Italian Prime Minister Mario Draghi during a press conference at the Prime Minister’s Multifunctional Hall on July 12, 2022 in Rome, Italy.
Massimo Di Vita | Mondadori Portfolio | Getty Images
Economic growth in the European Union continues to lag behind that of China and the United States, threatening the bloc’s goals to boost its geopolitical importance, social equality and decarbonisation, according to a report by the economist and policy Mario Draghi.
The long-awaited report led by Draghi – who previously served as Italy’s prime minister and president of the European Central Bank during the eurozone debt crisis – found those EU ambitions were now in doubt amid weakening productivity growth that slows overall economic expansion in the region.
The wide-ranging report outlines the major challenges the EU needs to address through a new industrial strategy, which will include lowering energy prices, increasing competitiveness and boosting defense investment.
The EU must also adapt to a world where “dependencies become vulnerable and it can no longer rely on others for its security,” the report said, citing the EU’s dependence on China for critical minerals and China’s dependence on the EU for its absorption. industrial overcapacity.
The EU’s high level of trade openness will leave it exposed if trends towards supply chain autonomy accelerate, the report continues. About 40% of Europe’s imports come from a small number of suppliers that are difficult to replace, and about half of that volume comes from countries with which the bloc is not “strategically aligned”, he says.
“The EU will need to develop a genuine ‘foreign economic policy’ that coordinates preferential trade agreements and direct investment with resource-rich countries, stockpiling in selected critical sectors and industrial partnerships to secure key supply chains technologies,” the report says.
The EU should ensure that dependencies do not increase and try to “exploit the potential of domestic resources through mining, recycling and innovation in alternative materials”.
Other goals include the full implementation of the single market, which includes 440 million consumers and 23 million companies, by reducing trade frictions. The bloc also seeks to ensure that its competition policy does not become an “obstacle to Europe’s goals”, particularly in the technology sector. The European coalition must also facilitate “huge investment needs not seen in Europe for half a century”, through a mix of private financing and public support. The EU meanwhile faces an “innovation deficit” that needs to be addressed through reforms, the report says.
The overall investment-to-GDP ratio of the EU should increase by around 5 percentage points of EU GDP per year to levels last seen in the 1960s and 1970s to meet defence, digitalisation and decarbonisation targets; according to the study.
On steps to mobilize private finance, the report recommends the transition of the European Securities and Markets Authority (ESMA) from a coordinator of national regulators to a single regulator for all EU securities markets able to focus on primary goals, similar to the US Securities and Exchange Commission (SEC).
The report was commissioned last year by European Commission President Ursula von der Leyen, who was elected to a second five-year term in July and is set to appoint new commissioners this week.
The findings “will spark a critical debate on the future of the EU/Eurozone, but there’s no need to hold your breath,” Lorenzo Codogno, founder of Lorenzo Codogno Macro Advisors, said in emailed comments.
“Nothing will happen until the new Commission is fully operational, and even after that, the difficult, fragmented and fragile political situation in the Member States makes it difficult to obtain the necessary political support for action. However, some surprises cannot be be excluded and therefore the ensuing political debate must be watched carefully,” he said.
