Draghi urges radical European Union reform requiring extra 800 billion euros a year

The European Union needs up to 800 billion euros ($884 billion) in additional investment per year to meet its key competitiveness and climate targets, according to a report from economist and politician Mario Draghi.

The bloc’s goals of bolstering its geopolitical relevance, social equality and decarbonization are being threatened by weak economic growth and productivity compared with the U.S. and China, the report states.

The wide-ranging study led by Draghi — who previously served as prime minister of Italy and president of the European Central Bank during the euro zone debt crisis — found EU priorities must include reducing energy prices, strengthening competitiveness, coordinating industrial policy and raising defense investment.

The EU must also adapt to a world where “dependencies are becoming vulnerabilities and it can no longer rely on others for its security,” the report found, citing the EU’s dependence on China for critical minerals, and China’s reliance on the EU for absorbing its industrial overcapacity.

The EU’s high level of trade openness will leave it exposed if trends toward supply chain autonomy accelerate, the report continues. Roughly 40% of Europe’s imports come from a small number of suppliers which are difficult to replace, and around half of this volume originates from countries with which the bloc is not “strategically aligned,” it says.

“The EU will need to develop a genuine “foreign economic policy” that coordinates preferential trade agreements and direct investment with resource-rich nations, the building up of stockpiles in selected critical areas, and the creation of industrial partnerships to secure the supply chain of key technologies,” the report states.

The EU will need to ensure dependencies do not increase and look to “harness the potential of domestic resources through mining, recycling and innovation in alternative materials.”

Other goals include full implementation of the single market, which includes 440 million consumers and 23 million companies, by reducing trade friction.

The bloc must also seek to ensure its competition policy does not become a “barrier to Europe’s goals,” particularly in the technology sector.

The European coalition must also facilitate “massive investment needs unseen for half a century in Europe,” through a mix of private finance and public support. The EU is meanwhile suffering an “innovation deficit” which must be tackled through reforms to research and development funding and policy, the report states.

Across many sectors, the report calls for greater harmonization of policy and focusing of funding. In clean technology development, for example, it found financial support was fractured among different programs, while manufacturers were struggling to compete globally, given Chinese subsidies and the huge domestic support provided by the U.S. Inflation Reduction Act.

On steps to mobilize private finance, the report recommends transitioning the European Securities and Markets Authority (ESMA) from a co-ordinator of national regulators into a single regulator for all EU securities markets able to focus on overarching goals, similar to the U.S. Securities and Exchange Commission (SEC).

To fast-track policymaking, the report proposes limiting the voting items that require support from an absolute majority of member states.

Public and private investments are being hindered by the size of the EU budget, its lack of focus and its risk aversion, the Draghi report says. It adds that looming repayments of the huge debt-financed NextGenerationEU Covid-19 recovery program starting in 2028 mean that the EU’s effective spending power will be reduced without a decision on sourcing new resources.

Certain areas of spending proposals, including defense projects and cross-border grids, will require “common funding,” it continues, adding that the EU should move toward “regular issuance of common safe assets to enable joint investment projects among Member States and to help integrate capital markets.”

Germany, traditionally resistant to moves toward additional common borrowing, responded to the proposals on Monday.

“The communalization of risks and liability creates democratic and fiscal issues. Germany will not agree to that,” Finance Minister Christian Lindner said, according to a CNBC translation of a Reuters report.

The EU’s total investment-to-GDP rate will have to rise by around 5 percentage points of EU GDP per year to levels last seen in the 1960s and 70s to meet defense, digitalization and decarbonization targets, according to the study.

Overall, the objectives set out would require a minimum annual additional investment of 750 to 800 billion euros, according to European Commission estimates.

The report was commissioned last year by European Commission President Ursula von der Leyen, who was elected for a second five-year term in July and is set to appoint new Commissioners this week.

Some analysts were quick to pour cold water on the scale of the resulting reform.

The findings “will trigger a crucial debate for the future of the EU/Eurozone, but there is no need to hold your breath,” Lorenzo Codogno, founder of Lorenzo Codogno Macro Advisors, said in comments emailed ahead of the report’s release.

“Nothing will happen until the new Commission becomes fully operational, and even after that, the tricky, fragmented and fragile political situation across member states makes it challenging to obtain the political support necessary for action. Still, some surprises cannot be ruled out, and thus, the political debate that will follow needs to be monitored carefully,” he said.

David Roche, founder of Independent Strategy, said the report would not result in an immediate market impact.

“The gap between US and EU productivity could be bridged by [Draghi’s] proposals to integrate nationally based supply side sectors and markets and boosting public and private investment massively. But it won’t happen,” Roche said in a note Monday, describing Europe as “paralysed by populism and incompetence at the national level.”

– CNBC’s Sophie Kiderlin contributed reporting.