Summary of the subject discussed: Mario Draghi’s report highlights Europe’s competitiveness crisis, stressing the need for a stronger financial system. Unlike the U.S., Europe relies heavily on bank financing, limiting innovation. Key reforms, like the Capital Markets Union, remain stalled due to political and bureaucratic hurdles. Overcoming these challenges is essential for fostering growth and innovation.
The 9th of September of last year, the European Commission published the highly anticipated “The future of European competitiveness – A competitiveness strategy for Europe” report: a strong, important, and dramatic “wake-up call” (Davies, 2024) in the form of a list of proposals from reputed former ECB president and Prime Minister of Italy Mario Draghi, largely prominent in the EU economic and financial sphere for his “whatever it takes” strategy to save the euro in the midst of the European sovereign debt crisis 2012 (Benigno et al, 2022).
In his report, Draghi does not shy away from recognising the severity of European competitiveness and productivity problems at the moment, stating that they pose an “existential challenge” to the Union (Draghi, 2024). The report outlines over 170 policy proposals (Pettinger et al., 2024), with the main focus being tackling the “slow agony” (Draghi, 2024) that Europe has been suffering as the result of its divergence in growth from other developed powers, namely the US, and China. Specifically, he proposes a series of transformative sectorial (in areas key to the future evolution of the European economy such as energy, automotive, pharma and defence) and horizontal (such as the acceleration of innovation and the closing of the skills gap) policies.
In particular, what experts such as Howard Davies noted at the time of the publishing of the article is the great importance that capital-market integration in the European Union will have if all of these measures are to be applied on the Old Continent’s struggling economy.
Indeed, a stronger European financial structure will be the base to sustaining whatever progress is to be made on the area of competitiveness. As a Union, Europe clearly lacks the financing potential needed to empower innovative firms, such as the ones driving the current AI revolution.
The data speaks for itself: US firms obtain approximately three quarters of their financing through capital markets, while European companies get almost that same amount of external funds exclusively from banks (Bloomberg, 2024). This over-reliance on bank financing is a problem for breakthrough players in new sectors, as traditional banks are more likely to invest in safer, less dynamic firms, which offer less potential for innovation and change. This, coupled with the great administrative and bureaucratic burdens that some European firms have to face, leads to alarming statistics, such as that 30% of European unicorn startups have moved to the US.
This problem is not new to economic chiefs in the EU, such as current ECB president Christine Lagarde, who in November 2023 was already talking about the need for a “Kantian shift” for the capital markets union (Lagarde, 2023). This CMU to which Lagarde refers is the project launched in 2014 by Jean-Claude Juncker, then president of the Commission.
The capital markets union, as well as the banking union, two important institutional enablers of this financial change in Europe, are still on their way of being completed, with no clues as to when they will actually be implemented. In addition, the European Securities and Markets Authority (ESMA), an agency set to be a European counterpart to the SEC in the
US, is not able to exploit all its possibilities due to a de-centralized system of capital-raising procedures, which vary from one EU country to another.
The truth is that the problems of European competitiveness and productivity are the reflection of other bigger issues that the Union is going through for quite some years now. While the Draghi report is an important piece of advice for the Commission, and its proposals should serve as a critical realization of the problems faced by the European economy, it has also received various critiques from the part of civil society organizations, NGOs, and trade unions for not being consulted enough in the writing of the report, only accounting for 5% of the contributions (Soler, 2024).
The above is a good example of the difficulties that any transformation in the current European climate will face. With a society which is more divided than ever on the relevance of the Union in the first place (with an increase in Eurosceptic movements and parties all around the continent), the differences in incentives and priorities between different nations, and the loss of political power of the leaders of the Union (France and Germany, with divided parliaments and internal struggles to deal with), reforms of the size of what is needed to improve the financial ecosystem will be difficult to push forward.
Finally, this year’s German federal elections will provide answers on what the largest population in the continent thinks of the EU, but there is no doubt that Europe should be respected as a global power which places importance on the welfare state, and as such, it should strive for a growth regime supported by an enabling financial architecture which can offer opportunities for innovation and prosperity.
