for the most indebted economies, which may find it difficult to justify this new expense without clearly defined country objectives and detailed direct benefits to their taxpayers.

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