Draghi report

[ionelv]

From the Draghi report summary:

The report acknowledges that the era in which the European Union relied on cheap Russian energy, boundless Chinese markets, and U.S. security is over.

Innovation, Decarbonization, Competitiveness, and Security

The first challenge is innovation. Draghi notes Europe’s strong innovation capacity but highlights that over one-third of its corporate “unicorns” relocate abroad, primarily to the United States, due to regulatory, financial, and training barriers. To bridge this gap, the report proposes several measures: creating a European Advanced Research Projects Agency (ARPA), incentivizing business angels and seed capital, involving the European Investment Bank, reforming pension plan regulations to channel European savings toward investment, and simplifying the research and development (R&D) framework program. It also suggests enhancing academic excellence, investing in research infrastructure, increasing R&D spending, and fostering a more innovation-friendly regulatory ecosystem. A focus on lifelong learning to upgrade workers’ skills is also emphasized.

The second challenge is aligning decarbonization with competitiveness. The energy crisis has led to significantly higher energy costs in Europe, which is undermining European competitiveness. Thus, the effort to decarbonize is an economic necessity. Draghi argues that decarbonization can boost competitiveness if well-managed but risks undermining it if it is poorly executed, especially if dependent on subsidized Chinese technologies. With European firms already facing higher energy costs than their U.S. counterparts, this disparity threatens growth if clean energy benefits do not lead to lower prices. Draghi advocates for a reform of the European electricity market to pass decarbonization benefits to consumers and suggests European-level industrial policies in clean technologies and electric vehicles to maintain a level playing field. The report details sector-specific competitiveness measures for energy, clean technologies, key raw materials, automotive, pharmaceuticals, transport, aerospace, and high-tech sectors.

The third challenge lies in investing and integrating Europe’s defense industry. The report gives a brutally frank assessment of the poor state of Europe’s defense industrial sector. Analyzing the sector through an economist’s lens, Draghi highlights the sector’s intense fragmentation when what it needs is scale and demand aggregation. Like the EU Defense Industrial Strategy, Draghi also highlights the amount of money spent on procurement outside of the European Union, which is as high as 80 percent. The report calls for more EU funding and an EU Defense Industry Authority to procure on behalf of EU countries, thereby aggregating demand and taking advantage of economies of scale. The report also calls for a European preference principle to “buy European” that could come with incentives—a recommendation that will make U.S. defense companies nervous.

Fourth, on economic security, the report stresses the need for greater EU strategic autonomy and economic security to reduce susceptibility to economic coercion by third countries. This requires increased defense spending, a more autonomous defense industry, and a policy for securing critical minerals. While acknowledging the high costs of autonomy, Draghi suggests mitigating these through cooperation among member states and trade agreements with non-EU member countries. The report also proposes a “foreign economic policy” that involves joint investments and purchases based on the European Union’s large internal market. Contrary to U.S. protectionism, Draghi supports free trade agreements as tools to enhance security and derisking.

Financing the Plan

Draghi quantifies the additional annual investment needs at over €800 billion, or about 5 percent of EU GDP.