Europe’s Competitiveness Crisis Requires More Than Technocratic Tinkering

Do you want the good news or the bad news first?

Good news, of course. Europe is finally waking up to the fact that it has serious innovation, competitiveness, and productivity challenges—what the 2024 Draghi report calls “an existential challenge.” The bad news? Very few European leaders are willing to acknowledge that Europe’s problems are caused by its social democratic worldview. Until that changes, not much else will.

The Draghi report essentially says the EU badly needs growth so it can continue doing what it has been doing. I hate to be the bearer of bad news once again, but it doesn’t work that way. Growth requires change. It is not manna from heaven that lets you keep your poor, non-growth habits.

The report states:

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.

The right statement would have been: “If Europe wants to become more productive, we will have to choose.” Choose between the precautionary principle and the innovation principle. Choose between a large social safety net and a competitive business environment. Choose between stability and creative destruction. Choose between a comfortable petit bourgeois commercial sector and a rough-and-tumble, mega-corporate sector that can fight and win in global markets, especially against China. Choose between America and China.

The report goes on to wax eloquently about:

Europe’s fundamental values are prosperity, equity, freedom, peace and democracy in a sustainable environment. The EU exists to ensure that Europeans can always benefit from these fundamental rights. If Europe can no longer provide them to its people – or has to trade off one against the other – it will have lost its reason for being.

I thought Europe’s fundamental values, at least since the Enlightenment, were rationality, scientific progress, industrial development, and wealth creation. So the better question is not whether it will have to make trade-offs, it will, but whether Europe continues to degrade into a deindustrialized tourism economy marketing its Middle Ages cathedrals and quaint urban squares. If it does, what will Europe’s reason for being be?

Once you set the terms of debate by putting much of the needed change off base for consideration—as violations of Europe’s fundamental values—all that is left is technocratic tinkering. Everything meaningful has been defined as anti-Europe.

Of course, the number one “tinker” is the single market. During a speech last November, European Central Bank President Christine Lagarde said that EU growth was slowing (from a business-cycle, not productivity, perspective) and that the answer was more cowbell. Sorry, I couldn’t resist: more single market. How many years does it take to get there? You’ve been at it since at least 1951 with the European Coal and Steel Community. Either force it on the member states now or just admit they don’t want one and move on to things you can actually do.

As for the Draghi report, it highlights three goals to “reignite sustainable growth.”

“First, and most importantly, Europe must profoundly refocus its collective efforts on closing the innovation gap with the US and China, especially in advanced technologies.”

Ah, yeah… did you see the memo about this? To close that gap, Europe actually has to abandon its ambivalence toward these technologies and embrace the creative destruction that comes with them. It also needs to stop believing that the EU regulatory juggernaut is a growth engine. In reality, it is a Sisyphean task to try to catch up with America and China in digital technologies like cloud computing, internet search, social media, and the like. You are so far behind that your efforts will fail, diverting human, political, and financial capital from areas where Europe could really lead, such as biotechnology, automotive, robotics, advanced chemicals, and more.

“The second area for action is a joint plan for decarbonization and competitiveness.”

This is like calling for a joint plan to eat more hamburgers and reduce heart disease. However noble the EU’s intentions to save the world from climate change, this is a plan for non-competitiveness. By raising EU energy costs and shackling EU producers with a multitude of restrictions, EU exporting firms, especially energy-intensive ones, will continue to lose market share, and EU productivity in the energy sector will fall. Saying that decarbonization is a growth strategy does not make it one.

“The third area for action is increasing security and reducing dependencies.”

This goal is even more hollow. While the report doesn’t come right out and say it, it effectively calls for independence from both the Chinese Communist Party and the U.S. Republican Party. Good luck with that. After China takes most of your auto, chemical, machine tool, biopharma, and electrical equipment market share, dependency on America for internet applications will be the least of your worries. Besides naively treating America and China as equal threats, this “reducing dependency” strategy means not only wasting money on sectors that Europe should be trading with the free world for (like many advanced logic and GPU chips) but also diverting attention from building on the EU’s actual strengths to drive specialization and global leadership.

When it comes to what to do, the report is more of the same. “First,” the report calls out that “Europe is lacking focus.” No kidding, but the real question is why Europe lacks focus. It is not because of a lack of widespread understanding of its challenges. The Draghi report is just one in a long line of op-eds, books, and reports that have called attention to them.

There is little focus because the political base doesn’t want to focus on competitiveness, productivity, and innovation. It wants a stronger social safety net. More climate regulation. More subsidies and protections for small companies. Keeping farmers happy. Regulating pretty much everything, even technologies barely emerging from the lab. Making sure everyone everywhere gets their piece of the Brussels pie so the Union doesn’t fall apart. And of course, blaming the Americans.

The problem is not focus; it is fundamental orientation and a rigid commitment to a fantasy world. The reality is that Europe’s idea of a growth policy is to slightly reduce its resistance to growth and digital disruption. It is to slightly reduce its restraints on business and innovators. It is to prosecute American tech companies just a bit less.

Europe’s idea of a growth policy is certainly not—to paraphrase Martin Wiener’s 2004 book, English Culture and the Decline of the Industrial Spirit, 1850-1980—to worship size, speed, digitalization, and money. (For more on the role culture plays in economic strategy and digitalization today, see my two-part post from February.) At its core, the EU reflects a general ambivalence toward the digital economy and society, which dampens rather than promotes digital transformation. For Europe, the digital glass is always half empty.

As such, all the talk in the Draghi report is nice, but it misses the point. The EU will not change unless there is a broad-based, fundamental change in how it sees itself in the world economy. The single most important thing European elites can do is recognize that they no longer live in a world where they can be “price makers.” In other words, leaders in Brussels and the national capitals have long deluded themselves into thinking they could create a globally dominant Europe that replaces the crass American hegemon. A Europe so big and powerful that it could ignore the requirements of a competitive business climate (including avoiding innovation-crushing regulations and the climate “hair shirt”).

EU leaders have also convinced themselves that social democratic policies expanding redistribution and regulation are pro-growth. In recent years, the EU has gone even further, believing it can export this model globally and establish its social democratic utopia as the dominant paradigm—with Europe at the center. Abandoning that dream is painful, to say the least, which is why Europe shows so few signs of change.

Indeed, the prevailing view is: “No need for us to change, especially not to become like those libertarian, gun-toting Americans. We will change the world, not America or China.” The Draghi report is ultimately a call for growth so that this EU utopian project will have the heft to succeed. More growth means change can be avoided. But let’s be clear, the project was doomed in a world where countries compete intensely for technological leadership. Few countries want to self-impose the EU’s shackles.

And while many are happy to take some EU subsidies, they will not be constrained by the EU’s “no-growth” regulatory model. Even worse for the EU’s utopian ambitions, the new “price maker” is China, which is outright hostile to the EU project and everything it represents. Unless the EU jettisons its noble but futile yearnings, it risks becoming a vassal state to Beijing. Enjoy your “prosperity, equity, freedom, peace, and democracy” then.

China, in particular, should serve as the wake-up call. Europe failed to fully integrate. It clung to the belief that social democratic economics was not a recipe for stagnation. It opposed large corporations and idolized small, independent (and often unproductive) firms. It tried to win in digital industries where it had little chance, and in the process became reflexively anti-American. Now, Europe is not just losing; it is falling behind decisively. And it is China, not the United States, that is outcompeting it.

The bottom line is that fixing the EU’s productivity, innovation, and competitiveness crisis will require more than speeches from neoclassical economists like Lagarde or reports from social democratic technocrats like Draghi. It will require a fundamental political reorientation.

Alas, as the failures of social democratic, socialist, and green policy visions become more evident each year (including the shortcomings of mass immigration), the alternative emerging in Europe seems to be a hard-right nationalist reaction, one that looks increasingly Trumpian in its competitiveness thinking (e.g., deregulation, expanded energy production, protectionism). But these movements do not seem interested in supporting what Europe truly needs either: a centrist, national developmentalist agenda that accepts the world as it is; aligns with the United States to preserve freedom and democracy; and fully embraces, with enthusiasm, creative destruction, rapid innovation, and robust economic growth.

Until Europe makes that shift, it will remain stuck—and we can expect more Draghi reports, more tinkering, and, ultimately, more decline.