Mario Draghi’s important report, published last year, is central to discussion about how the European economy can address underperformance. That report analysed why EU economic growth has been worse in recent years than that of the US. It goes on to suggest a range of reforms to remedy the perceived failings.
While the EU has undoubtedly grown more slowly than the US in recent years, the difference in living standards can be exaggerated. In some of the best-performing EU countries, Denmark and the Netherlands, national income per head is similar to the US, when adjusting for price differences. If you take on board that Europeans choose to work fewer hours and take longer holidays than Americans, those two EU members actually enjoy higher real living standards than the US.
However, in recent years it is the gap in productivity growth between the US and the EU that stands out. This is important as the growth in output per person ultimately determines the path of living standards.
The Draghi report points out that EU productivity growth over the past 20 years would be similar to the US, but for the success of the US tech sector. The problem is not how skilled we are or how hard we work in the EU, but rather what we produce is less valuable on world markets. The analysis in the report prompts a number of conclusions.
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There is a need to enhance innovation in EU economies, and to ensure that EU companies are able to exploit the benefits of their innovation and grow into international players.
Ireland has done well out of capturing investment from world leaders in vital sectors, such as IT and pharmaceuticals, without developing so-called national champions. However, this model of imported innovation is not easily generalised across the EU. So Draghi’s recommendations are valid: Europe needs to foster innovative firms.
One European success is Airbus, which is now the biggest supplier of commercial aircraft worldwide. However, there’s also been the demise of a promising start-up, Northvolt, which was to have competed with China in supplying batteries.
In 1993, when the EU’s single market was introduced, that ruled out using government subsidies to develop “champions”. This was very important for Ireland as, not only were such subsidies wasteful, but Ireland, as a small country, could not afford to compete.
The latest €17 billion Intel plant in Leixlip was completed without significant Irish subsidies. However it was worrying that, as that project was being completed, the German government was allowed to offer €10 billion to Intel to build a €30 billion computer chip plant in Germany. In the event, the Intel plant in Germany is not going ahead, but that subsidy decision creates a bad precedent. Large EU economies can always outbid small ones (such as Ireland) in a subsidy competition. The only fair and economically-efficient approach, if Europe is open to subsidises for some key businesses, is that such subsidies should come from the EU itself, and not from national governments, and should be payable wherever a plant is located within the EU.
The world of free trade, underpinned by agreed rules, has been vital for the Irish and the EU economies. That’s now obviously under threat. While building up new EU players in key industries may be important, the EU must not lose sight of the benefits of free trade, and should fight to maintain it.
Draghi argues that China’s State-sponsored competition represents a threat to Europe’s productive clean tech and automotive industries. However, cheap Chinese products can be important in meeting our decarbonisation targets at least cost. Rather than trying to stop international competition, it would be better if the EU concentrated instead on developing world-leading technologies in complementary areas.
Draghi points out the urgent need to complete the EU single market. The constraints that hinder the linking of electricity transmission systems is an example he highlights. The resulting differences in electricity prices across the continent are damaging the EU’s competitiveness. Fixing this would benefit the European economy.
The failure to develop a single EU financial market means that many households and businesses are losing out. Irish savers over recent years have earned much lower rates in deposit interest than in other EU countries.
Draghi also argues that EU regulation must be made much more efficient, which would enhance growth in productivity.
The German and French economies, traditionally the powerhouses of European growth, have been running out of steam. So it’s urgent that the new EU Commission works seriously on Draghi’s suggested menu of reforms.
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