Entering 2025, the EU faces a pivotal period. With the starting presidency of Donald Trump in the US and the ongoing war in Ukraine, the EU faces a harsh geopolitical climate for growth and must take collective action. The unspoken truths of the long term effects of the Eurozone crisis have been avoided by many in the EU. The former Italian Prime Minister and President of the European Central Bank, Mario Draghi, outlined these issues in his last report published in September: “The Future of European Competitiveness”, featuring a harsh assessment of Europe’s economic prospects and urging for decisive joint action in the EU, both economically, and most importantly, in preserving the principles upon it was initially founded.
The problems of the EU
The report emphasizes the critical role of productivity and market competitiveness in the EUs economic decline. EU worker production rates have been falling behind in comparison to the US and the lag in technology innovation and exclusion from the digital revolution that has revolutionized markets is hampering economic growth. Only 4 of the 50 leading tech companies are European, but this is not because there is no talent or innovative ideas in Europe; rather, entrepreneurs face fragmented markets with a lack of large investment necessary for expansion. Meanwhile, many of Europe’s most talented entrepreneurs are relocating to Silicon Valley, drawn by opportunities and innovation.
Then, there is the issue of energy. Europe aims to be a global pioneer in sustainability with its intensive climate regulations, but the continent also faces some of the highest energy costs in the world. According to Draghi, this poses a major disadvantage for households and already suffering sectors competing on a global scale, facing higher energy costs than its competitors in the global market. Since the Russian aggression on Ukraine and the following sanctions imposed on Russian energy, prices have further increased, showcasing how reliance on energy imports has turned into a major weakness. Nevertheless, the EU still fails to reduce energy imports and continues to rely on Russian natural gas at unprecedented levels.
It may already be too late, but the Draghi report delivers a harsh criticism of the EU’s energy imports, as it cannot afford to depend on nations like Russia and China for its energy supply in an uncertain geopolitical order. .
Finally, Draghi remarks how Europe’s defense capabilities could fall short in safeguarding these goals. This is due to the declining defense expenditures in European countries, compared to increasing military spending by other powers like the US and China.
What should the EU do?
In order to tackle the economic stagnation that the EU faces, Draghi argues that “it is up to us to take action in Europe” and proposes drastic changes in the financial system of the EU to do so. To finance all the changes to bring up competitiveness, the EU must stop thinking small and start combining its resources while adhering to its social model, ensuring the benefits from growth do not only arrive in the wealthiest areas. The report highlights the importance of closing the competitiveness gap by speeding up innovation in key areas such as AI, new technologies, semiconductors, automation, etc. In fact, the Commission has already approved one of Dragi’s proposals: the creation of 7 EU “AI factories” to provide infrastructure and supercomputing facilities for public and private services in an attempt to set a start to a new European AI innovation ecosystem.
This has to be aligned and coordinated with more intensive European-level industrial decarbonization of the energy industry, coupled with joint-purchasing of energy to enable strategic autonomy. These measures aim to bring newer opportunities for Europe’s sustainable technologies in a competitive market, especially for struggling industries like European car manufacturers. When it comes to defense, the report supports bringing together defense companies in Europe to face their fragmentation and to catch up to American investment and developing an European Industrial policy, which is now competency of individual member states. This would require standardizing defence systems and industries across member states, in the attempt to boost common European industries.
Carrying out these proposals will require major funding from public and private investment, which entails making the banking and market system more efficient by making it more interconnected and concentrated, completing the Banking Union. A unified financing policy with collective savings and investment market for public investment will lead to an increase in public resources to fund joint projects.
However, all this comes with issuing huge common European debt and increasing the EU’s centralization and competencies, which most European states are reluctant to take. Von der Leyen has already prioritized Draghi’s initiatives as the main focus for the next five-year term of the Commission and its commitment to turn Draghi’s detailed proposals into reality in order to make a more competitive EU market and decarbonize and securitize the EU economy.
The policies highlighted in last year’s most influential EU report are already being implemented by the Commission, but many are still skeptical about its implementation, as slow legislative processes and political opposition within the EU could make his proposals never come to life. In any case, time is running out for the EU to reverse its stagnating economy before it falls irreversibly behind, and this may be one of its last chances.
Pedro Belmonte
