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Former ECB President Mario Draghi presented on Monday a report on the future of European competitiveness. It contains strategic-economic plans that should make Europe competitive again. Europe has been lagging behind for some time, especially in terms of technology, compared to America and China, where one tech company after another is rising from the ground. What exactly is going wrong in Europe and how can the continent turn the tide?
The timing of Draghi's presentation of his report could hardly be better. Last week, alarming figures were again presented about the German economy. In July, industrial production in Germany was 2.4 percent lower than in June. This means that the level is 5.3 percent lower than a year earlier and no less than 17 percent lower than during the peak in 2017. High energy prices have been a problem for German industry for some time. 'Hommeles in industry', is how economist described it Han de Jong the situation in his column.
As can be seen in the chart, German industrial production took a hit mainly after the energy crisis in 2022. (Source: Crystalcleareconomics)
That a new reality may have emerged is also evident on a micro level with the disturbing news that Volkswagen is considering the closure of factories. To date, such a closure has not occurred in our eastern neighbors, but high costs put the group in a difficult position. The profit margin has shrunk to 2.4 percent. However, high personnel costs are not the only problem facing the Germans. They also just can't seem to match the software of Chinese competitors. Volkswagen kept the development of the software in-house, while Renault recently changed course and outsourced the development. As a result, Volkswagen is labeled as old-fashioned in terms of technology in China, where brands such as BYD are rapidly gaining market share from the German car brand.
According to the former president of the ECB, large-scale investments are needed to get the EU back on the right track. These investments amount to around EUR 800 billion per year, which is equivalent to 5% of GDP. That would be much higher than the Marshall aid that Europe received from the United States after World War II. Part of the funding can be covered by the current EU contributions from the Member States, but Europe will also have to look for new forms of funding.
Draghi argues for Eurobonds to finance such investments. In that case, the European Commission issues bonds, which means that the member states share the risk. With the introduction of the euro, exchange rate differences have disappeared, but today that difference translates into interest rate differentials on government bonds. For example, yields on Italian government bonds rise much faster when there is turmoil in the financial markets than their Dutch counterparts. It has already led to the introduction of the Transmission Protection Instrument, which allows the ECB to intervene if interest rate differentials between Member States widen too wide.
Europe has a lot of activity, but many companies specialize in technology in which there is no longer a breakthrough. As a result, 270 billion euros less is spent on research in Europe than in America and China. On the other hand, America and China have gone along with the trend of digitization. The lion's share of the largest companies now come from America or China. Earlier this year, Holland Gold Even though our own country is less represented in the list of the largest companies. Whereas in 2008 there were 17 Dutch companies in the top 1000, that number has now fallen to 7. In 2008, there were even two companies in the top ten largest companies, but Shell is now British and ING has since been relegated to place 200.
Draghi also notes that Europe needs to catch up. While such catching up will be very difficult for some technologies, there are great opportunities in areas such as robotics and artificial intelligence. To achieve this, European regulation needs to be overhauled. Currently, many regulations make it difficult for startups to advance to the next stage. Between 2008 and 2021, 30 percent of European Unicorns, startups with a market value of more than 1 billion, are headquartered to other countries. Most of them left for America, where there are much more lenient rules for companies.
There are also opportunities for Europe in the field of energy. European companies are suffering a lot from high energy prices. Electricity, for example, is two to three times more expensive than in America, and gas prices are four to five times higher. Draghi writes in his report that sustainability and competitiveness must go hand in hand. For example, Member States should jointly purchase gas in order to save costs, and less tax should be levied on energy. Since Europe does not have the luxury of a large availability of raw materials, it must fully commit to the construction of sustainable energy sources. Permits for the construction of such energy sources should therefore be made more flexible so that a wide variety of energy sources can be created quickly.
An interesting overview of Europe's position in various industries.
However, Europe is in a difficult situation. Such investments require strong decision-making in Brussels, but currently member states can block proposals with a veto and many proposals require unanimity. Also, countries such as Germany and the Netherlands are hesitant when it comes to Eurobonds, as there is a fear that the South will piggyback on the creditworthiness of the North. The parties that are most critical of European cooperation also won big in the last elections. As a result, there is little chance that proposals for more European cooperation will pass the parliaments without a fight. Nevertheless, Europe has to navigate its way into the new reality, in which it is caught between different power blocs at a time that seems to be becoming much more turbulent than in recent decades. Draghi's plan is not lacking in ambition, but whether the proposals of the former president of the ECB can also be translated into concrete actions remains a question where the answer is not forthcoming.
(Photo Mario Draghi: WORLD ECONOMIC FORUM/swiss-image.ch/Photo Remy Steinegger)
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On behalf of Holland Gold, Paul Buitink interviews various economists and experts in the macroeconomic field. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here to subscribe.
