EU faces ‘existential’ problems, Brussels warned in Mario Draghi report

The EU faces an “existential challenge” unless it vastly increases investment and reforms its industrial policy, a report ordered by the European Commission has warned.

The wide-ranging and long-awaited review, which was led by former European Central Bank chief Mario Draghi, said the bloc must increase spending by €800bn (£675bn) per year or face being left behind by the US and China.

European leaders were told they would be “forced to choose” between climate, economic and foreign policy goals if the EU does not become more productive.

The stark findings were published days before the make-up of the new Commission – the EU’s equivalent of a cabinet – was due to be confirmed.

Commission President Ursula von der Leyen, who was re-elected for a second five-year term in July, tasked Mr Draghi – a former Italian prime minister – with authoring the review last year.

The report was drawn up by a small team in a secretive atmosphere, and anticipation for its publication grew in Brussels after its release was delayed by several months.

The spending recommendations in the report are described as “unprecedented”. They are equivalent to 5% of the bloc’s GDP, and more than double the post-World War Two Marshall Plan.

Without extra investment, the EU will be unable to finance its social model and will have to “scale back some, if not all, of [its] ambitions”, the report warned.

The report – which is non-binding – calls for an expansion of joint borrowing by EU states in order to fund the investment, a move which would be controversial and could be opposed by some member states.

Speaking in Brussels following its publication, Mr Draghi said: “For the first time since the Cold War, we must genuinely fear for our self-preservation and the reason for a unified response has never been so compelling.”

The report highlighted productivity – the amount of goods and services produced from a given level of resources and labour – as a particular problem for the EU.

Sluggish growth has left European households paying the price, with living standards rising much more slowly on this side of the Atlantic, it found.

Mr Draghi also said Europe is not innovating fast enough, comparing it unfavourably to the US, which has become a home to several trillion-dollar tech giants.

He said Europe “largely missed out on the digital revolution led by the internet” and has become “stuck” in a static industrial structure, with few new companies emerging.

It said innovative companies favour moving abroad, enticed by better funding and less regulation.

The report also said the EU is facing a stern threat from state-sponsored Chinese companies as it tries to establish itself in emerging industries like electric vehicles and green technology.

It sets out 170 proposals on cutting regulation and improving decision-making, as well as increasing cooperation between national governments on a scale which has historically proved difficult for member states to agree to.

Speaking to the BBC, Lorenzo Codogno, a visiting professor at the London School of Economics and former head of the Italian treasury, warned that gathering the necessary political support to implement the recommendations of Mr Draghi’s “provocative and bold” report would be “extremely challenging”.

Veiled criticism of the report emerged soon after its publication, with German Finance Minister Christian Lindner saying EU joint borrowing would not solve structural problems, and that the main problem was not a lack of subsidies, but bureaucracy and a planned economy.