Is the Dragi Report Good for EU Citizens?

Is the Dragi Report Good for EU Citizens?

The EU Commission appointed Mario Dragi to examine how the European economy might be kick-started to boost economic growth. The Dragi report was published in late 2024 running to almost 400 pages. Last week the leaders of all member states met for a big Summit in Belgium to discuss this report and how to increase economic growth and to catch up with the USA.

Later this year the Irish government will chair the EU for six months. Our unpopular government could become popular with all 450 million EU citizens if it decided that enhancing Social Europe was to be the objective of our presidency of Europe. The Taoiseach could do this by ensuring that the Dragi report does not become a mechanism to undermine the lives of citizens to the benefit of European business as some think it might.

The Dragi Report is called  "The future of European Competitiveness". Mario Dragi, the former European Central Bank Governor for eight important years has a good reputation as he is credited with saving the Euro from collapse during the euro crisis with the famous comment "I will do what it takes" (on July 26, 2012, ) which calmed financial markets. Economist Paul Krugman said he was the greatest central banker of all time.

What is Competitiveness?

There is no definition of what the word competitiveness means in the report. A broad definition would be big focus on productivity, industrial innovation, and speed. It focuses on the ability of European companies to operate within a more unified Single market, compete with global rivals like the US and China, and overcome structural challenges such as high energy prices and slow digital adoption.

Competitiveness was crudely seen for a long time in Ireland as solely short-term movements in labour costs. This put the blame for poor economic development on trade unions. Fortunately it was later recognised as more complex when the National Competitiveness Council was established in 1997, as part of a Social Partnership agreement. Its reports take a broad and take a more accurate view of what the term competitiveness means. It is close to the inclusive  and broad 12 pillars set out by the World Economic Forum's Index, where labour costs are  but a part of one of 12 drivers.

The Issue and Context

The report opens by saying that EU economic growth, slowing since the start of the 21st century is "an inconvenience but not a calamity. " It  points out that Europe largely missed out on the digital revolution and says the productivity gap between the EU and the US is largely due to the tech sector. Europe is weak on many tech sectors that would drive future growth, with only four of the world's top 50 companies are European. It warns that Europe's workforce is due to shrink by 2 million workers each year between now and 2040.

Europe's fundamental values are set out clearly in the report as being "prosperity, equity, freedom, peace, and democracy in a sustainable environment."  The report argues that the only way to provide for these ambitions is to grow and become more productive while "preserving our values of equity and social inclusive exclusion." Therefore the report does have a strong emphasis on a social democratic type of Europe.

Actions

The Dragi report says there are three areas for action to stimulate economic growth. First and most importantly, it must refocus its collective effort on closing the Innovation gap with the US and China, particularly in tech. Secondly, is to have a joint plan for a decarbonisation and competitiveness to shift power generation towards secure low-cost clean energy. The third area for action is increasing security and reducing dependencies such on external suppliers of critical role materials. These are needed in building the clean energy transition and to become more alliance self-reliant on digital technology and chips. For example, it argues for coordinated preferential trade agreements (like Mercosur) and direct investment with resource-rich nations. It also argues the EU defence industry is too fragmented.

Dragi argued that member states are acting individually on industrial policies and their actions are not coordinated. It argues that there are three barriers, First it sees the lack of focus, with no backing up of common objectives. Secondly, Europe is wasting common resources particularly as it has huge collective spending power. Thirdly, Europe does not coordinate where it matters. It's industrial strategies, unlike the US or China are scattered - for example, legislation takes an average of 19 months for Europe to agree new laws. These are reasonable arguments.

Thus a new industrial strategy for Europe must be laid out and executed. Europe also needs Finance for a new investments particularly in technology, whereas Europe's capital markets are scattered throughout its own states.  It points out that most New Tech companies move to America for finance (as we have seen in Ireland with Stripe etc). Therefore it proposes Europe must advance its Capital Markets Union. Draghi also recommended an annual investment boost of EUR 800 billion to boost EU competitiveness. It also proposes that cross border electric grids must be strengthened with common action. Dragi also focuses on defence procurement within Europe, "while ensuring that European democratically elected institutions are at the centre of all debates" so that this ambitious plan enjoys democratic backing.

Thus, it can be seen that the report's author is very keen to retain the European Social model. It says that the European model combines "an open economy, a high degree of market competition and a strong legal framework and active policies to fight poverty and red distribute wealth". There might be some division on the last point, albeit Europe is less unequal that the US.

A Focus on Deregulation

A major criticism by many progressives is its focus on deregulation. As a former trade union economist who represented Irish workers in Europe for many years, I had often to listen to the European Commission's officials extolling the virtues of deregulation and asserting how labour markers regulation was stifling Europe. I always made the counterpoint that they needed to look at corporate governance, particularly the dominance of "shareholder value" in many European countries, which of course ultimately contributed to the financial collapse. The Dragi reports does not emulate that but it still has quite a lot on the need for deregulation. No one knows more than the Irish people what no regulation in financial markets means, after the crash of 2008 where all six banks collapsed and the taxpayer had to bail them out borrowing 64 billion, which was over two years of total tax revenues.  Good regulation is to be commended and bad regulation and slow implementation of regulation should be addressed. In my experience. Ireland is a country that is less bureaucratic than the other countries in Europe. So flexibility is fine, provided it is done under the guide of social inclusion.

In my view, Europe needs to focus on economic development which is not the same as economic growth and that its states need to work closer. The Dragi report is a very good start on how Europe should get its act together.  However, the report does come from a fairly conservative and orthodox economic perspective.

Economist, Danny Rodik, said of the Dragi report that "for many of the EU's leaders, the holy grail is the American Silicon Valley model of innovation. These leaders point to the “innovation gap” between the US and the European Union that the Dragi has documented and advocate reforms – such as financial market integration and digital deregulation – that would, in effect, make Europe more like the US."

This is a vital point. It is also important that we do not believe the nonsense that that the best innovation is the garage start up of the big tech companies. As Mariana Mazzucato has pointed out in "The  Entrepreneurial State" (reviewed in TASC blog here) the key components in the mobile phone were invented by the public sector and not by any lone garage entrepreneurs. Yes Steve Jobs did a great job in building the iPhone but it was based on public sector Innovation in America and Europe.

Further, European countries spend billions and subsidising private companies. Indeed Ireland gives hundreds of millions to the big tech firms which are located here in subsidies and grants. One of the Dragi's recommendations is that European countries stop competing with each other for these companies investments, which is a good point. Mazzucato argues that European state subsidies to private firms must from now on be tied to a quid pro quo for the state particularly to ensure a successful drive to the green transition.

Rodik continues "US productivity growth since 2000 has been lacklustre and last week's summer in Belgium in response to it sets out our steps forward, but they are tentative and orthodox. The European Social model must be protected as we advanced economic development. The tech sector is an island in an economy where many workers need a second job to keep their heads above water." He points out that American tech companies have become virtual monopolies/oligopolies and that they are not diffusing technology to other firms and are in fact strongly opposing it. In the US inequality is growing as the rewards flow upwards.

Rodik also argues that  Europe cannot return to its manufacturing glory days. There will be no more jobs in factories and he points out that even China has lost millions of manufacturing jobs over the past decade. The future of good Jobs in Europe will demand that we  focus on services, and we must enhance both productivity and working standards in areas ranging from care to hospitality. He concludes "if Europe is to assert itself on the global stage, as it should, it needs to restore its self-confidence. The world needs an alternative to the US and Chinese models, and for that, Europe’s leaders must have the courage to chart their own course."

Conclusion

The Dragi report and last week's summer in Belgium in response to it are steps forward, but they are tentative and orthodox. The European Social Model must be protected as we advance economic development and good jobs must be at the core to the green transition.

Paul Sweeney     @paulsweeneyman

Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions. He was a President of the Statistical and Social Enquiry Society of Ireland, former member of the Economic Committee of the ETUC, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.