The European Union needs far more coordinated industrial policy, more rapid decisions and massive investment if it wants to keep pace economically with rivals the United States and China, Mario Draghi said on Monday in a long awaited report.

The European Commission asked the former European Central Bank chief and Italian prime minister a year ago to write a report on how the EU should keep its greening and more digital economy competitive at a time of increased global friction.

"The situation at the moment is really worrisome," Draghi told a news conference in Brussels.

"Growth has been slowing down for a long time in Europe, but we've ignored (it)... Now we cannot ignore it any longer. Now conditions have changed."

Trade protectionism was increasing, the supply of cheap energy from Russia was gone, the bloc needed to pay more for its defence, and its population was shrinking.

In his nearly 400-page report, Draghi said the bloc needed investment of 750-800 billion euros ($829-884 billion) per year, up to 5% of GDP - far higher even than the 1-2% of EU GDP in the Marshall Plan for rebuilding Europe after World War Two. And the bloc must act on several fronts.

"It's 'Do this' or it's a slow agony," Draghi warned.

EU countries had already responded to the new realities, Draghi's report said, but it added that their effectiveness was limited by a lack of coordination.

Differing levels of subsidies between countries was disturbing the single market, fragmentation limited the scale required to compete on a global level, and the EU's decision-making process was complex and sluggish.

The report suggested so-called qualified majority voting - rather than a need for unanimity - should be extended to more areas, and as a last resort that like-minded nations be allowed to go it alone on some projects.

While existing national or EU funding sources will cover some of the massive investment sums needed, Draghi said new sources of common funding - which countries led by Germany have in the past been reluctant to agree to - might be required.

German Finance Minister Christian Lindner said joint borrowing would not solve EU problems and Germany - the biggest economy in the 27-nation bloc - would not agree to it.

Analysts said the EU may well drag its feet on Draghi's suggestions.

"Political difficulties in Germany and France, and longstanding divisions among other EU member states, will likely prevent a significant leap forward in integration that Draghi prescribes," analysts at Eurasia Europe said.

"Furthermore, recent political developments in France, notwithstanding (Michel) Barnier's appointment as PM last week, make us much more sceptical about the EU’s capacity to deliver meaningful fiscal ambition..."

SMARTER REGULATION

Draghi also said EU antitrust regulators should base merger approvals not just on competition within EU borders, but on whether a takeover could boost innovation in sectors, such as technology, where scale is critical to compete. Security and resilience should also carry more weight, he said.

The report also featured proposals for 10 economic sectors, including energy, AI, pharma and space.

Andrew Kenningham, chief economist at Capital Economics, said there were a lot of sensible proposals, but many were unlikely to be adopted, pointing to previous reports by former Italian prime ministers Enrico Letta this year and Mario Monti in 2010 that had "mostly fallen on stony ground".

EU growth had been persistently slower than that of the United States in the past two decades and China was rapidly catching up. Much of the gap was down to lower productivity.

If the EU maintained its average labour productivity growth since 2015, it would only be enough to keep GDP constant in 2050, Draghi said. However, the bloc needs greater wealth to cover decarbonisation, digitalisation and strengthening its defence.

Draghi's report comes as the issues he raised - lack of investment, loss of cheap energy and changing demographics - are casting doubt on the economic model of Germany, once the EU's growth engine. Volkswagen (ETR:VOWG_p), Europe's biggest carmaker and one of Germany's industrial keystones, said last week it was considering its first plant closures there.

Draghi said the EU was struggling to cope with higher energy prices after losing access to cheap Russian gas and could no longer rely on open foreign markets.

The former central banker said the bloc needed to boost innovation and bring down energy prices while continuing to decarbonise as well as reduce its dependencies, notably on China for essential minerals, and increase defence investment.

Source : Economy News by Reuters - Sep 9, 2024