The Draghi Report

The long-awaited report paints a stark picture of the Union’s future unless radical changes are made. The EU is distanced by the US and China, and is increasingly vulnerable to energy dependencies, underinvestment in innovation, and geopolitical instability. But not all is lost.

Mario Draghi in a similar plea during the “This is Europe” debate, Strasbourg, 2022

For years, the EU has prided itself on a robust social model and high levels of education, but while the bloc has been busy protecting its citizens, it has allowed for competitiveness to go down. Since the year 2000, real disposable income per capita has grown nearly twice as fast in the US as in Europe, while the productivity gap continues to widen. The numbers are striking: Europe’s productivity stands at less than 80% of the US level, largely due to its failure to capitalize on digital revolutions.

Draghi’s culprit? Technology—or rather Europe’s lack of it.

Left in the Dust by Silicon Valley and Shenzhen

The report exposes the gray reality of Europe’s stagnant tech sector, where none of the top global companies in cloud computing or AI are based on the continent. While American and Chinese companies race ahead, Europe’s tech investments lag behind. In 2021, European firms spent a staggering €270 billion less on research and development than their American counterparts, with the EU still relying heavily on older industries like automotive, rather than emerging sectors like artificial intelligence. The US, meanwhile, boasts six companies valued at over €1 trillion, all created in the last fifty years, while the EU has failed to generate a single company of that scale from scratch during the same period​.

"Europe is stuck in a static industrial structure with few new companies rising up to disrupt existing industries or develop new growth engines," the report warns, underscoring the dire need for a shakeup. With the world on the cusp of an AI revolution, Europe risks being left behind.

Energy Costs and Supply Chain

Beyond tech, energy prices remain a critical hurdle to the EU’s competitiveness, with gas prices three to five times higher than in the US. Wholesale electricity prices for European industries are two to three times higher than in the US and China, with the energy crisis of the last two years exacerbating this disparity. Member states also face vast disparities in energy costs, with electricity prices ranging from over €250/MWh in some regions to less than €100/MWh in others​. The volatility in both gas and electricity markets has reached unprecedented levels, which poses serious risks to long-term investment and supply security. The EU’s fossil fuel import bill rose to €416 billion in 2023, highlighting the need for a more resilient energy strategy.

The report also underlines Europe’s weaknesses in supply chains, such as its heavy reliance on external sources for energy. The EU, despite reducing its dependence on Russian gas—imports from Russia dropped from 40% to 8% between 2021 and 2023— but it remains vulnerable to supply disruptions. For instance, 42% of EU gas imports were purchased as liquified natural gas in 2023, a sharp increase from previous year

Moreover, the report reveals that 75-90% of the global capacity for wafer fabrication—essential for semiconductor production—is concentrated in Asia, leaving Europe dangerously reliant on imports for critical materials. Energy transition will require an investment leap of around 5 percentage points of GDP, comparable to the Marshall Plan, but whether the political will exists to make such monumental changes is the key question.

Security, Decarbonization, and Need for Speed

As geopolitical tensions rise, the EU must also focus on reducing dependencies in defense and raw materials. The continent, while collectively the second-largest military spender, lacks coherence. For example, with 12 different types of battle tanks across the Union, compared to a single model in the US, Europe’s defense capabilities are fragmented and inefficient. Similarly, despite its leadership in clean tech, Europe could lose out to China, which is flooding the global market with cheap electric vehicles and wind turbines, propped up by aggressive state subsidies.

The EU faces a difficult trade-off: meet decarbonization targets quickly by importing cheaper tech from China, or build its own resilient industry at a higher cost. If Brussels wants to stay relevant on the global stage, the latter must become a reality, even if it comes at an initial economic hit.

How to Act? - Draghi asks. Focus on Innovation.

"Procrastination has only produced slower growth," the report bluntly states. Europe has long talked a good game about innovation but, ironically, continues to overregulate. More than 60% of EU companies cite regulatory burdens as a significant obstacle to investment, with 55% of SMEs flagging administrative red tape as their biggest hurdle.

The report doesn’t mince words: if Europe wants to compete, it needs to streamline its decision-making and cut down the – optimistic – average nineteen months it currently takes to pass new laws. Otherwise, innovative companies will continue to pack their bags and head to Silicon Valley.

Draghi puts the EU face to the wall, with the risk of having to make an impossible choice: compromise its social model, fail on its climate goals, or lose geopolitical relevance altogether.

However, Europe has the tools to remain a relevant player.

The Strongest Sector: Clean Technologies on the Rise

At the forefront of Europe's sectoral strengths lies clean technologies. The report highlights the EU's decarbonization pathway, which envisions increasing the share of clean energy in the total energy mix from around 30% today to 75% by 2040.

The EU’s leadership in renewable energy, particularly wind and solar power, has led to significant investments in green tech, propelling innovation in sectors like electric vehicles (EVs), renewable energy storage, and hydrogen technologies. The expansion of the clean energy sector is anticipated to decrease reliance on fossil fuels and could eventually lower energy prices.

A key factor is the adoption of power purchase agreements (PPAs), which allow corporations to directly buy renewable energy. PPA volumes in Europe surged by 40% in 2023, with the technology sector leading the demand. Countries like Spain and Germany are driving this trend, which supports renewable energy growth and stabilizes energy prices in the long run​.

Green hydrogen, although still expensive, is crucial for decarbonizing industries like steel and chemicals, and the EU is investing heavily to bring costs down. Clean tech, driven by the EU’s climate goals, stands out as the sector most likely to secure Europe’s competitiveness in the long term.

The Weakest Sector: Energy-Intensive Industries Struggling with High Costs

While Europe may be leading in clean technologies, its energy-intensive industries are falling dangerously behind. High energy prices have left sectors such as chemicals, steel, and cement in a precarious position. The report shows that gas prices in the EU are 3-5 times higher than in the US, while electricity prices for industries are 2-3 times higher.

Energy-intensive industries rely heavily on affordable and stable energy supplies, and the volatility in gas and electricity markets has severely hampered their competitiveness. For instance, natural gas alone was responsible for setting the price of electricity in 63% of the hours in 2022, even though it only represented 20% of the energy mix​. This reliance on expensive gas has contributed to exorbitant energy costs across the union, making it nearly impossible for energy-intensive sectors to compete globally.

Furthermore, while the EU has implemented some relief measures, such as temporary price caps and subsidies, these are seen as short-term fixes. Long-term structural reform in the energy market is urgently needed to stabilize prices. Without it, Europe's traditional industries could face relocation or even collapse under the weight of these costs. The report underscores that 60% of EU companies cited energy prices as the top barrier to investment in 2023, a figure that is 20 percentage points higher than for US firms​.

The Rising Star: Digital and Advanced Technologies

The digitalization and advanced technologies sector is another area showing promise. The EU’s focus on AI and semiconductors is seen as vital to securing future competitiveness. Despite its current dependance, Europe has invested heavily in boosting domestic production, reducing its reliance on imports from Asia.

In particular, high-speed broadband networks are critical for digital transformation. The report outlines the EU’s plan to accelerate broadband deployment, particularly in rural areas where coverage is limited. The integration of AI across sectors, from energy to healthcare, has the potential to vastly improve productivity and efficiency. For instance, predictive algorithms are already optimizing energy generation and consumption, allowing Europe to better balance its renewable energy supply with fluctuating demand.

However, Europe’s digital sector still faces challenges, particularly in scaling innovation. The EU's venture capital ecosystem remains underdeveloped, and Europe lags behind both the US and China in later-stage funding for tech startups. This gap means that while Europe is leading in AI regulation, it is still playing catch-up in terms of tech entrepreneurship and innovation.

The Dragging Sector: Automotive

Despite its strong industrial history, the automotive sector is emerging as another weak spot for Europe. The automotive industry is at the heart of the EU’s economic engine, but it is facing headwinds as the global shift toward electric vehicles (EVs) accelerates. Europe’s traditional automakers, like Volkswagen and Renault, are struggling to keep up with the competition, particularly from China, which has rapidly scaled up EV production through state-backed initiatives.

While the EU is a leader in clean automotive technologies, it is falling behind in terms of scaling production and making EVs affordable to the broader public. China has flooded the market with low-cost electric vehicles, and unless European automakers can significantly cut costs and ramp up production, they risk losing their competitive edge.

The EU has set ambitious goals to transition its automotive industry to electrification, but supply chain disruptions and high battery costs are hampering progress. Moreover, Europe’s fragmented regulatory landscape further complicates scaling up production across the bloc. Although the report suggests that the EU's investment in battery technology could be a long-term fix, in the short term, Europe’s auto sector is struggling to compete on cost and innovation.

What Now?

The EU’s social model remains a point of pride, despite the austerity measures in place accross the continent— France, Germany or Italy —and it has to be reinforced and protected. This social model brought stability—a factor that has proven to be a competitive advantage in times of crisis. During the COVID-19 pandemic, Europe’s social systems cushioned the economic blow, preventing widespread social unrest and keeping consumer spending afloat through social safety nets and furlough schemes. This resilience is something Europe can leverage, particularly as it navigates energy shocks and global market disruptions.

The challenge now is striking a balance between preserving the best aspects of Europe’s social system—such as social equity and relatively high living standards—while reforming it to support competitivity.

The report suggests that closing the innovation gap and boosting productivity will require labor market reforms that encourage flexibility without undermining the protections that European workers have come to expect. In essence, Europe must modernize its social model to better align with the demands of a fast-moving global economy, while ensuring that the benefits of growth are shared widely across society. This project will require redistribution, adequate and unified taxes for the wealthiest companies, and massive investments in the public sector.

The social model remains one of the EU’s defining features, but it will need adjustments to avoid becoming a roadblock in Europe’s quest for renewed competitiveness. To say it’s comparable to a new Marshall Plan is no exaggeration, but it will come with — another — confrontation between EU member states.