Lack of productivity growth ‘existential challenge’ for Europe, Draghi report says

Europe is facing an “existential challenge” to increase its productivity, Mario Draghi’s long-awaited report on European competitiveness states, with the main priorities focused on advancing the tech sector and ensuring a successful transition towards climate neutrality.

“Now more than ever, we have to lean on productivity, but productivity is weak, very weak,” Draghi said at a press conference presenting the report on Monday (9 September).

If Europe fails to increase productivity, it will be impossible to meet its political ambitions, Draghi argues in the foreword of his report.

“We will not be able to become, at once, a leader in new technologies, a beacon of climate responsibility and an independent player on the world stage. We will not be able to finance our social model. We will have to scale back some, if not all, of our ambitions,” he notes.

The EU has indeed lost ground against global competitors over the past two decades.

“A wide gap in GDP has opened up between the EU and the US,” the foreword notes, with the report attributing 70% of the gap in per capita GDP to Europe’s lower productivity level.

As disposable income per capita in the US has grown almost twice as fast as in the EU since 2000, “Europe’s households have paid the price in foregone living standards,” he writes.

“The productivity gap between the EU and the US is largely explained by the tech sector,” Draghi writes, as “the EU is weak in the emerging technologies that will drive future growth.”

“The main reason EU productivity diverged from the US in the mid-1990s was Europe’s failure to capitalise on the first digital revolution led by the internet,” he notes.

Europe must double down on tech innovation, sovereignty

Although Draghi considers that some digital sectors, like cloud computing, are “lost” for Europe in terms of worldwide competitiveness, he believes that “Europe should not give up on developing its domestic tech sector.” 

“It is important that EU companies maintain a foothold in areas where technological sovereignty is required,” he writes, noting this will enable the EU to drive innovation in a wide range of industries, including energy, pharmaceuticals, materials and defence. 

In addition, the EU “still has an opportunity to capitalise on future waves of digital innovation,” states Draghi, quoting autonomous robotics or Artificial Intelligence (AI) services.

Draghi also supports EU-level regulation and stronger EU investment capabilities to promote the EU’s tech sectors, including telecom and space, as well as the cleantech sector.

Get decarbonisation right

On the topic of decarbonisation, Draghi calls for better coordination of European policies.

While the shift to a climate-neutral economy can be a “growth opportunity for EU industry,” if Europe fails to update its policies, “there is a risk that decarbonisation could run contrary to competitiveness and growth,” Draghi writes.

Currently, EU companies face energy prices that are two to three times higher than those in the US, while natural gas costs four to five times more.

The former European central banker wants to boost the EU’s buyers’ cartel, strengthen long-term contract ties to “reliable and diversified trade partners,” and clamp down on speculators. 

To reduce gas prices, Europe needs “all available solutions,” from nuclear to carbon capture, underpinned by extended emergency rules to speed up permitting for power plants and grids.

Draghi believes that “the cleantech sector is suffering from the same barriers […] that afflict the digital sector,” calling for more consistent regulation at the EU level and improved access to investment.

Increase fiscal space through growth

Increasing productivity will also be crucial to sustain public investments needed to digitalise and decarbonise the economy.

The report estimates that Europe requires an additional €750-800 billion in investments annually.

While Draghi notes that private funds can be leveraged through deeper integration of the Capital Markets Union, he warns that “the private sector will not be able to bear the lion’s share of financing investment without public sector support.”

Draghi highlights, “The more willing the EU is to reform itself to generate an increase in productivity, the more fiscal space will increase.”

Joint EU funds, however, should be reserved for common European goals, such as defence and “breakthrough innovation” – but only if EU countries can reach an agreement.

[Edited by Martina Monti]

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