Mario Draghi’s best ideas are those Europe finds least comfortable
Adam Smith thought that achieving spectacular economic growth required little more than “peace, easy taxes and a tolerable administration of justice”. Don’t tell Mario Draghi, who has just penned almost 400 pages on boosting European “competitiveness”, meaning economic growth. This is the second technocratic door-stopper commissioned by the European Union as it tries to bring stagnation to an end. As Mr Draghi observes in our online By Invitation column, an ageing population means that, if productivity growth does not rise, Europe’s economy will be no bigger in 2050 than it is today.
By the standards of such reports, Mr Draghi’s is commendably plain-spoken. The former Italian prime minister and president of the European Central Bank writes with authority and much of what he calls for is desirable. That includes more integrated markets, so that startups can benefit from scale among their customers and their financial backers. Mr Draghi also wants to unify decision-making on public investments; to pare back the thickets of regulation ensnaring Europe’s firms; and to link up electricity grids.
The biggest question was how much he would endorse the interventionist policies many politicians crave. Here Mr Draghi is too sympathetic to the mercantilists and their calls for subsidies for “strategic” industries, such as carmaking, the relaxation of competition and state-aid rules, and tariffs on imports from China. He pays little heed to Europe’s high-tech success stories, which owe more to markets than governments. Even the academic papers Mr Draghi cites in support of his case are generally agnostic about whether state support brings aggregate benefits to an economy, rather than just helping favoured sectors.
Yet Mr Draghi is no crude protectionist. He admits, for example, that in some industries Europe should not attempt to match foreign subsidies on exports but instead allow “foreign taxpayers to contribute to higher consumption by European consumers”. He often appeals to national security, which is a more solid basis for intervening than attempts to boost growth. If Europe follows his advice, its industrial policy will at least be thoughtful and guarded.
Mr Draghi’s most headline-grabbing analysis is that Europe needs investment by the private and public sectors to rise from today’s 22% of GDP to 27%. Germany, especially, needs this spending. Well-executed subsidies for R&D might work at a continental level. But northern Europe has little desire for more joint spending, a subject that Mr Draghi dances around.
Another problem is that Mr Draghi’s recommendations are so numerous that policymakers will be able to pick and choose from among them. Europe is used to wringing its hands over “competitiveness” and urging investments in infrastructure and technology: Jacques Delors, a former president of the European Commission, did that as early as 1993. Yet extra spending and subsidies are no fix for the structural issues that require Europe to embrace reform. As Mr Draghi also points out, the continent needs bigger, better and more integrated markets, which requires some centralisation but not dirigisme.
If policymakers ignore this and instead use Mr Draghi as intellectual cover for weakening competition and state-aid rules, allowing governments or the EU itself to pursue an excessively interventionist agenda, then Europe’s problems are likely to get worse. Mr Draghi might have done better to have focused his message on the things that Europe’s politicians do not want to hear. ■