Elon Musk is all powerful. Who can apply the brakes?
8 January 2025 • by Michael Skapinker in Governance
Like Henry Ford before him, the Tesla and SpaceX chief is a maverick with a lust for power and influence....
Audio available
Leadership
Where Mario Draghi’s €800bn industrial strategy for Europe falls short
The former Italian premier and ECB president’s call for massive EU investment is a wake-up call to Europe’s economic stagnation. But can the continent afford the trade-offs he overlooks?
Mario Draghi’s hotly anticipated report calling for a “new industrial strategy for Europe” is a bold and timely proposal to address the competitiveness gap Europe faces against the US and China.
The former Italian prime minister’s recommendation for Europe to invest an additional €800 billion annually, amounting to as much as 4.7% of EU GDP, makes it clear that the continent is at a crossroads. According to Draghi, without this massive investment, Europe risks falling further behind. “This is an existential challenge,” he wrote.
The 400-page report, commissioned by European Commission president Ursula von der Leyen earlier this year and published today, aims to keep Europe competitive at a time of economic stagnation across the continent and concerns over market fragmentation, heavy regulatory burdens, and the lack of large, integrated capital markets.
This would also provide a financial benchmark like US treasuries and give the euro a stronger role in global markets, strengthening the value of the currency in the process.
The case for an EU treasury bond
One of the most interesting proposals is the call for a “common safe asset”, essentially an EU treasury bond. It would provide Europe with greater financial security and, I believe, could even rival the US treasury bond as the world’s go-to risk-free asset.
This would also provide a financial benchmark like US treasuries and give the euro a stronger role in global markets, strengthening the value of the currency in the process. During the pandemic, the EU issued syndicated bonds, so this isn’t an entirely new concept. The practical question now is how such an asset would be structured.
Who would guarantee it? Would it fall under the European Central Bank’s jurisdiction, or would individual member states take on different levels of responsibility? These are big questions that need to be worked out, but overall, the concept of a pan-European safe asset is a strong one.
The report is published today as the European Commission faces mounting challenges, including a full-scale war in Ukraine and the rise of far-right parties. While it is comprehensive, there are some trade-offs that I believe Draghi doesn’t fully acknowledge.
“This is a hopeful outlook, but there’s a risk that focusing so heavily on decarbonization could come at the expense of technological investment.”
Decarbonization: A double-edged sword?
For one, the former ECB president strongly links decarbonization with competitiveness, arguing that investments in clean energy will lead to lower energy costs and greater industrial efficiency.
This is a hopeful outlook, but there’s a risk that focusing so heavily on decarbonization could come at the expense of technological investment. Industries like artificial intelligence, quantum computing, and biotech will define global competitiveness in the coming decades, and we can’t afford to shift resources away from these areas.
Another trade-off he glosses over is the potential impact on jobs. Transitioning away from fossil fuels will inevitably lead to job losses in certain sectors, such as mining and automotive.
While Draghi is optimistic about the job-creating potential of green industries, the net effect on employment isn’t as clear-cut as he suggests. These difficult trade-offs between decarbonization, technological innovation, and employment need more attention.
One of my initial concerns was that Draghi might adopt a narrow, one-dimensional view of competitiveness, focused solely on productivity. I’m pleased to say this fear was unfounded.
While he acknowledges that Europe is lagging behind the US in productivity growth – with real disposable income growing nearly twice as much in the US as in the EU – he also stresses that European competitiveness isn’t just about output. He defends the European model of prosperity, which includes critical elements like income equality, sustainability, and social protection.
This more comprehensive view of competitiveness aligns with Europe’s core values and helps maintain its distinct position on the global stage.
Recognizing Europe’s strengths
What I find particularly insightful is how Draghi highlights Europe’s strengths, such as sustainability and diversity, which are often overlooked in traditional measures of competitiveness (IMD’s own World Competitiveness Ranking takes these aspects into account). These are areas where Europe already excels, and Draghi rightly argues that these advantages should be harnessed further. His analysis of Europe’s strengths and weaknesses is precise and, in my view, spot on.
I agree with Draghi on several key points. He correctly identifies the lack of unified industrial policy as one of Europe’s most significant issues. “Europe needs coordinated strategy covering the entire value chain, from raw materials to final products,” he wrote.
Europe’s fragmented capital markets and financing systems are also major obstacles to decarbonization and digital competitiveness. Draghi’s recognition of these shortcomings is critical, and his call for action is timely, as the European Commission gears up for a new five-year term and shapes its forthcoming policies.
Another positive is his recommendation to move away from supporting national champions and instead focus on key industries. In the past, Europe has often favored large, established companies like Germany’s Volkswagen or France’s Danone. But these giants, while important, aren’t necessarily where the future lies.
Draghi suggests focusing on emerging sectors like technology and clean energy – industries that will drive innovation and global competitiveness in the future. This is the right move. Supporting national champions has its place, but Europe’s future depends on innovation and the ability to lead in cutting-edge sectors.
The roots of the Western Internet and the Chinese Internet are different.
Missed opportunity: Expanding the scope beyond the EU
One significant limitation in Draghi’s analysis, however, is his narrow focus on the EU. He measures Europe’s competitiveness against the US but confines his scope to EU member states.
Europe is larger than the EU – it includes Switzerland, Norway, and the UK. If we consider this broader Europe, the gap with the US is smaller. I would have liked to see Draghi address the potential for deeper economic integration with these non-EU countries. Full EU membership might not be feasible, but other forms of integration, such as trade treaties, could offer mutual benefits. This is an opportunity Europe shouldn’t ignore.
There’s no doubt that Draghi’s report will have a significant impact on European policymakers. Given his stature and credibility, as the former head of the ECB and premier of Italy, I expect this report to shape the EU’s agenda over the next five years.
With several key elections on the horizon, including parliamentary votes in Austria, Georgia, and Lithuania, coming after European Parliament elections, and regional votes in Germany that empowered the far-right, the timing of this report is crucial.
It provides a much-needed strategic direction for Europe, something that has been lacking in recent years. Draghi’s non-partisan, pragmatic approach makes him the ideal figure to set this agenda, and his recommendations will likely be taken seriously across the political spectrum.
As such, I don’t believe this report will be forgotten anytime soon. The scale of the challenges facing Europe is too great for policymakers to ignore Draghi’s recommendations. The expectations surrounding this report were immense, and Draghi has delivered a clear, forward-looking path. It’s exactly the kind of blueprint Europe needs right now, and I expect it to serve as a foundational document for European leaders in the years to come.
The challenge now is to turn this vision into reality. With Draghi setting the course, it’s up to European leaders to make the necessary political and financial commitments to ensure Europe remains competitive on the world stage.
As Draghi wrote optimistically in the report: “Never in the past has the scale of our countries appeared so small and inadequate relative to the size of the challenges. The reasons for a unified response have never been so compelling – and in our unity we will find the strength to reform.”
Authors
Related
Trust as a platform for ESG governance and competitive advantage
Vital to trade and commerce throughout history, trust is more important than ever in the age of global warming and artificial intelligence...
Don’t ignore the S in ESG: a strong social strategy is essential
Business giants are slowly realizing the benefits of focusing on societal impact. Here’s how your company can meet regulatory requirements and the expectations of sustainability indexes. ...
Four effective ways for a board to steer its way through a crisis
7 November 2024 in Governance
In times of difficulty, knowing when to get involved and learning to master your emotions are essentials skills to prevent making a bad situation worse....
- Audio available
Learn Brain Circuits
Join us for daily exercises focusing on issues from team building to developing an actionable sustainability plan to personal development. Go on - they only take five minutes.
Explore Leadership
What makes a great leader? Do you need charisma? How do you inspire your team? Our experts offer actionable insights through first-person narratives, behind-the-scenes interviews and The Help Desk.
Join Membership
Log in here to join in the conversation with the I by IMD community. Your subscription grants you access to the quarterly magazine plus daily articles, videos, podcasts and learning exercises.