What is happening in Europe?

The former President of the European Central Bank (ECB) and Italian Prime Minister, Mario Draghi, released a landmark economic report titled ‘The Future of European Competitiveness’ on 9 September, outlining a “new industrial strategy for Europe” focused on the bloc’s overall competitiveness and lack of growth. The document was produced at the request of European Commission President Ursula von der Leyen and recommends a radical policy of investment and structural change, which has been compared to the post-war Marshall Plan that rebuilt the war-ravaged European economy.

The report makes for grim reading on the economic future of the bloc, if it remains unchanged, citing the pressures of a shrinking European population, the digital productivity gap between Europe and its competitors, and the breakdown of the international rules-based system. The report is direct, stating that these problems present an “existential challenge” to the bloc, and the only solution to its economic woes is “for Europe to radically change.” In a statement to reporters, Draghi opined, “Growth has been slowing down for a long time in Europe, but we’ve ignored it... Now we cannot ignore it any longer. Now conditions have changed.”

Importantly, the call for investment and restructuring appears to represent a clear break with the post-2008 economic orthodoxy, which prioritised deficit reduction and austerity measures at the expense of public investment and government interventionism. Across the political spectrum, many believe this period of austerity sacrificed economic growth, especially in smaller member states, to the benefit of China and the United States, while fuelling a spike in anti-immigrant, nationalistic politics.

The 400-page report is vast and comprehensive accounting for Draghi’s piece published at the invitation of The Economist magazine outlining his major proposals and elucidating on the enormity of the project. The need for investment is foremost throughout, Draghi stressing the need for an "enormous amount of money in a relatively short time,” estimating at least €750-800bn (£560-600bn) annually in order to close the economic gap. In comparison, the report details the huge uptake in private and public investment into digital and technological innovation in the United States, whereas European law has strict provision in place against risky investments and the European Investment Bank is reluctant to issue public money to unproved technologies. As a result, Europe has fallen behind in a range of exciting new technological changes including AI, decarbonisation, fintech and green technology.

The report acknowledges that investment alone will not address the economic malaise and advocates for a reworking of the EU’s internal decision-making processes, regulatory frameworks, and antitrust rules. It calls for increased coordination at all levels of the Union, which it describes as top-down and executive-led, with little input from other departments and a lack of expert consultations. The report states that corporate mergers, financial regulations, and trade deals should no longer focus on preserving competition within the EU but should take a holistic approach that increases the overall competitiveness of the bloc, allowing companies to scale up and compete globally, not just regionally. The call for closer alignment between regulatory frameworks and the wider economic performance of the Union will likely draw criticism from left-wing politicians, who have expressed concerns about the report, viewing it as a justification for increasing corporate dominance of the bloc at the expense of regional producers and unfairly benefitting the manufacturing base of the ‘core’ member states.

The reaction to the report has been mixed with accusations that the report is ‘one-sided’ while others have criticised the lack of consideration for smaller producers and working people. Moreover, Draghi has drawn criticism for his past involvement as President of the ECB during the European Debt Crisis where countries such as Greece, Spain and Portugal imposed severe austerity measures in coordination with the EU drawing accusations of democratic deficit and unnecessary impoverishment. 

In an acknowledgement published by the European Commission the report received 236 contributions from academic institutions, think tanks, lobbyists and corporations. There have been accusations that the report is heavily biassed in favour of the EU’s founding ‘core members’ at the expense of the bloc’s smaller, newer and/or economically underdeveloped member states. Velina Tchakarova, a political consultant, criticised the report on Twitter stating “Not a single Central and Eastern European personality has been questioned by Draghi's team about the desolate state of Europe nowadays. Once again, we are becoming an object of someone else's fate and wrong decisions.” 

Other stakeholders have criticised the report for failing to consult with trade unions, representatives of small businesses, and environmental groups. Olivier Hoedeman, Corporate Europe Observatory's research and campaigns coordinator, told Euronews that "With such a one-sided process, it [the report] fails to adequately address the scale of the ecological crisis and social inequality in Europe.”

Despite the myriad criticisms levelled at the report, there is a growing consensus that the EU needs serious economic and structural reform to close the gap with other nations. In a policy brief published by the Centre for European Reform (CER), a London-based think tank which aims to increase integration within the EU, “The report’s diagnosis is hard to argue with: Europe’s innovative capacity is declining compared with other major advanced economies, as is its business dynamism. Intensifying state-led Chinese competition, geopolitical tensions, and continued reliance on imported energy mean that policy procrastination could lead to permanent stagnation, or worse.

What is in it for you?

For our readers in Europe, the report is likely to ignite political debate across the political spectrum and between different member states. The prospect of closer integration will provoke fresh criticism from right-wing parties, which have surged in recent years on a wave of Euroscepticism and anti-immigration sentiments, raising doubts about whether pro-integration legislation could secure parliamentary approval. As Filippo Taddei, an economist at Goldman Sachs, told Euronews, “European policymakers are still divided regarding the relative share that should be undertaken at the national and EU levels.” As Europe grapples with inflation and governments face tough public spending decisions, the idea of contributing to a Europe-wide recovery fund remains politically toxic. 

National politicians advocate for austerity measures and budget cuts to combat inflation and rising energy costs, while the report signals a break from economic orthodoxy by recommending significant increases in spending and deregulation. This approach seemingly overlooks the concerns of local, national, and regional economies, instead prioritising the scaling up of the EU-wide economy. This has set the stage for intense political debate and could spark a renewed sense of nationalism and autonomy across the continent as a bulwark against further integration and coordination. Financial Times columnist Martin Wolf opined that “today’s surging nationalism will make implementing such reforms harder still. Europeans are at risk of forgetting the lessons of their past: only if they act together can they hope to shape their future.”

What happens next?

The findings of the report are not legally binding; however, it was commissioned by the highest levels of EU leadership, who hold Draghi in high esteem. The commission letters for the report explicitly state that the new Commissioners-designate should draw upon its recommendations when undertaking their individual missions. In other words, the report will weigh heavily on the minds of decision-makers at the highest levels of governance. Despite this, if the upper levels of leadership fail to engage more broadly with different stakeholders and hold meaningful dialogue with national and regional figures, there is a risk of a standoff across the bloc between those advocating for closer integration and those fighting to preserve their political and economic independence.

The Polis Team in Birmingham