The following post tries to understand and put into context the so-called Draghi report of September 2024. The report is frank about the erosion of the competitiveness and global economic weight of European integration. While the voluminous report is a good medical report, it might well turn out to be merely the latest in a series of strategic visions, various reports and working papers. The strategies, solutions and proposals outlined are probably going to get lost in the maze of member states, and real progress regarding competitiveness after the warning signs that have emerged since the turn of the millennium is not likely. If only it were not so!
The sixth chapter of Daron Acemoglu and James A. Robinson’s 2012 book Why Nations Fail explores how Venice, Italy, became a museum. The authors point out that in the Middle Ages Venice was the richest city-state in the world economy, with an economic and political institutional system that proved transparent, democratic and inclusive. They go on to explain at length the reasons why the only major industry in today’s Venice, apart from fishing, is tourism. Instead of maintaining trade routes and institutions that foster economic growth as in the past, the authors argue, Venetians nowadays, with some exaggeration, only make pizzas and ice cream and blow coloured glass for tourists. Venice has gone from being an economic powerhouse to a museum.
Looking at the Letta report published in April this year and the Draghi report published in the autumn, one cannot help but wonder: is the whole of Europe facing the same fate as Venice? The short answer, after reading through the voluminous documents, is probably yes.
On 9 September 2024, the European Commission presented its report The Future of European Competitiveness, which was almost immediately picked up by the economic press as the Draghi report. Mario Draghi, former Italian prime minister, economist and president of the European Central Bank (ECB) from 2011 to 2019, created a unique phrase already in his lifetime when, in the midst of the euro crisis, he made it clear that the ECB would do everything it could to save the euro by declaring ‘Whatever it takes’. Now, in the autumn of 2024, the first sentence of the preface to his signature report also sets the tone, and perhaps one day it will become a catchphrase, but it does not give much cause for optimism about European competitiveness at present:
“Europe has been concerned about slowing growth since the beginning of the century. Various strategies have come and gone to boost growth rates, but the trend has remained unchanged.”
But what happened at the beginning of the century that the EU should be worried about? At the turn of the millennium, the Lisbon Strategy, finalised in 2001, still aimed to make the EU “the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion” by 2010. It was already clear at the mid-term review, but well before the financial and then economic crisis of 2008, that there would be no breakthrough in competitiveness by 2010. In fact, two Italian authors, Alberto Alesina and Francesco Giavazzi, in their 2006 book The Future of Europe: Reform or Decline, argued that “if Europe does not take serious action soon, its economic and political decline is inevitable…”
In fact, the Draghi report’s warnings are far from new, and join a string of concerns about the European economy and competitiveness that have been voiced before. But what has happened to make the need for a united front, a competitiveness strategy and an effective response to the challenges even more urgent?
The figure can be referenced here: https://infogram.com/eng-euchnusa-1h7v4pde5m1pj4k
By 2023, China had actually caught up with the EU in terms of the percentage of GDP extracted from the world economy, with both players accounting for 17%, while the US holds a commanding lead with 26%. This is not a coincidence, because between 2002 and 2023, the EU grew by an average of 1.4%, the US by 2.0% and China by 8.3% per year. In 2002, the difference in GDP between the US and the EU was “only” 17%, but this had increased to 30% by 2023. In purchasing power parity (PPP) terms, the difference is 12%. The US advantage is also striking because 72% of the difference in GDP per capita is explained by different productivity dynamics and 28% by the contribution of labour – and not to the EU’s advantage.
The EU is still very much touted as the world’s largest trader, but it is worth bearing in mind that while between 2000 and 2022 the EU’s world trade performance shrank by 3%, China’s grew by 13% and is now spectacularly higher than the European integration’s. One well-defined reason for this is that Europe is in a weak position in digital technology and has a static industrial structure, a vicious circle that results in a low investment and innovation cycle. The US, and in many cases China, are spectacularly better at investment that can drive competitiveness.
Mario Draghi, of course, also proposes reform measures and solutions in his nearly 330-page paper, such as Politico would say are impossible. But let us not get ahead of ourselves.
The former president of the European Central Bank (ECB) has a vision centred around clean energy, high-tech and strengthening resilience. Proposals include energy market reforms (cheaper energy, green transition, energy independence), looser fusion rules and changes to EU legislation, typically relaxing rules. All of this would require €800 billion a year of private and public investment, a major financial commitment, largely on credit, in an EU that is both trying to rearm and green, and where member states are also trying to reduce their budget deficits.
Draghi would finance the financial resources through joint borrowing, which will always be blocked by the group of so-called frugal countries, with Germany and the Netherlands in the lead. These countries typically have low levels of debt and it is difficult to put further support for indebted countries on the agenda. A well-known slice of the EU budget is the so-called own resource, which could be pumped up, for example, by EU-level taxes. This would require a consensus among member states, which seems completely unthinkable given the political situation that emerged after/during the crises of the 2020s. And if policymakers were to seek to cut the funds available to the countries that joined after 2004 for catching up, they would also face fierce political debates.
The Draghi report describes the EU losing ground and its fundamental problems with unusual frankness and perhaps even bluntness in places, which is certainly a new phenomenon after the rather veiled messages of the past. These include the Sapir report of 2003 and the Kok report of 2004. The latter was intended to be a wake-up call for achieving the Lisbon Strategy objectives and highlighted the need for stronger political commitment and urgent implementation of reforms. Twenty years later, a sentence from the Draghi report reads:
“We have reached the point where, without action, we must either put our well-being, our environment or our freedom at risk.”
But these words only paint a new picture for those who have not seen the post-millennium reports and warning signs. Unfortunately, the report may just be the next in a series of reports as the reform measures fail because of resistance from member states, the maze of bureaucracy or even being squeezed between the many areas of priority. We can only hope that the European Union will not suffer the sad fate of the Ottoman Empire, which also saw the warning signs and implemented reforms, but these were often inadequate or badly implemented.
Szabolcs Pásztor is an associate professor at the Department of Economics and International Economics of the University of Public Service (Budapest, Hungary). Previously he worked at the Central Bank of Hungary and as an advisor for the Hungarian Banking Association. He joined the Oeconomus Economic Research Foundation in 2020. He has taught at various universities in Australia, China, Belgium, France, Czechia, Italy, Russia, Turkey, Republic of South Africa, Kenya, Ethiopia and other countries. His main research interests are related to the issues of economic and financial transformation in developing countries.
