Last September, Mario Draghi’s much-awaited Future of European Competitiveness report was published. The comprehensive report clearly demonstrates Europe’s weaknesses and deteriorating trade position as it strives to remain a relevant player while the US and China dominate the global economy.
The overall assessment is that for Europe to be competitive in the future, it must work to close the innovation gap, pursue the decarbonisation of the economy despite the short-term costs, adapt to the volatile and more hostile geopolitical realities, massively increase the level of investment for the financing of large-scale projects in digital and clean technologies, and reform the EU’s governance.
These issues are not new or surprising. Yet Draghi manages to demonstrate how all these challenges are effectively linked. For instance, decarbonisation is needed not only to mitigate climate change but also to reduce the cost of energy over time. For as long as Europe depends on importing fossil fuels, businesses will be subject to higher energy costs and are subsequently at a disadvantage competing internationally. The report indicates how the price of electricity in Europe is two to three times more than in the US and gas prices four to five higher.
Decarbonising the European economy, however, requires a significant investment in renewable energy plants and grid capacity, which at the current pace will not match the energy demand within a few years. The report refers to the fact that, for instance, data centres alone currently account for two per cent of total energy demand, and this is estimated to grow to 28 per cent by 2030. Further pressure on energy infrastructures will be added by many other sectors, including the electrification of transport within the next decade.
At the same time, Europe must substantially increase the manufacturing of clean technologies and secure stable access to critical raw materials sourced globally. Otherwise, it will continue depending on the excess capacity of goods produced by other countries such as China, which is not politically aligned with the EU, and thus presents a serious risk of economic coercion.
Draghi demonstrates how European companies struggle with productivity and innovation compared to their main competitors, particularly in digital technologies that will be driving growth in the future. He blames the lack of industrial dynamism derived by weaknesses along the innovation life cycle, from start-up to scale-up, because of an insufficiently integrated capital market to generate investment at scale, as well as regulatory and jurisdictional hurdles in the EU.
To address all these challenges, Draghi argues that EU investment needs to grow by €750-800 billion annually. The EU budget, which at one per cent of the EU GDP is substantially small, must be reformed and streamlined through a ‘Competitiveness Pillar’ and invested more actively in start-ups, scale-ups and support private investment with a much higher risk appetite. There should be more regular issuing of safe assets, such as EU bonds for joint-investment projects. State aid must be increasingly linked to Important Projects of Common European Interests (IPCEIs).
The Draghi report will surely inspire wide-ranging policy initiatives during this EU legislature. Given its level of integration with the European economy, Malta’s prosperity is intrinsically linked to the EU’s competitiveness and success, and must therefore align itself with the opportunities that will be presented.
To start with, Malta must attract more foreign companies and nurture existing local ones from sectors that are poised to drive future growth. Given their centrality to the EU’s strategic priorities, these companies are likely to benefit most from a new ‘Competitiveness Pillar’ that is expected to be included in the EU Budget architecture during the next seven-year period starting in 2027. This pillar will streamline many of the current funding programmes to provide grants, loans and guarantees either by backing or complementing investments in areas considered of strategic importance to the EU.
Meanwhile, as the governance of the new EU budget takes shape, one must ensure that accessing direct EU funding is simplified and processes are more tailor-made to the needs of SMEs.
In the coming years, there will be more emphasis on IPCEIs. These are state-aid-supported initiatives involving stakeholders in multiple EU member states, in the absence of which the investment would probably not take place. Malta announced its first IPCEI earlier this year in the area of semiconductors and should be looking at providing further support to companies aspiring to implement projects, which in turn contribute to the country’s economic resilience, security or speeding-up the decarbonisation of the economy.
Raising additional money at EU level through joint borrowing is undoubtedly controversial, and several fiscally prudent member states are uncomfortable sharing debt with others that are less disciplined. Yet, looking at Draghi’s analysis, the writing is on the wall. Unless member states collectively match the level of investment of other international competitors, it is only a matter of time before Europe loses its relevance on the global stage.
The ‘Recovery and Resilience Facility’, a joint EU borrowing instrument financed through the issuing of bonds to raise funds to help member states emerge more resilient from the pandemic, sets a good precedent for similar future programmes aimed at fuelling investment to secure Europe’s future competitiveness. Malta would do well to support such initiatives subject to securing the right conditions and safeguards.
The Draghi report provides a good opportunity for reflection on the direction Europe needs to take during this period of transition from one legislature to the other. The economic challenges derived by the green and digital transition, coupled with the volatile geopolitical environment, require the EU to take bold decisions to chart its own future if it wishes to avoid being shaped by others.
Daniel Debono is the permanent delegate of the Malta Business Bureau in Brussels. The MBB is the EU business advisory organisation of The Malta Chamber and the Malta Hotels and Restaurants Association.