Mario Draghi’s report on competitiveness: What messages for Cohesion Policy?

September 2024

Europe's economic growth has been slowing for more than two decades and the productivity gap with global competitors such as the US and China is widening. The recently published 2024 report 'The Future of European Competitiveness: A Competitiveness Strategy for Europe (S'ouvre dans une nouvelle fenêtre)', highlights the changes and challenges the EU must overcome to regain its competitive edge.

This comprehensive report focuses on boosting productivity, addressing geopolitical dependencies and leading decarbonisation – all while upholding the EU's values of equity, social inclusion and sustainability. The report has been written by Mario Draghi, a key figure in European economic policy and former president of the European Central Bank (ECB), widely credited with steering the eurozone through the financial crisis. His background as an economist and former Prime Minister of Italy makes him a seasoned expert on economic governance and recovery.

This blog post looks first at selected key messages from the report and then at possible implications for Cohesion Policy. The report provides arguments for for a stronger investment focus and more territorial cooperation.

The future of European competitiveness: Key challenges and changes

The Draghi report analyses the current state of EU competitiveness and provides a clear set of recommendations for policymakers to ensure EU’s long-term economic prosperity. It focuses on sectoral and horizontal policies, addressing critical areas such as energy, digitalisation and clean technologies, with an emphasis on enabling Europe to lead in these vital areas.

At its core, the report conveys a stark reality: The EU needs to boost productive investment. Draghi argues that at least €750-800 billion of additional investment per year is needed. This is needed to address the urgent transformation of the EU economy, particularly in energy, digital infrastructure and industrial policy, and thereby close the widening competitiveness gap with global players such as the US and China. High energy costs, technological backwardness and dependence on imported raw materials are the main threats to its future competitiveness. The report stresses that the EU's success depends on accelerating decarbonisation, innovation and investment in clean technologies.

The EU cannot afford to delay this transition. Without immediate action to boost productivity, innovation and competitiveness, the EU risks falling behind its global competitors. The report also stresses that the EU cannot maintain its social, environmental and economic ambitions without addressing its slowing growth.

It is difficult to summarise Draghi's report of several hundred pages in a few paragraphs. Some key messages on how to revive competitiveness are:

• Close the innovation gap with major powers such as the US and China. One of the key challenges facing the EU is its failure to keep pace with technological progress. The EU has largely missed out on the digital revolution that the US and China have benefited from. For example, the EU is lagging behind in emerging technologies such as artificial intelligence (AI) and quantum computing. This gap has contributed to slower productivity growth. To close the innovation gap, the EU needs to reduce regulatory barriers that hamper start-ups and emerging technologies. The report calls for a stronger focus on education and adult learning to equip the workforce with the skills needed to thrive in an AI-driven world. Investment in research and innovation should be significantly increased, particularly in advanced technologies such as AI and quantum computing.

• Aligning decarbonisation with competitiveness by capitalising on the EU's leadership in clean technologies while managing the costs of the energy transition. The global drive towards decarbonisation presents both opportunities and challenges. The EU is already a leader in clean technologies, with strong industries in sectors such as wind energy and low-carbon fuels. However, high energy prices – due to the loss of Russian pipeline gas and a fragmented energy market – make it difficult for companies to remain globally competitive. While decarbonisation is necessary for environmental and energy security reasons, the EU must ensure that the transition is well-coordinated and cost-effective. The report suggests that ambitious climate targets should be coupled with policies that support industries such as clean technology and automotive, which are crucial to the transition to a low-carbon economy. According to Draghi, the EU needs to create a single strategy that links decarbonisation to its industrial policies, a 'Joint Plan for Decarbonisation and Competitiveness'.

• Strengthening security and reducing dependence on other global powers for critical resources and technologies. The EU is heavily dependent on imports for critical raw materials, especially from China, and on foreign digital technologies for sectors such as semiconductors. As geopolitical tensions rise, these dependencies have become vulnerabilities. The report stresses that the EU must take decisive action to strengthen its industrial defence capabilities and secure supply chains for key industries such as clean technologies and digital services. This includes strengthening the defence sector and building a robust industrial defence capability. This transformation is essential to ensure the EU's long-term security and economic independence.

A significant increase in investment is needed to support these changes. The report estimates that the investment-to-GDP ratio needs to rise by 5 percentage points, to levels not seen since the 1960s and 70s. This investment will be needed to digitise, decarbonise and strengthen the EU's defence capabilities.

Joint funding between the EU and member states will be essential for key EU projects such as breakthrough innovation and defence procurement. In this context, the report recalls that the EU's annual budget is small, at just over 1% of EU GDP, while member states' budgets together account for almost 50%. The private sector also has an important role to play. The report stresses that the EU needs the full implementation of the single market, including further integration of its capital markets, to better mobilise private savings for productive investment.

Draghi also calls for significant reforms to the EU's governance structure. Currently, fragmented decision-making processes and regulatory burdens hamper the EU's ability to act collectively. The EU therefore needs to streamline its decision-making processes to ensure that it can respond quickly to global challenges. In addition, to strengthen competitiveness, more tasks need to be devolved to the EU level (e.g. on defence procurement) to increase efficiency, and unnecessary regulatory burdens need to be reduced to encourage greater investment.

Future Cohesion Policy: Focus on investment and cooperation

Throughout the report, there are also several references to the role of cohesion and Cohesion Policy in the grand plan to increase competitiveness. They can be summed up in two points. First, there is a need to shift the focus to productive investment. Cohesion Policy must become a regional investment policy to boost the competitiveness of EU regions and the EU as a whole. Second, more cross-border cooperation is needed in many sectors. This may read as a proposal to extend the territorial cooperation strand of Cohesion Policy – widely known as Interreg – to territorial cooperation in investment-relevant sectors. It can also be read as a suggestion to develop Interreg from an 'minor sideline' of Cohesion Policy to its main element.

Despite its focus on the need to boost productive investment, Draghi's report recognises that growing inequalities can pose challenges and point to untapped potential. It stresses the importance of addressing these inequalities in order to promote inclusive growth. Historically, increased trade within the EU has helped to level the playing field by shifting production to lower-cost regions. But with the rise of service industries and innovation hubs clustering in large cities, there's a risk that wealth and development will become even more concentrated, leaving smaller towns and rural areas behind.

The EU budget and Cohesion Policy need to be refocused for greater impact. While recognising the challenges of cohesion, the report is critical of the high proportion of the EU budget devoted to economic, social and territorial cohesion. It underlines that the EU budget is not allocated to the EU's strategic priorities. Despite reform attempts, the share of the Multiannual Financial Framework (MFF) 2021-2027 allocated to Cohesion Policy and the Common Agricultural Policy remains at 30.5% and 30.9% respectively. In this sense, it implicitly suggests that Cohesion Policy should be refocused on the necessary productive investments and contribute to the required additional investment of €750-800 billion per year.

The report stresses that the EU budget is not about redistribution, but about creating an environment in which innovation and competitiveness can flourish in all territories. It advocates refocusing cohesion investment on key sectors such as education, transport and infrastructure to ensure that a wide range of regions can actively participate in sectors that will drive future growth, such as technology, clean energy and the green economy.

However, the report also highlights the importance of social cohesion, e.g. in relation to the need to address social inequalities, which could increase as the costs of the transition may disproportionately affect low-income households and lead to an increase in fuel poverty, increased alienation of citizens and disruption to SMEs. It advocates support frameworks to ensure that the energy transition is equitable and inclusive, as well as economically beneficial, as increased investment will allow savings on energy purchases in the future.

To boost competitiveness it needs more territorial cooperation. The report repeatedly stresses the need to strengthen various forms of territorial cooperation. In this sense, it can be read as advocating the upgrading and extension of Interreg. Whether it is energy, transport, technology or health infrastructure, cross-border cooperation ensures that actors in different parts of the EU can work together to solve common challenges. Some of the ideas put forward in the report could take Interreg to a new level:

• Multi-country industrial projects: Draghi proposes multi-country industrial projects that could be financed by EU funds with nationally pre-allocated envelopes in the next MFF. Under the current MFF, this could draw on European digital infrastructure consortia, Cohesion Policy and the Recovery and Resilience Facility (RRF) to meet STEP (Strategic Technologies for Europe) objectives. National investment could also be leveraged, for example through the mechanism for Important Projects of Common European Interest (IPCEI) – which provides state aid for cross-border projects – and a new mechanism for Competitiveness Joint Undertakings – which set up public-private partnerships between the Commission, interested member states and industry.

• Cross-border healthcare: This is particularly important to enable cross-border provision of healthcare and patients' rights to access their health data. Draghi suggests that Cohesion Policy investments can be used to complement the substantial investments in health system digitalisation under the RRF and the EU4Health programme.

• Research and innovation collaborative networks: Today, research and innovation activities rarely go beyond national or even regional borders. Draghi points out that around 70% of all co-owned patents are the result of collaboration within the same region, and almost 20% are created by partners in different regions of the same country. Only around 13% of co-patents filed each year involve organisations based in two different European countries.

• Energy cooperation: The report highlights the need for integrated regional energy networks linking different member states and regions. By pooling resources, sharing innovation and harmonising regulatory frameworks, the EU can create a more resilient energy market that reduces dependence on external suppliers. In particular, cooperation on energy networks, especially for renewables such as wind, solar and hydrogen, can ensure that regions with less renewable capacity still benefit from the green transition.

As the EU looks to its next phase of development, investing in and strengthening territorial cooperation in these key sectors will be crucial to maintaining its global competitiveness and ensuring inclusive prosperity in all its regions. A new approach to territorial cooperation as a key feature of Cohesion Policy could make a difference.

Policy coordination and synergies. Another important aspect highlighted in the report is the need for more policy coordination and synergies. The report underlines that synergies between different policy instruments are essential, taking into account the specific policy objectives of EU programmes (e.g. excellence in research and innovation under Horizon Europe and capacity building under Cohesion Policy). It also calls for greater coordination of national competitiveness policies: The next MFF could include financial incentives for member states to coordinate national policies and engage in regulatory adjustments. Under the current MFF, Cohesion Policy could be a lever for better coordination of EU and national policies, as already outlined in the 9th Cohesion Report.

In conclusion, in his eagerly awaited report on the future of European competitiveness, Draghi also offers some fascinating insights into the potential of Cohesion Policy. He makes a strong case for a more robust investment focus, greater territorial cooperation and better policy coordination, which is music to the ears of many.

by Kai Böhme