Europe faces hurdles in global competitiveness: Draghi's call for unity

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 indicated. Among the reasons highlighted 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 solution proposed was to increase investments by approximately €800 (£675) billion annually, which is about 5 per cent of the EU GDP (by comparison, investments under the famous Marshall Plan were about 2 per cent of GDP). The report also noted issues with defence 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, which obviously limits the development of the EU economy. At the same time, they are reluctant to invest in joint (and often their own) projects, which weakens local R&D potential, leading to its dispersion. For example, during the period of increased defence purchases in response to the Russian invasion of Ukraine (from mid-2022 to mid-2023), as much as 63 per cent of the value of defence orders were placed with the American industry and 15 per cent with non-American companies outside the EU.

In a similar period, EU countries allocated only 5 per cent of their defence spending to R&D activities (about €10.5 billion), while in the USA, 16 per cent of defence spending went to this purpose (€127 billion, i.e., several times more). The crisis is exacerbated by the fact that many countries are still avoiding meeting NATO’s requirement of allocating 2 per cent of GDP to defence (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 increase EU defence spending by about €60 billion.

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

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

According to him, public procurement regulations should also be revised to favour 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, technical support, etc.

In the USA, Germany bought, among others, F-35A multipurpose aircraft, 60 heavy CH-47F Chinook helicopters, and 10 P-8A Poseidon patrol aircraft. Especially the last transaction sparked controversy because Berlin initially planned to choose a French solution. Germany also eagerly imports or collaborates in the production of armaments with Israel.

Examples include the active Trophy protection system, air defence solutions (which, according to Germany, should be part of a “European” missile shield), the MELLS anti-tank missile (local version of Spike 2LR), or the planned purchase of PULS artillery rocket systems. The latter are becoming quite popular in Europe after purchases by Denmark, the Netherlands, and Spain.

Draghi’s plan as a whole is opposed by Germany, among others, who are reluctant to increase the debt necessary to finance the highly ambitious project. It can be said that scepticism regarding the discussed recovery plan for the EU enjoys a cross-party agreement in Germany, whose economy is also slowing down. Regarding defence, 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 defence, it is worth agreeing with Draghi that Europe spends too little on defence, including R&D and industry development. Defence cooperation in procurement should also be developed because, despite not always having good experiences, the scale of joint orders should bring numerous benefits.

However, this requires systemic solutions, including harmonising the requirements for equipment by various armies or 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 realisation of the global aspirations of member states. Examples include the British-Italian-Japanese GCAP aviation programme or - if it succeeds - the Polish-Korean cooperation.

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