Draghi calls for joined-up thinking in Europe
Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This article is an on-site version of Martin Sandbu’s Free Lunch newsletter. Premium subscribers can sign up here to get the newsletter delivered every Thursday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersFree Lunch readers will be well aware that the Draghi report has landed. In his long-awaited (and delayed) work, Mario Draghi, star-quality former Eurozone central bank chief and ex-prime minister of Italy, set out his analysis of Europe’s productivity challenges and how to address them.There is a short version (well, 69 pages) of the report that I recommend reading in full. For those who want more, there is a much longer in-depth version here. And for those who can’t be bothered to spend much time but want to be able to say they have read something, Draghi offers a readers’ digest version here.There are a lot of excellent ideas in the Draghi report. The analysis is clear-headed: while the task was to look into the EU’s “competitiveness”, Draghi wastes no time in stressing that this should be understood as how to improve productivity — and as a mercantilist zero-sum agenda where export surpluses are better the bigger they are, or “using wage repression to lower relative costs”. (It’s only a decade ago that Eurozone policymakers insisted on “competitiveness” when they meant lowering the labour share of income.) The many very good policy proposals include: more investment and more common funding for common goods; using better the EU’s size to improve terms by procuring raw materials and natural resources jointly; creating a truly single market for company financing (the capital markets union project) and removing barriers for companies to scale up to the level of the continent-sized market; and defining the desired trade-off between promoting domestic clean tech production and making use of Chinese capacity to meet European decarbonisation goals.You can read more about the details in my colleagues’ write-up and the FT’s largely positive editorial. But Brussels is the place good reports come to die. Only months ago, the Letta report on the single market also delivered plenty of good advice, as did many reports before it. So although Draghi’s answers to the question of “what” — what does the EU need to do — are excellent, the biggest question is the “how” — how to actually achieve all these things.That’s why I think the most original and consequential parts of his report, and so far those that have caught the least attention, are on how to change the way the EU makes policy. Draghi’s hundreds of pages of policy proposals amount to one big call for more joined-up decision-making. Here he is on how to make the decarbonisation agenda a success for productivity (my italics):Executing this strategy will require a joint decarbonisation and competitiveness plan where all policies are aligned behind the EU’s objectives.This includes not just domestic policy, but requires what Draghi calls a “foreign economic policy”. And here he is on a particular illustration of a failure to do so (my italics again):The automotive sector is a key example of lack of EU planning, applying a climate policy without an industrial policy . . . The EU has not followed up these ambitions [of phasing out internal combustion engines] with a synchronised push to convert the supply chain.(He says, for example, that the EU should consider extending carbon tariffs to the automotive sector.)This call for joined-up policymaking is more profound than it may seem at first glance. Obvious as it may sound, if it were actually achieved, it would be a game-changer for EU growth and the bloc’s influence on the world. That is because it would involve a greater degree of conscious planning for the EU economy as a whole, and that planning would require policymakers at all levels to take EU objectives more into account and not just narrow national interests. The promise is to make everyone better off on the whole by reducing anyone’s ability to prevent any particular cost to them. How does Draghi propose to do this? Here are the main ways:Common planning for productivityDraghi wants a “competitiveness co-ordination framework”, where all the existing policy co-ordination at present linked to fiscal planning (in the so-called European Semester) is gathered to formulate a common EU-wide productivity strategy and co-ordinate national policies with it. More common regulatory frameworks to escape rather than replace the patchwork of unharmonised national rulesDraghi endorses the idea of “28th regimes” — that is to say, a common regulatory framework in parallel with (not replacing) existing national ones. If a company or project chose to be governed by the 28th regime in question, this would be sufficient to allow it to operate anywhere in the EU. Draghi proposes 28th regimes for renewable energy projects, for interconnectors and for innovative small- and medium-sized enterprises to make it easy for them to scale up to the full EU market.More majority voting and less unanimityDraghi points out that the current treaties allow the EU to move more policy areas from unanimity to qualified majority decision-making, provided that is unanimously decided upfront (the so-called passerelle clauses). “All possibilities offered by the EU Treaties should . . . be exploited to extend QMV,” recommends Draghi.More ‘coalitions of the willing’Of course, many countries will not want to give up their veto rights in some sectors. Indeed, every sector may have some country determined to hold on to its veto. So, Draghi concludes, the EU must pursue the joined-up decision-making he calls for among the countries willing to do it without all 27 member states being on board. Preferably that would include the existing procedure for “enhanced co-operation” whereby nine or more member states can decide to use the EU institutions to do more together without forcing anything on the laggards.More centralised budget capacity for the strategically important sectorsDraghi could not be clearer: “Some joint funding of investment at the EU level is necessary to maximise productivity growth, as well as to finance other European public goods.” But it also works the other way round: “The more that governments implement the strategy laid out in this report, the greater the increase in productivity will be, and the easier it will be for governments to bear the fiscal costs of supporting private investment and of investing themselves.” The next budget, Draghi proposes, should have a dedicated “competitiveness pillar” to be managed under the framework mentioned above in point 1. This would have dedicated funding streams, such as “a centralised EU budgetary allocation dedicated to semiconductors supported by a new ‘fast-track’ IPCEI [Important Project of Common European Interest — the EU’s pre-identified projects with easier subsidy rules]”.These are, to be sure, bold proposals. But what is clear is that good policy proposals will not be realised without a decision-making reform along Draghi’s lines. Nor will the productivity growth acceleration everyone accepts is needed, and which Draghi convincingly argues is possible.What that also means are two things that should be of great interest to sceptical national leaders. One is that limited political time, energy and capital could now be most fruitfully devoted to Draghi’s procedural proposals — because they would greatly lower the cost of pursuing any of the substantive policy ideas by those who would like to. The second is that doing so may (whisper it) more than pay for itself — economically, of course, because of the prospect of faster growth, but therefore also politically, by getting Europe out of its economic funk. Fortune, in short, favours the bold. Other readablesRecommended newsletters for youChris Giles on Central Banks — Your essential guide to money, interest rates, inflation and what central banks are thinking. Sign up hereUnhedged — Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here More
