Mario Draghi’s report emphasises the urgent need for Europe to address its longstanding economic challenges by enhancing growth and productivity to secure its future prosperity and uphold its core values.
A Persistent Growth Gap
Since the early 21st century, Europe has grappled with slower economic growth compared to other regions, especially the United States.
As Draghi notes, “Various strategies to raise growth rates have come and gone, but the trend has remained unchanged.”
This stagnation is most evident in productivity, a critical driver of long-term growth, where Europe lags significantly behind. The productivity gap explains much of the widening income disparity between the EU and the US, with European households experiencing slower real income growth since 2000.
For a time, Europe managed to mitigate these issues through export success, increased labor participation (notably among women), and falling unemployment rates after the 2008–2012 crises. However, these measures provided temporary relief rather than structural solutions.
Furthermore, global conditions that once favoured Europe—such as robust world trade, geopolitical stability, and affordable energy—are no longer assured. As Draghi warns, “The foundations on which we built are now being shaken.”
Challenges in a Changing World
Europe faces profound challenges:
- Economic Dependencies as Vulnerabilities: Europe’s reliance on Russia for energy and China for critical materials has exposed it to geopolitical risks. Draghi highlights, “Our dependencies have turned out to be vulnerabilities.”
- Technological Lag: Europe missed the digital revolution, a key driver of productivity growth in the US, and now risks falling further behind in emerging technologies like AI. Only four of the world’s top 50 tech companies are European.
- Demographic Decline: For the first time in recent history, Europe’s population will not contribute to growth, with the workforce projected to shrink significantly by 2040. This demographic shift makes productivity gains essential.
- Investment Needs: The EU must allocate an additional 5% of GDP for investments in digitalisation, decarbonisation, and defence—levels unseen since the mid-20th century. Without productivity gains, financing these investments will necessitate trade-offs, risking Europe’s ambitions to be a global leader in technology, climate responsibility, and security.
Three Areas for Action
To reignite sustainable growth, Draghi identifies three key areas:
1. Closing the Innovation Gap
Innovation is critical for Europe’s competitiveness, yet systemic barriers hinder its potential. Draghi points out, “There is no EU company with a market capitalisation over EUR 100 billion that has been set up from scratch in the last fifty years.” Europe’s static industrial structure, fragmented regulations, and insufficient research and innovation (R&I) spending have stifled entrepreneurial dynamism.
EU companies invest €270 billion less in R&I annually compared to US counterparts. Many European entrepreneurs relocate to the US to scale their businesses, leading to a brain drain.
Draghi stresses the importance of integrating AI and other technologies into existing industries while fostering skills and opportunities for lifelong education. Europe must aim to match the US in innovation and exceed it in social inclusion.
2. Decarbonisation and Competitiveness
Europe’s ambitious climate targets present both opportunities and challenges. The EU is a global leader in clean technologies but faces high energy costs, with electricity prices 2–3 times higher than in the US. This disparity, driven by limited natural resources and inefficient energy markets, hampers industrial competitiveness.
To turn decarbonisation into a growth driver, Draghi advocates for a coordinated plan encompassing energy producers and clean-tech industries. However, Europe must navigate tensions between relying on cheaper imports (e.g., from China) and protecting its domestic industries. As Draghi cautions, “Decarbonisation must happen for the sake of our planet. But for it also to become a source of growth for Europe, we will need a joint plan.”
3. Enhancing Security and Reducing Dependencies
Geopolitical risks threaten growth, and Europe’s vulnerabilities are pronounced in critical raw materials and digital technologies. For example, 75–90% of global chip production occurs in Asia, leaving Europe exposed. Similarly, fragmented defense industries undermine Europe’s military effectiveness, despite being the second-largest military spender globally.
Draghi calls for an EU “foreign economic policy” to secure supply chains and reduce dependencies. He also urges better coordination in defense procurement and industrial partnerships, noting, “Peace is the first and foremost objective of Europe. But physical security threats are rising, and we must prepare.”
Barriers to Progress
Draghi identifies three obstacles preventing Europe from reaching its potential:
- Lack of Focus: Despite setting ambitious goals, Europe fails to align policies and prioritise effectively. Regulatory burdens stifle innovation, particularly for small and medium enterprises (SMEs).
- Inefficient Use of Resources: Europe’s collective spending power is diluted across fragmented national and EU initiatives. For instance, collaborative defence procurement accounts for less than 20% of total spending.
- Poor Coordination: The EU’s slow, disjointed decision-making process hampers its ability to respond to global challenges. On average, new legislation takes 19 months to finalize, delaying critical reforms.
A Call for Unified Action
Draghi underscores the need for a comprehensive industrial strategy to restore Europe’s competitive strength. This includes prioritizing breakthrough innovation, integrating fragmented markets, and adopting a more agile governance model.
Financing these efforts will require both public and private investments, supported by reforms to boost productivity.
He warns against procrastination, stating, “We have reached the point where, without action, we will have to either compromise our welfare, our environment or our freedom.” Instead, Europe must embrace its shared challenges and leverage its collective strengths to secure a prosperous future.
Draghi concludes on an optimistic note, emphasising the importance of unity: “The reasons for a unified response have never been so compelling—and in our unity we will find the strength to reform.”
Conclusion
Mario Draghi’s report outlines a stark yet hopeful vision for Europe. Faced with demographic decline, technological lag, and geopolitical instability, the EU must undertake bold reforms to reignite growth and productivity.
By addressing the innovation gap, decarbonising the economy, and enhancing security, Europe can overcome its vulnerabilities and maintain its values of equity, freedom, and sustainability. The path forward requires focus, collaboration, and a willingness to embrace change.
As Draghi asserts, “In our unity we will find the strength to reform.”
Mario Draghi’s report can be accessed here: https://commission.europa.eu/topics/strengthening-european-competitiveness/eu-competitiveness-looking-ahead_en
Main Image: EUROPEAN PARLIAMENT.
