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Europe’s ‘Reason for Being’ at Risk as Competitiveness Wanes, Report Warns
The European Union, facing a shrinking share of the global economy, needs to increase its spending by nearly $900 billion a year, according to a long-awaited report from Mario Draghi.
Jenny Gross and Patricia Cohen
Jenny Gross reported from Brussels, and Patricia Cohen reported from London.
Europe must increase public investment by nearly $900 billion a year in sectors like technology and defense, according to a long-awaited report published Monday in response to growing anxieties about the continent’s economy lagging behind that of the United States and China.
The challenge for the European Union is “existential,” Mario Draghi, a former president of the European Central Bank, said on Monday in Brussels. If Europe cannot effectively compete and, in turn, provide its people with security and prosperity, he said, “it will have lost its reason for being.”
Mr. Draghi said that the European Union needed additional annual investment of up to 800 billion euros ($884 billion) to meet the objectives he laid out in his report. That is equivalent to about 4.5 percent of the European Union’s gross domestic product last year. By comparison, investment under the Marshall Plan from 1948 to 1951 was equivalent to about 1.5 percent of Europe’s economic output.
The analysis is the result of a yearlong study requested by the European Commission on the causes of Europe’s competitiveness crisis, and it will serve as a guide for policymakers in Brussels, who will soon meet to determine the next five-year strategic plan for the bloc’s 27 member states.
Conditions that contributed to the continent’s prosperity have changed substantially since the coronavirus pandemic and Russia’s invasion of Ukraine. Cheap Russian gas is no longer available, and energy prices have soared. Those prices have come off their peak, but European companies still pay two to three times more for electricity than U.S. companies, the report found.
The European Union has also acknowledged that it needs to significantly increase military spending.
At the same time, growth and investment have fallen behind that of the United States and China, the world’s two largest economies, which are both deeply engaged in ambitious, multibillion-dollar efforts to build up their tech and green industries.
Europe has experienced weak demand for its exports, especially from China, and its position in advanced technologies is declining: Only four of the world’s top 50 tech companies are European. Nearly a third of Europe-founded “unicorns,” or companies valued over $1 billion that were founded from 2008 to 2021, have relocated their headquarters abroad, mostly to the United States.
Without drastic reform and increased investment, particularly in areas such as artificial intelligence, the situation will only get worse, the report found.
Several European leaders have frequently voiced concerns about the need for Europe to embrace more aggressive industrial policies. In April, President Emmanuel Macron of France said questions of whether Europe could be a powerhouse of innovation and production was essential to its future. “Our Europe is mortal,” he said. “It can die, and it all depends on our choices.”
To transform Europe’s economy, the European Union must develop an industrial strategy to ensure that Europe has enough employees with necessary job skills. About a quarter of European companies said they have difficulty finding suitable employees, especially at the managerial level, the report found.
Noting that the bloc depends on a handful of suppliers like China for critical raw materials, the report also called for more preferential trade agreements and investment in countries that could serve as alternate suppliers.
Mr. Draghi’s report reiterated the call for a single European capital market, adding that countries are responding to shortfalls in competitiveness in fragmented ways that lack coordination, preventing the coordination of large pools of capital.
But the politics are more complicated now. Far-right parties that have been hostile to some of the European Union’s initiatives and wary of extending more power to Brussels are in government in several European countries and gained seats in the European Parliament’s elections this summer. Many of Mr. Draghi’s proposals would require unanimous consent from member states, and several countries have voiced objections to some of the policies.
Political divisions within Germany and France, the bloc’s two biggest players, further complicate efforts to finance a long-term investment program.
“Can the Draghi report put the spotlight on that slow burning crisis enough in order to shake the E.U. out of its paralysis?” asked Nicolai von Ondarza, the head of Europe research at the German Institute for International and Security Affairs.
The gap in gross domestic product between the European Union and the United States, adjusted for inflation, has widened to 30 percent in 2023, from 15 percent in 2002, mostly driven by lower productivity in Europe. A substantial part of the productivity gap is because some Europeans prefer to work fewer hours, according to a report by the McKinsey Global Institute.
Jenny Gross is a reporter for The Times in London covering breaking news and other topics. More about Jenny Gross
Patricia Cohen writes about global economics and is based in London. More about Patricia Cohen
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