The Economy Brief - Europe’s urgent search for finding 5% of GDP for investments

Europe's urgent search for finding 5% of GDP for investments

Former European Central Bank (ECB) president Mario Draghi urged member states to boost investments by 5% of their GDP to address Europe's challenges, but to do this, the Union must put aside political battles over public debt and financial market regulation and focus on keeping investment within the EU.

To become green and digital as quickly as politicians want to see while also increasing defence spending, Europe needs additional investments equal to 5% of its annual output, Mario Draghi wrote in his report on the future of European Competitiveness, published this Monday.

But in Germany, Europe’s largest and industry-heavy economy, additional investments at 5% of GDP alone are needed for competitiveness, the green and digital transition – without including defence, according to a study presented by the industry group BDI, this week.

Underlining the grave problems the bloc faces, the BDI described their study as a “wake-up call”, while Draghi called Europe's challenges “existential” and the necessary boost in investment “unprecedented”.

You might expect policymakers to rush to mobilise the necessary solutions, but nothing of the sort was observed this week.

When politicians did pay attention – Germany, for instance, was largely preoccupied with debates on migration and border controls – they fell back to the usual arguments: No to more public debt on the political right, and no to deregulating financial markets on the political left.

To find an effective way to increase investment, it is worth listening to experts who know very well where the political and institutional red lines are and how to use creativity to circumvent them.

Europe is facing an “existential challenge” to increase its productivity, Mario Draghi’s long-awaited report on European competitiveness states. “Now more than ever, we have to lean on productivity, but productivity is weak, very weak,” Draghi said at a press conference presenting the report on Monday (9 September). If Europe fails to increase productivity, it will be impossible to meet its political ambitions, Draghi said. “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,” he added. Read more.

German CDU leader and chancellor hopeful Friedrich Merz pledges to do “everything I can” to prevent the permanent issuing of EU joint debt. Speaking at a debate in the German Bundestag on Wednesday (11 September), Merz picked up the proposal to create a permanent joint EU borrowing instrument, which Draghi argued was necessary to fund EU priorities and to help integrate European capital markets. “I want to say this very clearly, now and in the future, I will do everything I can to prevent this European Union from spiralling into debt,” Merz said. He described the €800 billion “Next Generation EU” joint borrowing scheme, agreed upon during the Covid crisis, as “an exception.” “But what Mr Draghi proposed […] is not covered by the current provisions of the European treaties,” Merz said, adding: "I will do everything to prevent Europe from going down the path of such debt." Read more.

European Central Bank (ECB) President Christine Lagarde says that the responsibility for boosting Europe’s lagging competitiveness ultimately lies with EU governments rather than monetary policymakers. Speaking to reporters on Thursday (12 September), Lagarde, who succeeded Mario Draghi as head of the ECB in 2019, praised the “concrete” nature of her predecessor’s numerous proposed “structural reforms”, especially those relating to deeper integration of the Capital Markets Union (CMU). However, she said she was unaware of any suggestion in Draghi’s report that the ECB’s mandate should be modified and reiterated the bank's commitment to ensuring inflation returns to its 2% target. “I’m really certain that monetary policy will do what it has to do, which is to provide price stability and to deliver on its mandate… Structural reforms are not the responsibility of a central bank. They are the responsibility of the governments,” she said. Lagarde’s comments came as the ECB downgraded its GDP forecasts for the eurozone for the next three years by 0.1 percentage points and cut its key interest rate by 0.25 percentage points to 3.5% – the second rate reduction this year. Read more.

Chinese firms operating in the EU criticise Mario Draghi’s suggestion that tariffs might be required to protect European industries from foreign competition, warning that such measures could escalate trade tensions between Brussels and Beijing. The China Chamber of Commerce to the EU (CCCEU) also pushed back against the Italian technocrat’s repeated condemnation of Chinese “overcapacity” and portrayal of Beijing as a “high-risk supplier” of critical minerals in his much-anticipated report on EU competitiveness, published on Monday (9 September). “Regarding the report’s proposal to apply tariffs or other trade measures, the CCCEU cautions against actions that could escalate trade tensions and disrupt the global green technology supply chain,” a spokesperson for the chamber, which represents over a thousand companies operating across the union, told Euractiv. The spokesperson added that rather than pursuing “restrictive trade measures, ” Brussels and Beijing should adopt a “cooperative approach” to address climate change and promote sustainable development. Read more.

Mario Draghi’s call for EU policymakers to reduce companies’ regulatory burden to boost the bloc’s faltering competitiveness receives praise from European business groups but is criticised by Europe’s largest trade union confederation. President of the influential lobby group BusinessEurope, Frederik Persson, praised Draghi’s “call for a frank and urgent discussion” on the EU economy’s challenges. “We will pay close attention to the call for a renewed industrial strategy, which rightly prioritises measures like incentivising productive investments in Europe, lowering energy costs or reducing regulatory burdens on companies,” Persson said. By contrast, Esther Lynch, general secretary of the European Trade Union Confederation (ETUC), which represents more than 45 million European workers, vehemently denounced the report’s emphasis on “deregulation”. “The focus on deregulation included in the report must be rejected, including all attacks against ‘gold-plating’,” Lynch said, referring to member states’ practice of imposing additional regulations beyond those required by EU directives. Read more.

Mario Draghi’s call for the EU to continue to issue joint debt to finance key investments deepens the divide in Germany’s already fractious coalition government and receives strong criticism from the Netherlands. “Joint EU borrowing will not solve structural problems: companies do not lack subsidies,” German Finance Minister Christian Lindner, leader of the pro-business liberal FDP, wrote on X on Monday. Lindner’s appraisal contrasted starkly with that of Vice Chancellor Robert Habeck of the Greens, who described Draghi’s report as “a call to action for the new European Commission and the EU as a whole”. Draghi’s report received a more uniformly negative reaction from members of the Netherlands’ four-party coalition government, which includes the far right. “More money is not always the solution,” Dutch Finance Minister Eelco Heinen, another well-known fiscal hawk and member of the conservative People’s Party for Freedom, was quoted by Dutch news agency ANP as saying. Read more.

Europe should stop being “naive” and step up efforts to support its faltering industrial base to compete with China and the United States, says the newly elected chair of the European Parliament’s Economic and Monetary Affairs Committee. Aurore Lalucq (S&D), a second-term French MEP who was appointed head of the Committee in July, told Euractiv in an interview that the state-led industrial strategies pursued by Washington and Beijing have put Europe at serious risk of becoming “a continent of consumers” rather than manufacturers. “The world has changed; we are no longer [experiencing] a ‘happy globalisation’. The US is defending their economy. China is also defending their economy. And we need to do the same,” she said. “It’s not about being protectionist per se. We just need to stop being so naive." Read more.