Europe’s competitiveness: the missed opportunity of the Draghi report

Electroshock. Emergency call. Existential threat. The report on Europe’s competitiveness that Mario Draghi, former head of the European Central Bank, presented to the President of the European Commission on September 9 has caused quite a stir, to say the least. The report marks a salutary awakening to Europe’s decline, the symptoms of which it clearly identifies. But the proposed remedies remain conventional – a plan, a loan and an industrial policy. It’s a missed opportunity, or almost.

The report recalls a factual evidence: Europe has been facing a slowdown in growth since the early 2000s, mainly due to lagging productivity, widening the economic gap with the United States. It now faces challenges related to demographic change, the loss of its main energy suppliers and its technological lag. To sustain growth and meet new investment needs, Europe must raise productivity. Without this, it risks compromising its ambitions in terms of technology, climate, independence and social well-being. To preserve its core values, it must make radical changes to boost growth and productivity.

The report’s most important recommendation concerns innovation, where it is vital that Europe refocuses its efforts on closing the gap with the US and China, especially in advanced technologies. It’s true that we are lagging alarmingly behind in all the major new technologies, from biotech to AI to the Web and many others. Europe has virtually no champions in these fields, with a few notable exceptions (e.g. ASML).

In addition to sounding the alarm, the report also reminds us of the link between innovation and the preservation of the social model. Very often, the defense of productivity and competitiveness seems abstract, even petty. It’s a capitalist thing, whereas the EU wants to be idealistic; it works on social issues and quality of life, not on competitiveness. But Europe won’t be able to maintain its social model if it continue its economic decline, because it won’t be able to finance it. The report underlines the urgency of this recognition. It is also because it has a social model and a quality of life to defend that the EU must become innovative and competitive again.

The two limitations of the Draghi report

However, the report has two limitations: first, its diagnosis, and second, the solutions it proposes.

The limitations of the diagnosis: The reality is that Europe is largely responsible for the situation it finds itself in. For years, it has been crushing businesses under ever more restrictive standards and regulations. The report mentions this, but very timidly, and only for SMEs, rightly pointing out that it is blocking their growth. But the negative impact of these regulations is much broader, as can be seen plainly in the automotive and agricultural sectors. They are not just the product of out-of-control government. They are also the product of a mindset, a mental model that has taken root: that of hostility to science and innovation, and even the celebration of a return to nature and degrowth. Europe wants to run on Monday, but it ties one foot down the rest of the week and cries on weekends. This mental model means that, in France in particular, the very words productivity, competitiveness, competition and profitability have become completely taboo in public debate.

The limits of the proposed solutions: While it underlines Europe’s decline, what does the report propose? More of the same! A big plan, a big loan and, wait for it, a big “coherent” industrial policy (of course, who would ask for an incoherent policy?). And, of course, subsidies for businesses.

Typical of the European mindset, the word “entrepreneurship” doesn’t appear once in the report! And yet the strength of the United States, against which we are losing the race, is the vitality of its entrepreneurial system. We are touching on an almost psychoanalytical cause of Europe’s decline: a Europe that spends its time railing against American entrepreneurs – one day Amazon, one day Google, one day Elon Musk – and more generally against American capitalism, which is universally reviled by the political class, especially in France, and then complains that we are not innovative. And we’re surprised? Basically, the EU wants the results of American capitalism, but without American capitalism, just with plans and technocrats. Oh, and with a helping hand for SMEs. It’s hard not to think of that famous apocryphal quote: God laughs at men who complain about the effects of which they cherish the causes. Here it’s the other way round: the EU wants effects (growth, productivity, competitiveness) whose causes it rejects (free markets, innovation, deregulation). This is magical thinking.

Moreover, the technocrats’ fascination with “unification” (in this case of the capital market) is astonishing. Historically, Europe succeeded because it was fragmented. It developed a variety of political and economic models. If one didn’t work, another could succeed. When we talk about the size of the United States, we often forget that the 50 states are quite fragmented in terms of regulation and taxation. But the idea of a single, monolithic model steered by an EU run by pro-growth technocrats is dangerous, to say the least. The lesson of the United States is the power of the entrepreneurial fragmentation model, which does not exclude state action, but this is not the lesson of the Draghi report.

Draghi therefore fails to make the link between over-regulation – which he rightly denounces but of which he does not seek to understand the origins – and his recommendations for policy-driven innovation, which inevitably lead to more control and regulation. More profoundly, he fails to explain the deep-rooted causes of this overregulation, which are linked to mental models of hostility to progress, fear of science and technology, and the primacy of politics over civil society and the economy.

A cultural shift

The report is therefore Colbertist in its thinking and its solutions: Europe becomes aware of the backwardness of “its” companies, just as a lord once worried about the misery of “his” peasants, not understanding that the system he defended was the real cause, and so he decides to take matters into his own hands because he has no confidence in society. What’s needed is a cultural change in European societies and in the political class. Growth, productivity and competitiveness must be desired. But they are not, because in recent years other beliefs have prevailed that are in practice hostile to innovation, progress and entrepreneurship.

While the report has the merit of sounding the alarm about a decline that is well underway and of pointing to some of the causes of this decline, it fails in its diagnosis, sidestepping the real problems and offering only solutions whose limitations are well known. That’s not too bad, since Europeans are likely to ignore it. Once the emotion it may have aroused has passed, the decline will quietly resume its course. In short, Europe’s salvation will not come from above, from the political world, and even less from the European Union.

🔎 The report is accessible here: Draghi report.

🇫🇷 A version in French of this article is available here.