I must admit that Draghi’s report on the “The future of European competitiveness” offers some sober reading. This report outlines that Europe’s economic growth has been falling behind that of the US and China. The report is hard-hitting as to why this has been happening. It mentions that while Europe claims to favour innovation, it then adds regulatory burdens, which are especially costly for SMEs, especially those in the digital sectors.
The report also claims that Europe is not integrated enough and still too fragmented, with the lack of integration of European capital markets being a case in point. In essence the report advocates for a greater European integration. This point is hammered strongly when the report mentions “Europe’s decision-making rules have not substantially evolved as the EU has enlarged and as the global environment we face has become more hostile and complex. Decisions are typically made issue-by-issue with multiple veto players along the way. The outcome is a legislative process with an average time of 19 months to agree new laws, from the Commission’s proposal to the signing of the adopted act – and before new laws are even implemented across member states”.This means that ultimately this report is advocating for a drastically different European Union than the one we know today.
To bolster such European economic growth, the report identifies three main action areas, which are that:
- Europe must profoundly refocus its collective efforts on closing the innovation gap with the US and China, especially in advanced technologies;
- Europe needs to set up a joint plan for decarbonisation and competitiveness; and
- Europe is to increase security and reduce dependencies.
On one hand, the key driver of the rising productivity gap between the EU and the US has been digital technology, with the need for Europe to capitalise on future waves of digital innovation, especially through the integration of AI in European industry.
On the other hand, the report argues that the EU’s decarbonisation goals are also more ambitious than its competitors’, creating additional short-term costs for European industry and that the way forward is to reduce energy costs by using the leadership Europe has in clean energy technologies, while walking away from the trap of using cheaper Chinese clean energy technologies for short-term gains.
To do all this requires a lot of financing, calculated at being some €750 to €800bn equivalent to 4.4 – 4.7% of the EU’s GDP in 2023. The report outlines that the fragmentation of Europe’s Capital markets and the overreliance on bank financing are among the main stumbling blocks that are stifling higher economic growth through innovation. Thus, the report argues that a way to bolster the capital markets union and also create a safe benchmark that lowers capital costs could be achieved through the issuance of the so-called “common safe assets”.
It was music to my ears when the report mentioned that: “The core focus of a competitiveness agenda should be to raise productivity growth, which is the most important driver of long-term growth and leads to rising standards of living over time… Competitiveness today is less about relative labour costs and more about knowledge and skills embodied in the labour force.”Applying this on a national scale, I believe the above provides a clear blueprint for the changes required in Malta’s economic growth model. The above is just a very brief overview of this report, which every policymaker, business leader and, I dare, citizen should read thoroughly and act upon.