The Draghi report on EU competitiveness Great... but 5 years too late!

I have a lot of respect for Mario Draghi. A man who can handle crises, saved the Euro in 2012, was Italy's Prime Minister at the height of Covid. And a modest one on top of that, with no big ego and no quest for media exposure. In many ways, he reminds me of Jacques Delors. This kind of man, who thinks and acts, is particularly rare. The proof is that there is not a single specimen among the current leaders of the Union, including the Member States.

With no operational functions left, Mario Draghi has been asked by the Commission to submit a report on The Future of European Competitiveness. This work follows on from the Letta report on the Single European Market presented to the EU Heads of State and Government in April 2024.

Letta Report - Draghi Report: twin reports

Letta and Draghi speak with one voice: the completion of the Single Market is THE essential condition for competitive redeployment of the Union. One remembers the mantra of “free movement of goods, people, services and capital” still today.

Between the end of the 80s and the beginning of the 90s, 282 directives were adopted to give life to the Single Market on 1 January 1993. These texts guaranteed the free movement of goods and people, whilst the Europe of services and capital was still to be finalised: capital markets, banking services, European patents, recognition of diplomas, public procurement, etc.

When Jacques Delors stepped down in 1995, it fell to his successors to complete the task. The Santer, Prodi, Barroso, Junker and von der Leyen Commissions were more concerned with broadening than deepening, and have failed to accomplish this priority task.

Successive Commissions - followed by the Member States - have filed the completion of the Single Market away, focusing instead on the creation of the Euro. However, claiming to create a single currency without a unified common market and without federally inspired governance was in itself sowing the seeds of the failure that would lie ahead.

Back in 2005, I asked the question in a book published by Europolitics: “Will the Euro be a tool of European integration? Or an instrument for its destruction?” During the first 20 years, the Euro was a protective shield. It was a time of easy money and zero interest rates, and the Greek crisis just an epiphenomenon.

The Euro still protects us today. France, in particular, would have devalued two or three times without the single currency. But this will not last. The rise in inflation following the Brexit, which was quickly brought under control by the ECB, was an initial warning. Today, the enormous need for liquidity (Ukraine, European defence, the transition to zero carbon, competitive recovery, etc.) is in contradiction with the economic divergences between Member States and their now structural dissensions. Huge debts, huge deficits, interest rate differentials, sluggish growth. In my view, the Euro is a pyramid that stands not on its base, but on its tip.

Draghi and Letta, the same damning assessment

Draghi and Letta are both pro-Europeans, there is no trace of Euroscepticism in their backgrounds, but their common observation is damning. Basically, to sum up, nothing is going well.

The first angle of attack in the Draghi report is “Europe is lacking focus”. Europe has lost direction, it’s dispersed. As I wrote recently, ‘The von der Leyen years were wasted years, simply because the thread of European history was broken. Already under Barroso I and Barroso 2, as under Juncker, the will to construct had faded with each enlargement.

Year after year, the European Union has become a rule-maker, a fussy and authoritarian bureaucracy. The disaster is so severe that the Commission has come to accept state aid, the ultimate negation of the very concept of the single market.

The von der Leyen Commission has added a layer of dispersion leading it to deal with ‘everything’, but badly: geopolitics, conflict management, European defence, all of which are outside its mandate and have therefore amounted to nothing more than posturing.

Draghi's observations are just as critical. Firstly, the loss of competitiveness vis-à-vis the USA and China. A loss that seems- reading between the lines, on the whole, irrecoverable. A growing technological gap. The weakness of European R&D. The EU is losing ground in clean technologies, particularly to China. Phasing out of rare earths. Uncompetitive energy prices.

To stay for a second on this last point, is there any European policy that has been more poorly managed than energy policy? A strong bastion of the Commission with highly authoritative officials until the 2000s, energy has been left to its fate: no debate (a fortiori decision) on nuclear power, erratic management of biofuels, Kafkaesque setting of electricity prices, rejection of innovation (shale gas, CO2 capture), keeping the energy mix under national jurisdiction, not to mention the Union's total unpreparedness following the Russian aggression. That's a lot, isn't it?

Common sense remedies, but no doubt illusory!

The Draghi report sets out 4 major themes for reform. The first concerns the essential completion of the single market. These include access to capital, banking and financial regulation, and so on. The von der Leyen Commission seems to have been concerned mostly with taxonomy! This demonstrates that the virtual has prevailed over the real.

The second theme concerns competitiveness: relocation of European industries, competition rules adapted to global markets, a dynamic conception of international trade. In short, just about the opposite of what has been done over the last twenty years.

The third theme relates to a reform of European governance. We all know the devastating effects of the trilogues, the delegated acts, the opaque decision-making processes that have shifted power from the political to the administrative level. Today, whether we are talking about the Commission, the Parliament or the Council, everyone has their own interests at stake and no reform is planned. The appointment of Mr Dombrovskis (in place since 2019) as Commissioner for simplification might make us smile if the situation were not so serious[Es1] .

The final theme concerns the financing of the ‘Draghi Plan’, which estimates investments needed within a range of €750-800 billion a year, or around 4.5% of GDP. This estimation seems realistic as far as we can tell.

This massive multiannual investment would generate additional growth of 6% over 15 years. This return on investment seems surprisingly low.

How will the Draghi Plan be financed?

The section devoted to the financing of the plan is not very developed because Mr Draghi does not dare to call things by their name. Clearly aware that a number of countries - foremost among them Germany - are hostile to a new community loan, there is only mention here of Eurobonds, which we understand would be common and guaranteed by the Union. This would de facto mean community financing outside the multiannual financial framework.

Let’s keep in mind that following COVID, the EU, acting on an idea put forward by President Macron, decided to launch a €750 billion recovery plan, partly in the form of loans, partly in the form of subsidies, a figure in line with the Draghi Plan.

Alas, three times alas, this plan - NextGenerationEU - launched in 2020, has only been used up to 37% by the beneficiary Member States! The remainder is still in the Commission's pipeline, for administrative reasons or because a particular country does not comply with the EU's humanist principles (Hungary, for example). So, the desired stimulus effect has not materialised. It is therefore an illusion to pretend to repeat this failed experiment.

On the other hand, President Biden's Inflation Reduction Act, although worth half as much ($350 billion), has generated an unprecedented boom in growth, jobs and investment in the United States, a significant part of which is due to the relocation of businesses from the European Union to the USA!

What to expect from the Letta Plan and the Draghi Plan?

Conceived by two highly credible personalities, these two plans have been widely reported in the international press. In fact, they have been summarised rather than commented on.

Expecting the Letta Plan or the Draghi Plan to be implemented globally is an illusion, but they send out a double signal: the urgency and the need to start... with the beginning, i.e. the completion of the Single Market.

Will the “existential challenge” facing the Union - to use one of Mr Draghi's expressions - be met? I fear not, for all the reasons listed in his report.  To be successful, we would need, if not audacity, at least a little bit of courage. Mrs von der Leyen's re-election by default (out of laziness some have said) for another five-year term sends out the wrong signal,  which is reinforced by the sidelining of Mr. Breton.

Daniel Guéguen – September 20, 2024

daniel.gueguen@eppa.com – +32 (0)474 37 74 42