Europe's Industrial Strategy Proposed by Mario Draghi

In a landmark speech at the Monastery of San Jeronimo de Yuste in Spain on June 14, 2024, former President of the European Central Bank, Mario Draghi, delivered a call to action for Europe to strengthen its industrial competitiveness. The speech, translated into French, Spanish, and Italian and published in Grand Continent, highlighted the challenges facing Europe and proposed solutions to close the gap with the US and other leading economies.

Draghi's speech came as Europe faces fundamental questions over its future due to aging societies, technological change, increasing defense capability, and the green transition. The President of the European Central Bank received the Carlos V European Award in recognition of his outstanding contributions to European monetary policy and economic stability.

One of the key areas of concern is Europe's productivity growth, which has been lower than the US for a long time, and the difference is predominantly due to the tech sector and digitalization. Sweden, for instance, has a tech sector that is more than twice as productive as the European Union average. In contrast, around 70% of foundational artificial intelligence models are being developed in the US, and three US companies account for 65% of the global cloud computing market.

To start closing the gap, Draghi proposed a series of policy actions. These include reducing the price of energy, re-thinking the innovation environment in Europe, and financing various investment needs. Simplifying the European projects of common interest and expanding their scope would make them a successful tool for increasing investment in critical areas. Streamlining regulation and better coordinating different financing instruments in Europe could improve the situation.

The financing needs for the green and digital transitions are massive and will have to be mostly provided by the private sector. Deepening markets for risk capital, equities, and bonds is the main way to mobilize private savings on an unprecedented scale in Europe. Reskilling the workforce will require strengthening education and training systems, encouraging adult learning, and facilitating the entry of highly skilled workers from outside the European Union.

Comparing the US and Europe, not having a federal budget puts Europe at a disadvantage in terms of deploying public and private capital. Decision-making on common projects in Europe often requires a drawn-out legislative process with multiple veto players. Achieving scale requires removing the remaining barriers to cross-border activity within the Single Market, especially those that stand in the way of digital diffusion.

Europe faces stiff competition from other global powers, particularly China. In 2019, China spent around three times as much on industrial policy as Germany or France as a share of GDP, and in dollar terms adjusted at PPP, it spent around ten times as much as both countries combined. By 2030, China's annual manufacturing capacity for solar PV is expected to be double the level of global demand, and for battery cells, it will at least equal the level of global demand.

The manufacturing sector in Europe employs two and a half times as many people as in the United States, and more than a third of European manufacturing GDP is absorbed outside the European Union. However, European firms spend about half as much as their US peers on research and innovation, leading to an investment gap of around €270 billion a year. A significant portion of research and innovation spending in Europe is at the national level, with only one-tenth being European.

In his speech, Draghi also highlighted the importance of setting research and innovation as a collective priority and creating the conditions for innovation to diffuse faster through the economy. The EU needs to focus on strategic sectors such as energy, digitalization, AI, and semiconductors.

Draghi founded in 2024 the European initiative known as the "Draghi Report" focused on strengthening the industrial competitiveness of the EU in these strategic sectors by proposing policies to reduce dependencies on unreliable countries and enhance innovation. This initiative is not a formal new institution but a strategic report guiding EU industrial and competitiveness policy.

In conclusion, Mario Draghi's speech at the Monastery of San Jeronimo de Yuste serves as a clarion call for Europe to address its industrial competitiveness challenges. By implementing the proposed policy actions, Europe can close the gap with the US and other leading economies, ensuring a prosperous and sustainable future for its citizens.

Mario Draghi thanked King Felipe VI for the ceremony and the contribution of many people. The speech was delivered in a setting steeped in history, with the monastery being the final resting place of Carlos V, symbolising the long and rich history of Europe and the centuries-long process of building European unity.