Energy Dependence: Europe’s Achilles’ Heel?

Mario Draghi is long awaited report on European competitivenesslaunched on 9 September, it provides a comprehensive assessment of Europe’s economic challenges and proposes solutions.

The report garnered mixed reactions, with some praising its thoroughness and others criticizing its recommendations.

Draghi’s assessment of the European economy

Draghi points to the decline of the European economy, highlighted by a declining share of global GDP and trade.

He attributes this primarily to lagging productivity, particularly in digitization. This has led to a significant gap in disposable income growth compared to the US

The report highlights the disappearance of the foundations on which European prosperity was built, including energy security and sources of growth.

The continent faces challenges such as a protectionist global environment, subsidized manufacturing by China and the dominance of technology.

Draghi also criticizes Europe’s fragmented response to these challenges, particularly in climate policy.

He claims that Green Deal’s the focus on energy transition without jobs and industry creation led to deindustrialization.

The report identifies energy dependency, a lack of investment and excessive regulation as further obstacles to European competitiveness.

Draghi’s three main solutions

1. Industrial policy: The report advocates a more assertive industrial policy, taking inspiration from China. Draghi proposes classifying industries and sectors based on strategic importance and implementing appropriate courses of action, including accepting imports for lost industries, promoting domestic production for strategic industries, developing joint ventures, and protecting emerging industries.
2. Addressing the investment and innovation gap: Draghi is calling for a massive increase in public and private investment, estimated at 750 to 800 billion euros annually. He recommends completing the Capital Markets Union and the Banking Union and advocates direct public investment through joint debt for EU projects.
3. Reforming the EU for flexibility and efficiency: Draghi suggests eliminating excessive bureaucracy and harmful legislation, especially those based on the precautionary principle. He proposes impact assessments for legislative packages and post-implementation policy evaluation. The report also calls for greater EU efficiency through political centralisation, including the extension of qualified majority voting.

Energy challenges and solutions

A key point of the report is Europe’s energy dependence, which Draghi sees as undermining his economic model.

Dependence on imported natural gas, especially from Russialed to high electricity prices, putting pressure on businesses, especially energy-intensive industries such as chemicals and metallurgy. This has created a significant competitive disadvantage for European companies compared to their US counterparts.

The report also criticizes Europe’s fragmented response to the energy crisis and climate policy challenges.

He argues that the Green Deal focuses on energy transition without sufficient consideration for job creation and industry has led to deindustrialization.

To address the energy challenges, Draghi proposes a multi-faceted approach:

• Promotion of renewable energy and energy efficiency: The report highlights the need to accelerate the transition to renewable energy sources and improve energy efficiency in all sectors.
• Investments in energy infrastructure: Draghi calls for significant investment in the modernization of energy infrastructure, including the modernization of electricity networks and the development of interconnections to facilitate the integration of renewable energy.
• Reforming the EU energy market: The report calls for a more integrated and efficient European energy market, reducing fragmentation and promoting competition.

Unanswered questions and contradictions

While the Draghi report offers valuable insights and solutions, it leaves some important questions unanswered.

The feasibility of debt-driven EU financing and accountability for productive investment remain concerns.

The report also avoids addressing the cost of Europe’s social model and its impact on investment and competitiveness.

Also missing are some clear answers on how to attract and retain top talent while maintaining Europe’s egalitarian values.

What’s next?

Mario Draghi’s report serves as a wake-up call for Europe, underscoring the urgent need for reform and investment.

It proposes a more assertive industrial policy, increased public investment and regulatory reforms to address the challenges facing the European economy.

But the report’s silence on the cost of the European social model and the complexity of attracting top talent leaves some crucial questions unanswered.

The future of European competitiveness depends on addressing these challenges and striking a balance between social well-being and economic dynamism.

By Michael Kern for Oilprice.com

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