Mario Draghi’s report on the EU’s global economic challenges and ways to address them, launched on September 9, has been compared to the Marshall Plan for post-war Europe and the New Deal in the U.S. in the 1930s. What does this document signify, and what are its key conclusions for the EU and Ukraine, which aspires to become a member of the Union? Forbes discusses these issues with Jacob Funk Kirkegaard, an analyst from the top European think tank Bruegel.
For over a year, the former president of the European Central Bank and former Prime Minister of Italy, Mario Draghi, at the request of the European Commission leadership, investigated the key reasons why the bloc has significantly lagged behind other leading countries in the world economically. Published on September 9, the report on this topic spans an impressive 400 pages.
One of the solutions to the problem is to increase investment in innovation and labour productivity in Europe to €800 billion per year. “This is about twice as much as during the Marshall Plan in Europe in the late 1940s,” Jacob Kirkegaard, a senior fellow at the Bruegel think tank (Brussels, Belgium), tells Forbes.
Is it appropriate to compare Draghi’s report to major transformation measures such as the Marshall Plan or President Roosevelt’s New Deal in the 1930s? Why has the need for economic restructuring arisen in the European Union? Is it feasible to implement these plans? How can and should Ukraine be involved in this?
Kirkegaard is not particularly optimistic about how Draghi’s recommendations will be received by European politicians. However, he considers the report an important document for the EU’s mid-term future. What key conclusions should European countries, including Ukraine, draw from it?
The conversation with Jakob Kirkegaard has been shortened and edited for clarity
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In yesterday’s publication by Politico, the authors compared Mario Draghi’s report on EU economic recommendations to something akin to late Soviet “perestroika” or the American New Deal of the 1930s. Do you agree with this comparison, or are we talking about less radical changes?
I think they are comparable. What Draghi proposes could lead to an increase in investments in the EU economy, at least in the medium term, of up to 5% of GDP. This is a very significant figure – about twice as high as during the Marshall Plan in Europe in the late 1940s. So, it is quite substantial.
Discussions about productivity issues and technological lagging in the EU have been ongoing for several years. Why do you think the EU leadership has chosen to focus on this now?
The first of three main challenges highlighted by Draghi is the lack of innovation. This issue has been on the EU’s agenda for several decades. The second challenge – decarbonization – has also been relevant for over 20 years. Finally, the third challenge concerns Europe’s ability to ensure its own national security, which has come to the forefront due to Russia’s aggression against Ukraine.
Now, we are facing a cumulative effect of the challenges that the EU has encountered. As Draghi pointed out, Europe is aging rapidly, so time is of the essence. At his press conference, he stated that if action is not taken now, the future will be, quote, “a slow agony of declining living standards and loss of economic influence compared to China and the United States.”
Why is Europe lagging behind in terms of innovation? Based on Draghi’s report, the reasons seem to be bureaucracy and the lack of a unified policy among EU member states. What do you consider the main reason for this?
I fully agree with Draghi’s fundamental diagnosis that the problem is not that Europe lacks innovative entrepreneurs, but that Europe does not commercialise these innovations.
The fact is that many of Europe’s most innovative companies and entrepreneurs relocate to the U.S. I also agree with Draghi’s conclusion that the internal market in the EU is not fully formed, so it is much easier for entrepreneurs to scale their business in the much more integrated market in the United States.
Furthermore, Europe presents challenges with its 27 different national regulators and 23 spoken languages, hindering rapid growth across the continent.
Is it realistic to overcome this problem?
There are some aspects of diversity within the EU that you cannot overcome. The solution may be what happened in the financial sector, where there is a single regulator (the European Central Bank – Forbes).
Perhaps such general “supervisors” should be created in other sectors as well. As it turns out, it is not enough for the European Commission to create the same rules. Each of the 27 governments of the member states can interpret them in their own way. This is a big political problem because national governments do not want to give up this power.
But as Draghi says, if you want to create a truly large integrated market, where a company founded, say, in France, could expand as easily as possible to, for example, Germany, Poland, Sweden, Italy, and other countries, you need more than just investment; you also need joint action at the EU level. This is the reason why a significant part of these issues has not been resolved until now.
What are the differences in the problem of technology and productivity in the countries within the bloc?
The differences do exist. For example, Sweden or Denmark have a significant level of venture capital funding, although it is not as high as in the U.S. They tend to have quite a few successful startups, as well as a significant number of large global companies. Here’s an example. The Danish pharmaceutical giant Novo Nordisk is currently the highest valued company in Europe. In the case of Sweden, there are a number of technology startups worth mentioning, such as the Klarna payment service or Skype, which was acquired by Microsoft a long time ago.
However, if we look at Italy, a major G7 economy, we see a large number of very small companies, even family businesses, dominate the landscape. It is difficult for them to invest in productivity improvements. Italy also has additional levels of regulation for companies with 10 or more employees. So, the overall level of productivity, venture capital funding and innovation, and R&D spending in Italy is significantly lower than in Northern Europe.
Is it realistic to implement Draghi’s plan, and how should Ukraine act?
Draghi recommends boosting investment in the technology sector and productivity issues at the EU level by €800 billion per year. Is it realistic to achieve this, and what are the potential sources?
This is the key “operational” challenge. Draghi says it should be a combination of public and private funds. On the public side, the source should be joint funds from the member states, such as Eurobonds issued at the EU level.
However, I think there will be great resistance to this in some member states, such as Germany and the Netherlands. In addition, ensuring sufficient investment at the level of certain countries will be a separate challenge. When national governments face budget deficit problems, the first thing they cut is investment. Social spending is typically spared from cuts, as reductions in this area tend to lead to voter dissatisfaction.
Private funds can also be mobilised by leveraging capital markets more effectively, particularly through pension plans, to tap into citizens’ savings. Nevertheless, in the short term, governments must take the lead in making investments, which will subsequently attract private capital.
One of the key themes of Draghi’s report is reducing the cost of resources with an emphasis on green energy. Will this solve the problem, and is there enough domestic production in Europe, for example, of solar panels, that could compete with Chinese or American counterparts?
I don’t see the lack of own production of solar panels in Europe as a major problem. The main issue is that, as Draghi clearly stated, Europe will never be able to compete on energy costs as long as it uses fossil fuels. Therefore, the EU needs to decarbonise its economy and completely switch to renewable sources.
On the other hand, in my opinion, Europe’s dependence on other suppliers is not as dramatic as Draghi believes.
How are Draghi’s recommendations perceived in Europe? We see the growing popularity of political forces with an anti-EU agenda in different countries. Is it realistic to implement the recommendations from this report in such conditions?
Unfortunately, achieving the recommended €800 billion annual investment in the short term appears unlikely. We’ve already seen the German Finance Minister reject this plan. Furthermore, current European political discourse centres more on limiting migration than boosting productivity.
However, the EU budget process will likely be influenced. Next year could see a shift in priorities aligning with Draghi’s recommendations: decarbonisation, reducing reliance on critical mineral imports, and bolstering the defence sector.
The latter entails establishing a European defence industry, which will be crucial in the medium term. Notably, Ukraine, with its potential for hosting significant production capabilities, could play a key role.
What does Ukraine, aspiring to become a member of the European Union, need to do to meet potential changes in the EU described by Draghi?
Besides the focus on innovation, which is a challenge for all European countries, I would highlight two more areas. First, decarbonisation. This means that during the reconstruction of the energy sector after the Russian attacks, to be aligned with the EU, you need to focus on renewable energy sources.
Secondly, as I’ve already mentioned, Ukraine’s role in European security, particularly defence production, will be pivotal. Therefore, Ukraine’s EU accession benefits both parties; it fulfils Ukraine’s aspirations and enables the EU to achieve the long-term objectives outlined in Draghi’s report.