Can the EU's decline be prevented?

The Draghi report is exceptional in its thoroughness and daringness to tackle critical issues for the European Union’s future. Some of its key messages go much further than what various reports and programmes have highlighted over time, such as institutional incompleteness and suboptimal policies. These vulnerabilities were made clear by the Great Recession, and in subsequent years, new institutional constructs and revised rules have been enacted, yet not in a decisive manner, and often dented by political constraints. A string of major crises such as the COVID-19 pandemic, the energy crisis, climate change and Russia’s invasion of Ukraine have furthermore strained the EU.

The Draghi report points out many of the key weak spots: insufficient innovation, the handicap of  high energy costs and a feeble joint defence capacity. The report identifies the roots of this state of affairs and makes a series of recommendations. These include reducing fragmentation, developing the Capital Markets Union and the Banking Union, improving the energy market (where highly volatile prices harm both consumers and producers), reconsidering competition policy, fostering an EU defence industry, streamlining the decision-making process, massively raising investment and revising an EU regulatory approach that hinders innovation. However, one has to be careful; artificial intelligence is both a boon and a bane, and shadow banking and crypto assets are  underregulated.

The focus of the report is the growing of the EU’s competitiveness gap unless its economic model changes. This may seem paradoxical as the EU has achieved current account surpluses for many years now. Only in 2022 did strong disruptions in energy markets cause a deficit. But surpluses soon came back afterwards.

The Draghi report gives voice to deep worries which are linked mostly with concerns that the Union is losing ground in technological and economic competition against the United States and China.

But is this a surprise? Just compare American and Chinese juggernauts with their EU counterparts, or how much the U.S. and China spend on research and development , compared with that of the Union. Moreover, the U.S. excels with its entrepreneurial culture, which is epitomised by Silicon Valley. China, like other Asian economies, is probably the best case of building competitive advantages over time, via what is now openly rediscovered in the West, conceptually, as industrial policy. Parts of such a policy have been used in the U.S. for decades in a more or less obvious way, especially in domains that pertain to military strength and security. The EU has practiced industrial policy too when, for instance, it developed Airbus as a European competitor to U.S. firms. But systematic industrial policy has been virtually missing at the EU level. The bottom line is that the EU is made up of national states, has fragmented markets, which is consequential for collective policies and outcomes. Furthermore, the French-German axis seems to have been eroded. Industrial policy is in its ascendancy in the U.S., as China’s technological catching up has become quite worrisome against the backdrop of geopolitical confrontations.

The report argues in favour of more investment spending, both public and private, to the tune of €800bn annually, or 4-5% of the EU’s gross domestic product. More investment can clearly help, but it needs to be embedded in a package of ongoing reforms which may be hard to accomplish. The EU could be helped by an agency that would fund strategic projects and enhance public private partnerships (just as the Defense Advanced Research Projects Agency (DARPA)does in the U.S.). Major building blocks of a genuine monetary union have to come into being, such as the European Deposit Insurance Scheme EDIS), a fiscal capacity, a safe asset (as mentioned by the report). Making the European Securities and Markets Authority a genuine EU authority would be useful. A larger and restructured EU budget could support EU strategic projects, apart from what is undertaken by member states. Securing means to reduce the cost of energy and substantially develop green energy is a must, as well as a way to stimulate decarbonization.

The Draghi report makes a strong case for further economic and financial integration, even if political developments in many member states create new impediments to such an end. The difficulty for those who need to strategise, not as a simple academic exercise, is that tinkering on the fringes of the big issues raised by the Draghi report does not move things forward. The zeitgeist does not seem to help in this regard either, as many in Europe and elsewhere are prone to think and act inwardly and be attuned to a negative defensive stance.. Preparedness against a menacing outer world makes sense, but spreading protectionism inside the EU among member states is a double-edged sword and can keep it fragmented, crippling its economic strength and reducing its soft power.

The EU should strive to rescue multilateralism, despite the tendency of emerging trading blocs and proliferating security related restrictions. For the sake of securing global public goods, dialogue and trade is needed, even with geopolitical competitors. These goods include dealing with climate change, pandemics, avoiding the use of nuclear and other high destructive weapons, averting an AI Armageddon and, not least, preventing and ending wars.

The EU needs to think big and act resolutely towards a state of affairs that helps it be internationally competitive in a deep sense. It may be that the EU will muddle through for years to come, as painful and complicated policy-tradeoffs, a dearth of resources,  and huge uncertainties make best choices mission impossible. This does not mean that the Draghi report cannot help illuminate policy options and tradeoffs; it can help the new Commission, national governments and all European institutions overcome stalemates, improve policies and avoid major blunders.

The views expressed in this #CriticalThinking article reflect those of the author(s) and not of Friends of Europe.