Last September, the much-awaited Future of European Competitiveness report by Prof. Mario Draghi was published. The report is a comprehensive one, well detailed and supported by economic facts and figures that clearly demonstrate Europe’s weaknesses and the deterioration in its trade position as it strives to remain a relevant player while giants such the United States and China exert dominance in the global economy.

The overall assessment is that for Europe to be competitive in the future it must work to close the innovation gap, pursue the decarbonization of the economy despite the short-term costs, adapt to the volatile and more hostile geo-political realities, massively increase the level of investment for the financing of large-scale projects in digital and clean technologies, and reform EU’s governance.

These issues are not essentially new or surprising. Yet, Prof. Draghi manages to demonstrate how all these challenges are effectively linked. For instance, decarbonization is needed not only to mitigate climate change, but also to reduce the cost of energy over time. For as long as Europe depends on importing fossil fuels, businesses will be subject to higher costs of energy and are subsequently at a disadvantage competing internationally. The report indicates how the price of electricity in Europe is 2-3 times more than in the US and gas prices 4-5 higher.

The process towards decarbonizing the European economy, however, requires a significant investment in renewable energy plants and grid capacity, which at the current pace will not match the energy demand within a few years. The report refers to the fact that for instance data centres alone currently account for 2% of total energy demand and this is estimated to grow to 28% by 2030. Further pressure on energy infrastructures will be added by many other sectors, including the electrification of transport within the next decade.

At the same time, Europe must increase the manufacturing of clean technologies substantially, and secure stable access to critical raw materials sourced globally. Otherwise, it will continue depending on the excess capacity of goods produced by other countries such as China, which is not politically aligned with the EU, and thus presents a serious risk of economic coercion.

Draghi demonstrates how European companies struggle with productivity and innovation compared to their main competitors, particularly in digital technologies that will be driving growth in the future. He blames the lack of industrial dynamism derived by weaknesses along the innovation lifecycle, from start-up to scale-up, because of an insufficiently integrated capital market to generate investment at scale, as well as regulatory and jurisdictional hurdles existing in the EU.

To address all these challenges, Draghi argues that the level of investment in the EU needs to grow by Eur750-800 billion annually. The EU budget, which is substantially small to the tune of 1% of the EU gross domestic product must be reformed and streamlined through a ‘Competitiveness Pillar’ and invested more actively in start-ups, scale-ups, and support private investment with a much higher risk appetite. There should be more regular issuing of safe assets such as EU bonds for joint-investment projects. State-aid must be increasingly linked to Important Projects of Common European Interests (IPCEIs).

The Draghi report will surely inspire wide ranging policy initiatives during this EU legislature. Given the level of integration with the European economy, Malta’s prosperity is intrinsically linked to the EU’s competitiveness and success and must therefore align itself with the opportunities that will be presented.

To start with, Malta must attract more foreign companies and nurture existing local ones from sectors that are posed to drive future growth, particularly those operating in the production of clean and digital technologies. Given their centrality to the EU’s strategic priorities, these companies are likely to benefit the most from a new ‘Competitiveness Pillar’ that is expected to be included within the EU Budget architecture during the next seven-year period commencing in 2027. This Pillar will streamline many of the current funding programmes to provide grants, loans and guarantees either by backing or complementing investments in areas considered to be of strategic importance to the EU. These investments will ultimately benefit other sectors as they subsequently trigger down to the rest of the economy.

Meanwhile, as the governance of the new EU budget takes shape one must ensure that accessing direct EU funding is simplified and processes are more tailor-made to the needs of SMEs.

In the coming years, there will be more emphasis made on Important Projects of Common European Interest (IPCEIs). These are state-aid supported initiatives involving stakeholders in multiple EU member states, in the absence of which the investment would probably not take place. Malta has announced its first IPCEI earlier this year in the area of semiconductors and should be looking at providing further support to companies aspiring to implement projects, which in turn contribute towards the country’s economic resilience, security, or speeding-up the decarbonization of the economy.

Raising additional money at EU level through joint borrowing is undoubtedly controversial and several fiscally prudent member states are uncomfortable to share debt with others that are less disciplined. Yet looking at Draghi’s analysis, the writing is on the wall. Unless member states collectively match the level of investment of other international competitors, Europe losing its relevance on the global stage is a matter of time. The ‘Recovery and Resilience Facility’, a joint EU borrowing instrument financed through the issuing of bonds to raise funds to help member states emerge more resilient from the pandemic, sets a good precedent for similar future programmes aimed at fueling investment to secure Europe’s future competitiveness. Malta would do well in supporting such initiatives once securing the right conditions and safeguards.

The Draghi report provides a good opportunity for reflection on the direction Europe needs to take during this period of transition from one legislature to the other. The economic challenges derived by the green and digital transition, coupled with the volatile geopolitical environment, require the EU to take bold decisions to chart its own future if it wishes to avoid being shaped by others.

This opinion piece was published on the Times of Malta on 3.11.2024