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Mario Draghi, former President of the European Central Bank and former Italian Prime Minister, has delivered his much-anticipated report on European competitiveness to European Commission President Ursula von der Leyen. The report does not hold back: it issues a stark warning about the European Union’s current trajectory and proposes new ways to think about key issues and policies.
According to Draghi, the challenges Europe is facing are nothing short of existential. Over the past two decades, income growth per capita in the EU has lagged behind that in the United States. More ominous, Europe is fundamentally unprepared to navigate a fast-changing global environment characterized by rising geopolitical tensions and rapid technological transformation. With the most open economy among the world’s major powers, Europe is highly vulnerable to trade tensions and other disruptions. Complicating matters further, Europe is heavily dependent on imported energy and critical raw materials, and confronts higher energy costs than its global rivals. Access to cheap energy is vital to economic leadership. Europe also lags behind countries like the US and China on technological innovation and commercialization. In fact, the EU’s presence in the tech industry is marginal, with no EU company ranking among the world’s top ten tech firms by capitalization. The EU is losing its edge even in industries it once dominated, such as automobiles. The problem is not a lack of ideas; rather, Europe has struggled to translate its ideas into commercial successes.
Economists agree that competitiveness is rooted not in trade surpluses, but in productivity, and here the EU is floundering. Europeans tout their superior social model and high quality of life. But if demographic trends and stagnant productivity persist, these advantages will soon be unaffordable.
Draghi paints a dismal but realistic picture. Before implementing drastic policy changes, such as those Draghi proposes, Europeans must establish a solid political consensus on the magnitude of the problem, including a clear idea of the strengths and weaknesses of Europe’s form of capitalism. If Draghi’s report does nothing beyond catalyzing such a process, it will have been a major achievement.
But the report can do more than help us understand the problems we face; it can also lead us toward more effective solutions. For example, in the 1990s, the prevailing belief was that low productivity reflected labor-market rigidity, but making labor markets more flexible did not lead to a surge in productivity. According to Draghi, a better approach would focus on bolstering private and public investment. As it stands, however, market fragmentation (which limits scale), along with policymakers’ failure to strike the right balance between tech regulation and support for innovation, is impeding private investment. Meanwhile, a failure to target the right priorities, a lack of industrial-policy tools to advance common EU objectives, and, most important, the inability to raise finance at the European level is undermining public investment....
more at Project Syndicate