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How can EU compete with US, China and others?

November 9, 2024

At a summit in Budapest, Italian economist Mario Draghi reiterated the reforms that the EU requires to keep pace with the United States and China. He cautioned that time is running out — and decisive action is required.

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Leaders attend the informal EU summit
European leaders gathered in Budapest for an informal EU summitImage: Marton Monus/REUTERS

Mario Draghi, former president of the European Central bank (ECB) and former Italian prime minister, attended an informal ministers summit on Friday in Budapest, where he once again laid out to the 27 EU heads of state and government how the European Union could regain its competitive edge against the US and China.

In September, Draghi presented a 400-page report on the topic at an EU summit in Brussels. At the time, there hadn't been much time to discuss the finer points of Draghi's proposals. The Budapest summit, organized by Hungary, which currently holds the presidency of the Council of the European Union, was an opportunity to cover what was missed.

Italian economist Mario Draghi
Italian economist Mario Draghi traveled to Budapest to discuss proposals he laid out in September on how to improve Europe's economic edge.Image: Ferenc Isza/AFP

One issue Draghi highlighted in particular was that time is running out. The European Union needed to take decisive action if it wanted to keep pace, he cautioned. Following Tuesday's reelection of US Republican Donald Trump, who has threatened to impose massive tariffs on imported goods, the Italian economist said that "the sense of urgency is greater than a week ago."

What does Draghi's report recommend?

Twelve years ago, during the European sovereign debt crisis, it was Draghi as head of the ECB who kept the European single currency afloat and bailed out cash-strapped EU member states. His famous line promising "whatever it takes" to shore up the euro helped reassure financial markets.

So, what suggestions does he make for the current situation?

1. To keep pace with the US and China, Europe should invest up to €800 billion ($857 billion) in research and development, infrastructure, and defense. That would bring the total investment from 22% to 27% of the EU's gross domestic product (GDP). However, it would require reversing the current trend in many member states of reducing investments. The International Monetary Fund (IMF) expects the EU to grow by only 1.2% in the coming years, but predicts double the growth for the US.

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2. The EU should commit to the regular issuance of common bonds to finance public investments in shared projects. The bloc first took out shared debt, in which EU members collectively pool financial obligation, to mitigate the effects of the COVID-19 pandemic. At the time, Germany's ex-Chancellor Angela Merkel, and her finance minister, the current Chancellor Olaf Scholz, agreed that should remain a one-time deal. But Draghi has urged the EU to develop an integrated capital market, much like in the United States, where borderless capital and credit traffic can help mobilize venture capital investments.

3. The EU needs to reduce its reliance China's supply chains and Chinese customers. Instead, it must find a way to counter state-subsidized Chinese competition. Europe's industry must also become more independent from raw materials and vendor parts from China. After the US, Chinas is currently the EU's second-largest trade partner.

4. Europe needs to retain existing and foster new key industries and tech firms by improving conditions for businesses. Currently, Draghi warned, too many companies aspiring to grow were offshoring their production from Europe. US-president-elect Trump has vowed to imposed tariffs on European products and shift production to the US, which will only increase the current economic pressure. Draghi called for a unified industrial strategy to bolster domestic businesses and boost productivity.

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5. The EU needs to streamline decision-making channels and reduce excessive and costly bureaucracy. "Europe does not coordinate where it matters, [and] Europe's decision-making rules have not substantially evolved as the EU has enlarged and the global environment we face has become more hostile and complex," Draghi said at a press conference in September. He added that legislation required an average of 19 months, which was far too long. In 2019, he said the EU had issued 13,000 laws regulating its economy, while the US had only issued 3,000. "That [fact] makes you think: 'Can we do a little less and can we be a little more focused?'" he concluded.

Now what?

EU leaders have issued a joint statement in which they welcomed Draghi's recommendations, but it remains to be seen how quickly they will follow them.

The largest point of contention remains the issuance of collective debt to finance investment. Countries like Germany, Austria and the Netherlands are opposed to the idea, while France and Italy have expressed their willingness to resume shared obligations. The new European Commission, which will be assuming office in December, will be called upon to develop proposals on how to finance investments.

Reduce the red tape

A unified industrial strategy will also prove difficult, given that EU members states compete among each other to attract businesses that provide their countries with jobs and tax revenue. Austrian Chancellor Karl Nehammer warned against considering collective debt before developing joint projects.

German Chancellor Olaf Scholz speaks before the press
Speaking at the summit, German Chancellor Olaf Scholz said it was time to slash through bureaucracy to improve the EU's economic prospectsImage: Kay Nietfeld/picture alliance/dpa

German Chancellor Scholz, who also traveled to Budapest despite this week's collapse of his governing coalition, has suggested slashing some bureaucracy. "Bureaucracy has been building up for decades," he said at the summit. "Now we need to reduce it in a short period of time. All so we can have growth and opportunities in the future.”

There are those in the EU who have long held the desire to cut through red tape, tedious paperwork, and excessive documentation to facilitate decision making. The first to voice such an idea was former Bavarian State Premier Edmund Stoiber who spent eight years in Brussels. His recommendations at the time largely fell on deaf ears.

This article originally appeared in German.

Bernd Riegert
Bernd Riegert Senior European correspondent in Brussels with a focus on people and politics in the European Union