Mario Draghi’s Plan for Europe: Some Good Ideas and One Really Bad One
The former president of the European Central Bank (ECB) and former Italian prime minister, Mario Draghi, the “savior of the euro,” has issued a raft of recommendations to rejuvenate the European Union (EU)’s economies. His advice begins with a tally of how far Europe has fallen behind the United States and, to some extent, China. He is especially distressed by Europe’s lack of innovation. Most of his suggestions have value. Some have great value. His plan, however, emphasizes industrial policy as a route to increased innovation, which will impede rather than spur innovation in Europe.
Draghi’s report, entitled The Future of European Competitiveness, paints a bleak picture of the twenty-seven EU economies. It recounts that the size of the EU’s real gross domestic product (GDP) has fallen from just 15 percent below that of the United States in 2002 to fully 30 percent in 2023. Since the U.S. population has grown faster than Europe’s, the difference on a per-capita basis is somewhat narrower. Real disposable income in the United States has grown since 2000 at twice the pace of Europe’s.
The EU’s share of world trade in goods and services has declined significantly over the past twenty-some years, which is lost to China. European businesses, Draghi notes with considerable chagrin, pay 345 percent more for industrial gas than American businesses. Worker productivity in Europe (output per hour) has trailed that of the United States, accounting for his analysis estimates for some 72 percent of the per-capita income gap between the two regions. Europe sees 70-80 percent less venture capital investment than the United States, while overall rates of capital investment have lagged considerably, suggesting that Europe needs to increase its rate by five percentage points of GDP to start catching up.
Draghi puts forward a wide range of remedies to address these shortfalls. They range from suggestions to increase the union’s trade competitiveness to suggestions on how Europe can narrow what he calls the “skills gap” of its workforce, referring not to the difference between the skills of European workers and those in the United States or China but rather to the difference between existing skill levels and those required of a modern economy. He offers several ways to enhance worker productivity, raise the rate of capital investment, and heighten the pace of innovation. Throughout, he stresses the need to protect Europe’s generous social services system and honor the union’s commitment to what he describes as “decarbonisation [sic].” The most helpful of this array of remedies falls, admittedly unevenly, into three basic areas.
One of these is financial. Broader and better integrated European capital markets will, Draghi argues convincingly, offer startups more opportunities than at present to get capital and scale up so that the whole economy benefits from European-based innovations. European financial markets today, he argues, are too fragmented to offer such benefits, causing many European innovators to go to the United States for venture capital financing and stay there to achieve scale.
Second, Draghi wants to stop the proliferation of over-complicated regulations across EU economies. Draghi notes that 60 percent of European companies label the regulatory “labyrinth” as a significant administrative burden and a major obstacle to investment, innovation, and growth. More than simply stopping the proliferation, his report calls for streamlining rules, for efforts to make regulations more consistent than they are, and for reducing the absolute number of regulations.
The third helpful suggestion is scaling the continent’s power grid to cross national borders. Its present fragmented structure has reduced reliability and raised costs sufficient to discourage capital investment and stifle growth. Scaling up the continent’s power grid might not bring these costs completely into line with those of the United States or China. Still, it has the potential to make Europe less dependent on external energy sources than at present, make power more reliable, and reduce the cost to the union’s households and businesses.
The great weakness in this range of remedies is Draghi’s emphasis on government-run industrial policies. This mistake deserves highlighting, not just for Europe but as a warning to the tendency to rely on such policies in the United States and elsewhere worldwide. Like many academics and politicians, especially the European variety, Draghi seems to believe that technology and innovation will make greater strides under government support and guidance, but the centralized direction and focus implicit in this approach are, in fact, antithetical to innovation’s fundamental need for a diversity of effort.
The difference lies in the always unknown nature of the future, as the great economist John Maynard Keynes is known to have called it (rather poetically) “the dark forces of time and ignorance.” Because not even the best educated and well-informed European planner can see the future, all investment and invention is effectively a guess at what will work best in that otherwise unknowable environment. Some guesses, of course, are better informed than others, but all necessarily must cope with an unavoidable uncertainty.
Better than a reliance on prescience, however, a great diversity of effort from a large variety of sources—effectively many guesses—will best increase the odds that one will, in fact, uncover one or more of those future needs. Many such guesses will certainly miss the mark, but those that hit on a future need to pay huge dividends to the lucky ones involved and the broader economy. Because industrial policies necessarily limit the number of guesses and concentrate on a few areas picked by the planners, they instead decrease the odds of turning up what the future will need. Indeed, Draghi explicitly recommends such concentrations.
China offers an illustrative case. It relies heavily on centrally directed industrial policies as a planned economy. Such policies worked in the past few decades, not because the planners were especially prescient but because while China was undeveloped, future needs were obvious. All its planners needed to do was look at the developed world. They could see the value of power stations, rail links, ports, paved roads, and such. Their concentrated effort paid off handsomely, but as China caught up to the developed world, the planners lost their guide to the future and then began to make mistakes and miss what a diversity of effort might have uncovered. For example, Chinese policymakers decided to concentrate on electric vehicles, semiconductors, and alternative energy sources, which were all in the headlines just the year before. What they overlooked was how the rest of the world decided that it did not want what China provided. Now, China’s economy suffers from excess capacity in these areas. A more diverse effort would have lessened the extent of the mistake and might have developed other capacities to act as engines of growth.
Draghi’s report singles out China as a model and a cautionary tale. The case would serve Europe better as a warning. True, Draghi does warn against policies that pick winners and losers, and for that reason, he tells his readers not to pick firms but rather industries. Even that approach would lack the necessary diversity. Washington, too, might take the same warning. Under the Biden administration, the nation has moved toward industrial policies, especially with the subsidies and penalties implicit in the CHIPS Act. These concentrations may work out. Today’s semiconductors certainly look like the future. But before leaping that way and almost exclusively that way, the policymakers might remind themselves of how Japan cornered the market on the production of simple chips in the 1980s, only to find that it had acquired dominance in an area made obsolete by the scaling-up of Intel’s microprocessor.
Much of what Draghi has recommended is well worth the attention of everyone in Europe’s union, indeed all governments in the world. However, his preference for industrial policies would be a mistake. Sadly, it will likely garner the most attention among politicians and bureaucrats because it calls for more state power and control.
Milton Ezrati is a contributing editor at The National Interest, an affiliate of the Center for the Study of Human Capital at the University at Buffalo (SUNY), and chief economist for Vested, the New York-based communications firm. His latest books are Thirty Tomorrows: The Next Three Decades of Globalization, Demographics, and How We Will Live and Bite-Sized Investing.
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