(Bloomberg) — Former European Central Bank President Mario Draghi called on the EU to invest as much as €800 billion ($884 billion) extra a year to make the bloc more competitive and to commit to the regular issuance of common bonds to compete with China and the US.
Most Read from Bloomberg
In his long-awaited report on European Union competitiveness, Draghi urged the bloc to develop its advanced technologies, create a plan to meet its climate targets and boost defense and security of critical raw materials, labeling the task “an existential challenge.”
Draghi said that Europe will need to boost investment by about 5 percentage points of the bloc’s GDP — a level not seen in more than 50 years — in order to transform its economy so that it can remain competitive. He warned that EU economic growth was “persistently slower” than in the US, calling into question the bloc’s ability to digitalize and decarbonize the economy quickly enough to be able to rival its competitors to the east and west.
“If Europe cannot become more productive, we will be forced to choose. We will not be able to become, at once, a leader in new technologies, a beacon of climate responsibility and an independent player on the world stage,” he wrote in the report. “We will have to scale back some, if not all, of our ambitions.”
European Commission President Ursula von der Leyen, who tasked Draghi with delivering the report, will need to decide how much of his recommendations to pursue.
The report comes as European leaders are increasingly aware of the loss of competitiveness against the bloc’s main rivals, partly due to Europe’s energy dependency and lack of raw materials. Meanwhile the EU continues to be hampered by the inability of its telecom and defense industries to harness economies of scale and be better prepared for a more nimble security stance.
The EU has also failed so far to push forward on a roadmap to lower the barriers of its capital markets to mobilize billions of euros across its borders needed to accelerate the development of clean technologies to meet its ambitious green targets or to create the next generation of technology champions.
One particular blessing for the private sector was Draghi’s call for more consolidation in the telecom industry, which he said is “needed to deliver higher rates of investment in connectivity.”
Draghi also pitched an adaptation of the EU’s competition policy so that “it does not become a barrier” to the bloc’s industrial goals. Specifically, he called for new assessments in tech deals that would examine how certain deals could boost innovation in Europe, as well as a further loosening of the EU’s guardrails for state aid across strategically important sectors.
The malaise of the European productivity is augmented by the weakness of national governments in the largest EU economies hit by political fragmentation and the rise of populist forces against some of the ambitious common solutions that Draghi is calling for, including joint debt.
The consequences of the slow response to the challenges posed by American financial incentives for the green transition and China’s aggressive industrial plans, with billions of dollars invested in subsidies, are already felt in some of the key industries.
Volkswagen AG announced that it’s considering factory closures in Germany for the first time in its 87-year history.
“Europeans need to understand that defense is not an answer, it’s just a temporary answer,” Alicia Garcia Herrero, economist at Natixis, speaking to Guy Johnson and Kriti Gupta on Bloomberg TV. “We need to attack — meaning certainly not anything but compete on better terms, meaning more innovation. The single market has to be strengthened.”
Draghi laid bare the challenges facing EU industry as it embarks on its mission to reach net zero by the middle of the century. Energy prices in the region are too high and are holding back investments, while the bloc’s climate goals are placing a heavy short-term burden on the highest-emitting sectors. China and the US do not face such obstacles, while the level of finance they provide to the sector dwarfs that of the EU.
Energy Plans
To make the energy transition an opportunity, Europe needs to sync all its policies with climate goals and come up with a joint plan for decarbonization and competitiveness that would span energy producers, clean tech and automotive sectors as well as energy-intensive companies where emissions are hard to abate.
The four largest emission-intensive industries in the EU, such as chemicals and metals, will require €500 billion over the next 15 years in order to decarbonize, Draghi’s report said. On top of that transport investment will amount to €100 billion every year between 2031 and 2050.
Draghi drew on the automotive sector for particular scorn, calling it a “key example of a lack of EU planning.” The bloc faces a real risk that EU carmakers continue to lose market share to China, which has is ahead of the 27-member bloc in “virtually all domains,” while producing at a lower cost.
The report suggests common funding for defense R&D in a number of sectors such as drones, hypersonic missiles, directed-energy weapons, defense artificial intelligence and seabed and space warfare, but also the space sector. He also recommends ramping up collaborative procurement on defense equipment as well as favoring European companies, provided they are competitive.
–With assistance from Katharina Rosskopf, Samuel Stolton and Alexander Weber.
(Updates with report details from the 10th paragraph.)
Most Read from Bloomberg Businessweek
©2024 Bloomberg L.P.