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Strong report: Mario Draghi
Something has gone terribly wrong in the European economy. This is not a British view, although many here would agree. It comes from Mario Draghi, the man who, as president of the European Central Bank in 2012, saved the euro with his promise that the ECB would do “whatever it takes” to achieve it.
Ursula von der Leyen, President of the European Commission, asked him to write a report on The Future of European Competitiveness. The results, which have just been published, were discouraging.
He concluded that the European Union was facing prolonged slow growth and that this would threaten its entire social model.
If it did not act, it would face a “slow agony” of decline.
The report is 400 pages long, but in short, the message cites three ways to improve performance: closing the innovation gap between Europe and the United States and China; seizing opportunities in the decarbonisation process; and making Europe less dependent on foreign supply chains.
To achieve this, Europe needs massive investment from governments and businesses, a rethinking of regulation and a change in competition rules so that European companies can combine to create industrial champions.
But he is not alone in his concern. In April, French President Emmanuel Macron said Europe was facing a “moral hazard.” And last weekend, Italian Prime Minister Giorgia Meloni put the problem succinctly: “America innovates, China replicates, Europe regulates.”
About 20 years ago, the United States accounted for 27% of global GDP at market exchange rates, the eurozone 22% and China just 5%. The United States is still virtually unchanged at 26%, China has risen to 17%, while the eurozone has fallen to 14%.
Unsurprisingly, the report has received a mixed reception.
Everyone agrees with Draghi’s analysis. What is done is another matter. To finance investment, he suggested that there should be some form of common borrowing, something that the German finance minister has already said would not solve the problems and that they are not prepared to accept.
Germany believes that it would in practice be guaranteeing the debts of less prudent countries.
Without Europe’s largest economy participating, it will be difficult to see any major progress in financing.
Deregulation, as Meloni points out, is also fraught with difficulties. Green groups dislike it, largely because they see environmental protection as a barrier to competitiveness. Common taxes? That’s a no-go. And sceptics point out that there have been similar reports in the past and that Europe’s relative performance has continued to decline.
I had a conversation with the head of one of Europe’s five biggest corporations at the time when Draghi was trying to save the euro. He was an early Brexiteer. Why? Because if we stayed in the EU, we would be “chained to a corpse.” I thought that was a rather blunt way of putting it, but his argument – that Europe would continue to decline – turned out to be, sadly, correct.
So what can they do? It would be easy to say that the main problems are burdensome regulation and high taxes, and that should be part of it.
But there are European companies that manage to pull through, and there are plenty of success stories where a more cautious culture has delivered better results than the American focus on short-term profits. Think of Airbus and Boeing.
I think the problem boils down to two related elements. One is that Europe has failed to create a significant high-tech sector like the Magnificent Seven. This also applies to the UK.
The other is cultural. There is no longer the same enthusiasm for wealth creation or respect for those who have succeeded. That is why fewer new companies are created, fewer risks are taken and the rich keep their heads down.
I don’t see Europe changing. We have the opportunity to do that, to become more like the United States, and I think that, over time, we will go in that direction.
But it will take a different kind of leadership than the pessimism we are currently offered.
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