Mario Draghi’s back  — with a lot of work to do

Mario Draghi could be a convincing champion for a more integrated EU that invests in growth, infrastructure and productivity, rather than one arranged along national budgetary lines.

There’s a case to be made that the biggest piece of news in European Commission President Ursula von der Leyen’s State of the Union speech last week was not the opening of a probe into Chinese electric-vehicle subsidies, but the appointment of Mario Draghi to prepare a report on the 27-nation bloc’s competitiveness.

If anyone else had been picked to do it, one might imagine the result being a tome packed with pleas to invest in research, adopt more efficient technology and integrate the EU’s capital markets — something destined to gather dust on a shelf somewhere. The fact that it’s Draghi suggests something more is going on.

The timing of the announcement and the stature of the ex-central banker — famous for his “whatever it takes” commitment to saving the euro — suggests a serious desire to bring in a heavyweight to tip the scales away from polarised Franco-German battles over Europe’s direction. There’s probably also a hope that uber-technocrat Draghi’s “ritorno” takes some oxygen away from more populist voices ahead of next year’s European parliamentary elections.

Yet the real potential lies with the kind of economic growth agenda Draghi might be able to push as the EU grapples with stagflation and global trade tensions. Draghi’s old stomping ground, the ECB, has garnered plenty of justified criticism over deploying the fastest hiking cycle in the euro’s history at a time when demand is weakening. Germany’s economy is expected to shrink 0.3 percent this year, while the euro area’s expected growth rate of 0.6 percent will lag that of the US and Japan. Moves like an EU probe into Chinese EV subsidies show a willingness to flex geopoliticalmuscles and defend domestic industry, but they don’t answer more fundamental questions. “All of Europe needs to regain competitiveness in crucial industries and countries must abandon the logic of their own personal garden,” says Italian carmaker representative Roberto Vavassori.

Draghi could be a convincing champion for a more integrated EU that invests in growth, infrastructure and productivity, rather than one arranged along national budgetary lines. In a speech to the NBER in July, he said that the EU had “massive investment needs,” including a green transition that will require more than €700 billion ($747 billion) a year to meet climate goals, yet lacked the tools to meet them. In a subsequent op-ed for The Economist, he said more fiscal integration was the only answer to defending against a series of external shocks (Brexit, Covid, war): “Forging a closer union will ultimately prove to be the only way to deliver the security and prosperity that European citizens crave.”

This will require facing up to some truths about the export-led model of Germany in particular. Appointing Draghi to the competitiveness file could be the start of a Europe being willing to shift away from competition abroad and focus more on domestic demand, reckons Financiere de la Cite economist Nicolas Goetzmann, which has been a strong driver of US growth. Germany is once again being labeled “the sick man of Europe” after years of giving its neighbors their economic marching orders during the euro debt crisis of the 2010s. Back then, “competitiveness” was a loaded term, associated with pushing high-debt countries to drive down labor costs and rein in budgetary largesse along German lines.

Today, it’s precisely the German model that looks un-competitive. The manufacturing powerhouse driven by cheap Russian gas and exports to China is being squeezed by some of the highest energy prices in Europe. A report by the German Chamber of Commerce and Industry earlier this year found that more than half of companies were experiencing negative or very negative effects on their competitiveness as a result of the energy transition, with a rising number of manufacturers considering relocating abroad. German-led trade dependencies have made the EU weaker, according to Draghi: “Reliance on the United States for security, on China for exports, and on Russia for energy, today have become either insufficient, uncertain or unacceptable.”

Europe’s economic debate is shifting. A paper co-authored by Sander Tordoir, economist at the Center for European Reform, set out earlier this year why Germany needs a new growth model — including more infrastructure spending, higher wages and filling digitalization gaps. Draghi’s work may end up prescribing similar treatment for the bloc as a whole. When Le Monde asked the ECB’s Fabio Panetta whether the Ukraine war had “permanently” hit Europe’s competitiveness, the central banker responded: “Europe’s growth model for the past 20 to 30 years is running out of steam.” He has a point.

If there’s a chance to put more sustainable growth back on top of the agenda in the EU, Draghi is the man to seize it. But he has a lot of work to do.

Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. Views are personal and do not represent the stand of this publication.

Credit: Bloomberg