“The Future of European competitiveness” document, commissioned by the European Commission and delivered by Mario Draghi in the second half of last year, undertakes a detailed analysis of the chronic issues impacting European productivity and competitiveness.
Set within the context of a global economy that is responding to a turbulent geopolitical environment, and reflecting the wide spectrum of European priorities in the sphere of climate change and resilience, this report can serve as a foundation for a renewed focus on delivering a competitive European economy by fostering growth within European businesses on the cutting edge of innovation.
Pressures on the European Economy
The report identifies three major transformations which the European economy must implement if it is to successfully navigate the coming decade: the need to accelerate innovation and growth, the need to decarbonise and promote sustainability while bringing energy prices down, and the need to increase resilience in the face of geopolitical uncertainty. The report points to a number of worrying metrics that indicate that the demand for EU products and services is falling with key trading partners like China, while Europe is failing to capitalise on growth opportunities such as innovation in the technology sector.
The twin shocks of the COVID-19 pandemic, and the invasion of Ukraine by Russia and the resulting energy crisis, have left the European Union in a vulnerable position, with growth stagnating at the same time that isolationist policies from the US and an economically aggressive trade approach from China threaten further instability. While trade openness is a key underpinning of the European project the EU must now take a realistic approach to global interdependencies that prioritises European resilience and security.
Innovation as the Driver of the European Competitiveness
The report identifies increases in productivity and population growth as the two key metrics that have fuelled European economic growth in the past. Acknowledging that demographic trends will mean a plateau and an eventual regression in the European population size, even after accounting for inward migration, Draghi places the emphasis on productivity gains as the solution to offsetting the impact of these trends.
This productivity, particularly in innovation driven sectors such as technology, must go hand in hand with a strong focus on developing skill sets within the labour market in order to ensure that the benefits gained through innovation in areas such as AI do not come at the expense of workers’ job security. Analysis carried out as part of the report indicates a number of obstacles to achieving the innovation required to make this transition, ranging from structural issues with the innovation lifecycle such as the financing, regulation, and scale-up opportunities for start-ups, to a lack of focus on breakthrough innovation in R&I public spending.
An Action Plan Towards Fostering Innovation
The report sets out ten key areas of action that can be broadly grouped into five categories. An emphasis is placed on facilitating access to finance for innovation, both through addressing weaknesses in the EU’s Framework Programme for R&I as well as improving the environment for international investment by incentivising business “angels” and seed capital investors. The key deficits identified in the current EU funding include a lack of focus on priority areas and on financing disruptive innovation, as well as an inadequate total budget and excessive bureaucracy in funding applications. Amongst other proposals the report proposes the doubling of the budget of the new Framework Programme to 200 billion euros over seven years.
Alongside this increase in funding the report seeks to identify areas of cost mitigation chiefly by supporting trade diplomacy towards establishing international agreements on cloud services between the EU and key allies, thus increasing efficiency, as well as continued public investment in high-performance computers to lower the cost of AI deployment under the EURO-HPC Joint Undertaking. An increase in funding is also required to prioritise supporting higher educational institutions in retaining key academics by creating an “ERC for Institutions” programme. Similarly the EU must prioritise key manufacturing sectors such as pharma by funding a number of life sciences innovation hubs.
The report also calls for an increase in coordination within the Single Market, both by coordinating public R&I policies across Member States to ensure a coherent and cohesive innovation policy, as well as by facilitating cross-industry coordination and data sharing to accelerate the integration of AI into European industry. A key part of this latter cross-industry coordination strategy is the harmonisation of national “AI Sandbox regimes” which should be capitalised on to identify necessary changes in regulation in order to support innovation.
This regulatory reform is also reflected in other areas of the report, such as the proposed consolidation of the telecoms sector by defining the telecoms markets at the EU level rather than the national level, thus allowing for a number of mergers alongside EU imposed requirements on innovation and investment. This approach of regulatory reform is also applied to a number of reviews and reforms that the report singles out as potentially necessary such those targeting bureaucracy in the process of registering and managing intellectual property as well as the regulatory burden on small companies.
Implementing the Draghi Report
In response to the Draghi Report, the European Commission has recently launched its Competitiveness Compass, which sets out a framework for the implementation of many of the proposed reforms.
This framework and its resulting actions, as well as how it may realise some of the specific proposals set out in the report, will be analysed in one of our upcoming articles.
