Mario Draghi has solutions for Europe's sluggish economy. Will EU governments listen?

BRUSSELS -- A long-awaited report on how to rescue Europe's economy from weak growth and red tape is in. The question is, how many of its recommendations will actually be enacted by the drawn-out decision-making process of the European Union?

The report stands out from other recipes for improvement because the project was headed by Mario Draghi, the former head of the European Central Bank who also served as Italy's prime minister in 2021-22.

Draghi is regarded as having saved the euro currency union with his 2012 promise that the ECB would do “whatever it takes” to save the shared currency from the debt and financial crisis then engulfing it.

Now the EU and its 440 million people are facing a persistent and growing growth gap with the US, the report says. Last year the EU economy grew 0.4% compared with 2.5% in the U.S.

Europe is also struggling with three areas where it has become dependent on outsiders: Russia for energy, China for growth and trade, and the U.S. for defense. All three are now disrupted or in question. Draghi says the EU and its 27 member governments have to work better together to develop their own capacities.

The report, requested by the European Union's executive commission, says Europe needs to massively ramp up infrastructure and green energy investments while slashing burdensome regulation in order to return to consistent, strong growth.

Whether any of it will actually take effect over the upcoming 5-year term of the re-elected commission President Ursula von der Leyen depends on backing from the EU's member governments and its parliament.

Here are some key takeaways from the report's nearly 400 pages:

Investment, investment, investment

To pay for the transition to clean energy and boost defense capacity, the EU would need to increase public investments by a massive 4.4%-4.7% of annual economic output, or 750 billion-800 billion ($828 billion-$883 billion), levels not seen since the 1960s and 1970s and dwarfing the post-World War II Marshall Plan. To find the money, the EU needs to integrate its financial markets so that companies can raise more capital through stock and bond sales rather than bank loans as they tend to do now. That has been one of the EU's long-standing projects, but it has moved slowly amid resistance to some aspects, such as shared deposit insurance.

Draghi also said that issuing shared debt would be one way to both fund investment in specific projects such as defense or cross-border energy grids. That's what the EU did to fund its pandemic recovery program. But the idea faces political resistance, and von der Leyen, the commission president, said at a news conference introducing the report that Europe's national governments would have to “look at the political will to have these common European projects.”

Innovation and new technology

Europe needs to “close the innovation gap with the United States,” Draghi said, pointing out that regulatory barriers and lack of startup financing meant that fast growing European companies - so-called “unicorns” valued at $1 billion or more - often moved to the U.S. in search of venture capital backing.

That, and too much regulation, leaves Europe stuck with an economy based on older, “middle technologies” such as autos instead of digital tech. The report pointed out that no EU company worth more than $100 billion has been set up from scratch in the last fifty years, while all six U.S. companies worth more than $1 trillion - such as Apple and artificial intelligence chip maker Nvidia - were started in that period. Only four of the world's top 50 tech companies are European.

“We have many talented researchers and entrepreneurs filing patents,” the report says. “But innovation is blocked at the next stage... innovative companies that want to scale up in Europe are hindered at every stage by inconsistent and restrictive regulations.”

While Europe's regulations on artificial intelligence and data privacy are “commendable, their complexity and risk of overlaps and inconsistence” can undermine the EU's own tech companies as use of AI becomes more widespread.

A pro-growth transition to renewable energy

The loss of cheap Russian natural gas over the invasion of Ukraine means Europe - which unlike the U.S. must import the bulk of its energy - must hustle to build out renewables. Energy prices have fallen but companies still face electricity prices 2-3 times higher than in the U.S. and gas prices are 4-5 times higher. Fossil fuels will “continue to play a central role in energy pricing for the remainder of this decade,” the report says.

Less reliance on the US for security

European Union countries are buying too much of their defense equipment abroad, almost two thirds of it in the United States, and failing to invest enough in joint military projects, the report says. NATO allies — almost all of whose members are part of the EU — have been ramping up defense spending since Russia annexed Ukraine’s Crimean Peninsula in 2014. Their aim is for each country to spend at least 2% of gross domestic product on national defense. NATO forecasts that 23 of its 32 members will meet or exceed the 2% target by the end of this year, up from just three countries in 2014.

The report highlighted the shortcomings of countries investing in their national defense industry rather than joint procurement. When Ukraine appealed for artillery, for example, EU countries supplied 10 types of howitzers. Some use different 155 mm shells, causing logistical headaches. In contrast, the A-330 Multi-Role Tanker Transport plane was developed jointly, and this allowed participating countries to pool resources and share operating and maintenance costs.

—-

McHugh contributed from Frankfurt, Germany