Another “Whatever It Takes” moment for Europe?Another“WhateverItTakes”momentforEurope?

In early September, Mario Draghi, the former Italian Prime Minister released a report that delivered a striking assessment of the European Union’s economic health and called for a multi-pronged approach to close its widening gap with its peers, notably the U.S. and China. 

A slow “agony” of decline is what Europe should expect if it does not get its act together to improve economic growth, according to Draghi. The 400-page report is unusually direct in its analysis and highlights multiple areas where Europe is falling behind.¹ It was commissioned by European Commission President Ursula von der Leyen. 

They include areas ranging from the “tech transition” where Europe relies on other countries for over 80% of its digital products and services to gas prices which are three to five times compared to the U.S.

The policy blueprint on how the EU needs to change its approach has prompted analysts to draw parallels with Draghi’s “whatever it takes” speech in July 2012 during his term as the European Central Bank President, widely considered as the turning point of the sovereign debt crisis.

A key part of the agenda is about reducing regulatory burden. 

For example, the report recognises that while securitization markets have thrived in the U.S., Japan, Australia and other jurisdictions post-global financial crisis, these markets are nowhere in Europe. While the regulatory and supervisory approaches on securitization are very similar across the globe, the footprint in Europe has been much heavier in its application than in other jurisdictions. 

However, there seems to be political appetite to address this. 

Other key recommendations in the report include rethinking EU competition rules for strategic industries, move towards regular issuance of debt to enable joint investment projects, improving decision-making processes and developing a foreign economic policy in which defence instruments and partnerships are used more strategically. 

“A large focus of the Draghi report is to formulate an EU level industrial policy which is geared towards developing European industries for certain sectors compared to areas where there is no competitive advantage,” said Taggart Davis, Vice President, Government Affairs at EMEA. 

“He is essentially saying, let’s figure out the industries where it makes sense to throw our collective industrial and financing firepower rather than try to boil the ocean.”

To achieve these objectives, the report calls for a minimum annual investment of 750-800 billion euros corresponding to around 5% of EU GDP, reversing a multi-decade decline across most large European economies. 

This is unprecedented. For comparison, the additional investments provided by the Marshall Plan between 1948-51 to rebuild Europe amounted to around 1-2% of GDP annually. 

However, Draghi’s recommendations venture into politically sensitive territory and have already come under political criticism.² For example, his proposals for more regular issuance of joint European debt have already run into opposition from Germany and other Member States who have traditionally opposed greater risk sharing at EU level.

But the EU’s need to jump start its struggling economy is more urgent than ever before. The region is entering the first period in its recent history in which growth will not be supported by rising populations with the report estimating that by 2040, the workforce is projected to shrink by close to 2 million workers each year. 

If the EU were to maintain its average productivity growth rate since 2015, it would only be enough to keep GDP constant until 2050 – at a time when the EU is facing a series of new investment needs that will have to be financed through higher growth.