Draghi and Letta: Two strategies to tackle the EU’s competitive lag

On September 9, Mario Draghi, former president of the European Central Bank (ECB), presented his report on “The future of European competitiveness”. The report outlines strategies to strengthen Europe’s competitiveness in the face of an economic slowdown and growing reliance on external resources, particularly energy, a situation worsened by recent geopolitical tensions.

His assessment? Europe is falling behind in competitiveness, especially compared to regions like the United States and China. This is most striking in the tech sector, where 36 of the world’s top 50 companies are American.

“Europe is trapped in a static industrial structure, with few innovative companies driving new growth. In fact, no European company with a market capitalization exceeding €100 billion has been created from the ground up in the past 50 years, while six U.S. companies valued at over €1 trillion have emerged in that time,” Draghi notes in the report.

Bridging the innovation gap with other competing blocs is one of the key challenges Draghi identifies, as highlighted in a recent MAPFRE Economics report. Two other pressing issues follow: how to reconcile decarbonization with competitiveness, and how to enhance economic security while reducing dependencies. Achieving these objectives will require stronger European governance and greater public and private investment.

Draghi points to an annual investment shortfall of €800 billion in Europe, mainly in energy (decarbonization through technologies like renewables, hydrogen, and nuclear energy), digitalization (R&D and artificial intelligence), and defense (creating a single, integrated market for defense products), representing around 4.4% of GDP. To finance this, Draghi proposes a combination of private investment unlocked through public subsidies and a joint EU debt issuance initiative. He also advocates reforming the current budget, shifting focus from cohesion policies and agricultural subsidies to innovation, defense, and energy infrastructure.

Experts from the Elcano Royal Institute, a corporate partner of MAPFRE, emphasize that beyond the data and diagnosis, the true innovation in Draghi’s report is its proposed solutions. To address the innovation gap, Draghi recommends creating a European ARPA agency, offering incentives for “business angels”, and increasing the European Investment Bank’s (EIB) involvement. He also suggests fostering European pension plans, launching a more impactful R&D Framework Program, and increasing R&D spending across Europe, among other initiatives. For the second challenge—balancing decarbonization with competitiveness—Draghi advocates for reforming the electricity market to pass the benefits of decarbonization on to consumers and supporting innovation while ensuring a level playing field, including EU-wide industrial policies. Lastly, in terms of security and reducing dependencies, Draghi highlights the need to boost defense spending—a cost that “should be mitigated through cooperation”—as well as implementing an external economic policy with a “liberal” approach to trade.

Former Italian Prime Minister Enrico Letta published a similar report in April 2024, titled “Much more than a market”. In this report, Letta reimagines the European Single Market, arguing that the decline in competitiveness is primarily due to a lack of integration in the financial, energy, and electronic communications sectors within the EU. “There is an urgent need to catch up and strengthen the Single Market dimension for financial services, energy, and electronic communications. This entails establishing an integrated framework between the European and the national level”, he says.

Significant investment in innovation, digital transformation and green technologies would also be necessary to achieve its objectives, always taking into account the social dimension. “The Single Market is a powerful engine for growth and prosperity, but it can also be a source of inequality and poverty if its benefits are not widely shared or, worse, if it leads to a race to the bottom in social standards,” he asserts in the report. The size of the EU also takes on special relevance, given that having “a larger European Union is the best way to protect European interests”, with the focus on the methods and timing of that expansion.

The geopolitical context does not go unnoticed. “Our industrial capacity in the fields of security and defence must undergo a radical transformation to avoid repeating the dynamics observed during 2022-2024. In that period, while supporting the Ukrainian resistance, Europeans spent substantial amounts, yet around 80% of these funds were spent on non-European materials”, he explains.

Letta also speaks of another way to strengthen the Single Market: creating a “fifth freedom” (in addition to those of the free movement of people, goods, services and capital) through research, innovation and education to create a sustainable and resilient market, as MAPFRE Economics explains.

“The fifth freedom could come to complement this framework to catalyse advancements in areas such as R&D, data utilisation, competences, AI, Quantum Computing, Biotech, Biorobotics, and Space, among others. Such fields could greatly benefit from the inclusion of the fifth freedom within the Single Market framework, the freedom of investigating, exploring and creating for the benefit of humankind without disciplinary or artificial borders and limitations”, Letta comments.

Both the Letta and Draghi reports underscore the urgency of strengthening the EU’s Single Market and boosting competitiveness through innovation, regulatory simplification, and financial integration. They also highlight the critical roles of digital and green transitions as drivers of economic growth, particularly amid low productivity and energy resource scarcity in the region.

There are some key common recommendations:

• Align strategic objectives. Both reports recommend aligning strategic goals, such as enhancing innovation and financial integration, with clear implementation frameworks.
• Prioritize regulatory simplification. Simplify existing EU legislation to foster a more business-friendly environment and reduce administrative burdens.
• Promote inclusivity. Encourage inclusion and accessibility in market policies, ensuring support for small and medium-sized enterprises (SMEs) while maintaining social cohesion.
• Improve financial and digital integration. Advance initiatives like a digital euro and improved financing frameworks to strengthen the resilience of the EU’s internal market and enhance its global competitiveness.
• Increase investment in R&D. Focus on boosting investment in research, innovation, and strategic sectors to sustain the EU’s competitive advantage on the global stage.