‘Super Mario’ Draghi pitches radical change to fix Europe’s economy

The 77-year-old former European Central Bank president, famous for his pledge to “do whatever it takes" to save the euro during Europe’s debt crisis, on Monday delivered his prescription for jump-starting Europe’s sluggish economy and strengthening its defense industry.

Draghi, among the continent’s most respected figures, was tapped by the European Union’s top official last September to create what has become a much-anticipated report amid escalating worries about how far Europe is falling behind the U.S. and China economically.

Draghi, whose nickname “Super Mario" was popularized after his 2012 pledge to support the euro helped defuse the EU’s debt crisis, promised to offer a prescription for “radical change" to enable Europe to compete internationally.

His report calls for a far more aggressive industrial policy and subsidies, changes to the bloc’s competition policy and a reshaping of European capital markets to attract investment.

The report will likely trigger intense arguments across the bloc, with some countries worried about Europe becoming too protectionist. It comes as political crises in Germany, France and other big European economies complicate agreement on EU-wide changes.

Some of the ideas Draghi is pushing, from expanding the single market to building a pan-EU capital union to boost investment, have been on the table for years. The EU’s 27 national governments have failed to advance them.

Draghi himself resigned as Italy’s prime minister in July 2022 after 18 months, partly because of opposition to his national economic and industrial plans.

Draghi said failure to implement reforms would leave Europe in an existential crisis.

“If Europe cannot become more productive, we will be forced to choose. We will not be able to become, at once, a leader in new technologies, a beacon of climate responsibility and an independent player on the world stage," he said in the report. “We will not be able to finance our social model. We will have to scale back some, if not all, of our ambitions."

Draghi said that EU countries need hundreds of billions of euros of additional investment annually, amounting to roughly 5 percentage points of the bloc’s output, to create a competitive digital and carbon-neutral economy. He said public investment in areas like breakthrough innovation, defense procurement and energy is critical for promoting private investment that would boost the continent’s productivity.

The bloc’s competition policy should change so that the rules don’t become a barrier to economic growth. He said the EU’s antitrust authorities should put more weight on whether a merger can boost EU innovation and can help create globally competitive companies.

Prompting the report is 15 years of European economic underperformance that leaders are struggling to address.

According to the International Monetary Fund, the EU’s 27 economies now account for just 14% of global output on a purchasing-power basis, down from more than 20% in 2000. Europe’s recovery from the Covid-19 pandemic has been far more sluggish than the U.S.’s and China’s, with the continent taking a major economic hit from Russia’s invasion of Ukraine, which pushed up energy prices.

Among the most controversial parts of Draghi’s proposals are on industrial policy, increased fiscal outlays and proposed changes to competition policy, which has long been viewed as untouchable. Disputes over the proposals promise to ripple throughout the new five-year term of European Commission President Ursula von der Leyen, which starts later this year.

Draghi’s central argument is that Europe’s economic travails will deepen unless it can become more competitive in emerging clean-tech and digital sectors, areas the Chinese and U.S. governments subsidize heavily.

Some of Draghi’s proposals are in line with an economic vision often promoted by France, one of the bloc’s more influential countries. They include a greater role for governments in business and curbing dependence on other countries.

Those ideas are likely to be challenged by many of the bloc’s smaller member states that believe strongly in the benefits they have reaped from embracing open economies and free trade.

“It’s very easy to agree on the goal, but there are question marks about the methods and the means and ways to get there," said Anna Stellinger, head of international and EU affairs of the Confederation of Swedish Enterprise, a trade group.

Stellinger said the EU should safeguard small-business interests in its push for ambitious regulation, especially on climate and non-exploitative supply-chain rules. It needs to be careful not to harm national structures, like Sweden’s robust capital markets, in its search for common markets.

And it needs to get the balance right between being more resilient against supply-chain shocks like the Ukraine war and the pandemic and remaining an open economy.

Self-sufficiency for a country like Sweden means “we would all end up eating potatoes, and it’s not that fun."

Draghi said Europe needs to focus on closing an innovation gap with the U.S. and China.

The U.S. Inflation Reduction Act, which offers hundreds of billions in tax breaks and other subsidies to the clean-tech sector, has lured some European companies to shift investment plans to the U.S.

Heavy subsidies in China are also a top concern for EU officials, who worry that an influx of low-price goods from China could worsen as the U.S. and other countries erect high trade barriers.

The EU recently imposed tariffs on electric vehicles from China of up to 36%. It has also introduced new laws that allow it to bar some heavily subsidized companies from bidding on public contracts in the EU.

Funding industrial subsidies would be challenging since European governments are already financially strapped and face pressure to boost social and military spending. One proposed solution, issuing pan-EU bonds to finance investment, faces strong opposition in Berlin and elsewhere.

Europe has taken dramatic measures in the past, but recently only amid extreme crises like the pandemic or the war in Ukraine.

“When it comes to the more radical recommendations, I am skeptical because I don’t see a particular willingness of the member states at the moment to face the realities of the challenges," said Fabian Zuleeg, chief executive of the European Policy Center, a think tank.

To address rising global tensions, Draghi advocated greater EU funding of defense research, changes in competition policy to allow industry consolidation and, as spending rises, a preference for buying European products.

European countries have significantly increased military spending in recent years, but much is for imports from the U.S. or other non-EU countries.

“Security is a precondition for sustainable growth," Draghi said.

Write to Kim Mackrael at kim.mackrael@wsj.com and Laurence Norman at laurence.norman@wsj.com