Mario Draghi calls for bold innovation and investment to boost EU's competitiveness

Former European Central Bank (ECB) president and former Italian prime minister Mario Draghi presented his report, The Future of European Competitiveness, emphasising the urgent need to revitalise Europe’s industrial sector.

“Europe is facing a world undergoing dramatic change. World trade is slowing, geopolitics is fracturing, and technological change is accelerating. We are the most open economy, with a trade-to-GDP ratio exceeding 50%, compared to 37% in China and 27% in the United States,” Draghi said.

Investment and funding needs

Draghi’s 400-page report calls for annual investments of EUR 750-800 billion ($836-892.6 billion) to ensure Europe remains competitive. “We need unprecedented levels of funding and cooperation,” Draghi insisted, urging banks to facilitate financing for key projects in the digital, green, and defence sectors.

ING economists Bert Colijn, Carsten Brzeski, and Peter Vanden Houte highlighted that unlocking EUR 800 billion ($892.6 billion) per year—approximately 5% of European Union’s (EU) gross domestic product (GDP)—is essential for sustained growth. “The plan requires unlocking significant financial mechanisms and streamlined processes” to direct investment into strategic sectors, allowing banks to expand their lending portfolios and engage in long-term financing initiatives.

Europe's reliance on bank financing poses challenges for funding innovative projects. Despite a shift toward capital markets after the global financial crisis, “bank loans are still the most important source of external finance for companies.” However, banks often lack the expertise to assess and monitor innovative firms, making it difficult to value intangible assets compared to angel investors and venture capitalists.

Draghi's report underscores three critical structural issues contributing to Europe’s stagnation: low investment levels compared to the United States, an innovation gap hindered by stringent regulations, and fragmented capital markets.

To bridge these gaps, the report recommends importing foreign technologies, completing the banking union, and ensuring that the green transition continues without disruption.

Enhancing innovation and addressing competitiveness

EU banks also face structural disadvantages relative to their US counterparts. As noted, "EU banks cannot rely on securitisation to the same extent as their US counterparts." In 2022, securitisation issuance in the EU was just 0.3% of GDP, compared to 4% in the US. This limits banks' flexibility and capacity to lend effectively.

The lack of capital market integration further complicates matters. Securitisation could allow EU banks to package loans from different member states into standardised, tradeable assets, attracting non-bank investors. Addressing these challenges is crucial for enhancing Europe’s innovation landscape and fostering a dynamic financing environment for emerging companies.

Germany, however, has expressed reservations about regularising joint EU borrowing, fearing long-term financial liabilities for wealthier nations. "Joint EU borrowing will not solve structural problems: companies do not lack subsidies. They are tied down by bureaucracy and a planned economy. And they have difficulty accessing private capital. We have to work on that," said German finance minister Christian Lindner on his X account.

HSBC indicates that Europe’s structural challenges remain significant. Draghi emphasised the need for joint investment in public goods and Eurobonds as a funding mechanism. He called for a more complete single market, improved banking and capital markets union, and more lenient competition regulations to allow European firms to compete effectively with their US and Chinese counterparts.

“But implementation is a tall order given rising EU political fragmentation. Not only is Germany’s enthusiasm for joint bond issuance cooling, but a new French government is unlikely to welcome further EU integration,” HSBC noted.

Fredrik Erixon, director of  European Centre for International Political Economy (ECIPE), emphasised the urgent need to liberate Europe’s capital markets. He said, “Europe has been falling behind in any measure when compared to other Organisation for Economic Co-operation and Development (OECD) economies of size, like the United States.” Erixon stressed the detrimental impact of excessive regulations, noting, “We’ve become the ‘Silicon Valley of Regulation."

A major concern is Europe’s stagnating innovation landscape. Draghi said, “There is no EU company with a market capitalisation of over EUR 100 billion ($111 billion) that has been set up from scratch in the last 50 years.” To address this, he called for a new legal framework, the “Innovative European Company,” to nurture startups and foster growth in high-tech sectors.

Jeromin Zettelmeyer, director of Bruegel, found Draghi's proposals for enhancing innovation and competition policy convincing. However, he raised concerns about his call for significant subsidies for clean technology and energy-intensive industries, noting, “He wants to recast trade policy as an instrument of EU industrial policy—imposing local content requirements.” Zettelmeyer cautioned that these strategies could easily backfire by making the EU’s ‘frugals’ even less willing to raise EU-level fiscal resources.

European Commission president Ursula von der Leyen highlighted the need to reduce red tape and the administrative burden to improve EU competitiveness. She said, “Each commissioner will be tasked with focusing on reducing administrative burdens and simplifying implementation: less red tape and reporting, more trust, better enforcement, faster permitting.”

Wim Mijs, CEO of European Banking Federation, said: “The future of Europe’s competitiveness hinges on a healthy banking sector. Europe needs a more liquid and deeper integrated capital markets union, along with a regulatory shift to foster economic growth and massive investment.” Banks can leverage this call for integration by exploring partnerships and innovative financing models that align with the EU's strategic goals.

Conclusion

As Europe addresses its competitive challenges, Draghi's report serves as a call to action for the banking sector to support economic revitalisation.  EU's future economic standing depends on banks' commitment to financing the necessary investments. 

Without decisive action from the banking industry, Europe risks losing relevance in the next industrial revolution. Prompt financial leadership is essential to address these challenges.