The EU is currently undergoing a critical period, mainly due to economic stagnation, lagging behind the US and China in the field of technology and insufficient progress in the battle against climate change. At the same time, the EU is faced with geopolitical tensions and the repercussions of the wars in Ukraine and the Middle East, an inability to efficiently manage migration flows and a steadily worsening demographic problem.
In this context, the recent report of the former president of the ECB, Mario Draghi, who advocates a radical change of the EU’s philosophy and operating structures, is being widely discussed. A key element of the proposed strategy is the emphasis on competitiveness, which is promoted through the adoption of a highly interventionist public sector policy.
The Draghi report advocates an active industrial policy with multidimensional government support of selected strategic sectors, focusing on research and innovation, renewable energy sources, upgrading of telecommunications and energy networks and the advancement of defence capabilities. The report proposes a steep increase in investment by €800 billion annually, with the largest share coming from the private sector. This would be combined with strong support from the public sector in the form of subsidies and tax incentives (in line with the Chinese government’s support for the electric car industry), as well as infrastructure investments (consistent with the model of the Biden administration). Regarding private investments, it is essential to promote the degree of integration of the capital markets and also to consider specific tax relief measures.
One fundamental point put forward by the report is the overhaul of the EU competition policy in order to facilitate mergers and the creation of larger business structures, capable of competing with US and Chinese tech giants. Reducing the regulatory burden, as well as streamlining the procedures for assessing EU funding programmes are additional important elements that would contribute to the evolution of competitive multinational companies. Furthermore, the report proposes interventions in the energy price setting mechanism, aiming to keep prices at low levels, thus counteracting the looming course of de-industrialisation.
Draghi’s proposals require a transformation of the institutional role of the European Commission, whose current budget amounts to merely 1 per cent of GDP. Adoption of the proposals would imply steeply increased budgetary outlays and the adoption of a flexible community fiscal framework, with a view to becoming supportive to the anticipated promotion of public investments. In the same context, the continuation of the European Commission’s common borrowing, based on the model of financing the national Recovery and Resilience plans, is being recommended.
The reactions to the proposed reforms vary, from full adoption, mainly by southern EU countries, to strong reservations, by countries such as Germany.
The reality, however, is unforgiving: in 2002, the GDP deficit between the US and the EU was 15 per cent but today it has doubled, reflecting the EU’s lower growth and reduced productivity. Hence, most analysts support Draghi’s recommendations for radical and substantial reforms and an overhaul of governance on the basis of a shared European strategy and common course. Under a different scenario, the EU risks being marginalised on the global stage.
Andreas Charalambous and Omiros Pissarides are economists and the opinions they express are their own
