HAMISH MCRAE: Mario Draghi’s warning to a listless EU

Something has gone terribly wrong with the European economy. That is not a British view, although many here would agree with it. It comes from Mario Draghi, the man who, as president of the European Central Bank in 2012, saved the euro by promising that the ECB would do “whatever it takes” to do so.

He was asked by Ursula von der Leyen, President of the European Commission, to write a report on The Future of European Competitiveness. The results, which have just been published, were appalling.

He concluded that the European Union would face persistently slow growth and that this would endanger the entire social model of the Union.

If the country did not take action, it would face a “slow path of suffering” of decline.

The report runs to 400 pages, but in short it identifies three ways to improve performance: closing the innovation gap between Europe and the US and China; seizing opportunities in the decarbonisation process; and reducing Europe’s dependence on foreign supply chains.

To achieve this, Europe needs massive investment from governments and businesses, an overhaul of regulations and a change in competition rules so that European companies can work together to create industrial champions.

He is not alone in his concerns. Emmanuel Macron, the French president, said in April that Europe was facing a “moral hazard.” And over the weekend, Italian Prime Minister Giorgia Meloni put the problem succinctly: “America innovates, China copies, Europe regulates.”

About 20 years ago, the US accounted for 27 percent of world GDP at market exchange rates, the eurozone for 22 percent and China for just 5 percent. The US remains virtually the same at 26 percent, China has risen to 17 percent, while the eurozone has fallen to 14 percent.

The report, unsurprisingly, was met with mixed reactions.

Everyone agrees with Draghi’s analysis. What you do is another matter. To finance the investment, he suggested that there should be some kind of common loan, which the German finance minister has already said would not solve the problems, and they will not agree to it.

Germany believes that in practice it is guaranteeing the debts of less cautious countries.

If Europe’s largest economy does not participate, it is difficult to make progress on financing.

Deregulation, Meloni argues, is also fraught with difficulties. Green groups don’t like it, mainly because they feel that environmental protection is being portrayed as a barrier to competitiveness. Common taxation? That’s impossible. And sceptics point out that there have been similar reports in the past and that Europe’s relative performance has continued to decline.

I had a conversation with the head of one of our five biggest companies around the time that Draghi was trying to save the euro. He was an early Brexiteer. Why? If we stayed in the EU, we would be ‘chained to a corpse’. That seemed to me a rather strong way of putting it, but his point – that Europe would continue to decline – has unfortunately been proven correct.

So what can they do? It would be easy to say that the biggest problems are burdensome regulations and high taxes, and that has to be part of it.

But there are European companies that do make it, and there are quite a few success stories where the more cautious culture has delivered better results than the American focus on short-term profits. Think Airbus and Boeing.

I think the problem comes down to two interrelated elements. One is that Europe has failed to create a significant high-tech sector along the lines of the Magnificent Seven. The same is true for the UK.

The other is cultural. There is not the same passion for wealth creation, or respect for those who have done well. So fewer new companies are created, fewer risks are taken, and the rich keep their heads down.

I don’t see Europe changing. We have the opportunity to do that, to become more like America, and I think we’ll eventually go that way.

But a different kind of leadership is needed than the bleak situation we live in now.