In the EU, the taboos of the 2008 economic crisis have already been overcome, when budget cuts were the recipe for overcoming the financial problems of peripheral countries, including Spain, and the issuance of public debt ran into practically insurmountable walls. Austerity was left aside during the pandemic, while expansive spending was the response that the 27 gave to the crisis left by the coronavirus. And the recipe persists in the face of the “existential challenge” of the region’s loss of competitiveness in the face of the United States or China, powers with which the gap is increasingly widening.
At a time when fighting not to be left behind in this fierce competition has become the “number one” objective of the European Commission and the capitals of the 27, the institutions have mandated the former Italian Prime Ministers Enrico Letta and Mario Draghi, also former President of the European Central Bank (ECB), reports in which both place public investment as one of the main ingredients for the EU to emerge from its lethargy. The formula proposed by the two Italian liberal politicians is that public injection serves as a lever to develop the private sector.
The former ECB president and former vice-president for Europe at Goldman Sachs even puts forward a figure for the necessary investments: between 750,000 and 800,000 million euros per year. This represents between 4.4 and 4.7% of the EU’s GDP. “To digitalise and decarbonise the economy and increase the EU’s defence capacity, total investment relative to GDP will need to increase by around 5 percentage points of EU GDP per year,” says the document, which supports throughout the dossier the idea that budgetary discipline must be strictly respected.
What the Italian economist does not specify is what part of this money should correspond to public investments and what part should be undertaken by the private sector. He does establish the distribution by sector: 300 billion should be allocated to energy; 150 billion, to transport; 150 billion, to digital technologies (where Draghi warns that the real gap between the EU and the United States is occurring, for example); 50 billion for defense capabilities; and between 100,000 and 150,000 million to promote innovation.
Germany says “no” to European public debt
The report devotes a specific chapter to how to finance these investments. “The EU can meet these investment needs without overburdening the resources of the European economy, but the private sector will need public support to finance the plan,” the document states. On the one hand, it recommends facilitating private investment with greater integration of capital markets, which now meet national criteria of taxation, control or insolvency. On the other hand, it engages in the joint financing of common public goods, among which it cites energy interconnections or defense equipment, through the issuance of European debt. Draghi argues that there is a recent and successful example in the Next Generation EU funds launched during the pandemic.
The Eurobond formula, also mentioned in the report presented by Letta a few months ago, is a very controversial tool within the EU. In fact, Germany was quick to oppose it. “By assuming a common EU debt, we will not solve any structural problems: companies do not lack subsidies. They are tied down by bureaucracy and the planned economy. And they have difficulty accessing private capital. We must work on this,” said the Minister of Finance, the liberal Christian Lindner.
And herein lies the problem with these types of reports, namely that the transition from paper to practice is complex and requires the approval of countries, which have overlapping interests. Germany is not in favour of issuing debt, while it is committed to showing all possible flexibility in terms of state aid, given that it has the fiscal power to support companies. For the time being, it is taking over the authorisations that the European Commission has granted in recent years for this type of subsidy, causing an even greater fragmentation of the single market. In fact, Draghi is committed to ending the wide margin that Brussels has enjoyed since the pandemic and to limiting state aid.
Expensive energy and oligopoly
The report also focuses on the energy market, “crucial for industry”, and regrets that the higher prices paid by the EU have been a brake on investments. “The price difference with the United States is mainly due to Europe’s lack of natural resources and its limited collective bargaining power, despite being the largest buyer of natural gas in the world,” it underlines.
According to his analysis, the EU has not taken sufficient advantage of its monopsony position [en teoría económica se refiere a la situación en la que un producto tiene un solo comprador]”and is too dependent on spot prices, which threatens Europe with more volatile natural gas prices.”
“This lack of leverage is particularly notable in the case of the pipeline, where the scope for redirecting gas flows is more limited, as demonstrated by Russia’s latest failed efforts. During the 2022 crisis, for example, intra-EU competition for natural gas between agents willing to pay high prices contributed to excessive and unnecessary price increases. In response, the EU introduced a coordination mechanism to aggregate and match demand to competitive offers, but there is no obligation for joint purchasing,” he observes.
Furthermore, the report warns that this gap is also due to fundamental problems in the EU energy market. “Investments in infrastructure are slow and suboptimal. Market rules prevent businesses and households from enjoying the full benefits of clean energy on their bills,” it laments.
On the other hand, he criticises the fact that the influence of financial markets has increased “price volatility”. Draghi describes a context of oligopoly [en teoría económica, cuando un puñado de empresas controlan un mercado]: “A few non-financial companies carry out the bulk of commercial activity in European gas markets.”
“The top five firms hold around 60% of positions on some exchanges and their short positions have increased significantly, almost 200%, between February and November 2022. Monitoring of the activities of these firms could be improved,” he advises.
Immigration as a lever for growth
Beyond the lack of dynamism of innovation, the dependence on third countries for raw materials and the fragmentation of the single market which constitute the classic diagnosis of the loss of European competitiveness, the document that Draghi submitted to the President of the European Commission, Ursula von der Leyen, comes up against the rejection of immigration that Europe has been experiencing in recent years and which is largely linked to the rise of the extreme right.
Draghi warns that demographic ageing and, as a result, the loss of the working population will have adverse consequences for the European economy that immigration will not be able to compensate for. “Historically, labour force growth has been a major driver of GDP growth in all major economies, with the working-age population increasing steadily. In the EU, however, growth in the working-age population has slowed since the 1990s and has started to decline overall in the last decade, mainly due to falling birth rates. “Positive net immigration does not compensate for the EU’s demographic decline,” the document says.
“Long-term demographic projections indicate that the EU population will continue to decline. This decline contrasts with that of the United States, whose population will continue to grow in the coming decades, albeit at a slower pace.”
It also prevents the EU from attracting foreign talent and retaining existing ones. “In addition to tech talent, the EU should simplify and streamline immigration procedures for highly skilled workers, including fast-tracking visas and residence permits for skilled professionals. Beyond the immigration procedures themselves, Member States should offer attractive job opportunities to highly skilled professionals and European mobility schemes, such as the Blue Card scheme, which facilitates the entry and stay of highly skilled third-country nationals for work purposes,” she added. the report states.
He is also critical of the European educational level, accusing it of failing to train new generations in the skills required by the market. This echoes the difficulties that companies have in finding qualified employees (a quarter say they have had difficulty finding employees with the right qualifications and 77% of EU companies say that even newly hired employees do not have the necessary qualifications).
“Skills shortages are a barrier to innovation and technology adoption and could also hamper decarbonisation. Europe produces high-quality talent in science, technology, engineering and mathematics (STEM), but its supply is limited. The EU produces around 850 STEM graduates per million inhabitants per year, compared to over 1,100 in the US,” it compiles.
