A new report by former Italian prime minister Mario Draghi on the state of competitiveness, released on 9 September, has delivered a sobering account of on the EU’s state of competitiveness in the global economy. The report, requested by the President of the European Commission, also proposed a new industrial strategy for Europe to address challenges such as slowing productivity growth, increasing competition, energy transition, security concerns, and geopolitical shifts. 

In his 400-page report, Draghi said that the EU needed to focus on three crucial issues: 1) closing the innovation gap with the US and China; 2) developing a joint plan to link the goal of decarbonisation with increased competitiveness; and 3) boosting Europe’s security and reducing its dependence on foreign economic powers.

• On the first point, he described Europe as being “stuck in a static industrial structure with few new companies rising up to disrupt existing industries or develop new growth engines”, and that the problem was not that Europe lacks ideas or ambition but that innovation is blocked by inconsistent and restrictive regulations that prevents commercialisation. 

• On the second point, he highlighted the risk that without consistent policies, EU’s decarbonisation plans could run contrary to its competitiveness and growth. While the global decarbonisation drive is also a growth opportunity for industry, it is not certain that the Europe will seize this opportunity, but may instead increase its reliance on China as the cheapest and most efficient way to meet its decarbonisation targets. 

• On the third point, he described Europe as being particularly exposed to rising geopolitical risks, for example being dependent on a handful of suppliers for critical raw materials, especially China. He proposes a genuine EU “foreign economic policy” – to coordinate preferential trade agreements and direct investment with resource-rich nations, build up stockpiles in selected critical areas, and create industrial partnerships to secure the supply chain of key technologies. 

Draghi also reiterated the need to strengthen governance within the European Union, enhance productivity, innovation capacity, and skills development, and balance decarbonization efforts with competitiveness in the global market.​ He also focused on critical areas like supply chain security, defense and space industrial capacity, concluding that the EU needs to finance more investments to enhance the EU’s competitiveness and resilience, to the tune of around EUR 800 billion annually for projects – whose objectives were already agreed upon by the EU. 

EU-US differences

The main reasons for the GDP gap between the EU and the US include:

1. High energy costs in the EU due to structural causes, lack of natural resources, slow infrastructure investment, and higher energy taxation compared to the US. 
2. More ambitious decarbonisation goals in the EU leading to additional short-term costs for European industries compared to the US and China. 
3. Higher regulatory burden faced by European companies due to the accumulation of or frequent changes to EU legislation, lack of a common methodology to assess the impact of new laws, and limited impact of efforts to reduce regulatory burdens. 
4. Lower level of productive investment in the EU compared to the US since the Great Financial Crisis, affecting both private and government investment. 
5. Slower productivity growth in the EU, particularly in key sectors like digital technology, accounting for around 70% of the gap in per capita GDP with the US. 

EU has already lost out in solar

The report notes that EU manufacturing costs in the solar photovoltaic (PV) sector are generally higher compared to China’s due to factors such as higher labor costs, energy costs, regulatory compliance, lack of economies of scale, and lower government subsidies and support. This cost difference is estimated to be around 35%-65%, posing a challenge for EU manufacturers in terms of competitiveness in the global market for solar PV products. ​

The report and its recommendations will now be assessed by policy makers in the EU, especially the Commission and the European Parliament, who may then take steps to address the EU’s challenges in remaining competitive, based on the proposals outlined in Draghi’s report. 

Key takeaways for ASEAN

The report’s recommendations could impact the EU’s external trading partners in several ways. One key recommendation in Draghi’s report is for the EU to invest in local production of key goods, to reduce dependency on its trading partners. For example, chips production, where 75-90% of current global wafer fabrication capacity is in Asia, is a key sector for the EU to create its own production on.  This could be interpreted as a shift away from the EU’s openness to trade and closing its doors to foreign investment. 

However, this does not necessarily mean that the EU will be closed off to external trade, given that 1) the EU will not be able to, nor wants to, be a production house for everything, particularly less so for low value-added products, and 2) the EU does not have enough critical raw materials nor natural resources as inputs for more advanced production. Furthermore, while the EU wants to invest more in its production capacity, it does not have enough capital to do it on its own, and will still have to rely to a large extent on foreign investment, albeit more selectively. 

Hence, the EU will still continue to import most raw materials and basic goods, as well as certain high end goods that it cannot meet local demand for, but it will be more selective from who it does so from, with the aim of “reduce its dependency”. This is alluded to in von der Leyen’s foreign policy strategy, where she looks at Central Asia as a region to secure critical raw materials from, and Latin America, Africa, India, and Indo-Pacific (i.e. ASEAN) to focus trade relations with. In ASEAN, critical raw minerals such as nickel can be found in Indonesia and the Philippines, while rare earth elements can be found in Vietnam, Malaysia, Laos and Myanmar.  ASEAN is also a big supplier of agri-food products such as coffee, bananas, coconut and cashew nuts to the EU, and the EU’s reliance on such exports will likely continue. The desire to have control over the supply chain of such products may also provide renewed impetus for the EU to propose new global gateway projects in ASEAN countries.