Mario Draghi's plan to save Europe from fragmentation
The European Union faces an "existential challenge" in a world of fragilities, the report by the former ECB president warns.
"Within our mandate, the European Central Bank is ready to do whatever it takes to preserve the euro. And believe me, it will be enough". These 24 words, pronounced by Mario Draghi as president of the ECB in July 2012, calmed the panic that was gripping the euro. Last week, the same man published a 393-page report on the subject.
As ECB president, Draghi addressed an immediate crisis with the instruments at his disposal. Today, he advises fearful politicians, beleaguered bureaucrats and a disillusioned public on why and how to make a great effort. The aim, once again, is to save the European project he holds dear from what he calls an "existential challenge"
The report states: "If Europe fails to become more productive, we will be forced to choose. We will not be able to become a leader in new technologies, a beacon of climate responsibility and an independent player on the world stage. We will not be able to finance our social model. We will have to reduce some, if not all, of our ambitions". The European Union is in danger of failing.
The world today is inadequate for the European Union. The era of dynamic trade and multilateralism is dying. The bloc has lost its most important supplier of cheap energy, Russia. Above all, it is entering an era of geopolitical conflict in which there is a risk that economic dependencies will become vulnerabilities.
Worse still, the European Union is entering this new world with many weaknesses. According to the report, "real disposable income per capita has grown almost twice as fast in the United States as in the European Union since 2000". Much of the reason is that the bloc has lagged far behind the US in the digital revolution. Only four of the world's top 50 technology firms are European. Energy prices in the European Union are high compared to those in the US. The bloc's demographics are also dire. Thus, "if the European Union were to maintain its average productivity growth rate since 2015, it would only be enough to keep GDP constant until 2050". And, not least, Europeans cannot protect themselves, as the invasion of Ukraine has shown.
The European Union cannot change the world, but it can - and must - change itself to cope. What emerges most clearly from this report are the common threads that connect these various ills. The most important are fragmentation, over-regulation, under-regulation, under-spending and excessive conservatism. Of these, fragmentation is the most damaging.
These evils appear repeatedly in the report, which notes that "Europe is trapped in a static industrial structure where few new companies emerge to disrupt existing industries or develop new engines of growth. Indeed, there is no EU firm with a market capitalisation of more than 100 billion euros that has been created from scratch in the last 50 years, while the six US companies with a trillion-euro valuation were created in that period". As a result, the list of the top three investors in research and innovation has been dominated by car manufacturers for 20 years. Europe is in danger of becoming an industrial museum.
Why? Fragmentation is the main answer. The single market does not exist, in terms of products or inputs. The university sector is also fragmented, as is public support for research and innovation. The lack of scale and risk-taking means that US funding sources are much larger than those in the European Union. As a result, "many European entrepreneurs prefer to seek funding from US venture capitalists and expand into the US market".
Over-regulation is also a major problem. This is partly due to excessive conservatism, but also to the tendency of Member States to add their own regulations to those of the European Union.
Fragmentation also affects energy and security policy. For example, there is no integrated energy market. Nor has the European Union managed to integrate its defence industries or its procurement of military equipment. This increases costs and reduces efficiency. This type of fragmentation is unaffordable, especially when the credibility of the US defence commitment is in question.
Inevitably and rightly, attention is paid to Draghi's measured and sophisticated adoption of more interventionist trade and industrial policies. One justification is concern for security. Another is that the European Union is getting an industrial policy anyway, but it is fragmented and spending on it is dominated by the larger member states. The last is that we know that, if done well, industrial policy can improve competition and overall welfare. Who now thinks that the creation of Airbus was a mistake? It has been a triumph. The lesson is that these major interventions must be done together, on a large scale and with clear objectives. The creation of a new carbon-free energy system will require all of that. So will an effective defence sector.
Unfortunately, the explanations for many of the problems Draghi describes, particularly fragmentation and conservatism, are also the reasons why his radical solutions are unlikely to be adopted. As he points out, "successful industrial policies today require strategies that encompass investment, taxation, education, access to finance, regulation, trade and foreign policy, united around an agreed strategic objective". For the European Union to achieve this, radical reforms are needed.
Today's growing nationalism will make it even more difficult to implement these reforms. Europeans risk forgetting the lessons of their past: only by acting together can they hope to shape their future. The British forgot this. Can the others remember it and act?
