Draghi’s report makes it clear: Europe has a Germany problem

The former ECB chief has warned that Europe will enter "a slow agony” unless it commonly invests €800 billion a year in its industry and more common debt. German ministers immediately shot that down.

"For the first time since the Cold War, we must genuinely fear for our self-preservation." So warns former European Central Bank chief Mario Draghi in his much-anticipated report on European competitiveness published today. It has been hailed as both the right diagnoses and the right prescription by business groups across the continent. But, almost immediately after it came out, it was rejected by Northern European politicians who are aghast at the solidarity Draghi says Europe must show in order to survive in an increasingly dangerous world.

EU leaders asked Draghi to draw up the report in light of the increasing GDP gap between the EU and its competitors, the US and China. The widening gap between Europe and America has been particularly alarming, as the economic recovery from the pandemic has been much faster and more robust in the US. Draghi has not sugar-coated the problem in his report, laying the blame at the feet of unambitious national leaders in the EU who refuse to understand that in order for things to remain the same, everything has to change.

“Without action, we will have to either compromise our welfare, our environment or our freedom,” the former ECB chief, also a former Italian prime minister, says in the 400-page report. "We should abandon the illusion that only procrastination can preserve consensus," he said. What he is calling for is essentially a new Marshall Plan - except this time, Europe would help itself rather than depending on help from America. He says an additional €800 billion per year is necessary in public and private investment in order to make Europe relevant going forward in the 21st century. "If Europe cannot become more productive, we will be forced to choose. We will not be able to become, at once, a leader in new technologies, a beacon of climate responsibility and an independent player on the world stage. We will not be able to finance our social model. We will have to scale back some, if not all, of our ambitions."

Draghi specifically recommends two things that have horrified Northern European politicians. For one, he says more joint debt (eurobonds) will be necessary to finance the economic, industrial and defence needs of the continent. He also suggests that Europe should stop playing by American-imposed free market rules that America itself no longer plays by. The EU’s competition rules should be relaxed to allow for the formation of European champions who can take on global rivals. Telecoms in particular should face less scrutiny so they can provide EU-wide services, taking into account European innovation needs and economic security, he concludes.

Drahi’s tough words were widely praised by European business leaders. Petri Salminen, president of SMEunited which represents European small businesses, said Draghi “identifies correctly the problems Europe has with productivity and competitiveness, along with a clear call for urgent action.” Ilham Kadri, CEO of Syensqo and president of the European chemical industry association Cefic, said: “As a CEO of a global company facing global challenges, I can tell you every boardroom in the world is now watching how fast action is taken. It is not the time for business as usual in Europe. This report provides proposals that need urgent implementation: it is our chance to double down and get it right.”

But in order for these recommendations to be implemented, Europe’s national leaders have to say yes. And while business leaders welcomed the report, political leaders - particularly in Europe’s frugal North - have been more muted or downright hostile today. The report was barely out before Berin said ‘nein’. "Joint EU borrowing will not solve the structural problems,” snapped German Finance Minister Christian Lindner. “Germany won't agree to this."

Indeed, at several junctures in the report, Draghi comes tantalisingly close to naming and shaming who has been the big block on European progress. Many of the things recommended in the report, such as joint debt and relaxed competition rules, have been pushed by France for years. But Germany, wedded to the principles of anti-protectionism and anti-debt, has always resisted.

It isn’t just in the economic sphere that Germany is holding the EU back. Draghi also calls for the EU to develop and support its own defence policy that can lead to a capability for self-defence. This has long been called for by France. But Germany, which has shown unyieldingly blind trust in the American military protectorate, consistently blocked these efforts until the Ukraine War and still today is back to dragging its feet, worried that increased EU defence capability will undermine NATO.

The scary thing about today’s report isn’t its recommendations. It’s the knowledge that in today’s Europe, led by a blundering German government and an internally distracted French government, it’s hard to imagine them ever being accepted. It is clear that the government of embattled German Chancellor Olaf Scholz is flailing, as was evidenced today by the shock announcement that Germany will impose checks on all nine of its national land borders, in violation of the EU Schengen code and without consultation with neighboring governments. It is clearly a desperate attempt to seem to be responding to the victory of the far-right AfD in last month’s local elections in Eastern Germany.

How can the EU confront its massive challenges when its main core country is trapped in a paralyzing inertia? How can it show ambition when its core country is allergic to it? And how can it acknowledge tough global realities when its core country is stuck in the past, refusing to see the world as it truly is today?

Europe has all the ingredients to make it a global superpower. If it pooled its economic and military might, it would be easy to address all these challenges. But national politicians have a natural instinct to avoid this pooling of power because it dilutes their own. And without a functional and realistic Germany to lead by example, all will be lost. The big question is: who can convince the Germans to be good Europeans? If not Draghi, then who?