A highly anticipated report on rejuvenating European competitiveness in the face of a shifting geopolitical and geoeconomic landscape was released on 9 September. Authored by Mario Draghi, the former President of the European Central Bank and ex-Prime Minister of Italy, the ‘Future of European Competitiveness’ report wants to help the EU regain its edge in an increasingly volatile world.
It recommends a tightly coordinated industrial policy with mammoth annual investments of about €750 billion. Securing such a massive investment is challenging, especially when major European economies such as France and Germany are already grappling with high debts and financial difficulties. Translating these ambitious ideas into action will be the real test.
The Draghi report has said what the European Union needs to hear but is too radical to implement. For instance, Draghi’s call to enable such investments by pushing the bloc on joint borrowing for joint investment projects is something that the EU’s member states and largest economies (like Germany) have resisted.
The tone and tenor of the report are simple: If the European project has to sustain itself, it has to act speedily at the EU-wide level. However, the ground reality is different. Member states have competing interests and perspectives and are used to existing in a state of permanent negotiation. Identifying common goals and enabling frameworks is not enough unless there is political will and financial capacity to perform within a stipulated time.
The report scores an important point where it shows that decision-making in the EU should create more space for the majority rather than only the member states that wish to move faster than the others. Whether this weakens or strengthens the EU fabric is open to debate but resilience is undoubtedly more of a necessity than a luxury.
Evolving transformative agendas
The European project is a dynamic entity. Before the war, the EU’s primary focus was the green transition, with ambitious plans to make renewable energy the cornerstone of its industries. This drive was also reflected in the Green parties’ strong electoral performance over the years. Just before the Russia-Ukraine war, the Greens achieved notable electoral success in Germany and formed a coalition with Chancellor Olaf Scholz’s Social Democratic Party in 2021.
However, the Russia-Ukraine conflict upended those aspirations in more ways than one. Europe had to pivot from cheap Russian energy, which was delivered through Soviet-era pipelines, and invest heavily in LNG terminals to import liquefied natural gas from alternative sources such as Qatar, the United States, and Norway. Germany alone made some of the largest investments in LNG terminals.
Additionally, the war prompted a debate over the role of nuclear energy. France, for instance, relies heavily on nuclear power (with some 56 operable reactors in the country), and has differing views from Germany, which remains opposed to nuclear energy.
As Russia’s war in Ukraine intensified, Europe had to pause its renewable energy goals. As Russian gas supplies were cut off, Europe had to revert to coal in anticipation of Brussels’ potential ban, which eventually happened anyway.
Europe still gets about 15 per cent of its gas from Russia, a sharp cut from the 40 per cent dependence on Moscow in 2021. This gas is mainly exported to landlocked countries in Central Europe that don’t have coastlines to accommodate LNG infrastructure. Ukraine’s takeover of Suzdha in Russia’s Kursk region could disrupt supplies for Austria, Hungary and Slovakia.
But the cost of diversifying from Russia’s cheap gas has been huge. Unsurprisingly, the Draghi Report unambiguously calls nuclear energy an essential component of decarbonisation.
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Europe’s trilemma
Before the war, Europe was already grappling with unfair trade practices by China and its overcapacity in critical sectors. The discourse on de-risking from China had started to take shape as Beijing’s unfair trade practices with overflowing subsidies were affecting European businesses and competitiveness. This growing concern led Brussels to label China as a partner, competitor, and systemic rival in 2019. Therefore by 2022, Europe faced the dual challenges of countering Russia’s energy weaponisation and addressing unfair trade practices by China.
Amid these issues, there emerged a third existential crisis: Building a new security architecture after the previous one was shredded to pieces.
The bloc had to support Ukraine and bolster its own security as the epoch of conventional war returned. In fact, the EU is now faced with a trilemma. It must deal with the dual challenges of diverging from Russian energy and chasing green transition, mitigating risks associated with China’s trade practices, and bolstering its own security.
Three years on, the situation remains grim.
The positive news is that Europe recognises the pivotal moment it is facing. Both member states and Brussels are engaged in discussions to reassess and strengthen their resilience. However, challenges such as war fatigue, insufficient investments and innovation, high social spending, a sluggish global economy, and overall global unpredictability have impacted the world at large, including Europe.
Then, there are also differing views on how to tackle the Russia-Ukraine war. The EU remains committed to Trump-proofing the European security apparatus, but the impact of these initiatives will be visible only toward the end of this decade, if at all.
On one hand, there is a noticeable shift in European attitudes toward lifting red lines on the use of Western weapons. But on the other, there are voices like Viktor Orban’s in Hungary, which remain defiant on Ukraine. While Hungary can’t block the EU’s decisions about Kyiv (as was shown by its sidelining in February 2024 in Brussels), it can delay the decision, adding to the EU’s overall strategic anxiety. The rise of the far-Right across Europe, which has so far remained divided in its approach toward Ukraine, could consolidate, contrary to Brussels’ view.
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Creating strategic gateways for India
From India’s perspective, at least two recommendations are relevant. The report highlights that in the case of developing skills and innovation, several European firms are unable to find employees with the right skills. This is certainly good news for India, which has an ample skilled labour force ready to enter the European ecosystem through strategic gateways.
The Indian side should double down on its ongoing effort to engage the European theatre, a commendable feat of the Narendra Modi government. New Delhi must look at ways to connect its market and services with not only Western but also Central and Eastern European economies and join their multi-modal connectivity projects without relying solely on the India-Middle East-Europe Economic Corridor (IMEC).
Peace in West Asia, even if it were to resume, will remain fragile and only time can tell when IMEC will become operational. However, Indian investors must not hold back from putting their money into ports such as Marseille in France, Trieste in Italy and Thessaloniki in Greece. India has already shown the intent to play a constructive role in the rebuilding of Ukraine, which will eventually become another strategic gateway into Europe.
Second, the report has realistically shown the limitations of Europe’s green transition goals, and its inability to coordinate a more effective industrial policy. This could lead to a more practical approach in long-negotiated trade agreements with emerging economies such as India and Indonesia.
Earlier this year, India signed its first free trade agreement with non-EU countries. These were the four European Free Trade Association (EFTA) states of Iceland, Liechtenstein, Norway, and Switzerland. While trade negotiations with the United Kingdom are close to getting finalised, the one with the EU has hit a roadblock over conditions laid out in the European Green Deal, especially those about the Carbon Border Adjustment Mechanism. With the EU reviewing its green agenda, it could be a good time to build resilience in the bloc’s FTAs. It’ll surely be a win-win for all parties.
The Draghi report, at best, serves as a reference point for the new commission that is set to come into action from December 2024 onwards. The next five years, with a second term for EU Commission President Ursula Von der Leyen, will shape the future course of the European project, and offer an expanded role and returns for New Delhi.
The writer is an Associate Fellow, Europe and Eurasia Center, at the Manohar Parrikar Institute for Defence Studies and Analyses. She tweets @swasrao. Views are personal.
(Edited by Zoya Bhatti)
Best remembered, as ECB chief, for Whatever it takes. At a time when the Euro was n crisis.