Mario Draghi speaks as a European constituent. The full speech anticipating his report on EU competitiveness

Time passes, roles expire, but when Mario Draghi speaks, the European agencies still beat fast. Every word of his is a theory. This happened again today at La Hulpe, near Brussels, during his address at the High-Level Conference on the “European Pillar of Social Rights” organized by the Belgian presidency of the Council of the EU. Draghi presented the project and philosophy, as they are shaping up, of his report on European competitiveness, which the President of the Commission Ursula von der Leyen has asked him to prepare, and which he will present to the European Council immediately after the June elections. His speech is full of constituent ideas, to shape a European Union suited to future challenges. The former Italian Prime Minister explained that there are three strands where urgent intervention is needed: making possible a European economy of scale, of continental dimensions, not fragmented among member states, as our economic rivals can do, acting as a single country; acting together for common goods and objectives, which benefit all but which no single country can achieve alone, for example with the integrated energy market and the unification of national capital markets; ensuring essential supplies of resources and raw materials. “These three strands,” Draghi noted, “force us to deeply reflect on how we organize ourselves, what we want to do together and what we want to maintain at the national level. But given the urgency of the challenge we face, we cannot afford the luxury of delaying responses to all these important questions until the next amendment of the EU Treaty. To ensure coherence between different political instruments we should be able to develop now,” continued the former ECB President, “a new strategic instrument for the coordination of economic policies. And if we were to discover that this is not feasible, in specific cases, we should be ready to consider proceeding with a subset of member states.” For example, enhanced cooperation, Draghi recalled, in the form of a ‘twenty-eighth regime’ (a different regime from the national ones, coordinated at a European level, which a member state might opt for, ed.) “could be a path to follow for the Union of Capital Markets, to mobilize investments. But the political cohesion of our Union requires that we act together, possibly always,” he concluded.

His complete speech:

«Good morning everyone. In a sense, this is the first time I have the opportunity to begin sharing with you how the structure and philosophy of what will be my report are shaping up. For a long time, competitiveness has been a contentious issue for Europe. In 1994, future Nobel Prize-winning economist Paul Krugman defined the focus on competitiveness as a “dangerous obsession.” His argument was that long-term growth stems from increases in productivity, which benefits everyone, rather than from attempts to improve one’s relative position and seize others’ share of growth. The approach to competitiveness in Europe after the sovereign debt crisis seemed to prove his thesis. We pursued a deliberate strategy aimed at reducing wage costs relative to each other and, by combining this with a procyclical fiscal policy, the net effect was only to weaken our internal demand and undermine our social model.

But the fundamental issue is not that competitiveness is a wrong concept. The fact is that Europe has had the wrong focus. We turned inwards, seeing our competitors among ourselves, even in sectors like defense and energy where we have deep common interests. At the same time, we did not look outward enough: with a positive trade balance, after all, we did not pay enough attention to our competitiveness abroad as a serious political issue. In a favorable international environment, we relied on global level playing fields and an international order based on rules, expecting others to do the same. But now the world is changing rapidly and has caught us by surprise. More importantly, other regions no longer respect the rules and are actively formulating policies to improve their competitive position. At best, these policies are designed to redirect investments toward their economies at the expense of ours; and at worst, they are designed to make us permanently dependent on them.

China, for example, aims to capture and internalize all parts of the supply chain for green and advanced technologies and is ensuring access to the necessary resources. This rapid expansion of supply is leading to a significant overcapacity in multiple sectors and threatening to weaken our industries. The United States, for their part, are using large-scale industrial policy to attract high-value national manufacturing capacity within their borders – including that of European companies – while using protectionism to exclude competitors and deploying their geopolitical power to realign and protect supply chains. We have never had an “industrial agreement” equivalent at the EU level, although the Commission has done everything in its power to fill this gap.

Therefore, despite a number of positive initiatives underway, there is still a lack of an overall strategy on how to respond in multiple areas. We lack a strategy on how to keep pace in an increasingly ruthless race for leadership in new technologies. Today, we invest less in digital and advanced technologies compared to the United States and China, even for defense, and we only have four global European technology players among the top 50 in the world. We lack a strategy on how to protect our traditional industries from an uneven global playing field caused by asymmetries in regulations, subsidies, and trade policies. A fitting example is the high-energy-intensive industries. In other regions, these industries not only face lower energy costs but also deal with a lighter regulatory burden and, in some cases, receive massive subsidies that directly threaten the ability of European companies to compete. Without strategically designed and coordinated political actions, it is logical that some of our industries will reduce production capacity or move outside the EU.

And we lack a strategy to ensure that we have the resources and inputs we need to realize our ambitions without increasing our dependencies. We rightly have an ambitious climate agenda in Europe and ambitious goals for electric vehicles. But in a world where our rivals control many of the resources we need, such an agenda must be combined with a plan to protect our supply chain, from critical minerals to batteries to charging infrastructure. Our response has been limited because our organization, decision-making process, and financing are designed for “the world of yesterday”: pre-Covid, pre-Ukraine, pre-conflagration in the Middle East, before the return of rivalry between great powers.

But we need an EU that is suitable for the world of today and tomorrow. And so, what I propose in the report that the President of the Commission has asked me to prepare is a radical change because that is what we need. Ultimately, we will have to realize the transformation of the entire European economy. We must be able to rely on decarbonized and independent energy systems; an integrated and adequate EU-based defense system; national manufacturing in the most innovative and rapidly growing sectors; and a leadership position in deep-tech and digital. But since our competitors are moving quickly, we must also assess priorities. Immediate actions are needed in sectors with the greatest exposure to green, digital, and security challenges. In my report, we focus on ten of these macro-sectors of the European economy.

Each sector requires specific reforms and tools. However, in our analysis, three common threads for political interventions emerge. The first thread is enabling scalability. Our main competitors are taking advantage of being continental-sized economies to generate scale, increase investments, and gain market share in the sectors that matter most.

In Europe, we have the same advantage in terms of natural size, but fragmentation holds us back. For example, in the defense sector, the lack of scale is hindering the development of European industrial capability, a problem recognized in the recent European Defense Industry Strategy. The top five operators in the United States represent 80% of its broader market, while in Europe they constitute only 45%. This difference is largely due to the fact that EU defense spending is fragmented. Governments do not procure much together—collaborative procurements represent less than 20% of spending—and do not focus enough on our market: almost 80% of procurements in the last two years have come from outside the EU. To meet the new defense and security needs, we must intensify joint procurements, increase the coordination of our spending and the interoperability of our equipment, and significantly reduce our international dependencies.

Another example where we are not exploiting scale is telecommunications. We have a market of about 450 million consumers in the EU, but per capita investments are half of those in the United States, and we are lagging behind in the rollout of 5G and fiber. One of the reasons for this gap is that in Europe we have 34 mobile network groups—and this is a conservative estimate, in reality, we have many more—that often operate on a national scale, compared to three in the United States and four in China. To generate greater investments, we need to rationalize and further harmonize telecommunications regulations among member states and support, not hinder, consolidation. And size is also crucial, in a different way, for young companies that generate the most innovative ideas. Their business model depends on the ability to grow quickly and commercialize their ideas, which in turn requires a large internal market. And scale is also essential for the development of new and innovative drugs, through the standardization of EU patient data and the use of artificial intelligence, which needs all this wealth of data we have, if only it could be standardized. In Europe, we are traditionally very strong in research but fail to bring innovation to market and improve it. We could address this hurdle, among other things, by revising the current prudential regulation on bank lending and establishing a new common regulatory regime for startups in the technology sector.

The second strand concerns the provision of public goods. Where there are investments from which we all benefit, but which no single country can complete alone, we have valid reasons to act together; otherwise, we will not provide adequate results for our needs: we will not provide satisfactory outcomes in terms of climate, for example in defense, and also in other sectors. In the European economy, there are several bottlenecks where a lack of coordination means investments are inefficient. Energy networks, and particularly interconnections, are one example. This is a clear public good, as an integrated energy market would reduce energy costs for our companies and make us more resilient in the face of future crises—an objective that the Commission is pursuing in the context of REPowerEU.

But interconnections require decisions about planning, financing, material procurement, and governance that are difficult to coordinate – and so we will not be able to build a true Energy Union unless we reach a common approach. Another example is our supercomputing infrastructure. The EU has a public network of world-class High-Performance Computing (HPC), but the spillover effects on the private sector are currently very, very limited. This network could be utilized by the private sector – for example, artificial intelligence startups and SMEs – and in return, the financial benefits received could be reinvested to upgrade the HPCs and support the expansion of cloud services in the EU. Once we have identified these public goods, we must also find the means to finance them. The public sector has an important role to play, and I have previously spoken about how we can better utilize the EU’s joint lending capacity, especially in sectors – such as defense – where fragmented spending reduces our overall effectiveness. However, most of the investment gap will have to be covered by private investments. The EU has very high private savings, but they are mostly channeled into bank deposits and do not end up financing growth as they could in a broader capital market. This is why the progress of the Capital Markets Union (CMU) is an indispensable part of the overall strategy for competitiveness.

The third thread is to ensure the supply of essential resources and inputs. If we want to achieve our climate ambitions without increasing our dependence on countries we can no longer rely on, we need a global strategy that covers all stages of the fundamental mineral supply chain. Currently, we are largely leaving this space to private actors, while other governments lead directly or strongly coordinate the entire chain. We need a foreign economic policy that delivers the same outcome for our economy. The Commission has already initiated this process with the legislation on critical raw materials, but we need complementary measures to make our goals more tangible. For example, we could envisage a European platform dedicated to critical minerals, mainly for joint procurement, diversified supply security, pooling, financing, and storage.

Another crucial input we must ensure – and this is particularly important for you, social partners – is our supply of skilled workers. In the EU, three-quarters of companies report difficulties in recruiting employees with the right skills, while 28 occupations that represent 14% of our workforce are currently identified as being characterized by labor shortages. With societies aging and attitudes towards immigration less favorable, we will need to find these skills internally.

Multiple stakeholders will need to work together to ensure the relevance of skills and to define flexible pathways for skill enhancement. One of the most important players in this regard will be you, the social partners. You have always been fundamental in times of change, and Europe will rely on you to help adapt our labor market to the digital age and to empower our workers. These three threads force us to deeply reflect on how we organize ourselves, what we want to do together, and what we want to maintain at the national level. But given the urgency of the challenge we face, we cannot afford the luxury of delaying responses to all these important questions until the next Treaty amendment.

To ensure coherence among the various political instruments, we should be able to develop a new strategic tool for the coordination of economic policies now. And if we were to find that this is not feasible, in specific cases, we should be ready to consider proceeding with a subset of member states. For instance, enhanced cooperation could be a path to follow to mobilize investments. But as a rule, I believe that the political cohesion of our Union requires that we act together – possibly always. And we must be aware that this very political cohesion is today threatened by changes in the rest of the world. Restoring our competitiveness is not something we can achieve alone, or by simply outdoing each other. It compels us to act as a European Union in a way we have never done before. Our rivals are ahead because they can act as a single country with a single strategy and align all the necessary tools and policies behind it. If we want to match them, we will need a renewed partnership among member states – a redefinition of our Union that is no less ambitious than that which the Founding Fathers did 70 years ago with the creation of the European Coal and Steel Community».