The EU: After Draghi?

In September 2024, the Draghi report on EU competitiveness was published to much acclaim. This blog suggests that acclaim for the diagnosis was deserved. But not for the policy prescriptions.

The Draghi Report: The diagnosis
 
The Draghi diagnosis of the challenges facing the EU highlighted the technology and productivity lag behind the US; the drag of a declining work force, and the challenge of new security burdens. It pointed to regulation as an impediment to growth, particularly to start-up firms and venture capitalists. 
 
In the 18 months since the report was published, awareness of these challenges has come into even sharper focus. 
 
Trump’s actions have shown how Europe can no longer rely on US security protection and that American interests as defined by Trump may conflict with those of Europe (as in Greenland). 
 
At the same time the implications of Europe’s technology lag are becoming more visible as AI applications extend. Traditional white-collar work is becoming unstable. In addition, within 20 years car ownership may be a thing of the past as self-driving cars can be summoned to the doorway as and when needed. With car production accounting for about 20% of Germany’s manufacturing output and about 6% of its GDP, a declining market for car ownership leaves a major gap in employment opportunities to be filled not only in Germany but across the European supply chain. In France, domestic car output has already fallen from a high of 370,000 units in 2002 to 91,000 units in 2024. In the UK vehicle production in 2025 was the lowest since 1952. In the US, Tesla’s shift from EV production to robots is a sign of the future.
 
The Draghi report views the EU and global decarbonisation drive as ‘a growth opportunity’ for Europe. However, whether the stimulus for innovation will compensate for higher energy costs in Europe is extremely doubtful. The Wall Street Journal recently confirmed that in 2024 electricity prices for industry in Germany, Poland, France and Italy remain between 2-3 times higher than in the US. The full costs of Europe’s decarbonisation efforts are in part concealed by the border tax adjustment mechanism – protectionism in another guise. 
 
The Draghi report confirmed how Europe continues to rely on bank financing for investment rather than equity investors prepared to back start-ups and risk venture capital. The report has been followed by European Commission initiatives to simplify EU regulatory processes through the introduction of omnibus legislation in eight areas with more to come. It has also been followed up by the Franco-German Task Force on Financing Innovation (FIVE) that has looked in particular at the need for finance for scaling up innovation and start-up ventures. In addition, the Commission published a report on financial market integration in Dec. 2025 intended to promote the concept of a Saving and Investment Union. 
A recent 2025 report (373) from the European Central Bank noted that it took European firms 23 years to reach Initial Public Offering (IPO)stage compared with 10 years in the US and that the availability of venture capital in the US is three times greater than in Europe. It has been reported that The City of London is no longer keen to see closer ties with EU financial markets at the cost of adopting EU regulations. Ability to compete with US financial markets is more important. According to the World Bank, compared with the US the market capitalisation of domestic firms in the UK was 93% of GDP compared with 216 % in the US, 44% in Germany and 85% in France.
 
The policy prescriptions: What was wrong
 
It the diagnosis was largely correct and even understated the challenges, what was not correct in the Draghi report were the policy prescriptions set out in response to the diagnosis. The report resorted to the tired old functionalist refrain that the answer consisted in the benefits of more being done by everyone at the European level instead of looking to a more differentiated and flexible EU. The refrain is about more ‘collective’ policies, more ‘coordination’ and more acting as a ‘community’ – all euphemisms for more common policies. It calls for more ‘delegation’ of public policies to the EU level obscuring that what is intended is more powers transferred up to the EU level. With the exception of the need for a new approach to skills, it failed to confront the need for Europe’s social market model to be reformed. Instead, it endorsed Europe’s welfare states by lamely pointing out that income inequalities are worse in the US. It recognised the need for democratic endorsement for change but failed to address the political drag of the EUs own democratic deficit. 
 
With the challenges to Europe even more profound than diagnosed by Draghi a much more radical reform agenda is needed. Europe’s social market model needs to be rethought; the EU’s preference for common policies rather than differentiated integration needs to be abandoned and its ‘democratic deficit’ needs to be addressed.          
 
The alternative reform agenda 
 
1. Rethinking the social market
 
Europe’s social market philosophy dates back to the 1930s and 40s when German and Italian ordo-liberals looked for a system of government that would provide an alternative to the collectivism of both communism and Nazism. They argued that a system that applied rules of behaviour to both politics and the market was needed. The rules needed to address income and wealth disparities as well as power disparities. The two forms of inequality were seen as interconnected.
 
Credited for Germany’s post war economic ‘miracle’ the social market model now needs to be updated. Instead, the Draghi report seemed to regard it as untouchable. Even on its own terms the model is not delivering to address inequalities. The share of net household wealth of the top 10% across Germany, Belgium, Norway and the Netherlands is above 50 % while that of the bottom 40 % is about 1% in Germany and outweighed by household debt in Norway and the Netherlands. The high level of public indebtedness of EU member states associated with the current pattern of benefits provided by the social market limits its ability to fund new priorities.
 
Social benefits need to be retargeted to reflect an aging population, changing patterns of inter-generational dependencies, and the need to incentivise the acquisition of new skill sets. The most obvious economies are the most difficult – for example, raising the minimum state pensionable age to at least 70. Larger personal contributions to the costs of education and health care and reductions in benefits paid to young adults will also be unpopular. Switching the emphasis of pension schemes from state funded Pay as you Go to occupational and private pension schemes (as recommended by FIVE) may also encounter resistance. But entrenched interests in current configurations of social benefits and the disincentives they place in the way of change have to be challenged if new needs are to be met and if the social market is to become fit for purpose in supporting those most in need. 
 
2 Coalitions of the willing
 
Instead of a model of European union where the goal is that all members should agree on the same policies at the European level backed by integration through the law, the model should be one of flexible and differentiated integration allowing member states to reform their social markets in their own ways and for different groupings of states to act together in different policy areas. Any negative externalities arising from the pursuit of policy goals in different ways should be adjudicated by tribunals of the members themselves instead of by a central court (the ECJ). 
 
The report of the FIVE provides two examples of where coalitions of the willing could emulate member states that have experimented successfully with policy change in critical areas. Sweden has pioneered pension reform with a hybrid system where occupational and private pensions play a much larger role. France and Germany are pioneering centres for scale-up financing. In such areas experimentation is required rather than common policies. Not every member state may want to apply the same model. 
 
Such differentiation by policy area should apply to support for rural populations where an ending of CAP is long overdue; immigration; climate goals and the regulation of the Internet and AI. In such areas there is no single common policy that can claim to be ‘right’. Where groups of member states see eye to eye, they should be free to discover what works and to assess the costs and benefits of their own joint approaches. Such groupings of the like-minded should include those outside the formal structures of the EU and include, where it makes sense, such jurisdictions as Canada, the UK, Switzerland and others. An example of this kind of differentiated policy making is the joint wind farm project in the North Sea which includes both Norway and the UK.
 
3. Addressing the democratic deficit: Beyond functionalism
 
Since its foundation Europe has followed a functionalist approach to integration where the pursuit of democratic values follows on in the wake of successful examples of common policies. One of the key weaknesses in this approach is that those institutions such as the Commission that drive common policies aim to control the evolution of political procedures in ways that boost their own powers. Integrationist parties in the majority in the EP see advantages in an alliance with the Commission. Both institutions abuse and misinterpret the ‘precautionary principle’ to justify EU common policies. It is used to justify measures to counter predictions of possible harms as against the original intent of the principle to warn against basing public policy on uncertain predictions.
 
There are a number of disadvantages to this functionalist approach that leads to what is usually referred to as a ‘democratic deficit’ in the EU. It feeds a sense of distance between the agenda of ‘Brussels bureaucrats’ and the priorities as felt and perceived by citizens. It contributes to the sense that there is a lack of genuine representation in Brussels where those in command of legislative processes fail to mirror the shape of the electorate and its concerns. The Draghi report calls for ‘self-restraint’ by EU institutions and for national parliaments to play a larger role. The call for self-restraint rings hollow alongside the call for much more in the way of common policies. The report does not acknowledge that no government is prepared to put the institutional structure to a referendum to check that it passes the ultimate test of legitimacy – that it rests on popular consent. Member states fear a negative vote.
 
The costs of the democratic deficit in whatever way it is framed are increasingly apparent. It feeds the growth of right-wing populist parties within member states. It makes the mobilisation of EU majorities more difficult. An overhaul is needed where the Commission’s right of initiative is transferred to the Council of Ministers, national parliaments have the power to stop initiatives that infringe on their own prerogatives, interpret in their own way what precautions are justified in the case of technological innovation and where tribunals of national courts adjudicate on any negative externalities arising from differentiated integration. The ideals of the EUs Charter of Fundamental Rights should be interpreted by national courts according to their own interpretations of fundamental values and not referred to the ECJ. A pluralist approach is essential to allow both for differences in interpretation and for reforming social policies. A democratic learning structure would itself underpin a differentiated Europe built around coalitions of the willing. 
 
Conclusion
 
This alternative reform package means that Europe needs much more radical reforms than European Union institutions seem currently prepared to contemplate. In their absence Europe will continue on its path of relative decline. There is however nothing inevitable about Europe’s decline. Possibly Trump’s presidency will give Europe the shock it needs. At the same time nothing in the way of reform should be ‘off limits’ including abandoning the fixation with common policies, reforming the hallowed ‘social market’ and changing the institutional structure of the EU itself.