Competitiveness is one of the most debated issues ahead of the European elections on June 6-9. The European Union’s (EU) capacity to counter “deindustrialization” and job losses, to protect its industry in the face of stiff international competition and to invest in strategic technologies from quantum to biotech is on the minds of leaders and voters alike.
As the EU faces the most severe economic downturn in a decade, a widening productivity gap, rising production costs and a sharp fall in domestic demand, industrial representatives were the first to react by issuing the Antwerp Declaration for a European Industrial Deal. Meeting with Commission President Ursula von der Leyen at the European Industrial Summit on February 20, 800 companies across a wide range of industrial sectors requested action to preserve European industries from global supply chain disruptions, climate change and the deteriorating geopolitical landscape.
How to revamp the EU’s industrial policy?
EU ministers in charge of industrial affairs and the EU’s internal market echoed the private sector’s ask by calling for a “competitive European industry driving our green, digital and resilient future” when they met on May 24. In their conclusions, the 27 member states put pressure on the next European Commission (being appointed after the elections) to prepare a European Competitiveness Deal. They see this as a natural extension to the existing Green Deal, which was at the center of the Commission’s current mandate (2019-2024).
This Competitiveness Deal would advance the following priorities:
- A more assertive cohesion policy that boosts the fundamental principles for the single market: the four freedoms of movement of people, goods, services and capital.
- Active support for companies in high-criticality industries: defense, aerospace, biotech, AI, quantum and net zero technologies.
- The onshoring of Europe-based value chains to achieve a degree of autonomy against import dependencies in these sectors and hedge against potential future disruptions in trade flows.
- A loosening of state aid rules, so that globally competitive European “champion” companies may arise in these sectors and carve out a role for Europe as a manufacturing hub.
Political implications
Polls predict that more lawmakers will be elected on the right side of the political spectrum in the next European Parliament. Ensuring that the EU has the ability to defend its industry, jobs will be one priority they will all agree on. European officials are therefore keen to anticipate their demands. Two former Italian Prime Ministers are central to this effort. They were tasked with complementary reports, one on the future of the single market by Enrico Letta and another on EU competitiveness by Mario Draghi.
Enrico Letta already presented his report to European leaders in April, advocating for an EU-wide strategic policy to bolster firms working in key sectors: communications, energy, defense, space and transport. He also hopes to reform the current state aid framework and make it more socially acceptable by distributing resources across the EU, preventing powerful economies like Germany and France from only subsidising their national companies. Berlin and Paris have already said they are willing to narrow the scope of the state aid framework. It could be extended to support future EU champions that are active in strategic industrial sectors and highly innovative, but are not yet at scale, thus creating space for them to become globally competitive.
Mario Draghi is expected to release his report in the next few weeks, but he already indicated that one of the main points of convergence with the Letta report is on resources. An estimated EUR 760 billion of state aid has been approved since the pandemic started, a figure comparable to the USD 737 billion in revenue raised under the U.S. Inflation Reduction Act, showing that the money can be found within the EU. However, a funding gap remains between the EU and U.S. in terms of investment, estimated by Mario Draghi to be at least EUR 500 billion a year, which is what the EU needs to finance its now “triple transition” (green, digital and industrial).
Who will pay for the EU’s triple transition?
Money remains to be the elephant in the room. To bridge the gap with competitors such as the U.S. and China, a joint strategy to better allocate public resources is not enough. The common budget is limited to about EUR 160-180 billion annually, amounting to just over 1% of European GDP. The EU will have to resort to private money as well, leveraging the European Investment Bank’s potential and/or resorting to common debt.
French President Emmanuel Macron suggested to “double the size of the EU budget, through common borrowing strategies” when he travelled to Germany to meet with Chancellor Olaf Scholz on May 26-28, repeating a suggestion he made in his new Sorbonne speech on April 25, clearly referring to joint debt instruments. However, there is no agreement among EU leaders on that topic, and Paris and Berlin do not share the same thinking, even if their leaders are trying to rekindle a frosty French-German relationship ahead of the EU elections. Macron and Scholz are also expected to see their parties finish behind far-right groups at home and might not be in a position to impose their views on peers from other member states after the elections.
Another, possibly more nimble, solution could be to ramp up joint procurement. In nascent markets with feeble business cases (e.g. in secondary raw materials), “Europe-first” or “green” criteria could allow the public sector to create the demand that leads European companies to scale. In this sense, industrial policy is seen as a way to reach Europe’s “green” goals by highlighting the complementarity of the Green and Competitiveness Deals. National governments do not currently buy much together, as their joint initiatives represent less than 20% of their total spending.
In his report, Enrico Letta floated the idea of rolling out an EU-wide public procurement framework that would provide EU companies – including SMEs and startups – less restricted access to public funding mechanisms and a more active use of private investments, including venture, equity and growth capital. However, it is Mario Draghi’s competitiveness report that is now an object of intense speculation.
Awaiting a definitive answer
The man tasked with drafting the competitiveness report is not only a former Italian Prime Minister, but Mario Draghi was also at the helm of the European Central Bank and gained international recognition when he said that the institution would do “whatever it takes” to salvage the EU’s economy and save the Euro when confronted with the sovereign debt crisis in 2012. With current Italian Prime Minister Giorgia Meloni positioned as a likely kingmaker in the next European Parliament, some see the unaffiliated Mario Draghi as a possible recourse if Commission President Ursula von der Leyen fails in her bid to be reappointed at the helm of the institution after the elections.
For all these reasons, Mario Draghi’s report will be watched closely. He is expected to build on the Versailles Declaration by EU leaders in March 2022 and the recent Franco-German Competitiveness Agenda, which make clear that bolstering the EU’s capabilities can only be achieved by nurturing the creation of industrial champions and drastically reducing its continuous overreliance on energy, semi-conductors and critical raw material imports. Draghi is equally likely to call for more investment in high-quality and net zero innovation, starting with AI, quantum technologies, biotechnologies, robotics and chemicals.
While the final content of the Draghi report is one of the best kept secrets in Brussels, one thing is for certain: competitiveness is a top priority for the EU in an increasingly hostile international environment. European jobs are at stake and EU officials know this is the first task they will have to tackle after the elections.
