Draghi Advocates for Massive New Spending in Europe
Former European Central Bank (ECB) President, Mario Draghi, has urged the European Union (EU) to invest an additional €800 billion ($884 billion) annually and commit to regular issuance of common bonds. He believes this is necessary for the EU to remain competitive with China and the US.
Draghi's report on EU competitiveness emphasizes the need for Europe to develop advanced technologies, meet climate targets, and bolster defense and security of critical raw materials. He described these tasks as "an existential challenge". According to him, Europe needs to increase investment by about 5% of the bloc’s GDP to transform its economy and maintain competitiveness.
Draghi warned that without such a massive investment, Europe would not be able to become a leader in new technologies, a beacon of climate responsibility, and an independent player on the world stage. He also noted that such a spending spree would require constant quantitative easing (QE) to monetize all the newly issued debt.
Germany's Response to Draghi's Proposal
However, Germany's Finance Minister Christian Lindner has already rejected Draghi's proposal for joint EU borrowing. Lindner argued that joint borrowing would not solve the structural problems facing the EU.
The report also highlighted the EU's slower economic growth compared to the US over the past two decades. Germany has been particularly affected, with its industrial sector struggling with high energy costs and a loss of competitiveness to China. The GDP of the euro zone’s biggest economy is barely higher than before the pandemic.
Draghi's report also suggested a rewriting of the bloc’s competition policy rulebook to allow more money to be invested into Europe’s key industrial sectors. He also urged regulators to adopt a more creative approach to vetting mergers, which could lead to the approval of more high-profile deals.
Challenges Facing the EU
The report noted that European leaders are increasingly aware of the bloc's loss of competitiveness against the US and China. This is partly due to Europe’s energy dependency on Russia, a lack of raw materials, and a lack of a defense strategy that does not rely entirely on the US.
Draghi also highlighted the challenges facing EU industry as it aims to reach net zero by the middle of the century. High energy prices in the region are holding back investments, while the bloc’s climate goals are placing a heavy short-term burden on the highest-emitting sectors.
Draghi suggested that the EU could follow the model of Next Generation EU, the recovery fund financed by €800 billion in joint debt to overcome the consequences of the Covid pandemic. However, proposals for permanent joint borrowing have been steadfastly opposed by Germany.
Bottom Line
The future of the European Union appears to be at a crossroads. The bloc faces significant challenges in terms of competitiveness, climate goals, and defense strategy. While Mario Draghi's proposal for massive new spending and joint debt could potentially address these issues, it has already met with resistance from Germany. It remains to be seen how the EU will navigate these challenges and what impact this will have on its future. What are your thoughts on this matter? Share this article with your friends and let us know your opinion. Don't forget to sign up for the Daily Briefing, available every day at 6pm.
