Draghi’s European Competitiveness Report: Key Findings

On September 9, 2024, the European Commission published the highly anticipated European Competitiveness report by Mario Draghi, former Prime Minister of Italy and European Central Bank chief. Famed for presiding over the ECB during the Eurozone crisis during the 2010s, Draghi was tasked by the Commission “to prepare a report of his personal vision on the future of European competitiveness.” According to the Commission, the “findings of the report will contribute to the Commission’s work on a new plan for Europe’s sustainable prosperity and competitiveness.” Commission President Ursula von der Leyen can pick and choose which recommendations to implement.

The report is technology-intensive, and focuses largely on bridging the productivity gap between the EU and the US, which Draghi makes clear “is largely explained by the tech sector” or Europe’s relative lack of one. Beyond stressing that Europe must close “the innovation gap with the US and China, especially in advanced technologies,” the other important areas for action, according to Draghi, are “decarbonisation and competitiveness” and “increasing security and reducing dependencies.”

A one-line summary of the report is that Draghi argues for Europe to become more like the US. The US is continually used as a benchmark for Europe to reach. However, he mentions Europe’s higher social welfare as a benefit not to be taken away, but warns that without drastically improving growth and productivity, Europe’s ability to fund social welfare is at risk.

Draghi’s main recommendations involve boosting technology innovation by seizing key areas where Europe is likely able to compete with the US and China, namely, developing artificial intelligence and clean technology such as electric vehicles. However, this requires extensive funding both from public and private sectors. Draghi recommends a massive increase in joint borrowing and “integrating Europe’s capital markets to better channel high household savings towards productive investments.” Draghi wants to see much more venture capital investing in high-risk projects, as a lack of venture capital has meant start-ups have been more reliant on bank loans which are unsuited to financing such ventures.

Draghi also calls for some deregulation, or at least, regulatory simplification, as he views regulation to be a particularly high hurdle for technology innovation. In addition, he wishes to see more mergers being approved, specifically in telecoms.

Early commentary on the report is mixed. Billionaire tech entrepreneur Elon Musk expressed support for Draghi’s recommendations, endorsing “a thorough review of EU regulations to eliminate unnecessary rules and streamline activity in Europe would revitalize growth and strengthen competitiveness.” This is unsurprising given the extensive regulatory problems Musk’s companies are facing in the EU.

Researcher Simone Tagliapietra wrote for Bruegel that the report “is a masterplan for a new European industrial strategy” with particular praise regarding the recommendations to boost decarbonization. Others, while supporting Draghi’s plan to improve resilience and security, believe Draghi may be misguided regarding promoting tech innovation. Though Draghi calls for the creation of larger firms and relaxed competition policy, Anselm Küsters, Divisional Head of Digitalisation at the Centre for European Policy, took to LinkedIn to argue that, to the contrary, “digital markets thrive when competition is vibrant and the playing field is level.”

Civil society groups including the Balanced Economy Project, Lobby Control and Rebalance Now also argue that while US tech companies dominate the industry, “building European champions to compete with them, if achieved by weakening competition policy, will worsen market power imbalances: it is incoherent to try and promote Europe’s competitiveness by curbing competition in European markets.”

Innovation and investment

Draghi argues that there is an increasing innovation gap between the EU and the US caused by a relatively stagnant investment in research and innovation. While “the top-three US companies for spending on Research and Innovation (R&I) have shifted from the automotive and pharma industries in the 2000s, to software and hardware companies in the 2010s, and then to the digital sector in the 2020s”, the EU In contrast, “has remained static, with automotive companies consistently dominating the top 3 R&I spenders.” Thus, Europe only spends on “mature technologies” where productivity is slowing. This problem is compounded by “regulatory and jurisdictional hurdles” that prevent new technologies from scaling. He laments that because of lack of investment opportunities, “many innovative companies end up seeking out financing from US venture capitalists (VCs) and see expanding in the large US market as a more rewarding option than tackling fragmented EU markets.”

In addition to the lack of venture capital investment, Draghi argues that public spending is insufficient. The EU’s Horizon Europe funding program, though having a €100 billion budget, “is spread across too many fields and access is excessively complex and bureaucratic. It is also insufficiently focused on disruptive innovation.”

To improve European funding, Draghi calls for unity in financing instruments, which are currently “split along national lines and between Member States and the EU.” Fragmentation, he argues, is unconducive to scaling new technologies, blocks the creation of large investment pools, and creates “unnecessary complexity and bureaucracy for the private sector.”

He argues for the full implementation of the Single Market, as fragmentation within the EU exacerbates the inability for massive growth and reduces demand for financing. For example, “EU companies with high growth-potential prefer to seek financing from US VCs and to scale up in the US market where they can more easily generate wide market reach and achieve profitability faster. Between 2008 and 2021, 147 ‘unicorns’ were founded in Europe – startups that went on to be valued over USD 1 billion. 40 of these have relocated their headquarters abroad.”

Earlier this year, law professor Anu Bradford published a paper that also highlighted the lack of a Single Market and deep capital market as a reason why the US and not the EU lead in technology creation. Bradford argued that there are complex challenges in implementing a Single Market, as the “EU is a heterogeneous consumer market that comprises twenty-four official languages. There are notable political and cultural differences across the EU Member States, in addition to differences in per capita GDP and levels of technological maturity.” The report, however, does not mention these more cultural aspects.

Regulatory burden

Draghi also calls for some deregulation in the technology market. He writes explicitly that “the EU’s regulatory stance towards tech companies hampers innovation” alluding that the regulatory environment is too fragmented and complex as “the EU now has around 100 tech-focused laws and over 270 regulators active in digital networks across all Member States”. He disagrees with the “precautionary approach” of laws which dictate the “specific business practices ex ante to avert potential risks ex post. For example, the AI Act imposes additional regulatory requirements on general purpose AI models that exceed a predefined threshold of computational power – a threshold which some state-of-the-art models already exceed.” Draghi sees this as excessive, particularly as he sees artificial intelligence as a potential area for growth, as discussed below.

He calls for a reassessment of legal instruments needed and argues that it is “crucial to reduce the regulatory burden on companies. Regulation is seen by more than 60% of EU companies as an obstacle to investment, with 55% of SMEs flagging regulatory obstacles and the administrative burden as their greatest challenge.”

While Draghi argues that regulatory red tape creates high compliance costs, for example, “limitations on data storing and processing create high compliance costs and hinder the creation of large, integrated data sets for training AI models” putting EU companies behind, Bradford argued in her paper that data “laws such as the GDPR are more likely to facilitate than undermine innovation, by mitigating uncertainty and complexity. After all, an EU with twenty-seven disparate approaches towards data protection would, no doubt, present even greater barriers for data transfers across Europe.” Draghi may make compelling proposals to enforce EU law more consistently and coherently, but suggesting that deregulation is the answer is unlikely to produce technology innovations that serve EU interests of maintaining social welfare.

An area in which Draghi proposes a reassessment of regulation is competition. Draghi argues that for “priority sectors” like digital technologies, “regulation should be designed to facilitate market entry” and “not become a barrier to Europe’s goals.” He concludes that “since innovation in the tech sector is rapid and requires large budgets, merger evaluations should assess how the proposed concentration will affect future innovation potential in critical innovation areas.” Calls for strategic market concentration are likely to be met with frustration in a regulatory environment that has grown to become far more skeptical of the benefits of mergers.

One area Draghi argues is ripe for facilitating consolidation is the telecoms sector, which he argues is a requirement “to deliver higher rates of investment in connectivity.” This is a highly contentious issue, as civil society groups argue that “academic, commercial and institutional research over many years overwhelmingly shows that mergers and consolidation in telecoms increase prices but without increasing quality or investment. For example, recent research found that prices in the U.S.’ more consolidated market were seven times higher than in Italy. Worse performance at higher costs harms the economy, citizens’ wellbeing, and the public interest.” On the other hand, Jillian Deutsch reported for Bloomberg that mobile operators in the UK and Europe are asking for more consolidation because currently “they aren’t able to charge consumers enough to make a return on the capital needed to invest in good networks.” EU officials are largely split on the issue, so it remains to be seen if Von der Leyen takes up Draghi’s suggestion and whether it ends up being successful.

Role of AI

Though clean energy is offered as a potential growth area for EU industry, Draghi’s report is striking in its insistence that the EU hone in on advancing artificial intelligence. Draghi argues that the EU should capitalize on this moment, which he sees as “the cusp of another digital revolution.”

The EU did not emerge as a leader in the “first digital revolution led by the internet” nor in cloud computing dominated currently by “just three US ‘hyperscalers.’” These hyperscalers benefit from “continuous massive investments, economies of scale and multiple services offered by a single provider.” However, Draghi argues that there is time for Europe to catch up on offering AI applications which he argues “will revolutionize several industries in which Europe specializes and will be crucial for EU companies ’ ability to remain leaders in their sector.”

To meet this vision, Europe “should promote cross-industry coordination and data sharing to accelerate the integration of AI into European industry” as well as utilize its supercomputer capacity by extending it to “innovative start ups.” By “allowing public sector ‘computing capital’ to be provided to innovative SMEs in exchange for financial returns,” the EU would be able to build on its AI factory initiative to be funded by Horizon Europe funds.

Data sharing and industry cooperation would be boosted by Draghi’s “AI Vertical Priorities Plan,” which seeks to “accelerate AI development across the ten strategic sectors where EU business models will benefit most from rapid AI introduction (automotives, advanced manufacturing and robotics, energy, telecoms, agriculture, aerospace, defense, environmental forecasting, pharma and healthcare).” Industry would cooperate by supplying data from their industry to train AI models. Again, Draghi argues that participants should be exempt from antitrust enforcement and introduces an “AI Sandbox regime” to “enable regular assessments of regulatory hindrances deriving from EU or national legislation and provide feedback from private companies and research centers to regulators.” It is notable that there is continuous reference to how regulation may hinder start-ups competing in this space rather than acknowledging how antitrust has the potential to help combat market concentration in an industry already suffering from market incumbents dominating the space.

Though early in his report, Draghi states that raising EU competitiveness “should also not lead to policies of defending ‘national champions’ that can stifle competition and innovation”, his proposal to shield strategic industry players from regulatory compliance could be read as endorsing national champions. The massive investments envisioned in the report are largely “in line with the Commission’s wider push to increase total EU spending on AI to €20 billion annually by 2030, including private investments.” Under Von der Leyen’s presidency, the development of AI factories will be one to watch going forward.

Closing thoughts

Draghi’s report contained themes of unity and sovereignty. Unity in terms of implementing the Single Market, condensing and merging legislation, the creation of a capital markets union, and guaranteeing supply chain and trade agreements with US tech companies. Sovereignty in terms of increasing and protecting security and reducing dependencies in a “world of less stable geopolitics.” For example, Draghi advocates for reducing dependencies in supplying raw materials for technology development and harnessing the potential of domestic resources. Overall, he warns that dependencies must “not increase, especially on high-risk suppliers that could compromise the security of EU networks and citizens’ data.”

It remains to be seen what recommendations will be picked up and what will be opposed. The report has already faced pushback on its public financing proposals, and the EU is set to be more divided as Parliament shifts slightly to the right. What remains clear is that industrial policy is going to remain a hot button issue.