Whither Europe, Or Is It Wither

Commentary by William Alan Reinsch

Published September 23, 2024

Last week featured the arrival of a long-awaited report by former European Central Bank head and former Italian prime minister Mario Draghi, The Future of Europe's Competitiveness. It is a comprehensive look at the EU economy, diagnosing its problems and suggesting a wide range of remedies. Reaction to it in Europe has been mixed but largely positive. Economists tend to like the analysis but have diverging views on the recommendations, which propose more government intervention in the economy than some would like. There seems to be consensus that something needs to be done to jump-start growth on the continent, but whether the Draghi report turns out to be a catalyst for action or ends up on a shelf in the Berlaymont library remains to be seen.

In the report, Draghi cites, among other things, the European Union's productivity gap (accounting for 70 percent of the difference in per capita GDP between the European Union and the United States), the long-term growth-slowing implications of the European Union's population decline (not unique to Europe but characteristic of most developed countries), higher energy costs due to Russia's invasion of Ukraine and the subsequent cutoff of oil and gas imports, and the likely need to devote more resources to defense and national security after three decades of relative peace and stability.

The larger problems that stand out, however, relate to investment, regulation, and governance. With respect to the first problem, Draghi faults the European Union for years of investing in "old" technologies and failure to put money into new ones. The report points out that the top three R&D investing companies in the European Union are auto companies, while in the United States they are digital technology companies. That is not surprising, since the European auto industry employs 2.4 million people directly and accounts for an additional 13 million jobs, but it means that in many ways the digital revolution is passing Europe by. Of the fifty largest tech companies in the world, only four are in Europe. In cloud computing, for example, the largest EU provider has only 2 percent of the market. Of the top ten companies investing in quantum computing, five are in the United States, four are in China, and none are in Europe. European companies spend €270 billion less on R&D than their U.S. counterparts, especially in tech sectors. In short, as the tech revolution broadens and deepens, the European Union is on the sidelines "just watching."

Second, Draghi reports increasing business complaints about overregulation. Of course, businesses always complain about regulation in every country, but in the European Union it appears to be a particular problem, with more than 60 percent of EU companies viewing regulation as an investment deterrent and 55 percent of small- and medium-sized enterprises identifying regulatory hurdles as their greatest challenge. This is an issue the Scholl Chair has researched at length with respect to digital trade regulations. See our work on the cost of complying with the Digital Markets Act and Digital Services Act and review the digital policy tracker currently on our website that follows law and regulatory developments in some 30 countries. While much of the complaining about these regulations comes from U.S. companies which believe-correctly in my view-that they intentionally discriminate against large U.S. tech platforms, our research shows a significant cost of compliance for EU companies as well.

The third problem is governance, which refers to the eternal problem in the European Union of how to get all 27 members moving in the same direction at the same speed. While extraordinary progress has been made in the nearly 70 years since the creation of the European Coal and Steel Community, the European Union is still a collection of sovereign states, many of which enjoy exercising their sovereignty, often at inopportune moments. Sorting out-and agreeing on-which decisions belong to the European Commission and which belong to the member states remains a huge issue, particularly as economic policies, largely in the commission's purview, and defense and security issues, largely in the member states' purview, have become conflated. This is a long-term challenge that has prevented the European Union from becoming everything its advocates have hoped for.

There are too many specific recommendations to cite here, but, interestingly, the three big problems Draghi wants to tackle are the same ones the United States faces-the need to run faster in technology development, accelerate decarbonization (in the EU case not only for climate reasons but to reduce the costs and dependencies of fossil fuels), and increase security by reducing dependencies and promoting supply chain resilience. All of these problems involve spending money-some €800 billion in Draghi's estimation-and all of them require a greater degree of coordination among the member states.

Perhaps the greatest value of the report is that it highlights the fact that the European Union is at an inflection point-it remains to be seen whether it will restimulate growth and innovation, improve productivity, and develop greater supply chain resilience or whether it will gradually wither away and not die but return to a group of smaller economies that compete as much with each other as they do with the rest of the world. The former would be better, not just for Europeans, but for the world, and we should all hope Europe chooses that path.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

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