LONDON, Sept 9 (Askume Breakingviews) – In the tradition of Italian football, Mario Draghi finds it much more difficult to attack than to defend. The former European Central Bank president rescued the euro zone during the debt crisis and led the country’s response to the pandemic as prime minister. Tackling the EU’s huge investment gap with the United States and China will be another matter.
Draghi’s 69-page main report on the future of European competitiveness makes chilling reading. The EU’s growth rate is 30% slower than the United States. China is a rising threat, competing directly with euro zone companies in about 40% of industries, up from 25% in 2002. Rising geopolitical tensions are slowing trade growth, which accounts for about 45% of Europe’s GDP.
Draghi concluded that with a growing population and the urgent need to green and digitalise the economy, the EU will need to increase its annual growth to the maximum
The second goal is the easiest to achieve. Draghi’s proposal to encourage mergers among the EU’s 34 mobile phone players makes sense given the scope of the EU rather than national market shares. Also, his plan for common procurement standards so that the defence budget can flow towards European companies rather than foreign ones makes sense.
However, mobilising private and public capital will be difficult. Trade accounts for four-fifths of EU investment, but this investment is constrained by the fragmentation of EU capital markets and heavy reliance on bank financing.
The public sector should do more, but it is constrained by economic and political factors. The 2023 budget deficits of 11 member states, including large countries such as France and Italy, exceed the EU’s 3% GDP limit . Even in countries with more favourable fiscal situations, such as Germany and the Netherlands, politicians are reluctant to approve more “Brussels spending”. In addition, the EU’s two most important capitals – Berlin and Paris – are facing political turmoil.
Reactivating the 800 billion euro pandemic recovery fund would help, and Draghi is a supporter. But the plan is funded by bonds issued by the EU – a temporary departure from member countries’ long-standing dislike of common debt instruments. Unless Draghi can convince governments that Europe’s investment crisis is as worrying as Covid-19, his latest plan of attack is likely to fail.
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(The author is a Askume Breakingviews columnist. Views expressed are his own.)
Referral Information
Mario Draghi said in a much-anticipated report on September 9 that the European Union needs more coordinated industrial policies, faster decision-making and large-scale investment if it wants to keep up with the United States and China economically.
A year ago, the European Commission asked the former European Central Bank president and the Italian prime minister to write a report on how the EU should maintain its economic competitiveness amid growing global frictions.
Draghi said the EU needs additional investment of 750 billion to 800 billion euros a year, equivalent to more than 4% of GDP. That’s far more than the 1% to 2% of the Marshall Plan for European reconstruction after World War II.
