Mario Draghi is the talk of the town this week. The former European Central Bank president who coined the phrase "whatever it takes” to save the euro more than a decade ago is now warning of "slow agony,” economically speaking, if the European Union does not catch up to the United States and China.
After a year putting it together, Draghi handed his two-part, 393-page competitiveness report over to European Commission President Ursula von der Leyen on Monday. It is nothing short of an end-to-end makeover of how the EU does business in a world that looks to be leaving the bloc behind. Draghi has called for a more coherent industrial policy and significant investment at the EU level.
Despite its size, both in terms of population and GDP, the EU has been steadily trailing the world's other global economic superpowers. European policymakers have struggled with how to change that — and left it to Draghi, a veteran eurocrat and former Italian prime minister, to say the hard part out loud.
"Common debt is instrumental,” he told reporters after presenting the report.
Germany, the EU's biggest economy, has already balked at more borrowing. The famously frugal country is itself facing budget woes at the national level.
Yet if and how the EU should take on debt to invest in the sectors that need a boost is something of a distraction, Niclas Poitiers, a research fellow at Bruegel, a Brussels-based economics think tank, told The Parliament.
For the macroeconomics analyst, the devil — and the good stuff — is in the details.
The following interview has been edited for length and clarity.
What does the Draghi report mean to you?
I think he really landed on something that I'm personally very fond of, which is basically understanding this as a productivity issue. So, what can we do to make our economy more productive? That is kind of the core of the issue rather than basically some kind of grand concept of external competitiveness, which is not really very sensible for an economist.
From my reading, I think there is a little bit confusion, just to put this in front. I was reading the German press this morning and I got press requests asking what does Draghi want with €800 billion of public debt? He never — he doesn't really talk about the public debt that he says he wants. He says he thinks it's beneficial to have a safe asset and he says there's a need for a reformed budget. But, I mean, he was very clear on this in the press...it is not the fight he wants to pick.
Then what does he want?
I think basically what some of these questions are about is how do you conduct industrial policy? And I think that is something that everyone is grappling with — so how do you understand industrial policy? Where do you see the role of the government in this? And I think here he strikes quite a balanced position. So, there is kind of the orthodox position, which is basically we don't like state aid, we don't like too much involved government. You maybe call this ordoliberal.
And then there's basically the opposite argument, which is more interventionalist, or corporatist, which is basically saying we want the government to help our companies, our champions, to compete in international markets. And here he strikes, I think, a balanced position between the two positions. We are living in a world where countries like the US and China are using industrial policies to promote strategic sectors. We have to acknowledge that that means we also have to support these sectors if we consider them of strategic importance.
Debt or no debt, where does the money come from?
Some will come from the public [sector], some will come from the private [sector]. And how do you generate that? And here what is the role of the government to facilitate that? And some think it's really just a capital markets union. It's really about making sure that the incentives for private investors are such that they feel comfortable investing in Europe, that savers are much more enabled to invest in more efficient, better financial products that also leads to higher investment. But some of this [is] also just the government intervening and making up for some lack of investment and, quite frankly, making up for the lack of cohesion.
The push he's saying is we need this investment, and we need to do things to make these investments happen. And then there's different ways you can do that. I think this reading that comes out of this — that this [is] just about common debt and these kind of things — I think it's really not about that. There's the framing that actually we need to use the European budget much more effectively, and one way of doing that would be to boost the European budget.
But that's not the core part of the argument. The core part of the argument is we need to have more investments, period.
Doesn't a bigger budget mean more spending, which a net contributor like Germany opposes?
The first question is basically, do you need more public investment? And I think the answer is clearly: yes. We need to fund more defence. We need to fund the green transition. We are in a contractional economic cycle, so we might even want to support our industries. We need to fight industrial policy — or we need to respond to industrial policy in the US and China. So, there's a lot of pressures to invest more from the public purse.
Because we have so far failed to build the capital markets to do this from the private side, we need to also make up for that. If we want to achieve our targets, we need more public money.
Where would the money come from? This is where common debt would come in. Something has to give.
What else explains the EU's economic sluggishness?
I think that is the core question – and it comes down to productivity. It's about us not being competitive in sectors like digital and innovative sectors in pharma. Why are we losing out against US? Why are we not as productive? And one of the answers [Draghi] gives is overregulation, the regulatory burden. But some of the answer is just like the business environment, like cost. One of the answers he gives is higher energy costs. Some of it is basically the industrial policy. But I think the biggest part of this is just we don't have the same kind of innovative business environment. And the question is: How we can create that? That is the core of the report.
It's about research and innovation, right? Like this question of why do the most talented researchers all go to the US? How do you help startups to scale? How do you finance mid-caps? How do you create more competitive environments? Why do we have so many unproductive companies that still are around and are not outcompeted in the market or don't face competitive pressures?
This is where some of the tensions in the Draghi report come into play — boosting competitiveness, lowering regulations, but maintaining strong worker protections and social welfare that the EU is known for and the US lacks. How do you square that circle?
I'm not entirely sure you can. The US system is kind of like a winner-takes-all system. It is a system that really rewards winners.
It's a system that really has very high incentives to play very, very aggressive. And now the European system doesn't have these features. We don't set the same incentives for effort. In a way you can see that, I think, very clearly is hours worked. In the US, partly because of the necessity to put in a lot of effort into your work in order to get a good life, people do not substitute money for time in the [same] way in Europe. In Europe, we have declining hours per worker, constantly declining ... much lower [than] in the US.
Why is that? Because people can actually make that choice in a way in the US, because your incomes, what you can consume, is linked to your employment. But also your health insurance, your education of your children, your university — there are a lot of benefits that are kind of monetized in a way. They're not monetized in Europe. My health insurance doesn't depend on me doing a big effort, therefore I'm maybe much more likely to work less hours.
If you look at productivity per hours worked, it is as high as in the US in some European countries even though people work less. We know that Europe can be as productive as the US despite the welfare state model. The question is why do we kind of lose ground to the US?
How does this report matter in the bigger picture?
I think the first one is just as a point of reference. The European ecosystem lives around debating. It's a very technocratic place. People debate a lot of these ideas, and you need some reference point, and this is a report that everyone will have read.
The kind of dismay that people have right now with the economic situation is to the large extent driven by things that are actually outside of the scope of some policymakers. Yet there's an underlying structural deceleration that we need to address. And I think he really manages to put the focus on that in this report. And I think that will be very important for the debate going forward that we have this common understanding. It's not just about solving the last crisis and reacting to this crisis.
What is the thing that we have to do in this kind of new world where we feel pressured by the Chinese industrial policy and we are fearful of a [potential] new Trump administration? What is the thing that we can do to kind of get our act together and kind of be in control again of our own destiny? And I think this moment gives a new sense of hope – a new sense of purpose and new sense of focus.