When on 16 August 2022 the U.S. Congress adopted the Inflation Reduction Act (IRA), that was swiftly signed into law by President Joe Biden, Europe remained mostly silent.
Well, French President Emmanuel Macron said that the IRA was “super aggressive.”, and did so in a very (un)diplomatic way, during his state visit to Washington. In was only much later, in December 2022 that he declared that Europe needed an urgent response to the U.S. Inflation Reduction Act to ensure a future for its industry. He welcomed the mandate given to the European Commission to come up with a plan early next year.
“When you have two superpowers massively subsidizing some sectors, you could decide not to do anything, to respect the rules and the purity of (free-market) doctrine … but nothing much will be left (in Europe) in the end,” Macron said. He added that Europe’s response, via national and EU instruments, should amount to about 2 percents of its output.
In typical EU style, a few more months were needed for the European Commission to task Mario Draghi with writing a report to shed light on the European economy’s outlook. Of course, the official version is that the project was never “meant” as a response, let alone a retribution to the IRA, but one doesn’t have to be a political genius to understand that the European Commission simply couldn’t leave the issue “unanswered”.
Unfortunately, it doesn’t seem to be surprising that the European leadership needed months to recognize the significance of the American step. Especially not so considering the developments of the last decade, let it be from realizing the real dangers of irregular migration from China’s advances in Africa, seemingly all “missed” by Europe’s greatests.
In come Mario Draghi.
A great and respected banker and amazing bureaucrat. With a group of selected experts, he set out to climb the mountain. They created a comprehensive report on the EU’s competitiveness titled “Report of the High-Level Group on the Future of Europe’s Industrial and Technological Competitiveness“, revealed in September 2024.
It turned into a 360-page analysis addressing critical challenges and offering recommendations to enhance the EU’s competitive standing in the global economy. It is structured around several key themes and policy areas, all among the most cited and discussed elements due to their significant impact on shaping the EU’s future industrial and technological landscape.
To sum it up in two sentences: the report concluded that European productivity and growth lagged behind those of the United States and China. And also, that Europe had few companies in the top echelons of the global technology industry and relied too heavily on older industrial companies for its research and innovation.
It took a little longer than the one-year President Macron requested, but according to the Commission’s own standards and ability to keep deadlines (starting with the simple task of setting up a new Commission), the report was on time.
After the first introduction in the European Parliament, deputies weren’t satisfied.
Most criticized the lack of concrete indications of necessary steps.
Though it shouldn’t have come across as a surprise.
The IRA is a legislative act passed by the U.S. Congress, and as such, it includes detailed provisions, specific funding allocations, and concrete steps for implementation, providing clear, actionable measures. On the other hand, Draghi’s report is a strategic document that provides a high-level analysis and recommendations for enhancing EU competitiveness. It focuses on broad goals, such as increasing investment in green technologies, boosting digital transformation, and enhancing strategic autonomy, but it does not (probably also cannot) include detailed implementation plans or specific project funding.
The other mayor difference between the IRA and Draghi’s report is that the IRA primarily focuses on domestic priorities, particularly in areas like climate change, healthcare costs, and tax reforms. Though it also has international implications, especially due to its potential impact on global trade and energy markets, but it wasn’t the main intention.
The European report is more focused on the strategic resilience of the EU in the international economic race, than on existing economic approaches. For example, while the IRA has a strong focus on agriculture and the healthcare system, Draghi’s report completely missed traditional sectors such as food and agriculture, hospitality, and transportation. This was the second main focus of the critics.
Draghi’s report was written in a period marked by the shock of the war in Ukraine and the changing international environment. A period when it was (is) difficult to know who your real partners were, or in fact, when the realization had hit home that there were no real partners only countries and regions vying for power.
Maybe that’s the reason behind the report’s focus on achieving strategic autonomy, especially in critical sectors like energy, technology, and industrial supply chains.
As it happened a few times through history, turning inwards is (has often been) seen as a trusted solution in response to shocks, even with the high risk of sliding into protectionism (as it happened with the IRA).
Again, critics warned that this approach could lead to market distortions, increased costs for businesses, and a deviation from the EU’s commitment to open markets and global trade.
The report’s central focus is on the need for more investments in general, but specifically in the field of research and development and investments. In Draghi’s calculations, about €800 billion would be needed to make the European economy competitive on the world stage. As mentioned earlier, Draghi did not focus on traditional sectors and their future; he envisioned Europe’s leading role in the latest, most advanced sectors like AI, blockchain, and quantum computing, while also championing green technologies to meet climate goals and establish a sustainable economy.
He certainly had a point when he said that the EU has already lost the race in several sectors, but in the latest fields, there were chances to catch up with the USA and China.
Draghi and his team also addressed the energy sector as a critical factor influencing the overall competitiveness of European industry.
This topic has been a hot potato for quite a while; thus it is a welcome development that it was included in the report, and with such a wide focus.
Draghi establishes the obvious: that thanks to the sanctions against Russia and the war in Ukraine, European energy prices are now much higher than those in the USA. Hence, European industry has competitive disadvantage. According to the report, EU companies face electricity costs that are 2-3 times higher than those in the U.S., while natural gas prices are 4-5 times higher. No wonder high energy costs in the EU were identified as the most significant challenge that affects the cost structure of European businesses, particularly in energy-intensive industries, especially compared to regions like the U.S. and China. Though Draghi refrained from drawing up a detailed action plan, the report outlines several strategies aimed at reducing energy costs and enhancing the energy resilience and sustainability of the EU.
A great emphasis is put on the need for the EU to diversify its energy sources to reduce dependency on imports from a limited number of countries. This includes increasing the share of renewable energy (solar, wind, hydropower) and investing in alternative sources like nuclear energy and hydrogen.
Draghi’s team also proposed several ideas, such as investment in renewables, improving cross-border energy interconnections, reforms in the EU’s energy market, developing energy storage and grid technologies, and building a hydrogen economy. The report identifies hydrogen as a potential game-changer for reducing energy costs in hard-to-decarbonize sectors such as heavy industry and transportation.
Of course, there are still many questions about the future uses of hydrogen, whether it was a realistic long-term plan or would end up like various carbon storage solutions once declared the “saviors of the world” yet couldn’t get further than the planning tables.
Team Draghi spent hundreds or thousands of hours with consultations.
The product is a great read, and a good summary, yet it failed to reveal any significant new evidence or piece of information that hasn’t been talked about lately.
Perhaps naturally, the report doesn’t openly criticize any previous or planned European action, and if it does it does it in an overly cautious manner. On the downside, it often feels like chapters out of a fantasy novel: a little too imaginative here, maybe too far-sighted there.
Also, the reader might be forgiven to have the occasional feeling of reading some bureaucratic masterpiece, worded in a way to hide the lack of consensus on possible short-term actions. This might also be the reason for using general guidelines. But this being the case, all the hard work won’t help much to Europe to find its way out of the labyrinth, unless there is a classified version, distributed only to a select few, of course.
It is also very likely that President Macron had also other ideas in mind when he requested a European strategy in answer to IRA. A MEP from his Renaissance party, Bernard Guetta still welcomed the report, praising its “French approach” and the bravery to give up “taboos over common defense, industrial policy, and joint debt”. He continued by saying, “It is absolutely necessary to call on member states, the European Parliament, and the future Commission to fully adopt the idea of industrial policies and joint investments”. Spanish Finance Minister Carlos Cuerpo had the same opinion, saying “Like Draghi, we think that part of the required financing will necessarily come from the EU level. We share the urgent need to work towards a permanent EU common debt program”.
German Finance Minister Christian Lindner was disappointed. According to Politico, it took him “less than three hours” to say a firm nein. “More money is not always the solution,”, Dutch Finance Minister Eelco Heinen said, joining his German colleague in rejecting the report.
There is no need for a crystal ball to know that reactions will be divided at the same fault line as financial matters usually are: the Frugal Four vs the others. And, in spite of its many positive aspects and forward-pointing ideas, the report will likely fail to provide enough momentum to keep the topic on the agendas of short-term oriented European leaders, let alone to inspire some common effort.
