In his 2024 publication, "The Future of European Competitiveness," Mario Draghi asserts that European Union (EU) companies are facing a dual challenge: heightened competition from abroad and constrained access to overseas markets. The abrupt loss of Russia as the EU's primary energy supplier has significantly impacted the region's energy security. Additionally, the prevailing geopolitical instability has led to the emergence of new interdependencies, which have subsequently become sources of vulnerability. In the view of Draghi, Europe is confronted with a fundamental challenge to its very existence. The continent's core values, including prosperity, equity, freedom, peace, and democracy within a sustainable environment, are at risk of being undermined if Europe is unable to provide these values to its citizens or if it is forced to prioritize one value over another.

In his remarks, Draghi identified three main areas for improvement: innovation, decarbonization and competitiveness, and security. He called on Europe to undertake a comprehensive reorientation of its collective endeavours, emphasizing the importance of narrowing the innovation gap with the United States and China—particularly in the domain of advanced technologies. Furthermore, he emphasizes the importance of investing in the decarbonization process to facilitate a transition in power generation towards secure, low-cost, and clean energy sources. Lastly, in order to retain their freedom, the European states require the implementation of a genuine EU foreign economic policy.

To achieve this, the EU must coordinate preferential trade agreements and direct investment with resource-rich nations, build up stockpiles in selected critical areas, and create industrial partnerships to secure the supply chain of key technologies. It is only through collective efforts that the necessary market leverage can be created. Draghi believes that the effort should be both public and private in nature, with the goal of creating a more integrated European Union, both in terms of policy and economic activity. He characterizes this as an epochal challenge that necessitates collective action and financing through public debt, with an estimated cost of 800 billion1.

The debate over public debt: Germany's opposition and alternative proposals

Despite the fact that Draghi's proposal is well-researched, offering a series of case studies to support his approaches and basing his considerations on economic and financial calculations, a number of voices began to express discontent shortly after his presentation. The emergence of these voices of discontent and opposition can be attributed to a narrow perspective that prioritizes the national level over the Union's. A few hours after the presentation of the Draghi study, Germany's Finance Minister, Christian Lindner, a member of the Free Democratic Party, declared that Germany "will not support" one of the text's central ideas: pooled debts2. In my opinion, it is unclear why Germany is opposing the proposal, given that it is currently experiencing a recession and would likely benefit from increased public spending.

But what alternative proposals have other countries put forth in lieu of an increase in public debt? Germany has expressed opposition to the proposal, citing its long-standing commitment to fiscal responsibility, which is often defined as the "debt brake" (Schuldenbremse). Germany's economic model is based on maintaining balanced budgets and low public debt. This is designed to mitigate the risks associated with high debt levels, such as inflation3 and financial crises. Instead of increasing public debt, Germany advocates for increased private sector investment, which will encourage innovation, and also for an efficient use of existing EU funds to stimulate growth.

Germany is not the sole nation to express opposition to Draghi's proposal. Finnish leaders have also articulated similar concerns, emphasizing the financial implications and potential risks associated with relaxing fiscal rules. Sweden and Denmark have also conveyed comparable concerns about fiscal prudence, advocating for the maintenance of strict fiscal rules and exercising caution regarding large-scale public spending.

Spain, which has made significant strides in the transition to green and sustainable energy in recent years, occupies a pivotal role in the import and export of Chinese electric vehicles. However, it exercises caution in considering the proposal, as it perceives the potential for adverse effects on Spanish exporters. Spanish Prime Minister Pedro Sánchez has expressed reservations about reconsidering Spain's stance on customs duties on Chinese electric vehicle imports. However, this reconsideration may be influenced by the recent agreement to invest $1 billion in Spain for the production of hydrogen electrolysers with a technology that enables the production of emissions-based hydrogen from renewable sources.

Conversely, France is ideologically aligned with Draghi's approach, endorsing the concept of augmented public expenditure to reorient the European economy and bolster the competitiveness of European industries. This is exemplified by the imposition of duties on Chinese products to facilitate the relocation of production back to Europe. Italy, similarly, supports the idea of increased public spending to boost innovation, decarbonization, and competitiveness, likely due to the fact that Italy has a long history of high public debt.

Historically, EU countries have demonstrated a significant divergence of opinion on this matter. The potential implementation of Draghi's measure does not only signal a pivotal shift in the discourse surrounding European austerity but might also exacerbate the existing discord.

The need for collaboration and a unified vision

As a non-economist, it is challenging to evaluate which of the proposals will have a beneficial impact on European competitiveness. However, it seems reasonable to suggest that an effective deployment of existing funds, particularly those received during the pandemic crisis, could be a priority for the entire European Union, even if they are largely earmarked for specific sectors. It would be advisable to observe and attempt to circumvent the hypothesis put forth by former Economist editor Adrian Wooldridge, who postulated that Europe is more likely to maintain its current industrial strategies, which are distorted by the protection of special interests, and that this will support weak national economies instead of fostering new technological advances and competitive industries4.

Therefore, as Draghi has proposed, Europe should advance together, and collaboration between its member states is necessary if Europe wants to compete with other major economic forces. It is not beneficial for Europe to face competitiveness challenges at the national level; in fact, it is a challenge already lost at the outset. Therefore, as Draghi has emphasized, the focus on future competitiveness plans should be collaboration and a unified vision for Europe and its future.

National interests and protectionism may impede the effective implementation of the competitiveness proposal, thereby preventing the requisite reforms and investments from being undertaken. When one considers the instability of political governments in some EU countries—such as France, where Macron's influence has diminished following recent political defeats, and Germany, where the coalition government led by Scholz is losing stability and power, as evidenced by recent regional elections and the Austrian election, which was won by a populist party—it becomes evident that these factors may hinder the effective implementation of the competitiveness proposal.

In conclusion, Mario Draghi's proposals for enhancing European competitiveness underscore the pressing necessity for innovation, decarbonization, and a unified foreign economic policy. Although the prospect of a more integrated and collaborative Europe is attractive, the route to achieving it is beset with difficulties. As mentioned, the effective implementation of these ambitious plans is hindered by a number of significant obstacles, including the influence of national interests, political instability, and the presence of entrenched protectionism.

Nevertheless, the prospective advantages of a unified strategy are considerable. By working together, EU member states can leverage their collective strengths to compete with other major economic forces. Therefore, as Europe navigates this critical juncture, it is essential for leaders to rise above short-term national interests and embrace a shared vision for the continent's future. Only through collaboration and a commitment to common goals can Europe hope to maintain its core values of prosperity, equity, freedom, peace, and democracy within a sustainable environment.

References

1 It is a major joint investment plan—800 billion euros, or 4.4-4.7 percent of European GDP (the Marshall Plan sought by the United States after World War II was 1-2 percent of GDP)—in energy transition, digital technologies, defense, security, productivity, and innovation.
2 Faggionato, G.and Von der Burchard, H. (2024, September 9). Germany’s Lindner rejects Draghi’s common borrowing proposal.
3 CEIC Data. (n.d.). Italy government debt: % of nominal GDP.
4 Parker, S. (2024, September 11). Draghi’s letter: Industrial strategy risks heartbreak. Advisor Perspectives.