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Mario Draghi: How Do We Change Our Continent’s Trajectory?

Europe as a spectator

For years, the European Union, with its 450 million consumers, believed that its economic weight came along with geopolitical power and influence in international trade relations.

This year will remain etched in our memories as the year when this illusion was shattered.

We had to resign ourselves to tariffs imposed by our largest trading partner and longtime ally, the United States.  

This same ally pushed us to increase our military spending — a decision we perhaps needed to make in any case — but in ways and forms that probably do not reflect Europe’s interests. Even though it has made the largest financial contribution to the war in Ukraine and has the greatest interest in a just peace, the European Union has, until now, only played a fairly marginal role in peace negotiations.

At the same time, China has been able to openly support Russia’s war effort while also developing its industrial capacity in order to dump its excess production in Europe — now that access to the American market is limited by the new barriers imposed by the United States’ government.

European protest has had little effect. China has made it clear that it does not consider Europe an equal partner and has weaponized its control of rare earth minerals to make our dependence even more binding.  

While Iranian nuclear sites were being bombed and the massacre in Gaza intensified, the European Union also remained a spectator.

These events quashed any illusion that economic power alone would be able to guarantee any form of geopolitical power.

It is therefore not surprising that skepticism towards Europe has never been higher. But it is important to ask ourselves where this skepticism really comes from.

In my opinion, this does not reflect the values that the European Union was founded on: democracy, peace, freedom, independence, sovereignty, prosperity, and fairness. Even those who support the position that Ukraine should cede to Russian demands would never accept the same fate for their countries; they also value freedom, independence and peace, and solidarity — if only for themselves.   

It seems to me rather that this skepticism concerns the Union’s ability to defend these values.

This is partially understandable. Political organization models, particularly those that transcend states, also emerge to respond to the problems of their times. When these problems evolve to the point that they make the existing organization weak and vulnerable, this organization must change.

While Iranian nuclear sites were being bombed and the massacre in Gaza intensified, the European Union remained a spectator.

Mario Draghi

This is the reason the Union was created. In the first half of the 20^th century, the previous models of political organization — nation states — had, in many countries, completely failed to defend their values. Many democracies had rejected any rules in favor of brute force and Europe was plunged into the Second World War.

For Europeans at the time, it was therefore almost natural to develop a form of collective defense for democracy and peace. The European Union represented an evolution in response to the most urgent problem of the time: Europe’s tendency to sink into conflict.

Pretending we would be better without the Union would be absurd.

The Union once again transformed in the years following the war, gradually adapting to the neo-liberal era between 1980 and the beginning of the 2000s. This period was characterized by faith in free trade and the opening of markets, by shared respect of multilateral rules, and by the conscious reduction of state power, which delegated functions and greater autonomy to independent agencies.

Europe prospered in this world: it transformed its shared market into a single one, it became a key player in the World Trade Organization and created independent authorities that oversaw competition and fiscal policy.

But this world no longer exists. And many of its defining features have disappeared.

The existential threats of a new world

Whereas markets used to be relied on — whether right or wrong — to steer the economy, large-scale industrial policies have become the new norm.

Where once the state saw its powers reduced, today all available means are mobilized in its name.

Europe is ill-equipped in a world where geo-economics, security, and the stability of supply chains govern trade relations more than efficiency.

Our political organization must adapt to the demands of its time when these demands are existential: we Europeans must come to a consensus on what that entails.

Yet if it is obvious that destroying European integration in favor of a return to national sovereignty would only further expose us to the whims of the great powers, it is also true that, in order to defend Europe against this growing skepticism, we should not look to the lessons learned in the past for the future which awaits us: our successes in previous decades were, in reality, responses to specific challenges at the time and tells us little about our ability to overcome the ones before us today.

Recognizing that economic power is a necessary but insufficient condition to achieve geopolitical power could be a starting point for political reflection on the Union’s future.

We can take some comfort in the fact that the European Union was able to transform in the past. But adapting to the neo-liberal order was, by comparison, a relatively easy task. The primary objective at the time was opening markets and limiting state intervention. The Union was therefore able to act primarily as a regulator and arbitrator and avoid dealing with the more difficult matter of political integration.

In order to overcome current challenges, the Union must shift from being a spectator — or at best playing a supporting role — to being the lead actor. It must also change its political organization, which is inextricably linked to its ability to meet its economic and strategic objectives. Economic reforms also remain a necessary condition in this process of increasing awareness.

Nearly eighty years after the end of the Second World War, collective defense of democracy is taken for granted by generations of people who did not live through that period. Their firm commitment to European political integration also depends, to a large extent, on its ability to offer citizens a vision for the future, including economic growth which, for the past thirty years in Europe, has been weaker than the rest of the world.

In order to defend Europe against this growing skepticism, we should not look to the lessons learned in the past for the future which awaits us

Mario Draghi

Two levers: the market and technology

The report on European competitiveness highlighted a number of areas where Europe is losing ground and where reforms are most urgently needed. But there is a recurring theme throughout the report: the need to fully take advantage of the European scale in two directions.

The first is the internal market.

The Single European Act was adopted nearly forty years ago. And yet there remain significant obstacles to intra-European trade. Removing these obstacles would have a considerable impact on European growth.

The International Monetary Fund estimates that if our internal barriers were reduced to the level of those applied in, for example, the United States, the Union’s labor productivity would be about 7% higher in seven years.

Conversely, over the past seven years, total growth in productivity was only 2% here in Europe.

The cost of these barriers is already visible. European countries are preparing to launch a massive military venture with €2 trillion — a quarter of which will come from Germany — in additional defense spending planned between now and 2031. And yet we are still imposing internal barriers equivalent to a 64% tariff on industrial equipment and 95% on metals.

The results are clear: slower bidding, higher costs, and more purchases from suppliers outside the Union, all while not stimulating our economy. All this because of obstacles we impose on ourselves.

The second dimension concerns technology.

In light of the global economy’s evolution, one thing is now clear: no country which aspires to prosperity and sovereignty can allow themselves to be left out of the race for critical technologies. The United States and China openly use their control of strategic resources and technology to obtain concessions in other areas; any excessive dependence thereby becomes incompatible with a future in which we are sovereign.

But no single European country has the necessary resources to develop the industrial capacity required for these technologies.

The semiconductor industry clearly illustrates this challenge.

Chips are essential to the current digital revolution, but the factories that produce them require considerable investment.

In the United States, public and private investment have focused on a small number of large factories with projects ranging from $30 billion to $65 billion. In Europe, most of this spending remains national, primarily in the form of state support. These projects are much more modest — generally between $2 billion and $3 billion — and scattered among our countries, all with varying priorities.

The European Court of Auditors has already warned that it is unlikely that the European Union will reach its objective of representing 20% of the sector’s global market by 2030 — compared to 10% today.

Today, only some form of common debt can support large-scale European projects.

Mario Draghi

Therefore, whether it is the interior market or technology, we arrive back at the same fundamental point: in order to meet these objectives, the European Union must move towards new forms of integration.

We have the chance to do so thanks, for example, to the “28^th regime”, which goes beyond the national dimension through an agreement on projects of common interest and their joint financing. This is an essential requirement for them to reach a technologically adequate and economically self-sufficient scale.

The need for a common debt  

There is good debt, and there is bad debt. Bad debt pays for current spending, becoming a weight on future generations. Good debt finances investments in strategic priorities and increasing productivity; it generates the growth needed to pay for itself.

Today, in certain sectors, good debt is no longer feasible at the national level because such investments, made in isolation, cannot achieve the scale necessary to increase productivity and justify the debt.

Only some form of common debt can support large-scale European projects that fragmented and insufficient national efforts will never be able to achieve.

This applies, for example, to defense, particularly in terms of research and development; to energy, in terms of the necessary investments in European networks and infrastructure; and to disruptive technologies, an area where the risks are very high but where potential successes are essential to transform our economies.

Transforming skepticism into action

Skepticism can be useful; it helps us to better see through the rhetorical fog.

But we must also believe that change is possible and have confidence in our ability to bring it about.

To Europe’s citizens, I would like to say this: you have all grown up in a Europe where nation states have lost their relative importance; you have grown up as Europeans in a world where it is natural to travel, to work, and to study in other countries. Many among you accept being both Italian and European, many of you recognize that Europe helps small countries to achieve objectives together that they would not be able to achieve alone, especially in a world dominated by superpowers such as the United States and China. It is therefore natural that you aspire to change in Europe.

Over the years, the Union has been able to adapt in emergency situations, sometimes beyond all expectations.

We have been able to overcome historic taboos such as common debt within the framework of the recovery plan and help each other during the pandemic.

We carried out a massive vaccination campaign in record time.

We demonstrated unprecedented unity and commitment in our response to Russia’s invasion of Ukraine.   

But these are responses to emergencies.

The true challenge is now something else entirely: to act with the same determination in ordinary times, to face the new realities of the world we are entering.

The world does not look on us kindly: it does not wait for the slow pace of our community rituals to impose its strength upon us. It is a world which demands a radical transformation of our objectives, our timelines, and our working methods.

We can change our continent’s trajectory.   

Mario Draghi

The presence of five heads of state and the presidents of the European Commission and Council during the last meeting at the White House was a show of unity which, in the eyes of citizens, is worth much more than any number of meetings in Brussels.

Until now, a large part of the adaptation effort came from the private sector, which demonstrated its stability despite the great instability of the new trade relations. European businesses are adopting cutting edge digital technologies, including artificial intelligence, at a rate comparable to the United States. And Europe’s strong manufacturing base could respond to increased demand by strengthening internal production.

Any delay comes more from the public sector. This is where decisive changes are more necessary.

Governments must determine which sectors to focus their industrial policy on. They must remove unnecessary barriers and review the structure of energy permits. They must agree on how to finance the colossal investments needed in the future, which the European Commission estimates at around €1.2 trillion per year. And they must come up with a trade policy which is adapted to a world which is moving away from multilateral rules.

In short, they must rediscover the unity of action.

It is not a question of doing so only when circumstances become unsustainable, but now, while we still have the power to shape our future.

We can change our continent’s trajectory.

Transform your skepticism into action, make your voice heard.

The European Union is above all a mechanism for achieving the shared objectives of its citizens.

It is our best chance for a future of peace, security, independence, and solidarity: it is a democracy, and it is us, you, its citizens, Europeans, who will decide its priorities.