A Summary of the "The Future of European Competitiveness" report by Mario Draghi

Europe stands at a critical juncture, facing significant challenges to its economic competitiveness and future prosperity. A new report outlines a comprehensive strategy to reignite sustainable growth and innovation across the European Union. We, at Newnex, are summarising the salient points of the report as a quick overview.

The EU has long prided itself on combining economic integration with social inclusion and environmental protection. However, persistent slow growth and lagging productivity compared to the United States and China are threatening Europe's ability to maintain its high living standards and ambitious goals.

Three key transformations are identified as crucial for Europe's future:

1. Accelerating innovation and finding new growth engines

Europe is being squeezed between weakening foreign demand and rising competition from China, while also falling behind in advanced technologies. Only four of the world's top 50 tech companies are European, and the EU's share of global tech revenues has declined. Urgent action is needed to boost innovation, particularly in breakthrough technologies like artificial intelligence.

2. Reducing energy costs while continuing decarbonization

Despite recent price declines, European companies still face electricity prices 2-3 times higher than in the US, and natural gas prices 4-5 times higher. The transition to clean energy presents both challenges and opportunities for European competitiveness.

3. Increasing security and reducing dependencies

Rising geopolitical risks and vulnerabilities in critical supply chains necessitate a more coordinated European approach to economic security and strategic autonomy.

The report identifies three main barriers hindering Europe's progress:

1. Lack of focus: Despite articulating common objectives, the EU often fails to set clear priorities or follow through with coordinated policy actions.

2. Inefficient use of common resources: Large collective spending power is diluted across multiple national and EU instruments, reducing impact.

3. Insufficient coordination: The EU's slow and fragmented policymaking process struggles to produce the coordinated, multi-faceted responses needed in today's complex global environment.

To address these challenges, the report proposes a new industrial strategy focusing on:

1. Closing the Innovation Gap

  - Europe must focus on advanced technologies to close its innovation gap with the U.S. and China, particularly in AI and digital technologies.

  - Encouraging R&D and supporting new tech companies can drive innovation, shifting away from the static industrial structures currently hindering growth.

  - To attract talent and financing, Europe must streamline regulatory burdens and improve its capital markets.

2. A Joint Decarbonization and Competitiveness Plan

  - The EU’s high energy costs impact its industries' competitiveness, making a coordinated decarbonization strategy essential.

  - While Europe leads in clean technologies, competition from countries like China pressures the EU to maintain its edge.

  - Addressing energy security and promoting clean technology can reduce dependencies on external energy sources and support growth.

3. Enhancing Security and Reducing Dependencies 

  - Europe's dependency on external supplies for critical resources (e.g., rare earths from China) is a vulnerability in a volatile geopolitical climate.

  - Building a "foreign economic policy" within the EU to secure strategic resources and invest in defense industries is essential for sustainable growth.

4. Overcoming Barriers

  - Fragmented policies and lack of focus weaken Europe’s competitiveness. Coordinated efforts are needed across innovation, defense, and trade.

  - Reducing regulatory burdens for SMEs and enabling high-growth companies to scale within Europe will help retain talent and capital.

5. Financing Investments

  - To fund necessary transitions in technology, energy, and defense, Europe must increase investment rates and mobilize both private and public resources.

  - Initiatives like the Capital Markets Union can channel household savings into productive investments, providing financial backing for Europe's transformation.

6. Strengthening Governance

  - Reforms to the EU’s governance model are critical for effective policy coordination. Streamlined decision-making will allow the EU to tackle cross-border challenges more efficiently.

  - Embracing flexibility in policy implementation and reducing unnecessary regulations can empower industries while maintaining social cohesion.

The strategy emphasizes the need for coordinated action across multiple policy areas, from fiscal incentives to trade policies and foreign economic strategies. It also calls for a rigorous application of the subsidiarity principle, reducing regulatory burdens where appropriate.

Crucially, the report underscores that raising productivity is fundamental to creating the fiscal space needed for public investment in key European public goods. Some degree of joint funding for breakthrough innovation, defense procurement, and cross-border infrastructure may be necessary to maximize productivity and competitiveness.

While acknowledging the difficult timing and potential trade-offs involved, the report argues that procrastination is no longer an option. Europe must move forward with reforms to preserve its welfare, environment, and freedom. With unity and democratic backing, the EU can find the strength to implement the necessary changes and secure a competitive, prosperous future for all Europeans.

For Europe to secure its competitive position on the global stage, it must embrace an ambitious strategy rooted in innovation, sustainability, and strategic autonomy. Through focused investments and coordinated policies, Europe can drive productivity and protect its social and economic values amidst the challenges ahead.

Link to the full report