While much of Washington last month was focused on Congress’s most recent struggle to fund the government, across the Atlantic a prominent European politician released a report with significant implications for policymakers here in the United States.
The report, which has come to be known in policy circles as “The Draghi Report,” was written by Mario Draghi, an Italian economist, banker, and statesman who also once served as the prime minister of Italy. The report is fascinating, especially given the remarkable honesty and clear call to action for a sea change in the way that the European Union (EU) has typically done business, particularly regarding its regulatory and enforcement approach to the tech sector.
As Draghi notes, “Europe’s fundamental values are prosperity, equity, freedom, peace and democracy in a sustainable environment…If Europe can no longer provide [these fundamental freedoms] to its people – or has to trade off one against the other – it will have lost its reason for being. The only way to meet this challenge is to grow and become more productive…And the only way to become more productive is for Europe to radically change.”
Throughout the report, Draghi contrasts the state of the European economy to that of the U.S., and how the EU continues to fall behind. He points to the lack of growth in the European innovation and tech sector as a significant reason for these failures, as well as the areas in which change and investment are needed in order to drive the productivity that he says Europe so desperately needs to increase.
Specifically, he surmises that the reason Europe has fallen behind the U.S. (and subsequently China) in the digital space is due to weak growth and productivity, and a regulatory system that more often than not kills innovation. “The problem is not that Europe lacks ideas or ambition,” he notes. The issue is that “innovation is blocked at the next stage: we are failing to translate innovation into commercialization and innovative companies that want to scale up in Europe are hindered at every stage by inconsistent and restrictive regulations.”
Draghi details some of these barriers to success in his report. He notes that Europe claims to value innovation, but that the EU imposes regulatory burdens that are particularly costly and self-defeating for small- and medium-sized enterprises. He also faults the EU’s failures to focus its resources appropriately and coordinate its industrial strategies effectively.
In suggesting a revamp of the EU’s strategy to help bolster the private sector and drive productivity and growth, the author presents interesting ideas about how to, among other things, reorient its current merger policy to make it more innovation friendly.
Draghi examines what exactly is driving the rising productivity gap between the EU and the US, and concludes that, ultimately, it’s due to the differential in the EU and US tech sectors. Europe’s failure to capitalize on the digital revolution, he notes, has resulted in some digital sectors likely already being “lost,” because it will be too costly and difficult to catch up. And in doing so, he points the finger rather directly at a regulatory environment which imposes barriers to innovation in Europe:
“Over the past two decades, the top-three US companies for spending on Research and Innovation (R&I) have shifted from the automotive and pharma industries in the 2000s, to software and hardware companies in the 2010s, and then to the digital sector in the 2020s. In contrast, Europe’s industrial structure has remained static, with automotive companies consistently dominating the top 3 R&I spenders. In other words, the US economy has nurtured new, innovative technologies and investment has followed, redirecting resources towards sectors with high potential for productivity growth; in Europe investment has remained concentrated on mature technologies and in sectors where productivity growth rates of frontier companies are slowing.”
So why should lawmakers in the U.S. care what Mr. Draghi has to say? In his report, Draghi provides a roadmap for how to avoid regulatory failures here in the United States that would have similarly negative impacts on U.S. businesses, particularly those that drive innovation, growth, and productivity in the United States. While the U.S. system certainly isn’t perfect, it has served its purpose well. Given all the challenges for Europe that Draghi details in his report, it is hard to see the case for moving in a more European direction.
