Draghi’s love letter to industrial strategy risks heartbreak

MARIO Draghi wants Europe to follow the United States and China down the road marked “industrial strategy”. As Europe’s most influential economist – a former head of the European Central Bank, former prime minister of Italy and technocrat supreme – Draghi had enormous leeway in preparing his report on European competitiveness. He could have focused on unleashing Europe’s entrepreneurs or lightening its burden of entitlements. But instead, he produced a 400-page love letter to industrial strategy.

Draghi advocates an increase of 800 billion euros (S$1.15 trillion) in the European Union’s collective investment, both public and private, to drive growth in the economy’s critical sectors. That massive sum is the equivalent of 4.4 to 4.7 per cent of Europe’s gross domestic product (for comparison, investment under the Marshall Plan in 1948-51 was 1 to 2 per cent of GDP). He carefully eschews the “old industrial strategy” of producing national champions and conquering global markets, but only does so to embrace the “new industrial strategy” even more enthusiastically.

Draghi’s world is one of forging common objectives, agreeing on joint plans and delivering coordinated responses, rather than creative destruction, animal spirits and neutral government. He wants to create a new “competitiveness coordination framework”, align trade policy with industrial policy, consolidate Europe’s fragmented telecoms industry, “engineer a coherent strategy for all aspects of decarbonisation, from energy to industry”, and secure critical supply chains. With this report, the world’s last remaining neoliberal great power – the EU – surrenders to the fashion for industrial strategy.  

Draghi focuses on three areas where he thinks that state activism is the only solution to the EU’s precipitous decline. The first is high-tech. The EU is stuck in a static industrial structure with the bulk of its research and development investment going to traditional industries such as automobiles. Not a single EU company with a market value of more than 100 billion euros has been founded in the past 50 years. Only four of the world’s top 50 tech companies are European. The only way to address this deficit is for the EU to organise joint funding for investment in “breakthrough innovation” and other “key European public goods”.

The second is the green transition. The EU ought to be primed to lead this, given the quality of its green-energy companies and the enthusiasm of many of its consumers. But in the past few years, it has been overtaken by China in electric cars and, to a lesser extent, the US in electric batteries. The danger is that the EU’s ever-tightening green regulations (internal combustion engines will effectively be abolished in the EU by 2035) will destroy Europe’s car industry, one of its biggest, as people snap up much cheaper Chinese electric cars. In response, Draghi suggests “defensive trade measures to level the playing field globally and offset state-sponsored competition abroad”.

The third area is collective security. With war raging in Eastern Europe and the US weary of paying more than its fair share for Nato, the EU needs to spend more money on defence while also modernising its armed forces. In 2023, Europe spent only 4.5 per cent of its total defence budget on R&D compared with about 16 per cent in the US. The solution: Stop buying so many weapons and parts from abroad and start using your defence power to consolidate a fragmented defence industry. Draghi also widens the notion of “defence” to include a “foreign economic policy”. Europe is dangerously dependent on supplies of, say, critical minerals from a handful of unstable countries. It therefore needs to shift its supply chains to friendlier countries and, if it does import resources from unstable countries, bind them to it through a combination of preferential trade agreements and direct investment.

Draghi is all too familiar with the classic problems that beset industrial strategy. He goes out of his way to argue that the EU has no choice but to opt for a state activism of their own, given China and America’s policies. He also warns about familiar evils such as picking winners and sliding into protectionism. He focuses on restructuring economic sectors rather than picking national champions. But he is nevertheless guilty of naivete when it comes to the power of technocratic planners to block rent-seeking or promote “disruption”. At one point, he argues that the best way to turn EU universities into engines of economic growth is to provide star professors with the same pay and perks as EU officials – hardly the formula that created Silicon Valley.

Introducing industrial strategy is difficult enough in nation-states with long traditions of collective action and popular consent. Draghi’s plans face more formidable problems. The EU decision-making process is glacial, subject to innumerable veto points and dominated by a bureaucratic class that lives in a world as different from the quicksilver world of the Internet economy as it is possible to be. The EU is still divided between an EU quasi-government, which pushes for ever more centralisation, and national governments that pay the bills; and the politics in both realms is increasingly polarised. Just three hours after Draghi’s speech unveiling the report, Germany’s Finance Minister Christian Lindner declared that Germany “will not agree” to one of Draghi’s central ideas, joint borrowing. That position reflects Germany’s abiding opposition to writing out a blank cheque to more indebted European governments.

The danger is that Draghi’s central idea (collective investment) will be frustrated by Germany, even as his subordinate ideas become twisted into an excuse for protecting incumbents (particularly the car industry), subsidising struggling companies and fencing out superior rivals. Draghi’s shiny new industrial strategy might look attractive to a Europe fearful of its fast-deteriorating competitive position relative to China and the US. But the Old Continent is more likely to end up with something different: a hotchpotch of old industrial strategies – some national, some Europe-wide, all of them distorted by vested interests – propping up Europe’s fading economies rather than producing the next Apples or Googles.