Mujtaba Rahman is the head of Eurasia Group’s Europe practice. He tweets at @Mij_Europe.
In January, the European Commission unveiled a sweeping new strategy to help the EU remain competitive. It was a move that underscored growing worries over the widening innovation and productivity gaps between Europe and its global rivals, and was in direct response to intensifying global competition, stagnant growth, weak demographics and new headwinds from high energy costs, security risks and trade policies.
But while political progress to date suggests the EU is still falling far short in closing its competitiveness gap with the U.S. and China, it’s also wrong to conclude that the entire “Draghi” agenda is blocked.
Indeed, there are bright spots to be found, including the EU’s efforts to cut red tape, the improving outlook for European defense funding and the consolidation of the bloc’s defense-industrial base. In other areas of the agenda, however — such as deepening banking and capital markets integration or improving the continent’s tech ecosystem — progress remains lackluster.
So, let’s take a closer look.
First, the biggest advances made so far are in the area of defense. Brussels has now relaxed its fiscal rules to allow countries to spend 6 percent of GDP over 4 years on defense, and for this not to count against their deficits. EU leaders have also agreed to a €150 billion loan facility that will enable member countries with less fiscal space to benefit from cheaper Commission borrowing from capital markets, which will then be passed onto them as loans.
The EU has taken formal steps to encourage joint procurement of defense equipment and to prioritize local suppliers as well. And there was, of course, a big fiscal move from Germany, which ditched its debt brake, allowing for unlimited borrowing outside the regular budget beyond 1 percent of GDP, as well as the €500 billion special vehicle meant for infrastructure.
The problem, however, is that a very large number of member countries don’t have the fiscal room to ramp up defense spending — certainly not to reach the 5 percent target — unless the EU agrees to more common financing, as it did with Covid-19 and the NextGenerationEU facility. And this depends on Germany leveraging its economy to the benefit of Europe.
If Europe really is going to deliver Pan-European defense public goods — such as integrated air defense; a European satellite, intelligence and drone program; and other so-called “European strategic enablers” — it’s going to need common borrowing to do it.
Meanwhile, another key priority in Brussels has been reducing administrative barriers for businesses, and EU governments are likely to make significant gains in this area. The Commission has already presented two draft “omnibus” packages to cut red tape, focusing on sustainability, corporate due diligence and investment. The aim? Reducing the regulatory burden without altering the overall direction of sustainability policies.
More such bills are now expected on defense, digital, mid-caps and sustainable finance. And the Commission has also adopted a “one in, one out” principle for new administrative requirements, aiming to help further reduce the regulatory burden.
This imperative is as political as it is economic, as this agenda is essential to keeping center-right parties on board in both the European Parliament and the European Council.
Unfortunately, however, this is where much of the good news ends.
When it comes to efforts on integrating capital markets, for example — which is a big agenda item — the political obstacles remain formidable. Even though the Commission has presented its latest strategy for greater integration of the EU’s banking sector and capital markets, member countries continue to resist the harmonization of corporate and foreclosure laws, tax regimes, pension systems, and market supervision and infrastructure.
And when it comes to the EU’s tech and digital ecosystem — another big ticket item — the bloc still continues to face structural barriers in closing the gap with Silicon Valley, which retains its advantage with European startups hungry for funding and talent. This situation is unlikely to be addressed without the closer integration of EU capital markets. And while the Commission unveiled an ambitious “AI continent” strategy in April, substantive legislative initiatives will take time.
Overall, tech is essential to the wider strategy’s success, yet it still accounts for most of Europe’s productivity gap with the U.S., and progress has been too slow.
There are other things EU leaders can do in the meantime, however. For example, with the U.S. and the EU now striking a deal on tariffs, Washington’s haphazard approach should revitalize the bloc’s wider trade agenda.
The EU-Canada trade deal is a great start in this direction. But the agreement is still in what’s known as “provisional implementation,” which 10 EU member countries have to ratify. And without full ratification, the investment parts of the deal can’t take effect.
If successful, the EU-Latin America trade deal, Mercosur, would be an even bigger prize here. Currently, France remains the deal’s biggest antagonist since the country has concerns over agricultural “dumping.” However, Brussels is now trying to negotiate safeguards to satisfy the political concern in Paris that a deal done over French President Emmanuel Macron’s head would invite the far right to power in 2027.
Finally, another test on trade will be Brussels’s ability to finalize deals with countries in the Gulf and Asia-Pacific — including India and Australia. The hope with these deals isn’t just to unlock greater market access but also to secure supply chains, while looking to revamp Europe’s industries.
U.S. President Donald Trump’s return to the White House has created the potential for a real economic revival in the EU — and the answers are all in Draghi’s report. But even though some progress is being made, EU leaders still need to do more to grasp the nettle and really bolster the continent’s growth prospects.
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