Mario Draghi delivers a wake-up call on the EU economy.

Mario Draghi Unveils Plan Aimed at Curing EU's Single Market Malaise

(Image credit: Bloomberg / Contributor)

published 22 September 2024

Europe’s super-technocrat Mario Draghi – the former chief of the European Central Bank (ECB) and Italy’s emergency prime minister in 2021-2022 – delivered a long-awaited report into Europe’s stagnant economy on 9 September, and what can be done to revive it. During the eurozone’s sovereign debt crisis, the erstwhile World Bank and Goldman Sachs economist was famed for vowing to do “whatever it takes” to protect the euro from collapse.

His mammoth and rather chilling 400-page report, delivered last week to the European Commission in Brussels, is “a great deal more wordy” but delivers essentially the same message, says the Financial Times. Draghi wants a far more integrated, bloc-wide industrial policy focused on digital and clean technology and defence, plus more rapid decision-making if it wants to keep pace economically with the US and China. In addition, it will need a gigantic level of public and private capital to raise the proportion of GDP spent on investment by 4.7 percentage points (about 27%). This time, “whatever it takes” works out at roughly €800 billion a year.

Just a bit. Relative to the size of the economy, the 4.7-point uplift is more than double the size of the Marshall Plan to reconstruct Europe from the ruins of the Second World War. Such a change would require a world-historic effort that has never been seen before and a radical overhaul of the EU’s political processes. But then the crisis, says Draghi, is genuinely existential: If Europe cannot halve the current “slow agony” of economic decline, it faces a much poorer and more unstable future and political irrelevance.

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But there’s no shortage of other contenders for Draghi’s most scary data point. In 1990, the EU’s 12 member states accounted for 26.5% of the global economy. Today, its 27 states account for just 16.1%. Since 2000, real disposable income per capita has risen almost twice as much in the US as it has in the EU. And European productivity is now just 80% of America’s, compared with 95% in 1995.

Euro-optimists could certainly point to the role of currency movements when it comes to GDP data. For example, the strength of the dollar since the global financial crisis (the euro traded above $1.50 in summer 2008, compared with $1.11 in mid-september) means there’s a risk of overstating the difference between the economies, when measured in dollar terms, since the comparisons don’t account for purchasing power parity. Moreover, some analysis suggests that America’s superior growth is more due to workers’ willingness to work longer hours and take less time off, rather than productivity per se (where some EU nations have in fact outperformed the US average in recent years). Nevertheless, even by its own analysis, Europe’s prospects are undeniably grim, and competitiveness is at the root of the problem. “We claim to favour innovation,” Draghi writes, “but we continue to add regulatory burdens on to European companies which are especially costly for small and medium-sized companies and self-defeating for those in the digital sectors”.

The headline solution is massively greater investment to fund an industrial policy to allow the EU to compete with the US and China, especially in clean tech, digital and artificial intelligence. But there are 150 recommendations altogether, ranging across ten “strategic sectors”, with detailed proposals, including a reformed and more integrated single market, the creation of a genuine capital markets union, energy market reforms, looser merger rules and streamlined legislative processes making it harder for member states to slow down and veto changes. Draghi also urges reforms aimed at strengthening the bloc’s currently fragmented defence sector, so that industrial policy also serves geopolitical ends in a more threatening world.

Germany’s finance minister immediately rejected the idea of joint debt issuance at the EU level, for example (sparking a political row within the already fragile coalition). And even if some of Draghi’s reforms are eventually pushed through, the process is likely to be typically slow, rancourous and convoluted – especially given that the EU’s normal motors, Germany and France, both currently have weak governments.

The sorry truth is that Draghi’s good ideas – the most vital one being a capital markets union – will get “kicked into the long grass of future budget negotiations” and the vast majority of them won’t happen. That’s bad news for the EU and bad news for the UK. We are part of Europe, and its security and defence – underwritten by a strong economy – are our problems, too. “Without some burst of visionary statecraft or a historical lucky break”, the future for Europe is one of decline.

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.