Draghi Report: How Can Europe Catch Up with the US?
Europe's reluctance to reform is closely linked to the fact that there are enough people here living a sweet life.
Recently, a European Union competitiveness report called the "Draghi Report" has been widely circulated in Europe and has sparked heated discussions elsewhere in the world.
Draghi is the former President of the European Central Bank and former Prime Minister of Italy.
In September of this year, he officially submitted a report on the EU's economic competitiveness to the European Commission, titled "The European Competitiveness Outlook," which is now the widely discussed "Draghi Report."
After the report was released, some joked that Draghi, who had vowed to "do whatever it takes to protect the euro" during the euro crisis, is now putting his heart and soul into trying to "protect" the European integration plan.
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The question is, this time, is anyone in the EU listening to Draghi's words seriously?
"Since the beginning of this century, Europe has been worried about slowing economic growth.
Various strategies to increase the growth rate have emerged, but the trend has not changed," Draghi writes clearly in the preface of the report.
What trend?
"No matter which indicator is used to calculate, the gap between the EU and the US GDP is getting bigger and bigger, mainly because the slowdown in EU productivity growth is more obvious.
European families have paid the price of declining living standards.
On a per capita basis, since 2000, the increase in real disposable income in the United States is almost twice that of the EU," Draghi writes.
According to World Bank data, the United States' GDP in 2023 is about 27.36 trillion US dollars, and the EU is about 18.35 trillion US dollars.
It should be noted that the EU's population is at least 100 million more than that of the United States, which shows the gap between these two major economies in terms of per capita GDP.
Data shows that the gap between the EU and the US GDP was 15% in 2002, but by 2023, it had expanded to 30%.
Draghi pointed out that 70% of this gap comes from the difference in productivity between the two major economies: in 1995, the EU's productivity was almost 95% of the United States, but now this proportion has dropped below 80%.
There are many reasons for the decline in EU productivity, and Draghi believes that one of the most important reasons is that the EU is far behind the United States in digital innovation, and even can't keep up with China.
The original text of the report is "The EU is weak in emerging technologies that promote growth."
For example, among the top 50 technology companies in the world, only four are European companies; many European entrepreneurs prefer to seek financing from American venture capitalists and expand their scale in the American market; since 2008, 30% of European unicorn companies (that is, startups valued at more than 1 billion US dollars) have left the EU to develop in the United States; there is no European company with a market value of more than 100 billion euros that has started from scratch in the past 50 years, while the United States has six companies with a market value of more than 1 trillion euros that were created during this period; in the past 20 years, the top three investors in the European research and innovation field are all car companies, and the EU is at risk of becoming an "industrial museum"... Draghi pointed out that if the EU cannot take quick action in innovation, infrastructure, and technology investment, Europe will gradually lose its global competitiveness.
The "Draghi Report" also points out that today's global environment is particularly unfavorable to the EU: the era of trade prosperity and multilateralism is gradually fading away; the EU has lost Russia, its most important source of cheap energy; the world is entering an era dominated by geopolitical conflicts, in which economic dependence may become a weakness; internally, the EU's population is aging and the labor force is gradually decreasing.
In Draghi's words at the press conference, "By 2042, 2 million workers will disappear from the labor market every year."
Because of the above challenges, the "Draghi Report" calls the current lack of EU economic competitiveness a "survival crisis."
In order to boost the EU's competitiveness, Draghi has put forward many suggestions in the report.
The former President of the European Central Bank made it clear that he does not want to question the social foundation of the EU.
Draghi said that improving competitiveness is not just about "reducing labor costs, reducing wages, or increasing flexibility".
The key is to master the future of high technology, so skills and training are needed.
Draghi believes that "in fact, if we exclude the high-tech industry, the EU's productivity is slightly higher than that of the United States."
Draghi pointed out that "a static industrial structure will only produce a vicious circle of low investment and low innovation."
In order to break this vicious circle, Draghi suggested that innovation should be the core driving force for the EU's economic recovery, and a real "Copernican revolution" should be carried out within the EU, that is, subversive and thorough change.
He hopes that the EU can create a truly subversive European innovation agency - the "European Advanced Research Projects Agencies" based on the model of the US Department of Defense Advanced Research Projects Agency.
Draghi called for the 27 member states of the EU to strengthen cooperation in the report, adopt joint borrowing and joint financing methods, and invest 750 billion to 800 billion euros per year, that is, 4.4% to 4.7% of the EU's GDP, to cope with the competition from the United States and China.
In contrast, after World War II, the Marshall Plan, which helped Western European countries rebuild, provided additional investment of only 1% to 2% of GDP per year.
To achieve this investment goal, Draghi advocated copying the model of European countries issuing bonds to raise funds after the COVID-19 pandemic.
Although the President of the European Commission, Ursula von der Leyen, said when accepting Draghi's report, "Some European common projects will need a common financing plan," von der Leyen did not explicitly state that she would promote Draghi's proposed joint borrowing plan.
The incoming EU Competition Commissioner and former Spanish Deputy Prime Minister, Teresa Ribera, also cautiously said when talking about Draghi's joint borrowing plan recently, "It is obvious that the amount of funds needed to accelerate this transformation is so important that we should not make mistakes."
Draghi also suggested that the EU should further improve its integration and unite the strength of its member states to better compete with the United States and China.
He called on EU member states to speed up the construction of the single market, especially in the fields of telecommunications, energy, and finance, because in his view, a unified market can not only help European companies expand their scale, but also enhance the EU's competitiveness in the global market.
Draghi pointed out in particular that due to a more open capital market, two-thirds of American companies' financing is mainly obtained through the capital market, while European companies' financing methods still mainly rely on bank loans, not the capital market, which makes it difficult for emerging companies to obtain the necessary financial support.
Draghi's suggestions also include: the EU should create a unified capital market regulatory agency similar to the US Securities and Exchange Commission to eliminate financing barriers between EU member states; the EU should simplify the internal regulatory framework and reduce cumbersome regulations to promote innovation and business development; the EU should formulate unified EU laws for innovative companies to eliminate legal conflicts between EU member states.
Teresa Ribera responded positively to this part of the "Draghi Report."
She promised that EU transaction supervision will enter a new era, and the relevant corporate merger and acquisition rules will "evolve" to help EU companies expand their scale and compete with global competitors.
Draghi was famous for his statement of "doing whatever it takes to protect the euro" when he was the President of the European Central Bank.
During the eurozone sovereign debt crisis, Draghi established the European rescue fund and successfully saved the euro.
In 2019, Draghi stepped down as the President of the European Central Bank.
In 2021, he became the Prime Minister of Italy.
Although he was in this position for less than two years, his efforts to revive Italy, which was hit by the epidemic, still received widespread praise.
So, this time, can he save the European integration plan he loves and solve the EU's lack of competitiveness "survival crisis" through the "Draghi Report"?
Although people from all walks of life do not have much objection to the "Draghi Report" on the EU's lack of competitiveness, they have different views on the prescriptions prescribed by the report.
French economist Thomas Piketty, the author of the once popular book "Capital in the Twenty-First Century," said that the "Draghi Report" is a big step in the right direction.
Piketty wrote in a column article for the French "Le Monde": "The great value of this report lies in challenging the dogma of fiscal austerity."
When some people in the EU advocated for long-term fiscal austerity, Draghi called on the EU to reconsider its fiscal priorities, and Piketty especially praised this.
Piketty downplayed people's concerns about the level of government debt in some EU member states, pointing out that although these debts are high, they are not out of historical records, and the government should increase spending at the current very low real interest rates.
The director of the Bruegel Institute, a think tank based in Brussels, the capital of Belgium, Jerome Zettelmeyer, also highly praised the "Draghi Report," praising the report as "powerfully shaking the EU policy debate," and said that Draghi's suggestions on strengthening innovation, reducing capital market fragmentation, and joint borrowing are both convincing and very necessary.
Zettelmeyer believes that the suggestion in the "Draghi Report" to focus the EU budget on public goods and reform governance is particularly persuasive.
However, he also pointed out that some other suggestions made by Draghi "have raised concerns about unexpected consequences," such as the suggestion to increase subsidies for clean technology and energy-intensive industries at the same time.Zettelmeyer's colleague, senior fellow at the Bruegel Institute, Jacob Kirkegaard, is skeptical about Draghi's joint borrowing plan.
Kirkegaard believes that joint borrowing is nothing but a "euphemism for Eurobonds," implying that all EU member states would jointly guarantee debt, a move that would be opposed by wealthy countries, including Germany.
Bank of America researcher Athanasios Vamvakidis believes that although the report is a crucial step towards a difficult and lengthy reform process, EU leaders have not yet reached any consensus on such reforms.
He expects that substantive reform measures will not be introduced until at least 2025.
Goldman Sachs economist Filippo Taddei also questions the feasibility of many of the recommendations in the "Draghi Report," and points out that the source of funding for Draghi's joint borrowing plan remains the most difficult issue.
Taddei stated that unless the German and French parliaments strongly support the European integration plan, the EU is unlikely to secure the funding needed for the "annual investment of 750 billion to 800 billion euros" as suggested by Draghi.
"So far, EU policymakers still have disagreements on the proportion of funding contributed by member states and the EU itself," said Taddei.
Taddei believes that although some regulatory reforms and industry reforms with lower costs may be introduced in 2025, the disagreement among EU policymakers on the proportion of funding may delay the introduction of larger investment measures by the EU.
He stated that it is precisely for this reason that Goldman Sachs will not adjust its forecast for EU debt insurance in 2025.
Andrea Renda, Director of Research at the Centre for European Policy Studies, has made a more severe criticism of the "Draghi Report," saying that the report still adheres to the "traditional economic view that GDP growth is the cornerstone of socio-economic performance."
Renda believes that what the report talks about is still the challenges faced by the EU over the past 20 years, rather than dealing with potential future crises.
He criticized that the report failed to formulate contingency plans for future development if it is not satisfactory.
Former French ambassador to the United States, Israel, and the United Nations, Gérard Araud, affirmed the diagnosis of the EU's various problems in the "Draghi Report," and believed that the prescriptions in the report also have a "shock" effect.
However, Araud pointed out that the challenges faced by the EU are far more than those revealed by Draghi.
Araud listed these challenges, such as the Russia-Ukraine conflict on the European continent; various geopolitical risks in the Near East and Middle East near Europe; the refugee crisis; the pattern of Germany relying on cheap energy from Russia, foreign exports, and American protection has been broken; France is falling into a political crisis, and its influence within the EU will also be greatly reduced; populist movements are rising all over Europe; moderate parties in EU countries are easily succumbing to the will of the aging population demanding protection rather than innovation, making the EU look more like a nursing home than an innovative enterprise.
Speaking of the last challenge, Araud pointed out that more and more EU researchers and engineers are going to the United States, where they can find the necessary funding and an environment conducive to entrepreneurship.
As someone said, "America innovates, Europe regulates."
As a former French ambassador to the United States, Araud said with frustration that he often encounters some young French people going to the United States to realize an idea or a patent, or to conduct research, because these young French people know that everything will become easier on the other side of the Atlantic.
"You can't help but ask: while creating the future elsewhere, is the European continent becoming just an enviable tourist destination because of its scenery, monuments, and quality of life?"
Araud wrote in his article submitted to the French "Le Point": The EU Commission has just published the "Draghi Report," which proposes bold action plans to help the European continent out of the trough, but most countries remain silent, and Berlin has explicitly refused.
At the end of his article, he questioned: Does this mean we should be desperate?
Do Europeans intend to continue watching the awakening history?
Perhaps the onlookers see more clearly.
In the United Kingdom, which has already withdrawn from the EU, columnist Janan Ganesh's evaluation of the "Draghi Report" is neither "praise" nor "criticism."
He wrote in the British "Financial Times" that the EU does not need to be anxious about the gap with the United States because "after all, the European continent is a different place."
The EU is a loose union composed of a group of ethnic nations with different languages and cultures.
It has avoided mutual slaughter in the two world wars in the first half of the 20th century and has reached a level of mutual tolerance and mutual support today, which is quite good.
At the end of the article, Ganesh, who was born in Nigeria and later immigrated to the United Kingdom, wrote: "I would rather live in Europe, and I do live in Europe.
The frequency with which American elites come to the European continent for vacation far exceeds the frequency with which European elites go to the United States for vacation, which is very revealing.
In fact, Europe's reluctance to reform is closely related to the fact that there are enough people living a sweet life here."
It is not clear whether his words are praise or criticism, but if you think about it carefully, Ganesh's "Americans come to Europe for vacation" and Araud's "Europeans go to the United States to start a business" seem to be two sides of the same coin.