Europe wants to be competitive, but it can’t decide whether to run faster or try to move the starting line.
As Mario Draghi’s magnum opus, generally known as the “Draghi Report,” declared, “the only way to become more productive is for Europe to radically change.” Yet, preserving the European Union’s way of life too often translates into preserving the EU’s incumbent champions. To grow through this, the 27 member states are going to have to push through their discomfort and do a better job working together.
Thereport, published in September 2024 to inspire Ursula von der Leyen’s second European Commission, broadly pushes Europe to step up its game, not shore up its status quo. In it, the former president of the European Central Bank calls for more EU-level investments and fewer national subsidies. He pushes for green jobs and green energy to go hand in hand, via an ambitious decarbonization agenda.
He supports more joint EU borrowing both to finance these investments and to give Europe the benefits of a true safe asset on par with US treasury bonds. Yet, even Draghi couldn’t escape the pull of the national-champion mentality, with a chapter on telecommunications that practically contradicts his otherwise laudable stance on competition rules.
European Commission President von der Leyen has kicked off her next five-year term with plans for a “competitiveness compass” to put some of Draghi’s better ideas into practice and draw on the lessons of former Italian Prime Minister Enrico Letta’s earlier report on fixing up the European single market. Improving innovation, speeding up the green transition, and making the EU more resilient are all worthy projects. But the member states will have to act together in order for these goals of keeping up with the United States and China to succeed. As the International Monetary Fund warned in December, unilateral moves by individual countries run the risk of doing more harm than good.
Championing the Champions
Europe’s love of its historic champions takes many forms—familiar companies, familiar regulators, familiar political parties. In Germany, for example, a huge anti-incumbency push against the coalition government of Social Democrat (SPD) Chancellor Olaf Scholz, which broke up in early in November and officially collapsed in December, is likely to send the EU’s biggest economy back to the future. Friedrich Merz of the center-right Christian Democrats (CDU/CSU), the expected next chancellor, may represent a welcome change from Scholz’ three-party coalition. But bringing back the party of four-term leader Angela Merkel is a sign that however much Berlin wants to be free from its current paralysis—and notably loosen its self-imposed budgetary self-destruction—it is also not ready to stray too far.
While envying the US track record of growing global tech giants and world-renowned stock markets, the EU seems determined to hang on to its tech regulations, its system of nationally-led industrial aid, and even its fragmented financial markets. Brussels wants to sink its teeth into its array of digital rules, which prioritize oversight and compliance. Captains of industry want the EU to allow more mergers and dish out more subsidies. Meanwhile member states oppose centralizing supervision of stock exchanges, asset managers, and other key finance players. Disparate as these goals may be, in each case, the instinct is too often to give more power to existing stakeholders.
To be productive, Europe will need to turn this kind of inertia on its head. Take mergers, for example. Making big companies bigger shouldn’t be an end goal on its own—these companies also will need to offer better services and pursue innovation. Yet the telecoms industry, for example, says pan-European operators won’t be able to make enough money to justify cross-border tie-ups and should be allowed to consolidate within more local markets. To the extent the EU wants communications companies to scale up, it also wants them to offer better infrastructure and more consumer choice. Creating more national monopolies isn’t the secret weapon there. As France’s competition chief Benoit Coeure has said, antitrust rules are not what is keeping the sector from improving.
Rather, the EU needs to untangle its patchwork of national regulations and look for explicit ways to advance technology without weakening existing offerings. As a quartet of German and Italian experts wrote for the Centre for Economic Policy Research (CEPR), national governments need to “get their act together” to allow for true cross-border markets. As long as customers are stuck with their national offerings, allowing more mergers just gives companies more power to line their own pockets.
Crisis Management, in Advance
Releasing longstanding narratives about austerity, national control, and 20th-century industry can help the EU pull itself out of its quagmire. There are plenty of strengths to draw on: The EU has a first-class set of universities, an excellent record on early-stage research, and a crisis-fighting mindset that has repeatedly saved it from the brink.
Ideally, the EU would improve each of its recent successes before the next disaster hits, rather than waiting for financial markets and geopolitics to expose its weaknesses. A stronger and more stable EU will be more resilient to whatever challenge comes next, whether driven by a natural disaster, a new war, a trade showdown, or something else entirely. Just because the next crisis has not yet revealed itself does not mean it is not coming, nor does it mean the EU does not know ways to prepare constructively.
For example, pandemic borrowing programs have flourished from a financial point of view, allowing Brussels to put together a top-class bond program that can hold its own alongside the bloc’s big sovereign issuers. But countries’ ability to spend the EU money has not kept up with markets’ willingness to provide it. The next step will be to renew joint borrowing efforts, so this financing capacity does not go to waste. While permanent borrowing operations may be politically and legally challenging under the EU’s current treaties, the member states could certainly choose to create a new one-time investment fund to pick up where the pandemic recovery efforts leave off. Public goods, including a better and more cross-border energy grid, would benefit all 27 member states, taking up Draghi’s challenge to keep costs manageable while also making countries more resilient to national disasters and less dependent on foreign fossil fuels.
Another achievement is the eurozone’s Single Supervisory Mechanism, hatched during the debt crisis and, 10 years later, the mainstay of a stronger and better-regulated banking system. Here, too, national-level resistance has stymied further progress. Efforts to shore up the process for handling failing banks have floundered, and there is little appetite for common deposit insurance despite broad consensus that its absence weakens financial stability.
Green Deal, Capital Markets
When it comes to becoming more productive, more competitive, and more secure, the EU can put its money where its mouth is by following through on two big promises: the Green Deal and Capital Markets Union. The big Brussels agenda here is appropriately sized to match the EU’s needs. Advancing these ambitions will help on every front.
Climate action is one of Europe’s biggest global strengths. In contrast to the whiplash from changing US administrations or China’s growth-focused mindset, EU countries have rightfully made the green transition a centerpiece priority. The trick now will be to avoid a green trade war, either through competing subsidies that hinder the very innovation they are trying to produce or through efforts to police deforestation and carbon emissions outside the EU’s borders. The EU will need to manage its trade partnerships with a view toward climate strategy, not just economic diplomacy, and it will need a new agenda to win cooperation from countries of the Global South.
The EU also needs money, for going green and other goals. Here, the bloc can do much more to move past its dependence on bank loans and encourage a true ecosystem of market funding options. Yet for the past 10 years, efforts to create a single market for finance have mostly been treading water. Hemmed in by EU budget rules and market skepticism, national leaders realize they need to bring in private investors. The time is ripe to move beyond incremental moves and tackle some of the bigger obstacles to joined-up finance. The best places to start are common supervision and more inclusive retail investing options. With a more integrated rulebook and clearer channels to bring savings off the sidelines, the EU can attract the financial firepower it requires.
The Now and the Future
Europe needs to squeeze all it can out of Draghi’s call for action. As concrete reforms emerge from the report’s hundreds of pages of analysis, they will benefit from the endorsement of the EU’s most revered economic statesman. As head of the European Central Bank, Draghi pledged to do “whatever it takes” to keep the common currency together. In commissioning the competitiveness report, von der Leyen sought to capture that same spirit to meet the challenges ahead.
At the same time, Draghi’s report is very much of this political moment. Many of its arguments reflect the politics of the day, and in five years’ time its influence may have ebbed. By that point, Letta’s report on the single market may prove to have more staying power. Its menu of improvement ideas, presented in a vetted and analytically supported manner, can serve as a reference point for EU and national politicians for years to come.
Giving up sovereignty is never easy, yet EU member states and entrenched industries will have to let go to move ahead. To the extent Draghi can convince policymakers that the legacy of change is worth the upfront political costs, Europe has a better chance to thrive.
Rebecca Christie is INTERNATIONALE POLITIK QUARTERLY’s Brussels columnist and senior fellow at Bruegel, the European think tank specializing in economics.
