Can anything spark Europe’s economy back to life?

The report follows another, published in April, by Enrico Letta, another former Italian prime minister, which looked at the single market. Both focus on how to make Europe more competitive. The authors want to boost innovation, increase funding for riskier ventures (commercial, financial or scientific) and exploit Europe’s scale by bringing together hitherto fragmented markets. In short, they want to make Europe a bit more European, which in these areas at least is smart. The questions are as follows: Will countries be willing to see integration in sensitive sectors such as defence? Will they be able to overcome the narcissism of small differences? And will they be willing to spend as required?

Although Europe has long been poorer than America, its citizens used not to mind too much. Americans had too many guns and they had coq au vin. But as Mr Draghi lays out with urgency, the world around Europe has changed, making the continent’s lack of growth and innovation a threat to its way of life. “The EU has reached a point where, without action, it will have to compromise either its welfare, the environment or its freedom," he writes in an guest article for The Economist.

Mr Draghi’s case is supported by a number of developments, including that the rest of the world is no longer playing by what the EU considers the rules. Led by America and China, countries are using protectionist policies to give their own firms an edge. Europe fears it will lose out economically if its companies cannot compete. It also risks becoming dependent on foreign supply-chains that China wishes to dominate, such as for rare earths, or to which a future American administration could one day restrict its access, perhaps in a crisis, such as for advanced tech.

Another is that Europe’s decline is becoming more painful. In 1995 European productivity was 95% of America’s; today it is less than 80%, which is a big enough gap for holidaymakers to notice. In frontier tech, such as artificial intelligence, Europe now looks set to fall further behind. And as this tech spreads to more and more sectors—think of self-driving cars—Europe’s potential for innovation will further decline. Pricey energy will make it still harder to lure cutting-edge firms in the future.

On top of this, Europe’s failure to exploit its scale is becoming more of a problem, as other countries make the most of their own size. “In the 1980s, when the single market was taking shape, Italy’s economy was about as big as China’s and India’s combined," notes Mr Letta. It hardly seemed to matter if industries such as defence, energy, finance and telecommunications were national affairs. No longer.

What can Europe do? Mr Draghi concentrates, most of all, on boosting innovation, arguing that it should become “a tool of first resort". For this to happen, he suggests that countries will have to pool research decision-making and funding, while agreeing to lift spending. He favours the creation of European Advanced Research Projects Agencies (ARPAs), based on the famed American agency of the same name, which played an important role in the creation of technologies including GPS and the internet. He also wants to spend big on “world-leading research institutions" via a competitive process.

Next comes support for risk-takers. Bank funding is readily available to established firms with assets to post as collateral and revenues to service debt. It is less suited to younger firms with neither, and with uncertain prospects. Yet in Europe three-quarters of corporate borrowing comes from banks, compared with just a quarter in America. Deeper and more liquid capital markets are thus essential for growth, agree the two ex-prime ministers, in a message being echoed increasingly widely by both national leaders and bosses. “The green deal won’t work without capital-markets union," says Christian Sewing, chief executive of Deutsche Bank.

Creating such a union means overcoming fragmentation, such as 27 different approaches to insolvency. It also means moving from unfunded public pension systems to better funded, market-based schemes.. According to New Financial, a think-tank, pension assets come to just 32% of European GDP, against 173% in America. “We need a cultural change on how we fund businesses, given all the investment required. In this regard, we also need regulatory changes in Europe to allow growth to be financed," Mr Sewing argues. Mr Draghi suggests creating a European supervisor for capital markets, similar to America’s Securities and Exchange Commission.

On regulation more broadly, Mr Draghi is careful not to challenge the basic economic insight that competition is the surest spur to innovation. But he does point to changes in tech and markets, arguing that regulators should be better staffed, faster to move and willing to take impact on future innovation and supply-chain resilience into account. Perhaps, for instance, Alstom and Siemens, two European train-makers, should have been allowed to merge in 2019, to better compete against Chinese firms. He also wants European state aid to be less fragmented and more focused on common continental interests.

Mr Draghi’s report has been well received by Europe’s powerbrokers and thinkers, and will continue to be until it comes to implementation. Take something that ought to be relatively uncontroversial: the creation of a competitive process for funding world-class research institutes. When Germany introduced a similar scheme in the 2000s, most of the money ended up in two prosperous southern states. As a consequence, the programme was quickly adjusted to make sure that every region benefited. Similarly, America’s ARPA thrived in the absence of red tape. It is hard to imagine European governments overcoming their instincts in either case.

Many of Mr Draghi’s plans—such as the creation of a single capital-markets supervisor—also require power to be transferred away from national governments. “Such a step would help to remove all the hidden barriers in Europe," argues Nicolas Véron of Bruegel, a think-tank, “but neither national regulators nor many market participants would want such a strong European supervisor." Governments like to have sway over their countries’ most important companies. “Each head of government wants the CEOs of the national energy firms, banks or telecom companies on speed dial, in case of crises," says Mr Letta.

In his analysis of individual industries, Mr Draghi is keen to create cross-European markets where none yet exist. In telecoms, for instance, he wants to make mergers easier, to boost investment. Yet Margrethe Vestager, the commission’s departing competition chief, is strongly opposed to this idea. “Telecoms is probably the worst example of the need for scale," says Zach Meyers of the Centre for European Reform, another think-tank. Fewer operators would mostly mean higher prices and lower quality, but not more investment.

Moreover, plans to reform competition rules in the name of sovereignty or resilience may embolden the wrong people. Mr Draghi also spends too little time considering why more market-minded countries, such as the Netherlands and the Nordics, which are small even by European standards, are home to innovative tech firms. Or why Germany, after at last liberalising its planning regime, is seeing renewables take off without European help.

Then there is money. According to commission estimates, to meet Mr Draghi’s plans €750bn-800bn a year extra in spending would be required, taking the share of investment in the continent’s GDP from 22% to 27%—an unprecedented increase after decades of decline. If the past is any guide, four-fifths of this would have to come from the private sector, which is not going to happen even if the capital-markets union is a roaring success.

That leaves debt-funded EU spending, which Mr Draghi says would be useful, but stops short of seeking outright. He knows that northern European leaders have little to no appetite for another batch of debt. “Never in the past has the scale of our countries appeared so small and inadequate relative to the size of the challenges," Mr Draghi writes. And he is correct. Now he faces a far harder job than analysing those problems: he must convince national governments to give up power.

© 2024, The Economist Newspaper Ltd. All rights reserved. From The Economist, published under licence. The original content can be found on www.economist.com