Boosting EU Competitiveness: Fresh Impetus by Draghi or Back to Old Habits?
Main takeaways
- Draghi’s report urges Europe to cut red tape and foster a pro-investment climate
- EU overregulation has particularly stifled growth and investment in digital innovation
- Mobilising existing funds and encouraging investments are crucial for EU’s future
Earlier this week, the much-anticipated report on the way forward for Europe’s ailing competitiveness, authored by Mario Draghi, finally came out. Expectations for what’s next are high, but above all the report should be seen as a – last? – wakeup call for Europe to do better and stop thinking everything can be solved with more of the same: more regulation, more self doubt, more protectionism. It’s high time the EU actually starts to listen to what industry and employers, innovators and market leaders need to succeed in the EU.
The next five years are about turning the corner and empowering, emboldening and encouraging success – instead of punishing it. It’s undeniable that Europe has fallen behind in the global race for excellence and innovation. Rather than focusing on our strengths, we now have a damaging inferiority complex. It was visible with the Letta report, and now the Draghi recommendations also come from a European zeitgeist that speaks of self doubt.
Rather than fixing the real root problems, however, so far Europe has had the tendency to revert to the old tried and failed approach of trying to fix problems and gaps in our economy with more regulation. The last European Commission wanted “better” and “smarter” rules, but those high hopes did not survive the day-to-day regulatory mindset. The results have been poor, to put it mildly. This is what I’ve been calling the ‘cost of Europe’ for the past year or so. And now it’s one of Draghi’s main findings, yet we still risk exacerbating it further.
1. The old continent in trouble
I usually don’t like quoting big consulting firms, but a recent McKinsey study sums the situation up very clearly. “Investment is the simplest way to gauge Europe’s competitiveness, and the region’s investment pulse is low,” the authors emphasise. This is not a complicated conclusion to reach, we all know it instinctively. In fact, the European University Institute’s Centre for A Digital Society recently published a comprehensive paper focusing exactly on what’s needed to fix this most glaring of Europe’s problems: ‘Strengthening EU Digital Competitiveness: Stoking the Engine’.
If the new 2024-2029 European Commission mandate now truly is to be one of both implementation and boosting competitiveness, then the solution is simple: implementation must be translated into reducing the regulatory burden and dramatically encouraging new investment. And that should include friendly and like-minded partner countries and companies. There is simply no other way to come even close to achieving the targets for our digital economy that we’ve been talking about.
We’re starting from a difficult spot, with Western Europe the only global region McKinsey study where “total factor productivity has fallen over the past century” according to the McKinsey study. Is that because we don’t want to increase our productiveness? No. We just spend too much time complying, and not enough time trying – trying to grow and trying to innovate.
2. Mobilising money
A few good examples from the McKinsey investment paper highlight the problem in stark fashion. Europe’s venture capital assets are one quarter the size of those in the US, which has over €700 billion more devoted to capital expenditure and R&D than Europe. If we’re investing €700 billion less, how can we pretend to compete? But we Europeans can’t blame the others, we need to get there ourselves – without the persistent inferiority complex that makes Europe always look over its shoulder, rather than looking ahead.
The Draghi report now suggests spending hundreds of billions of euros per year to give the EU’s competitiveness a boost. Perhaps even bringing us back in the global race. In reality, however, extra spending by the EU is expected to face an almost immediate backlash from EU Member States. Germany, for example, already made clear it doesn’t want to see any increase in the EU budget, while the Dutch want to lower their contribution drastically.
Introducing EU taxes or punishing successful companies by making them pay for less competitive sectors (such as former telecom monopolists) isn’t going to help our competitiveness either. So, Europe needs to find new ways of mobilising existing money. As the European University Institute study found, the EU actually creates more tech start-ups annually than the United States, but many innovative EU companies struggle to scale up due to insufficient access to capital.
Meanwhile, EU pension and insurance funds control a whopping €13 trillion in assets. Europe could tap into this resource by permitting these funds to invest in higher-risk, higher-reward ventures. This would not only help diversify portfolios, but also funnel tens of billions into the EU tech sector. According to the study’s authors, this single reform could be sufficient to properly address the long-standing issue of inadequate funding available for high-tech start-ups in the European Union.
3. Self-made problems
This matters on many fronts. In Europe, the average life of a start-up is three years. The European Artificial Intelligence Act’s implementation, on the other hand, is expected to take six years. Today, many of our start-ups still end up paying more for lawyers than for developers, coders, or other innovators they could hire instead. And when they come to Brussels, too often they have to listen to politicians telling them how their businesses should be run, rather than setting clear rules and creating a system to support them.
Many of our problems are self made. Europe’s reality is that over the last few years, more than 70 different sets of digital and tech rules have been adopted. Europe has congratulated itself at being the very best at regulating, with over 13,000 new pieces of legislation in total since 2019. The Letta and Draghi reports, however, show that this (over)regulation is not, and has never been, a workable solution.
In reality, overregulation and poor enforcement have drained EU Member States of resources, harmed companies, and blocked the emergence of start-ups and European champions. It has been a boon for lawyers certainly, and the Brussels bubble perhaps, but it has held Europe as a whole back. Even Mr Draghi had to call out the regulatory labyrinth that Europe created for itself, starting with the implementation of the General Data Protection Regulation. The same could be said to the uncertainty on the Digital Markets Act’s process and rules.
The starkest conclusion in the investment study is the most powerful. In the same time span that we saw Europe celebrating unprecedented waves of new regulation (and burdens on companies in Europe), we’ve also seen a big fall in investment and research, with large European companies investing less than ever compared to their US counterparts. That’s the EU spending less on its innovation potential and digital ambitions.
The timing is clear: in the last seven years, the spending gap between large EU companies and their US counterparts has gone from 35% (already not great) to about 80%. And again, this is particularly noticeable in capital expenditure and R&D spending on technology, energy, industry and semiconductors, even in telecoms. It’s difficult to ignore that this widening gap corresponds quite specifically to the massive surge in EU regulation.
4. Rejecting yesteryear’s thinking
And before we go all protectionist, let’s remember that the largest American companies are investing more than three times what Europe’s top companies invest. Much of that also flows into Europe. European companies simply won’t be able to find the means and desire to invest in this kind of ambitious manner if the EU would shift its focus to protectionism and taxing certain industries, friendly countries or international companies just for not being European (enough).
Indeed, old tried and failed ideas still made their way into the Draghi report unfortunately, perhaps recycled out of hope they might work this time. Those ideas failed before, and would only cut down investment and growth even further. This includes unnecessary instincts to regulate more, such as regulatory intervention that would harm Europe’s cloud and telecoms markets (where the same ideas return and could have been copy-pasted from the positions of failed old ‘national champions’).
On telecoms specifically, focusing on propping up old incumbents to the detriment of the rest of the value chain doesn’t make any sense if you want to stimulate real growth and competitiveness in Europe. Rather than wasting time on these flawed debates, which would not solve anything, we can salvage Europe’s competitiveness by reducing the regulatory burden – taking the best of Draghi’s recommendations, but without the old habits.
Conclusion
The EU needs to dramatically cut the burdens on growth and increase the supply of capital, encouraging Europe’s digital innovators to actually invest, to actually be ambitious. If we aren’t trying, how can we complain after the fact? If our leaders are willing to settle for creating big fish in Europe’s small pond, we have to insist that we need majestic creatures that can swim the world.
The solution is to give companies – Europe’s innovators, employers and investors – certainty and predictability, rather than imposing ever growing costs and internal barriers. We need to actually complete the Single Market and allow it to live up to its name, rather than allowing constant gold plating that only erodes it to satisfy short-term national priorities.
Europe can only succeed if we create a climate where everyone is being encouraged to invest and grow, rather than simply struggling to survive the next set of legal challenges. As Mr Draghi said when presenting the report, maybe we should focus on doing a little less, but doing it better. Focusing less on having the most regulation, but rather on the very best and for crucial issues only. Stay tuned for our concrete suggestions in the coming weeks.
