Europe's competitive edge at risk: Draghi's bold recovery plan debated

European countries are facing challenges in competing in global markets. Former Italian Prime Minister and former ECB President Mario Draghi proposed a recovery plan that wasn't well-received by everyone.

In the report, or rather in two reports by Mario Draghi, structural problems of the European Union and its member states in terms of global competition, especially with China and the USA, were highlighted. Among the issues noted were decreasing productivity, low innovation, a shortage of skilled workers, high energy prices combined with the costs of the energy transition, and the spread of unfair competition in international trade. The proposed solution was to increase investments by approximately 800 billion euros ($886 billion dollars) annually, which is about 5 percent of the EU GDP. By comparison, investments under the Marshall Plan were about 2 percent of GDP. The report also noted issues with defense and the arms industry.

Draghi pointed out two worrying trends. First, EU countries are keen to procure weapons and their components from outside the Community, limiting the development of the EU economy. At the same time, they are reluctant to invest in joint (and often their own) projects, weakening local R&D potential and leading to its dispersion. For example, during the period of increased defense purchases in response to the Russian invasion of Ukraine (from mid-2022 to mid-2023), 63 percent of the value of defense orders were placed with the American industry and 15 percent with non-American companies outside the EU.

In a similar period, EU countries allocated only 5 percent of their defense spending to R&D activities (about $11.8 billion), while in the USA, 16 percent of defense spending went to this purpose ($140 billion, several times more). The crisis is exacerbated by the fact that many countries are still avoiding meeting NATO's requirement of allocating 2 percent of GDP to defense (by the end of 2023, 9 out of 32 NATO countries had not met this requirement, most of which are EU members). Achieving this requirement by all EU countries would result in an increase in EU defense spending by about $66 billion.

The report emphasized that the dispersion of organizational efforts deepens production fragmentation. For example, 10 different types of 155 mm caliber guns were sent to Ukraine, not all of which use the same ammunition. The arms industry is also said to be over-regulated, similar to many other sectors.

As a remedy to this unfavorable situation, the author recommended increasing investments in R&D activities, the defense industry (within the framework of the aforementioned increased investment expenditures), and supporting European industrial integration. Draghi also proposed broader usage of the joint defense procurement mechanism and the creation of a separate position for a commissioner for the defense industry.

According to Draghi, public procurement regulations should be revised to favor EU solutions. When purchasing solutions outside the USA, a model should be sought in which many EU countries would purchase jointly to obtain better conditions, including moving production to the EU and ensuring technical support.

Draghi's plan as a whole is opposed by Germany, among others, who are reluctant to increase debt necessary to finance the extremely ambitious project. Skepticism regarding the discussed recovery plan for the EU enjoys cross-party agreement in Germany, whose economy is also slowing down. Regarding defense, Berlin seems to be sitting on the fence: on one hand, the interests of German arms companies are important, but on the other, where it's convenient, they prefer non-EU solutions.

The plan as a whole contains many elements worth discussing. In terms of defense, it is worth agreeing with Draghi that Europe spends too little on defense, including R&D and industry development. Defense cooperation in procurement should also be developed because, despite not always good experiences, the scale of joint orders should bring numerous benefits.

However, this requires systemic solutions, including harmonizing the requirements for equipment by various armies and creating uniform procurement procedures. On the other hand, cooperation with countries outside the EU does not necessarily have to endanger the EU economy; it can even support the realization of member states' global aspirations. Examples include the British-Italian-Japanese GCAP aviation program or, if it succeeds, the Polish-Korean cooperation.

The proposed integration of European defense, while potentially beneficial for the EU as a whole, also carries the risk of weakening or even eliminating smaller players in the market. While Draghi cites the USA as a positive example, Americans are currently seeking ways to rebuild smaller, more innovative companies.