By Emil Bjerg, journalist and editor

“We have reached the point where, without action, we will have to either compromise our welfare, our environment or our freedom,” Draghi warns. In his new report, he details how to get Europe back on track. 

“It’s ‘Do this’ or it’s a slow agony,” Mario Draghi, former President of the European Central Bank, said Monday when he released his report The future of European competitiveness. A 400-page blueprint for competitive strategy commissioned by Ursula von der Leyen.

From Draghi’s perspective, the EU has been dependent on three pillars that have proved unstable in recent years: energy from Russia, exports from China, and the US defense.

The EU is struggling to maintain its competitiveness in a changing global market, where Chinese companies thrive on subsidies, and the American government invests large sums in strategic sectors. Draghi — and a large number of European politicians and analysts — worry that the EU in its current form — with limited integration and chunky regulation – is unable to follow the growth of two superpowers while other emerging economies are also taking market shares.

Increased Public Spending and Common Debt

To catch up with its competitors, Draghi argues that the EU needs to invest “enormous amounts of money in a relatively short time”. He specifies that the EU needs to invest at least €750-800 billion annually to keep up with the US and China. Draghi urges the importance of increased investments, particularly in sustainability, technology, defense, infrastructure and innovation.

To finance that, Draghi proposes that the EU countries take on common debt similar to the Next Generation fund during the COVID-19 pandemic. France’s Macron is a proponent of common debt, while countries like Germany, Austria, and the Netherlands historically have been opposed to taking on common debt. “The communalization of risks and liability creates democratic and fiscal issues. Germany will not agree to that,” Germany’s Finance Minister Christian Lindner said in the wake of the report.

However, Politico quotes a German official as expressing support for “increasing the spending path into research and development, climate, innovation and so on, which is certainly needed in global competition.”

Draghi: Public Investments Increase Productivity and Innovation

In the report, Draghi argues that public investments play a critical role in driving productivity growth and economic prosperity. American companies invest €700 billion more annually than European ones, giving them an advantage in innovation, research and development.

To catch up, Draghi encourages EU leaders to double the EU’s research and innovation budget to €200 billion in the next seven-year planning cycle, from 2028 to 2034.

Translating Innovation into Growth

Draghi argues that Europe has largely missed out on the digital revolution, meaning that the thriving industries are largely older industries with less potential for new breakthroughs.

Writing for The Economist, Draghi notes that Europe is not lacking ambition to innovate. “But innovation is blocked at the next stage: it is not translated into commercialization, and innovative firms that want to scale up are hindered by inconsistent and restrictive regulations. Many European entrepreneurs prefer to seek financing from American venture capitalists and scale up in the American market,” Draghi writes.

Draghi suggests a number of initiatives to help European innovation: from making it easier for researchers to commercialize ideas, to joint public investment in breakthrough technologies, to removing barriers to scaling up for innovative companies, to investing in computing and connectivity infrastructure to lower the cost of developing AI.

How likely are Draghi’s suggestions to be carried out?

On Saturday, Draghi met with EU leaders to discuss his findings and recommendations. Especially the suggested increase in public spending and common debt will likely create discussion in the months to come.

On the one hand, Draghi’s work has been commissioned by Ursula von der Leyen, and a lot of—primarily centrist politicians—are supportive of his recommendations for increased public investment and common debt tools to enhance EU competitiveness. On the other hand, Europe suffers from a polarized political landscape, limiting the political consensus needed for implementing drastic reforms.

Recently, in the case of COVID-19 and Russia’s attack on Ukraine, Europe has shown the ability to further integrate and respond effectively to crises. The question remains whether Europe will be able to do the same for long-term economic strategies.