The Draghi Report and the Europe of Our Discontent

Mario Draghi’s report, The Future of European Competitiveness, published in September 2024, is invoked as the guiding document through which the European Union may achieve the objectives of closing the innovation gap that separates it from the United States and China, advancing the processes of decarbonisation and increased competitiveness, and reducing its dependence on the United States in matters of defence.

The report argues that Europe’s technological lag behind the United States and China is observed essentially in the field of information and computing technologies, rather than across the remaining sectors of economic activity. However, when comparing productivity between the European Union and the United States across a set of twenty-one sectors of the economy, Draghi acknowledges that the European Union holds a clearly visible advantage in only six sectors, and a marginal advantage in two others.

One of the obstacles which, according to the report, prevents European companies in the new technologies sector from scaling up and reaching the productivity levels of their American counterparts is the difficulty in obtaining capital caused by the fragmentation of European capital markets. This has led many such companies to seek capital in the United States and relocate their headquarters there. The report stresses, however, that fragmentation is not exclusive to capital markets, and remains present in many other sectors, despite the European Single Market having been established more than thirty years ago.

The report concludes that the union of capital markets is the means through which technology companies may gain easier access to capital within the European Union as they grow, rather than relocating to the United States. The fact is, however, that the project of integrating the European Union’s capital markets is not a novelty introduced by this report, since the plan for its implementation has existed since September 2015, when it was presented by the European Commission to the European Parliament. Thus, without this being his intention, Draghi makes us aware of the difficulty the European Union faces in carrying through some of its initiatives.

Moreover, there are no strong grounds for optimism regarding the effect that the unification of financial markets may have on increasing the funds available for financing. Even if integrated, European capital markets will continue to be relatively limited in scale. Brexit removed the London financial market, which was the largest in the European Union and accounted for 30% of the total European financial markets. Furthermore, European financial markets are, in general, considerably less efficient than those of other countries, as shown by the UNCTAD ranking of net exporters of financial services for 2021, led by a large margin by the United States and the United Kingdom, with Germany appearing in seventh place, followed by Ireland and France. These figures reveal the difficulty faced by European Union capital markets in channelling large volumes of capital originating from third countries.

These limitations of European financial markets are not addressed in the report, in which there is a noticeable emphasis on solutions of a purely internal nature, such as highlighting the contribution that improvements in the functioning of the single market — namely through the removal of regulatory barriers — may make to increasing the competitiveness of European companies. As for competitiveness vis-à-vis countries outside the Union, the report focuses on the contribution that new technology companies may make once an increase in their productivity has been achieved.

From this perspective, the intention expressed in the report is not very different from the ambitious objective of the Lisbon Agenda of 2000, which was intended to be achieved by 2009, according to which the European Union was to become “the most competitive and dynamic knowledge-based economy in the world”.

In the emphasis it places on increasing European competitiveness in the information and computing technologies sector, the report also overlooks the fact that this market is already dominated by a small group of gigantic technology companies, almost all of them American. These are located either in Silicon Valley or in Seattle. This concentration — whose causes, well known to economists, are common to all kinds of industries — can be explained by the fact that a company located near others in the same sector can more easily keep pace with the technological, organisational, and process innovations occurring within its field of activity. One of the reasons frequently cited for the concentration of technology companies in Silicon Valley is the proximity of Stanford University, from which research is disseminated and subsequently incorporated into these companies.

With regard to this fundamental condition supporting technological development, the Draghi report laments the fact that the European Union has few universities occupying leading positions of excellence at the global level and capable of transferring their research to sectors where it may be commercialised. It notes that although the number of international patent registrations in Europe in 2021 represented 17% of the global total — not substantially lower than that of the United States (21%) or China (25%) — the European situation in relation to those two countries is far worse when it comes to research centres. Indeed, Draghi tells us that the European Union has only three scientific research institutions ranked among the world’s top fifty, whereas the United States has twenty-five institutions within that group and China fifteen.

The truth is that the situation could have been significantly different had the European Union not stopped short after initiating student and university staff mobility programmes in the 1990s. Universities with centres of research excellence are not lacking within the European Union. What was lacking, however, was a programme to create networks bringing together the areas of research excellence of several universities. The economies of scale resulting from such an initiative would have made the presence of European universities in the global leadership of scientific research far stronger, and the impact of these centres on industry would likewise have been substantially greater.

This disappointing combination of ambitious projects left unrealised, together with the difficulty of overcoming barriers to improved integration of European markets, contributes to making the period the European Union is living through today more bitter than the one it experienced before those projects were conceived. “When a light goes out, the darkness is greater than if it had never shone,” wrote John Steinbeck in The Winter of Our Discontent.

In this context, it is worth asking the question: what future awaits the ideas and proposals presented in Mario Draghi’s report?