The Draghi report contains some useful proposals but fails to match up to the challenges the European Union is facing.
In 2000 European Union leaders adopted the ‘Lisbon strategy’, which promised to make the EU ‘the most competitive and dynamic knowledge-based economy in the world’. It was associated with neoliberal reforms based on labour-market ‘flexibilisation’, deregulation and ‘liberalisation’. Yet, 23 years on, the former president of the European Central Bank, Mario Draghi, was tasked by the European Commission once more to place European ‘competitiveness’ at the centre of EU economic policy-making.
In 1994 the American economist Paul Krugman had identified the fallacy of thinking that countries (or regions) could ‘compete’ like companies. And in as much as it meant anything, the ‘competitiveness’ of jurisidictions did not depend on international but domestic factors, mainly productivity growth.
In his report, Draghi does identify raising productivity in the EU as the most important driver of long-term growth and rising living standards. And he rejects a zero-sum competitive game based on trade surpluses, defending EU ‘champions’ or lowering wage costs. Yet why then extend the ‘dangerous obsession’ (as Krugman put it) with such an ambivalent term as ‘competitiveness’—rather than just calling this a European productivity and growth agenda?
Orthodox economics
But then Draghi’s concept of productivity is itself narrow, largely tied to innovation. And his report provides ample evidence that the EU economy lags behind the United States and China on advanced technologies. It blames this innovation gap on:
- too much ‘red tape’, to be rectified by fewer, simpler regulations and a reduction of companies’ reporting obligations by up to half;
- lack of finance, due to fragmented and over-regulated capital markets and limited availability of risk-taking capital, to be tackled by a genuine capital-markets union, a large (public and private) investment programme of €800 billion per annum, a common safe asset and the channelling of private savings into venture-capital markets;
- weak digital skills among the workforce, implying increased R&D spending (including via European Research Council and Horizon Europe grants), more education in the technology-related ‘STEM’ subjects and a Tech Skills Acquisition Programme to promote vocational training.
The diagnosis and the bulk of the proposals thus remain rooted in orthodox, supply-side economics. The report focuses on improving business conditions and ignores other crucial factors driving productivity, such as working conditions and wages.
Its deregulatory agenda has been at the forefront of EU economic policy-making for two decades, with a variety of initiatives—the REFIT programme, ‘better regulation’, the Regulatory Scrutiny Board and so on—already in place. The report recognises that these have had limited success. It concludes, unpersuasively, that they should be intensified.
Benefit to society
Yet regulation itself can lead to innovation: think of the stimulus to more energy-efficient cars, home appliances and buildings from abatement of greenhouse-gas emissions. It entails not only a cost to business but also a benefit to society. The report does call for a unified methodology assessing the benefits as well as costs of new regulation but it is very difficult to measure and monetise the social benefits.
What remains vital is however an assessment based on democratic deliberation. The proposed curbs on regulation and plea for uniform implementation by member states—so no ‘gold-plating’—would not only make it increasingly difficult for legislators to expand on the social and environmental aquis but also undermine effective national implementation of existing EU legislation (such as that on corporate social due diligence).
On financing the investment sought, the report recognises the lack of patient capital in the EU but misses the underlying problems. Financialisation of the EU economy has brought excessive profit expectations, negative attitudes towards risk and short time horizons. And during the last quarter century a macroeconomic framework focused on price stability and fiscal austerity has constrained public investment—arguably the most important factor behind the dismal investment performance of the EU, compared with the US and China. While a common safe asset is commendable as a key element of a capital-markets union, the report otherwise proposes highly problematic measures, such as securitisation and encouragement of second-pillar pension funds as sources of venture capital.
Remarkably, Draghi does not request an increased EU budget, apparently because this would be anathema to influential member states such as Germany. Yet this is also true of his proposal for a common safe asset—recall the ‘eurobonds’ controversy. It thus remains unclear how his annual €800 billion investment programme would be financed.
Aggressive foreign economic policy
Within the ‘competitiveness’ focus on the external environment, the report identifies the EU’s dependencies on critical raw materials, energy, and green and digital technologies. It calls for a more ‘assertive’ trade policy, using trade and economic policy more broadly to pursue economic security. Given the war in Ukraine and the intensification of geopolitical conflict, the report advocates a European military-industrial complex, via common military procurement and a €500 billion security investment package.
By joining the chorus of those deploring Europe’s lack of ‘hard’ power, this increasingly aggressive foreign economic policy, evidenced in all recent EU strategy documents, grossly overestimates the international clout of the EU. If anything, its ‘strategic autonomy’ has ebbed.
This is true vis-à-vis the US, upon which Europe depends above all for its security and supply of natural gas. It similarly applies to China. Realising the EU’s decarbonisation agenda will be impossible without critical raw materials and green technologies from China, which is also the most important market for many EU products, including vehicles, with German companies for instance heavily invested.
But dependencies also exist towards the global south, where relations have suffered mainly due to unbalanced EU trade policies, particularly vis-à-vis African countries, and ‘vaccine nationalism’ during the pandemic. The report’s proposal to negotiate preferential trade agreements with resource-rich countries and use Global Gateway funds to buy governments’ goodwill smacks of neo-colonialism. Instead, the developmental needs of producer countries should be prioritised, taking full account of the massive environmental and social effects of resource extraction and Europe’s up-to-now largely unacknowledged climate debt.
As for defence policy, thanks to the post-pandemic reintroduction of the (revised) fiscal rules, most European countries will head into another round of austerity in the coming years. So any ‘military Keynesianism’ is simply off the cards. And the report fails to acknowledge that the North Atlantic Treaty Organization’s defence shield for Europe comes with a price tag, in the form of increased arms purchases from the US.
Development of a European military-industrial sector will thus be impeded, at least in the near term. Given the profound cleavage between France and Germany, when it comes to promoting their respective national sectors, and the deep antipathy of an ascendant far right across Europe to any power transfer to the supranational level, the most likely outcome will be ‘guns instead of butter’: any increase in military expenditure will come at the expense of spending on social wellbeing and the green transformation.
Winners and losers
Draghi’s agenda for structural change would necessarily create winners and losers; its social and political acceptance will crucially depend on the distributional implications. Yet apart from advocating a skills agenda, the report makes no attempt to reconcile competitiveness and this social dimension. It thus implicitly accepts ‘trickle-down’ economics, assuming that more growth will automatically benefit the population at large. Assessed against the European Green Deal, with its emphasis (albeit limited) on just transition, this is a major step back.
While the report proposes the largest investment programme in EU history—transferring hundreds of billions of euro of public money to the private sector—the social conditionalities needed to ensure the benefits would be fairly shared are absent. Nor does it discuss in any detail the metrics of performance that would allow public financial support to be linked to meeting predefined criteria.
Environmental objectives remain at the margin, with the partial exception of the decarbonisation agenda. In its uncompromising focus on growth, the report does not in any meaningful way address the challenge of decoupling this from energy and resource consumption, except for a few superficial references to the circular economy.
Lack of imagination
All in all, although the report contains interesting analyses of a wide array of industries and some topical policy proposals, it fails to provide a convincing package to tackle the key challenges of our time. What remains is a supply-side agenda based on deregulation and liberalisation, coupled with a more aggressive (though illusory) approach to international economic relations.
This speaks to the lack of imagination and courage displayed by the EU political elite in confronting current realities. Krugman nailed it when he wrote that the notion of ‘competitiveness’ is primarily employed by politicians when they need to muster popular support for unpopular policies. Dragh’s report is new wine in an old bottle.
Werner Raza is director of the Austrian Foundation for Development Research (ÖFSE) in Vienna.
Michael Ertl (michael.ertl@akwien.at) is an economist at the Vienna Chamber of Labour and an external lecturer.
Michael Soder works as an economist in the Economic Policy Department of the Vienna Chamber of Labour. He is a lecturer at Vienna University of Economics and Business Administration and the University of Applied Sciences Campus Vienna.