EU Affairs The Future of European Competitiveness

Vice President JD Vance accusing Europe of abandoning Western values, suppressing free speech and permitting mass migration. US tariff manoeuvres. Political turmoil in France and Germany. Rising fragmentation and the regression of globalisation.

The global context is a delicate one in which Europe has found itself exposed to the elements. Trade openness in Europe, measuring the extent of engagement with international partners, has increased in recent years – a strength in a globalised world, but a vulnerability in a fragmented one. It relies on a handful of suppliers for critical raw materials, but especially China. The EU has been reliant on cheap Russian energy, boundless Chinese markets and US security. According to the IMF, about 40% of imports from outside the EU are sourced from countries not aligned with the EU and around half of such imports would be difficult to access through alternative suppliers.

Meanwhile the failure to lower internal barriers to growth and domestic production has exacerbated the reliance on external partners and increased Europe’s vulnerabilities. As a result, the Eurozone barely grew in 2024, highlighting its fragile domestic recovery from the pandemic. GDP in the Euro Area stagnated at 0% in the fourth quarter of 2024 over the previous quarter.

In a similar way that the UK is navigating the choppy geopolitical waters and trying to turn the sails towards something better resembling economic growth, the EU is upping the urgency to ensure it does not get left behind.

Enter Mario Draghi, the former Prime Minister of Italy and former President of the European Central Bank. At the behest of EU President Ursula von der Leyen, Draghi produced a weighty 400-page report on the future of European competitiveness, focusing on three key challenges for the EU:

1. Closing the innovation gap with the US
2. Harmonising decarbonisation with competitiveness
3. Enhancing economic security by reducing dependencies

In his report, Draghi proposes an economic paradigm shift for Europe. There is insufficient investment in Europe, both public and private, and growth has been undermined by austerity following the 2008 financial crash.

Draghi refers to the fact that over one third of EU corporate unicorns relocate abroad, primarily to the US, due to regulatory, financial and training barriers. He also argues the EU is stuck in a static industrial structure: no EU company with a market capitalisation over €100 billion has been set up from scratch in the last fifty years, compared with 6 US companies that have been created in this period. Similarly, many European entrepreneurs prefer to seek financing from US venture capitalists for better prospects on commercialisation.

And against the backdrop of an increasingly unpredictable US, the EU will need a genuine foreign economic policy to retain its freedom and statecraft. For example, Draghi suggests coordinating preferential trade agreements and direct investment with resource rich nations, building stockpiles in selected critical areas, and creating industrial partnerships to secure supply chain of key technologies.

Another important area needing to be unlocked is decarbonisation, which should be an opportunity for Europe, but is not currently being realised, particularly due to red tape. Indeed, the EU has a lack of natural resources. But also, market rules have prevented industries and households from capturing the full benefits of clean energy in their bills. Without a plan to transfer the benefits of decarbonisation to end-users, energy prices will continue to weigh on growth.

One of Draghi’s ideas is an omnibus regulation, whereby corporate sustainability requirements are consolidated into one, reducing the administrative burden and simplifying the sustainability reporting process for firms. There is also a focus on harmonisation of regulation in this area.

Having to navigate 27 sovereign jurisdictions, EU policymaking can be quite disaggregated, meaning that decision making is slower than it could be. Draghi’s report estimates that the average time to agree new laws is 19 months.

The proposals in the report are being described as ambitious. But will it work? Draghi quantifies that additional annual investment needed to bolster EU competitiveness is over €800 billion, or about 5% of GDP. He recognises that financing this will require greater private resources, which necessitates developing European capital markets. There is also a pressing need for simpler and more flexible regulation to remove friction from the EU’s legislative process. At the same time, member state reluctance to cede sovereignty will make coordination on many of the initiatives challenging.

Of particular controversy is the proposal of common debt, which would mean increased risk sharing amongst European nations, with economically stronger countries like Germany and France helping to absorb the debt of weaker member states. Germany and the Netherlands have already expressed opposition to this.

But, even if not all of the proposals in the Draghi Report are enacted, most political groups of the European Parliament are backing it, calling it a wake-up call for action.

The Draghi Report was published on 9 September 2024. That was before the Trump administration sprung into action, before the US and Russia sat down for talks to end the war in Ukraine, before the tariff agenda commenced. So, as geopolitical lines continue to rift and spheres of influence continue to bulge around the world’s top two economies, the challenge of staying competitive becomes ever relevant.