ZEW Economist Friedrich Heinemann on Draghi’s Report on European Competitiveness

Former ECB President Mario Draghi has presented the long-awaited report on European competitiveness, which he handed over to the recently re-elected President of the European Commission, Ursula von der Leyen. Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim and professor at Heidelberg University, has commented on this matter:

“Draghi’s report is an important document that could have a considerable impact on the programme of the new European Commission. It contains many insightful and relevant analyses of the EU’s position in global competition. The tone of the report regarding Europe’s current performance in global competition is very pessimistic, which helps to shake the complacency that sometimes dominates economic policy debates in Brussels. This is commendable. However, beside its strong and compelling messages, the report also shows significant gaps and imbalances.

The call for the EU to finally realise the potential of European public goods and overcome the fragmentation of its single market is to be welcomed. The sections on the EU’s and the Commission’s responsibility for weak competitiveness due to over-regulation and the resulting burden on businesses are also strong. Draghi calls not only for restraint in new legislation, but also for a measurable reduction in reporting obligations for companies. In terms of climate policy, the report takes a clear position on technological neutrality and advocates for more openness towards alternative fuels in the mobility sector.

However, Draghi’s report has several weaknesses. It is deeply convinced of the success of European industrial policy and the ability of technocrats to identify sustainable industries. The sections classifying industries according to their future viability in Europe are almost reminiscent of concepts used in planned economy.

Overall, the report lacks appreciation for market-based instruments in climate policy. The highly successful European Emissions Trading Scheme is discussed mainly in terms of its financing role or as a cost burden for certain industries. Ideas on how to expand such market-based instruments are largely absent, even though many environmental economists see this as the best way to achieve an affordable climate policy that preserves competitiveness.

Furthermore, the report almost completely ignores the location factors that explain the poor rankings of the major EU countries in all competitiveness indices. These include high taxes and social security contributions, high labour costs, weak work incentives in welfare systems and heavy labour market regulation. The need to adapt social security systems to the ageing of the population is not even mentioned. While the European welfare state is rightly highlighted as essential for coping with structural change, there is little acknowledgement that taxes and levies in their current form are so high that they undermine Europe’s competitiveness.

Like others before him, Draghi feeds the problematic narrative that countries with sound public finances have an unfair advantage in the single market, distorting it. However, he barely addresses the risks posed by unsustainable public debt in highly indebted countries. This represents a problematic reversal in the recognition of responsible versus irresponsible fiscal policy.

Unfortunately, the call to set priorities for European public goods in the EU budget is far too vague. A bolder report might have demanded cuts in the Common Agricultural Policy, but this is notably absent. The proposal to refocus Cohesion Policy also remains much too unspecific.

Due to the lack of courage to demand reallocations within the EU budget, the focus, as in all high-profile reports on behalf of the Commission, is on large additional debt-financed EU programmes. The idea is to mobilise hundreds of billions of euros through regular EU bond issues. There is a lack of critical awareness that an important precedent has been set by the COVID-19 recovery plan, Next Generation EU. Originally intended to finance European public goods, it was repurposed into a transfer instrument for financially distressed Member States, with its success now questioned by evaluations, such as that of the European Court of Auditors.

Like Letta’s report on the single market, Draghi’s report argues for regular EU bond issues on the unconvincing grounds that this would create a European “safe asset”. However, it overlooks the fact that EU bonds trade at a significant risk premium compared to top-tier national issuers such as Germany or the Netherlands. This suggests that market doubts about the EU’s ability to repay its debts in the coming decades will prevent an increasingly indebted EU from becoming a truly safe investment.

In conclusion, despite its correct and important detailed recommendations, Draghi’s report does not offer the new Commission a truly convincing direction. Instead, it contributes to further neglecting key challenges – prioritising public budgets, reforming social security systems and reducing tax and contribution burdens – in Europe’s reform agenda.”