Europe's wake-up call to avoid 'slow agony' of decline

Europe must make radical reforms and ramp up investment to catch up with the United States or face a painful decline: that is the message of a report by former European Central Bank chief Mario Draghi that EU leaders will debate on Friday.

Draghi identified the smorgasbord of challenges that the European Union faces: sluggish economic growth, a slowdown in productivity, low innovation and rising dependencies on other countries for critical raw materials, including China.

Of particular concern for Draghi in his 400-page report published in September is the widening gap between the United States and Europe in terms of economic output, innovation and more.

The Italian ex-premier called for "a new industrial strategy for Europe", with extra investment of up to 800 billion euros ($863 billion) a year and drastic policy changes.

For Draghi, his report is the antidote to avoid a "slow agony" of decline for Europe.

Here are some of Draghi's recommendations:

New trade era

Draghi warns Europe the world is entering a new era of trade policy to which the bloc is "already adapting" but he warned against "the pitfalls of protectionism".

That warning came even before Donald Trump won back the White House.

The EU has new tools to tackle thorny trade issues -- heeding the lessons of Trump's first term that began in 2017 -- but Draghi said their use "should be pragmatic and aligned with the overarching goal of raising the EU's productivity growth".

Draghi urges Brussels to take a cautious "case-by-case" approach and deploy "defensive trade measures" to create a level playing field and secure critical supply chains.

Mind the innovation gap

One word which frequently pops up in the report is innovation, with Draghi especially pushing for Europe to close "the innovation gap" with the United States and China.

But innovation in the tech sector requires a lot of money, meaning only the largest companies can afford to take the necessary risks to innovate.

Draghi's answer? Europe should look at mergers between companies in a different way and "assess how the proposed concentration will affect future innovation potential".

But in return, companies merging together must commit to investment that the EU would monitor to "prevent improper uses" of the "innovation defence".

This investment focus extends to the telecoms sector. Draghi recommends "facilitating" the merger of operators at the European level to bolster network investment.

(More) money, money, money

Europe's financing needs are "massive" to fulfil the report's objectives, Draghi said.

There would need to be an extra annual investment of 750-800 billion euros to finance the EU's green and digital transition as well as its greater defence needs.

And he put the onus on both the public and private sectors to finance the investment.

"The private sector will not be able to bear the lion's share of financing investment without public sector support," the report said.

Draghi raised the idea of joint borrowing, which is backed by France. But other states, including Germany, vehemently oppose common debt, concerned that it would force them to contribute disproportionately more than other countries.

Citing the EU's historic 800-billion-euro coronavirus recovery fund, Draghi said common borrowing could be used to "finance joint investment projects that will increase the EU's competitiveness and security".

Deepening financial markets

According to Draghi, there is a lot of untapped money in the European economy.

European households have billions of euros more in savings than those in the United States but these "are not being channelled efficiently into productive investments".

One remedy for this is that the EU must forge ahead with plans to build the capital markets union, which would better mobilise private capital in the 27- country bloc.

Draghi also wants to encourage individual Europeans to invest in private pension funds and create joint bodies to supervise markets.

The push fits in with the theme throughout the report of greater integration. For example, Draghi wants the EU to boost its joint defence procurement.

"We have large collective spending power, but we dilute it across multiple different national and EU instruments," he wrote.

Less red tape

During a period where the EU wants its businesses to flourish and prosper, instead European companies are suffering from "the rising weight of regulation", Draghi wrote.

The report pointed to three main hindrances: overlapping and inconsistent rules, the extra burden from fragmented regulation across the bloc and laws that especially load small and medium companies with "a proportionally higher burden".

He noted that the bid to streamline the EU's rules has had "limited impact so far".