Tech takes center stage in Draghi’s Marshall Plan for Europe

In his long-awaited report about European competitiveness, designated wise man Mario Draghi recommends that the EU ups semiconductor spending with “hundreds of billions of euros.” The largesse should focus on innovation and the establishment of testing labs, incentives for both chip design, manufacturing and (3D) packaging, and support for the use of the chips in innovative European products. Crucially, to prevent fragmentation and weak coordination, a significant part of the budget should be managed by the EU itself, rather than by individual member states.

Draghi’s proposals for the semiconductor industry echo his recipe to increase European competitiveness, which largely centers around boosting innovation and productivity. All in all, Europe should raise investment in innovation and industry by 800 billion euros annually, the former ECB president and Italian minister argues. At 4.7 percent of GDP, that’s over double the scale of the Marshall Plan, in relative terms.

Such a drastic increase in spending, along with other measures, is necessary for a continent that risks falling into oblivion after decades of lackluster economic growth compared to the US, the former ECB president and Italian Prime Minister argues. Europe faces an “existential challenge” to avert the “slow agony” of decline, he said at the presentation of his report. “We’ve reached the point where, without action, we’ll have to either compromise our welfare, our environment or our freedom.”

Productivity gap

Many of Europe’s problems originate elsewhere in the world. Free trade is eroding as protectionism is on the rise, confidence in global supply chains has faded, energy prices have spiked and the US security umbrella no longer feels as safe as it used to. But Europe’s main problem, Draghi argues, is internal. The productivity of European workers is now 80 percent of that of their US counterparts, down from 95 percent in the late twentieth century. It needs to rise to maintain prosperity and to be able to afford necessary investments such as decarbonizing the economy; the average productivity growth rate since 2015 would only be enough to keep Europe’s GDP constant until 2050.

Draghi traces the productivity gap between the EU and the US to the tech sector. “The main reason EU productivity diverged from the US in the mid-1990s was Europe’s failure to capitalize on the first digital revolution led by the internet – both in terms of generating new tech companies and diffusing digital tech into the economy. In fact, if we exclude the tech sector, EU productivity growth over the past twenty years would be broadly at par with the US,” the report reads.

Many of Draghi’s recommendations therefore look to bolster Europe’s technological innovation potential. The budget of Horizon Europe, the EU’s key research and innovation funding program, should more than double to 200 billion euros. This should broaden Europe’s research base by increasing funding for science at large, but Draghi also champions the establishment of elite institutions similar to MIT and the US Advanced Research Projects Agencies.

Next, turning innovations into cash-generating inventions should become easier. Removing regulatory burdens and harmonizing national regulations will help European companies gain scale, as will facilitating access to capital. Strategic industries, such as semiconductors, AI and green tech should be supported by comprehensive, pan-European industrial policies that include tax, trade and foreign policy components. “It’s important that EU companies maintain a foothold in areas where technological sovereignty is required,” the report states.

Main problem

Draghi’s bold vision faces enormous political obstacles. His call for increased European integration, including a bank and capital market union and a transfer of power away from national governments, has always been a sensitive topic. Northern member states like Germany and the Netherlands are cautious – to say the least – about increased spending, let alone about joint borrowing. German Finance Minister Christian Lindner already said that it wouldn’t solve structural problems and that the main problem wasn’t a lack of subsidies but bureaucracy and a planned economy.

European Commission President Ursula von der Leyen, who commissioned the report, is nonetheless throwing her weight behind Draghi’s recommendations. “Your findings will inspire our work for the months and years to come,” she said.

Main image: Mario Draghi presenting his report. Credit: EU