The Draghi report on European competitiveness and the financing of its investment plan

On Monday 9 September 2024, Mario Draghi presented in Brussels the report that Ursula von der Leyen had commissioned from him a year earlier, under the title "The future of European competitiveness"[1]. The document runs to nearly 400 pages and contains some 170 recommendations[2]. Its diagnosis is not new. Its figures are. We read the report as members of the generation that will be working, and paying taxes, during the whole of the period it describes.

The diagnosis and the bill

The report begins with productivity. Around 70 per cent of the gap in GDP per capita between the Union and the United States is explained by lower European productivity[3]. Energy is the second cause: European companies still face electricity prices two to three times those in the United States, and gas prices four to five times higher[3]. The third is demography. The workforce is projected to shrink by close to 2 million workers a year until 2040[3]. Draghi draws the conclusion without ornament: "This is an existential challenge"[3].

He identifies three areas for action[3]. The first is to close the innovation gap with the United States and China, above all in advanced technologies. The second is to combine decarbonisation with competitiveness, so that the energy transition lowers costs instead of raising them. The third is to reduce dependencies and increase security, from critical raw materials to defence. Across these areas, the report proposes industrial policies for ten sectors and a set of horizontal measures on innovation, skills and governance[1].

The bill is the part that has travelled. Draghi puts the additional investment needed at EUR 750 to 800 billion a year, which is close to 5 per cent of the Union's GDP, with as much as EUR 450 billion of it for the energy transition. He compares that effort with the Marshall Plan, which amounted to 1 to 2 per cent of GDP a year between 1948 and 1951[2]. The report says that the investment share of the economy must rise by about 5 percentage points of GDP, a level the Union has not seen in decades[3]. He warned at the presentation that the Union must act or face "a slow agony"[4].

The financing question, and why it is a generational one

The report does not say that joint debt is the only route, and Draghi was careful on the point. He said at the presentation that common debt issuance "would make things infinitely easier", that it was not the goal of the report and that other forms of public financing would be acceptable. He added that grid investment was hard to imagine being covered by private money, so that public money becomes urgent[5]. The report itself notes that a larger role for public investment has implications for the issuance of common safe assets[3].

The reactions came within hours. Germany's finance minister, Christian Lindner, said that common debt would not solve structural problems. The Commission President praised the work and said that some of the proposals would go into the mission letters of the next Commissioners, and she did not endorse joint borrowing[4]. France, which pushed for the pandemic borrowing in 2020, now has less weight in that argument because it is under an excessive deficit procedure[4]. Von der Leyen's political guidelines of July already promise a European Competitiveness Fund within the next long-term budget, which will not take effect before 2028[6].

We state the arithmetic plainly. Union public debt stood at 82.0 per cent of GDP at the end of the first quarter of 2024, and euro area debt at 88.7 per cent[7]. If the additional EUR 800 billion a year is borrowed, the generation born after 1992 repays it, and repays it with a smaller workforce, since the report itself expects close to 2 million fewer workers a year[3]. If it is raised by taxation, the same generation pays it during its working life. If it is drawn from private savings, the Capital Markets Union that the guidelines rename the Savings and Investments Union has to be completed first, and that project has stalled for nine years[6]. There is no fourth source. Every reading of the report ends with the people now under 35 paying for it, and the question is only through which channel and in exchange for what.

That is why we do not read the report as a document about competitiveness alone. It is a proposal for a transfer across time. A transfer across time is legitimate when the generation that pays receives the asset. Grids, research capacity and defence industry are assets of that kind, if they are built. A transfer across time is not legitimate when the money finances the current consumption of the generation that decides. The report's chapter on skills is short next to its chapters on industry, and the single reference to education and adult learning says that the Union should aim to exceed the United States[3]. We would have wished for more. A workforce that shrinks by 2 million a year cannot absorb EUR 800 billion a year of investment unless the people who remain are better trained than the people who leave.

What we recommend

First, any Union borrowing instrument that follows from this report should be written with a repayment schedule and a list of the assets it finances, published together, so that the generation repaying can see what it bought. Second, the Competitiveness Fund promised in the political guidelines should carry a skills component of fixed proportion, and we propose one tenth of its size, allocated to vocational training and adult learning in the ten sectors the report names. Third, the Council should ask the Commission for an intergenerational impact statement on the report's financing options before the European Council of October, in the same way it asks for a budgetary impact statement. Fourth, the Member States that oppose joint debt should say which of the two other sources they prefer, because a refusal without an alternative is a decision to do nothing, and the report explains what nothing costs.