Former European Central Bank President Mario Draghi’s September report “The future of European competitiveness” provides a sober assessment of the critical challenges the European Union (EU) must overcome to maintain its economic standing amid global competition. This assessment, along with the report’s proposals for improving the bloc’s global economic competitiveness, garnered a significant amount of media coverage and expert debate upon its release, reshaping the EU economic policy discussion in 2024. However, it is what happens in 2025 that will determine whether the ambitious recommendations set out in the Draghi report will indeed move forward.
Importantly, the goal of increasing EU competitiveness as outlined in the report is not at odds with the need to strengthen transatlantic economic cooperation. In fact, a common thread in several of the report’s recommendations—increasing investment in high-tech sectors, creating a Capital Markets Union, standardizing EU foreign direct investment rules—is that they would provide opportunities for enhancing the EU-US economic partnership.
The four-hundred-page report identifies three areas on which to focus. First, the report argues, the EU should focus on technological investments to close the innovation gap, especially with the United States. As strange as it may seem, the overall amount of EU gross fixed capital formation (investment) over gross domestic product (GDP) is as large as in the United States, if not larger. However, if construction is excluded, there is an investment gap of about 2 percent of GDP (roughly 1.5 percent private and 0.5 percent public). At the same time, the productivity of those assets in the EU is similar to that in the United States, but with one exception—high-tech industries. The EU makes major investments in mid-tech sectors, such as the auto industry, but it invests much less in intangibles, such as software and research and development. When it comes to supporting new technologies, for example, the European Innovation Council’s Pathfinder instrument has a budget of only €256 million for 2024, compared to more than fifteen times that amount for the US Defense Advanced Research Projects Agency, known as DARPA. As a result of this investment shortfall, the return on EU investments is lower, diverting the bulk of venture capital and private equity funds away from the bloc. This creates a “middle technology trap.”
To break out of this trap, Draghi’s report calls for a number of regulatory policy interventions. First, the report argues, Brussels should take steps to better integrate the EU common market in the fields of new technologies, venture capital, and private equity by removing national obstacles to cross-European activities. This would mostly entail removing barriers caused by differing authorization procedures and the large number of reporting authorities across the EU. Second, the report recommends that the EU accelerate the creation of the Capital Markets Union, which would create a pan-European space for the financing of high-tech investments that typically require equity rather than credit as a source of funding. Third, the Draghi report argues that the EU needs to adapt competition rules to help foster the scaling up of firms in strategic industries, such as advanced manufacturing and robotics.
All of those proposals would open up opportunities for US private investments in the nascent European digital market. At the same time, transatlantic cooperation in science and research and development—for example, through joint US-EU initiatives in sectors such as artificial intelligence, semiconductors, biotechnology, and aerospace—would enhance both economic resilience and security.
The United States and the EU enjoy a deep economic linkage driven by innovation and rules-based market institutions.
As a second main focus, Draghi’s report recommends that the EU pursue the necessary objective of decarbonization with economic competitiveness in mind. The European Green Deal, aimed at achieving carbon neutrality in terms of emissions by 2050 and a reduction of 55 percent of emissions (compared to 1990 levels) by 2030, has been largely laid out in terms of regulations over the past five years. However, its implementation is complicated by a number of factors: fragmented national standards, the differing speed of implementation across member states, unnecessary regulatory burdens, bottlenecks in the provisioning of key inputs, and a lack of coordination across policies.
The result is that the European car industry, historically one of the cornerstones of EU competitiveness, is ailing. Investments in EU power grids are uncoordinated, causing negative spillovers across countries. Moreover, the cost of energy in the EU varies widely and is on average three or more times higher than for competitors in the United States and China. At the same time, the EU remains a technological leader in green industries, which can be leveraged to implement a competitiveness turnaround of the industry. And investment in renewables will be vital to enabling the EU to achieve more strategic autonomy on the energy front. Once again, the report calls for greater policy coordination and market integration in those areas. In particular, harmonizing transatlantic regulatory frameworks for carbon pricing, emissions standards, and renewable energy integration would be essential for companies to operate on both sides of the Atlantic and infuse much-needed investment into the market.
Third, the report underlines the need to enhance security—especially economic security—while reducing external dependencies. One of the main recommendations is to look beyond trade, highlighting the role of foreign investment. Currently, the EU’s investment screening mechanism is in the hands of EU member states, with only a reporting requirement. The report calls for strengthening the investment screening mechanism and creating a common foreign direct investment policy that could leverage the overall size of the single market and prevent rival countries from extracting concessions or posing security threats.
Foreign direct investment is a major area of transatlantic cooperation. Transatlantic trade in goods, valued at more than one trillion dollars annually, surpasses by far EU and US trade flows with China. But the most important aspect of the transatlantic economy is mutual foreign direct investment, with more than $7.4 trillion (roughly equally split with $3.95 trillion of US investment in the EU and $3.46 trillion of European investment in the US) of capital invested. Harmonizing investment rules between the EU and the United States, improving regulatory frameworks, eliminating nontariff barriers, and increasing mutual access to services, procurement opportunities, and digital markets, would thus be a great source of economic growth for both the US and EU economies.
As EU officials seek to turn last year’s most influential policy report into this year’s policy, they should keep in mind that enhancing the bloc’s competitiveness is compatible with strengthening economic relations with the United States. The United States and the EU enjoy a deep economic linkage driven by innovation and rules-based market institutions, making the transatlantic economy the most successful trading bloc in the world, comprising up to 44 percent of the global economy. The approach the EU takes to enhance its global economic competitiveness in 2025 should preserve the mutual gains that stem from strong transatlantic relations.
Carlo Altomonte is an associate professor of European economic policy at Bocconi University and vice president of ISPI.
Valbona Zeneli is a nonresident senior fellow at the Atlantic Council’s Europe Center and at the Scowcroft Center for Strategy and Security.
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Image: European Commission President Ursula von der Leyen holds Former European Central Bank (ECB) chief Mario Draghi's report on EU competitiveness and recommendations, as they attend a press conference, in Brussels, Belgium September 9, 2024. REUTERS/Yves Herman.