Draghi urges EU to carry out radical reforms, requiring an extra 800 billion euros per year

A report by economist and politician Mario Draghi says the EU needs up to 800 billion euros ($884 billion) in additional investment annually to achieve its key competitiveness and climate goals.

The report points out that the EU’s goals of greater geopolitical relevance, social equality and decarbonization are threatened by weak economic growth and productivity compared with the United States and China.

The wide-ranging study, led by Draghi, who served as Italian prime minister and European Central Bank president during the euro zone debt crisis, found that EU priorities must include lowering energy prices, boosting competitiveness, coordinating industrial policy and increasing defense investment.

The EU must also adapt to a world in which “dependence is becoming fragile and it can no longer rely on other countries for its security,” the report found, noting the EU’s reliance on China for critical minerals and China’s reliance on the EU to absorb its resources .

The report goes on to point out that the EU’s high level of trade openness will put it at risk if the trend toward supply chain autonomy accelerates. The report said that about 40% of Europe’s imports come from a small number of suppliers that are difficult to replace, and about half of them come from countries that are “strategically non-aligned” with the EU.

“The EU needs to develop a real ‘foreign economic policy’, coordinating preferential trade agreements and direct investment with resource-rich countries, building inventories in selected key areas and establishing industrial partnerships to secure supply chains for key technologies, ” the report stated.

The EU needs to ensure dependence does not increase and seek to “harness the potential of domestic resources through innovation in mining, recycling and alternative materials”.

Other goals include the full implementation of the single market, which includes 440 million consumers and 23 million companies, by reducing trade frictions.

The EU must also seek to ensure that its competition policy does not become an “obstacle to European goals”, particularly in the technology sector.

The European Union must also promote “investment needs on a scale not seen in Europe for half a century” through a combination of private financing and public support. The report pointed out that at the same time, the EU is facing an “innovation deficit” and must solve this problem through R&D funding and policy reforms.

The report calls for greater policy coordination and funding focus across many sectors. In clean technology development, for example, it found financial support was fragmented across projects, while manufacturers struggled to compete globally given Chinese subsidies and huge domestic support from U.S. inflation-cutting bills.

Regarding steps to mobilize private funds, the report recommends transforming the European Securities and Markets Authority (ESMA) from a coordinating body of national regulators into a single regulator for all EU securities markets, able to focus on overall objectives, similar to the U.S. Securities and Markets Administration bureau.

To speed up policy development, the report recommends limiting voting items that require the support of an absolute majority of member states.

Draghi’s report said the EU’s budget’s large size, lack of focus and risk aversion were holding back public and private investment. It added that the next generation EU Covid-19 recovery plan financed by huge debt starting in 2028 is about to be repaid, meaning that without a decision to procure new resources, the EU’s effective spending capacity will decline.

The report goes on to note that some areas of the spending proposals, including defense projects and cross-border power grids, will require “common funding”, adding that the EU should move towards “regular issuance of common security assets to support joint investment projects between member states” , and help integrate capital markets.

Germany, which has traditionally resisted additional co-borrowing, responded to the proposals on Monday.

“The mutualization of risks and responsibilities creates democratic and fiscal problems. Germany will not agree to this,” Finance Minister Christian Lindner said, according to a Reuters report translated by CNBC.

Research shows that the EU’s total investment as a share of GDP must rise by about 5 percentage points per year, reaching the levels of the 1960s and 1970s, in order to achieve defence, digitalization and decarbonization goals.

Overall, the European Commission estimates that the targets set will require additional investment of at least 7.5 to 800 billion euros per year.

The report was commissioned last year by European Commission President Ursula von der Leyen, who was elected to a second five-year term in July and will appoint new commissioners this week.

Some analysts were quick to pour cold water on the scale of the resulting reforms.

Lorenzo Codogno, founder of Lorenzo Codogno Macro Advisors, said in comments emailed ahead of the report’s release that the findings “will trigger A crucial debate on the future of the EU/Eurozone, but there is no need to hold your breath”.

“Nothing will happen until the new Commission is fully operational, and even then the thorny, fragmented and fragile political situation among member states makes it challenging to obtain the political support needed for action. However, some contingencies cannot be ruled out , and therefore the ensuing political debate needs to be carefully monitored,” he said.

David Roche, founder of Independent Strategy, said the report would not have an immediate impact on the market.

“The productivity gap between the United States and the European Union can be narrowed by: [Draghi’s] Recommends the integration of supply-side sectors and markets across the country and the promotion of public and private investment at scale. But that’s not going to happen,” Roche said in a report on Monday, with Europe “paralyzed by populism and incompetence at the national level.”

—CNBC’s Sophie Kiderlin contributed reporting.