What is the economic future of the European Union? What is in the Draghi report?

Former Italian Prime Minister and former President of the European Central Bank Mario Draghi states in a detailed report that the only possible path forward for the European Union is greater integration.

However, member states, some of which are very reluctant to accept comprehensive reforms, delegate powers, or coordinate policies, need to avoid blocking these efforts and provide adequate funding.

On September 9, Draghi presented the 400-page document titled 'The Future of European Competitiveness,' which was requested by European Commission President Ursula von der Leyen.

The main focus of the Draghi report is to pave the way for new investments and growth by increasing borrowing in the short term. However, Draghi proposes doing this within the framework of 'protective' economic policies.

The EU, which will take on more debt, could fund the 'European Army' project that French President Emmanuel Macron has long been advocating.

Protectionist economic policies could enable the EU to create its own economic giants similar to Google or Huawei, which could lead to a revival of the European economy.

The publication of the report comes just a few months after the presentation of the 'Letta Report,' which proposed deep changes to the European Union's internal market. However, Draghi's text is far more strategic and ambitious.

The text addresses three fundamental challenges for the European Union: closing the innovation gap with the US, reconciling decarbonization with competitiveness, and increasing economic security by reducing dependencies.

The report acknowledges that the era in which the European Union relied on cheap Russian energy, unlimited Chinese markets, and U.S. security has come to an end. These factors, combined with Europe's declining competitiveness and its lag in the fourth industrial revolution, necessitate a profound rethinking of the European Union's growth model.

While the diagnosis of Europe's competitive gap with the U.S. and China is not new, Draghi's detailed proposals provide a roadmap for the European Commission's next five-year term.

The Draghi report was published at a time when uncertainties regarding Europe's economic future are increasing. As Draghi states in the report, Europe is economically 'losing' against the US and China.

The return of the US and China to expansionary industrial policy caught the European Union unprepared. Europe's economic model was based on building an open and competitive market that benefited from free trade within a rules-based international system.

However, the emergence of expansionary industrial policy in the US and China, the erosion of multilateral institutions, the focus on economic security, and the relatively slower growth in production in Europe compared to the US have raised significant concerns about the viability of Europe's economic approach.

Draghi's analysis outlines the economic challenges facing the EU in 5 points.

According to this, the first problem is innovation. Draghi points to Europe's strong innovation capacity but emphasizes that more than a third of corporate 'unicorns' have primarily moved to the United States due to regulatory, financial, and educational barriers.

The second issue identified in the report is reconciling decarbonization with competitiveness. The energy crisis has led to significantly higher energy costs in Europe, which weakens Europe's competitiveness. Therefore, the effort for decarbonization is defined as an economic necessity.

Third, investing in the European defense industry and integrating it into the EU. The report offers a rather harsh assessment of the poor state of the European defense industry.

The report calls for more EU funding and an EU Defense Industry Authority that would make procurements on behalf of EU countries. Draghi also calls for the establishment of a 'buy European' principle that could come with incentives; a proposal that might unsettle US defense companies.

Fourth, the report addressing the issue of economic security emphasizes the need for greater EU strategic autonomy and economic security to reduce sensitivity to the economic problems of third countries.

While acknowledging the high costs of autonomy, Draghi suggests that these can be mitigated through cooperation among member states and trade agreements with non-EU countries.

In contrast to US protectionism, Draghi supports free trade agreements as tools to enhance security and de-risking.

This could open the door for Turkey to establish new partnerships with Europe in the field of defense.

Draghi calculates additional annual investment needs at over 800 billion euros, or approximately 5% of EU GDP.

Whether there will be an investment project to finance this high figure remains uncertain.

Financing these investments will require more private resources, which will necessitate the development of European capital markets, the completion of the Banking Union initiative, and the provision of more public resources for joint projects financed by EU borrowing.

Finally, Draghi emphasizes the need for simpler and more flexible regulations, criticizing the high regulatory costs for small and medium-sized enterprises.

The report also suggests a review of European competition policy to encourage projects that are in the common interest of European countries. The goal is to create 'European champions,' which are large companies capable of competing with giants from the US and China.

It is not yet clear whether the Draghi report will become official policy. However, the likelihood of the report being implemented appears high.

If this happens, there will be comprehensive changes in the EU economy.

Experts have long criticized the EU for being 'overly stable' in economic and political terms. According to the EU's Draghi report, charting a new course could create a new situation that renders these criticisms invalid.

The report aligns well with the priorities of the new European Commission, which will take office in December 2024.