Why the Draghi Report Is a Huge Opportunity for Germany

In the autumn of 2023, Commission President Ursula von der Leyen gave Mario Draghi a task – figure out why Europe’s economy is struggling so much. A year later, he presented the results of his investigation in nearly 400 pages. His main conclusions: the European economy is suffering from stagnant productivity growth, little innovation, a shortage of skilled workers, high energy prices and brutal competition in global markets. Add to that the monumental tasks of decarbonisation and reducing dangerous dependencies, as well as a chaotic mix of economic policies without a coherent strategy.

Sounds familiar to German ears? That’s no coincidence. Unlike during the Eurozone crisis, Germany is now in the eye of the storm. Since 2019, the German economy has practically flatlined. Its industrial production is shrinking faster than in the rest of the Eurozone. Productivity growth has fallen below the European Union average. And no other EU economy is as exposed to China’s aggressive state-backed push into its key sectors as the German one.

But Draghi’s report doesn’t just offer a refreshingly blunt analysis. It is an invitation – particularly for Germany – to tackle these issues jointly in a European framework. To fully grasp this, however, one needs to read the report, not just hit Ctrl+F and search for the word “debt.”

What you will then find are two main proposals. First, Draghi argues that the framework conditions for Europe’s businesses must be radically improved. What is needed is cheaper energy – yes, including nuclear – along with an ambitious Capital Markets Union, serious red tape cutting and better access to skilled labour. German companies have been calling for these measures for years. Now, Draghi has laid out a detailed plan to make them happen.

Second, the report calls for an EU industrial policy strategy worthy of the name. On this point, Draghi is right too. Of course, industrial policy has been happening in Europe for some time, but what is missing is a coherent strategy.

Sometimes, member states let companies fail, sometimes they intervene. Sometimes they support the transition to climate neutrality through regulation, other times they do not. Sometimes they protect domestic production with tariffs and standards, and at other times, they let global competition reign.

Meanwhile, the EU continues to pile on regulations that often do not align with national policies. The result is an expensive, inefficient mess that fails to offer policy and planning certainty – just look at the internal combustion engine phase-out debate. It is hard to envy anyone making 30-year investment decisions under these conditions – who will likely delay or relocate their investments.

To fix this, Draghi says, Europe must make a choice. The continent must finally agree on which sectors it will let the market have its way – up to the point of allowing production to leave Europe – and which sectors it wants to maintain and rebuild for strategic reasons. These decisions must then be followed by concrete actions, including regulation and financial support.

Draghi’s blueprint for a coherent industrial policy hits the nail on the head. If we get this right, Germany has much to gain. Business and households would have planning certainty and could rely on a large internal market where all economic policy levers now pull in the same direction.

Even financially, Draghi’s plan does not have to result in a loss for Germany. Take, for example, the EU’s Horizon Europe research funding program, where Germany is the main beneficiary. If there was a significant European funding programme for decarbonising industry or building chip production, the money would not flow to Sofia or Salerno, but to Munich and Magdeburg.

If Germany wants to solve its problems with Europe, rather than against it, a confident response to the report could look like this: Let’s take Draghi at his word and quickly implement all the improvements to framework conditions for our businesses.

Let’s decide what sectors deserve our support and put the full force of the continent behind that decision. Let’s ensure that industrial policy is not a disguised redistribution programme, but that production happens where it makes the most economic sense. And once we’ve agreed on all of this, then we can talk about money – but only then.

Anyone who refuses to have this discussion because they fear the spectre of EU debt is missing a huge opportunity for the German economy. Those who actively shape the debate now can achieve a lot – and still say no in the end, if the result is not right. In reality, it is not a hard decision.

This text is a translation of an op-ed that was published in Handelsblatt on 17 September 2024.

About the authors

Lucas Guttenberg is Senior Advisor for European economic policy at Bertelsmann Stiftung.

Nils Redeker is Deputy Director of the Jacques Delors Centre.

Sander Tordoir is Chief Economist of the Centre for European Reform.