European Union: Changing to survive

Mario Draghi presented his long-awaited report on “The future of European competitiveness” to the European Parliament. Europe will have to be more productive to boost and maintain economic growth, considering that demographic factors will not help going forward (lack of population growth and lower workforce). To preserve high levels of social inclusion, digitize and decarbonize the economy and increase geopolitical relevance, massive investments and progress towards greater European integration will be needed. The report estimates that it will be necessary to increase annual investment in the European Union (EU) by between 750-800 billion euros, corresponding to 4.4-4.7% of EU GDP in 2023. This is an existential challenge.

Report Highlights:

The report, which provides more than 170 concrete measures in different strategic sectors, proposes a new industrial strategy for Europe focused on three priority areas to reignite competitiveness and ensure sustainable growth:

• Closing the Innovation gap, especially in advanced technologies: Europe is lagging US and China. Some data to illustrate this starting point; for example:  Only four of the world’s top 50 tech companies are European, spending on R&D is much lower than that of the US (in 2021, European companies invested 270 billion of euros less than the American ones) and many European entrepreneurs prefer to seek financing from US venture capitalists and scale up in the US market. Various measures are proposed to promote disruptive innovation, for example: the creation of a specialized European agency that promotes and finances this type of innovation, incentives for business angels and venture capital, more active participation of the European Investment Bank, greater spending on R&D at a joint European level, a series of measures to improve workers' skills in a lifelong training model... The vertical integration of AI in the industry will be key to increasing productivity in the future, according to the report, considering that the tech sector largely explains the current productivity gap with the US.
  
  
• Decarbonization and competitiveness of the economy: electricity and gas prices in Europe are 2 to 5 times higher than in the US. For decarbonization to be a source of growth, it is essential that Europe a joint plan spanning industries that produce energy and those that enable decarbonization. Climate policy should be aligned with industrial plan.
  
  
• Increasing security and reducing dependencies: Europe must react to the new geopolitical environment. Aggregate EU defense spending is currently a third of that of the US. The current European defense industry is too fragmented. For example, twelve different types of battle tanks are operated in Europe, whereas the US produces only one. Cooperation should be increased with joint investments and purchases and with a genuine EU “foreign economic policy” that increases strategic autonomy and economic security to be less susceptible to economic coercion from third countries.

This new industrial strategy will be based on various key aspects without which it will not be successful, such as:

• Full Implementation of the Single Market: without which it will not be possible for innovative companies to gain scale to compete globally, nor create a common energy market that reduces prices, nor mobilize the private financing necessary to transform the economy, financing and reducing regulatory burden.
  
  
• Financing: it will be necessary to increase annual investment in the European Union between 750-800 billion euros, equivalent to 4.4-4.7% of the EU's GDP. It will require public and private investment and at the same time increase productivity so that there are no restrictions on public spending. To achieve this, it will be essential to integrate European capital markets to better channel household savings into productive investments (reinforcing the role of pension funds that invest for the long term), reviving the securitization market to give banks more flexibility. and complete the Banking Union. Joint financing at the European level and the issuance of a common European asset will also be necessary to finance common goods (i.e. defense or energy infrastructure), following the precedent of the NGEU funds.
  
  
• Reduction of the regulatory burden: To begin lowering the “stock” of regulation, the report recommends appointing a new Commission Vice President for Simplification to streamline the EU’s accumulated legislation, while adopting a single, clear methodology to quantify the cost of the new regulatory “flow”. The EU should fully implement the announced cut by 25% of reporting obligations and commit to achieving a further reduction for SMEs up to 50%.