Mario Draghi's economic plan is a barely disguised power grab on behalf of the Brussels elite.
Source - Spiked 02/10/24
The European Union’s proposed solution to its economic struggles? More centralisation. More interventionism from Brussels. More EU, in other words.
That is the key message from Mario Draghi’s report on the future of European competitiveness, published last month. It may present itself as a sober economic analysis, complete with proposed policy solutions. But this report – commissioned by the EU and produced by a former head of the European Central Bank – is best understood as a political manifesto for an ever closer EU, controlled from Brussels.
Indeed, Draghi contends that the EU’s economic difficulties stem from what he calls too much ‘fragmentation’ along national lines. He even attributes the cumbersome nature of EU regulations to their ‘national fragmentation’. This, he writes, has led to inconsistencies and differences in how rules like the ‘commendable’ General Data Protection Regulation (GDPR) are applied. ‘The ultimate goal’, he states, ‘should be to make EU and national regulation a consistent single corpus’, formulated by the European Commission.
Draghi consistently blames the EU’s economic and political problems on the difficulty of reconciling differing national views and interests. For him, at least, the answer is obvious: more EU. ‘We must take a new stance towards [members’] cooperation’, he writes, by ‘removing obstacles, harmonising rules and laws, and coordinating policies’.
‘Coordinating policies’ here clearly does not mean co-operation. It means Brussels’ top-down control of Europe. That is why Drahgi’s report is chiefly concerned with ‘strengthening governance’ – a euphemism for the extension of the European Commission’s power. Stronger governance, he writes, ‘means “more Europe” where it really matters’. And this means less national sovereignty where it really matters, too.
The report’s economic analysis, such as it is, serves as a justification for the EU’s key objective – namely, the further political centralisation of Europe. Draghi argues that the EU needs to implement interventionist economic and industrial policies in order to compete with the US and China, and that these would be best undertaken on a Europe-wide scale by Brussels.
To come to this conclusion, Draghi rehearses a familiar economic narrative. Until the turn of the millennium, Europe’s economies were generally doing okay, he claims. Since then, though, Europe has fallen way behind the US and, more recently, China, which is described as a ‘geopolitical rival’.
He also reiterates the now standard suggestion that to rescue its economies, Europe needs to emulate the US and adopt the sort of industrial policies introduced by the Biden administration. This means pouring hundreds of billions of euros into ‘forward-looking’ sectors, like green energy, semiconductors and storage batteries.
Each part of this narrative is flawed. Firstly, the contrast between US dynamism and European sluggishness is overstated. Anyone can cherry-pick economic data from the US that look better than Europe’s, but that doesn’t tell us much about their relative economic dynamism. What we have seen in recent years, rather, is America’s greater economic resilience to recent global shocks, from the financial crisis to Covid to the war in Ukraine. This partly derives from its strongest asset – the continuing global role of the dollar. This helps maintain demand for US Treasury bonds, thereby facilitating federal borrowing and enabling the extraordinarily loose budget policies we’ve seen under presidents Obama, Trump and now Biden. For example, this year’s US budget deficit is expected to be about six per cent, double that across the EU.
This unusually high level of Washington spending, not least during and after the pandemic lockdowns, keeps the American economy active. But it has not prevented the decline in American productivity growth. Even with its high levels of public spending, and its huge fossil-fuel resources, the US is suffering from similar problems to Europe. Workers’ incomes have stagnated, the quality of jobs remains poor and infrastructure is crumbling.
Moreover, Draghi is sometimes a little economical with the truth to establish his thesis – that Europe needs similar levels of investment to the US, controlled centrally by Brussels.
To illustrate the gap in overall productive investment between the two economies, Draghi’s researchers exclude Ireland from the EU data – presumably because of Ireland’s high investment rates since 2015 – and selectively exclude investment in housing from their measure of overall investment. This partial comparison with the US helpfully generates what looks like an annual investment shortfall as a share of GDP for the ‘EU (without Ireland)’ in the years following the financial crisis.
However, if Draghi had simply compared the EU with the US over this period for all gross investment (gross fixed capital formation), then it would have shown the US lagging behind Europe. From 2009 to 2022, gross investment averaged 21 per cent across the EU versus 20.3 per cent in the US.
Draghi doesn’t let inconvenient data get in the way of his argument. Instead, his team were able to finesse the statistics to justify his demands for more US-style intervention and more EU control.
In fact, going back to the start of the 21st century, there isn’t much difference at all between the equally disappointing records of both Europe and the US when it comes to productivity growth. A comparison of the decade before the 2008 financial crash (2000-2007) and the one after (2011-2019) is revealing, and directly contradicts Draghi’s claims about the US’s superior performance. It shows that US productivity growth fell by slightly more than Europe’s did in the decade following the financial crisis.
Secondly, these drops in productivity growth have been accompanied by a broadly common set of economic policies. On both sides of the Atlantic, governments imposed easier monetary policies, similar regimes of business subsidies and had similar recourse to protectionist trade measures.
Thirdly, this transatlantic policy alignment points to what has actually become the biggest obstacle to the US and the EU escaping their productivity slumps. The underlying source of Europe’s economic plight, like those of other mature economies, has been the gradual seizing up of its productive mechanisms since the 1970s. This ‘seizing up’ is shown by the reduced churn or turnover in businesses and jobs. Over the past few decades, company exit-and-entry rates have slowed, industry concentration levels have risen and both job creation and destruction have trended downward.
This contrasts to historical periods of economic crisis when business churn would tend to rise as the less efficient companies went bankrupt, allowing workers and resources to move into more productive sectors and companies. This churn would have the beneficial outcome of higher average productivity levels. Now, we have more rigid and inflexible business structures, where most of the unprofitable firms manage to keep afloat. This clogs up resources and tends to lead to the freezing of productivity levels.
Draghi himself recognises this problem. ‘Europe is stuck in a static industrial structure’, he writes, ‘with few new companies rising up to disrupt existing industries or develop new growth engines’. Yet while this is true, Draghi fails to drill down into the reasons why this has been happening. This is likely because the ‘reasons why’ would contradict his argument for heftier state activism.
For almost four decades, novel fiscal, monetary, procurement and regulatory policies have all tended to prop up existing business, whether they are productive or not. This ongoing attempt to support the economic and corporate status quo has not been a purposeful strategy. Rather it’s been the semi-conscious product of a culture dominant within European and other Western elites. A culture fearful of change and prone to micromanagement. A culture with no grand visions, no trust in people, and no confidence that genuine change could make things better. As a result, policymakers across the West have sought to avoid any unnecessary risks and disruption, and have tried instead to preserve what exists, at all costs.
In Brussels in particular, this apprehensive, safety-first approach has found favour in place of the traditional ‘creative destruction’ that usually characterises capitalism. The huge downside of this protective, safety-led state intervention is that by preventing many businesses from collapsing, it robs the market system of its periodic bouts of cleansing, when unproductive businesses and debt would get wiped out. In the absence of any cleansing, we have economies dominated by large slow-moving, state-dependent corporations. These exist alongside an assortment of zombie businesses – corporate deadwood, kept alive because of state-backed largesse, and with a limited capacity to invest in technology. Hence, the weakness of innovation and the sluggishness of productivity growth.
Most of the Draghi report’s proposals reflect this cultural disposition to support the status quo. Yet throwing enormous amounts of money at a stagnant economy doesn’t kick-start innovation. As we’ve seen in America, it mostly helps bigger businesses expand their operations and defend their market position. Intentional or not, this acts to buttress the incumbent corporations. Outwardly they can appear stable, but internally they can be pretty fragile, as is well illustrated by the current troubles at Volkswagen, or Danish wind-farm firm, Oersted.
To hasten productivity growth, what European economies really need is a twin approach aimed at transforming this damaging economic culture. In short, we need to get government out of business matters, and businesses out of government responsibilities. Instead, what we get from Draghi is a 400-page tract for more intrusion by the Brussels bureaucracy in the affairs of both businesses and national European governments.
This article is based on an introduction given at the conference, Unshackling Europe’s Economy: What Holds Us Back?, held in Brussels on 24 September 2024, organised by MCC Brussels.
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