Can the EU avoid Mario Draghi’s ‘slow agony’?

I had started to think that the UK had cornered the market in de-motivational political addresses. However, a 400-page report from Mario Draghi last week, in which the former head of the European Central Bank called for a new EU industrial plan, offered a reminder that Sir Keir Starmer and Rachel Reeves do not have a monopoly on painful home truths.
Questioned on whether his proposals were “do or die” for the EU, the cheery spin of Draghi was that implementing them was merely a case of “do this” or endure “a slow agony”.
The punditry following the report’s launch compounded the pessimism. While its ambitions — to reignite stagnating productivity by raising about €800 billion (£680 billion) a year to invest in tech and clean energy — were widely viewed as well intentioned, they were also written off by many as an impractical pipedream. The analysis I read put the odds of Draghi’s vision becoming reality at somewhere between “unlikely” and “impossible”.
Granted, the competing interests and fragile finances of many EU member states — and the problem that several of their leaders don’t seem to like the EU, or each other, very much — mean it is hard to see them signing up to an action plan involving closer collaboration and writing big cheques.
However, I’m going to break with tradition and try to be the voice of optimism here. I actually think Draghi’s report could fire the starting gun on some meaningful, pragmatic changes for the euro bloc.
For a start, Draghi is no buffoon. Nicknamed “Super Mario” after his actions were widely credited with averting the European debt crisis in 2009-10, he is one of the most respected politicians and economists in the world. In 2015, Fortune magazine named him the second “greatest leader” globally — behind Tim Cook, the chief executive of Apple, but still ranking comfortably ahead of the Pope and Taylor Swift. It is unlikely, then, that someone of his experience and calibre would waste time producing 400 pages of twaddle that he knew to be unworkable.
Second, by setting out what, in his view, should happen in an ideal world, Draghi has articulated the scale of the problem but left room for people to stop a long way short of his recommendations, while still taking steps forward.
A major hurdle in implementing Draghi’s proposals, to which the commentariat has been quick to point, is the rise of populist far-right factions in several powerful EU member states. Their argument goes that a move towards more protectionist politics makes the possibility of tighter EU co-operation a harder sell.
Yes, but another reason for optimism is that right-wing parties are typically pro-deregulation and business-friendly. Nationalist member states may be resistant to Draghi’s calls for a more complete single market and common debt issuance to fund joint investment projects, but his advocacy for more lenient competition regulation, less red tape and a free market that can compete with the US should get a more sympathetic ear. A period when Europe is shifting to the right is not a bad time to push for these.
Draghi’s report notes that “the productivity gap between the EU and the US is largely explained by the tech sector”, highlighting that “the EU is weak in the emerging technologies that will drive future growth”.
It was quite ironic, then, that the day after the report’s release, the EU’s top court slapped Apple with a €13 billion tax bill — the corporate equivalent of taking a date to an overpriced restaurant, divulging that you’re not really that into them, forcing them to pay, and then burbling that you’d love to keep seeing each other.
I’d argue that in order to narrow the chasm in economic output versus the US, the EU not only needs to rethink its approach to regulation, but also to consider ways to be more pro-business — and this starts with tax. As Europe’s power dynamic shifts to the right, it would not surprise me if tax becomes a bigger part of the debate on boosting competitiveness.
Originally from Rome, Draghi will understand that it wasn’t built in a day. If his report resulted in member states coalescing around the idea of less bureaucracy and lighter-touch regulation, that would represent progress. It would lay the foundations for easier implementation of more ambitious changes in future, such as funding for joint investment projects, and capital allocators might start to take more of an interest. The fact that price-earnings multiples of European stocks are approximately half those of US stocks tells you that investors have not found much compelling about the bloc’s long-term prospects.
If, on the other hand, Draghi’s recommendations are discarded outright as too challenging, many investors will not hang around to find out whether his prognosis of “slow agony” turns out to be correct.
Seema Shah is chief global strategist at Principal Asset Management