September 24

Energy Dependency: Europe’s Achilles Heel?

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Mario Draghi’s report highlights Europe’s declining competitiveness, attributing it to lagging productivity, energy dependency, and an investment gap.
Draghi proposes a three-pronged solution: a more assertive industrial policy, increased public and private investment, and regulatory reforms for greater flexibility and efficiency.
The report emphasizes the need to address Europe’s energy challenges through renewable energy, infrastructure investment, and market reform, while also acknowledging unanswered questions about the cost of social welfare and talent attraction.

Mario Draghi’s much-anticipated report on European competitiveness, released on September 9th, provides a comprehensive assessment of Europe’s economic challenges and proposes solutions.

The report has garnered mixed reactions, with some praising its thoroughness and others criticizing its recommendations.

Draghi’s Assessment of the European Economy

Draghi highlights the decline of the European economy, evidenced by a falling share of global GDP and trade.

He attributes this primarily to lagging productivity, particularly in digitalization. This has led to a significant gap in disposable income growth compared to the U.S.

The report points out the disappearance of the foundations on which European prosperity was built, including energy security and sources of growth.

The continent faces challenges such as a protectionist global environment, Chinese subsidized manufacturing, and tech domination.

Draghi also criticizes Europe’s fragmented response to these challenges, particularly in climate policy.

He argues that the Green Deal’s focus on energy transition without job and industry creation has led to deindustrialization.

The report identifies energy dependency, an investment gap, and excessive regulation as further obstacles to European competitiveness.

Draghi’s Three Main Solutions

Industrial policy: The report advocates for a more assertive industrial policy, taking inspiration from China. Draghi proposes categorizing industries and sectors based on strategic importance and implementing corresponding courses of action, including accepting imports for lost industries, promoting domestic production for strategic industries, developing joint ventures, and protecting infant industries. 
Tackling the investment and innovation gap: Draghi calls for a massive increase in public and private investment, estimated at €750 to €800 billion annually. He recommends completing the Capital Markets Union and Banking Union and advocates for direct public investment through common debt for EU projects. 
Reforming the EU for flexibility and efficiency: Draghi suggests removing excessive bureaucracy and damaging legislation, particularly those based on the precautionary principle. He proposes impact assessments for law packages and evaluating policies after implementation. The report also calls for increased EU efficiency through political centralization, including extending qualified majority voting.

Energy Challenges and Solutions

A key focus of the report is Europe’s energy dependency, which Draghi sees as undermining its economic model.

The reliance on imported natural gas, particularly from Russia, has resulted in high electricity prices, putting pressure on businesses, especially energy-intensive industries like chemicals and metallurgy. This has created a significant competitive disadvantage for European companies compared to their US counterparts.

The report also criticizes Europe’s fragmented response to the energy crisis and the challenges of climate policy.

He argues that the Green Deal’s focus on energy transition without sufficient consideration for job and industry creation has led to deindustrialization.

To address the energy challenges, Draghi proposes a multifaceted approach:

Promoting renewable energy and energy efficiency: The report emphasizes the need to accelerate the transition to renewable energy sources and improve energy efficiency across all sectors.
Investing in energy infrastructure: Draghi calls for significant investments in upgrading energy infrastructure, including modernizing electricity grids and developing interconnections to facilitate the integration of renewable energy.
Reforming the EU energy market: The report advocates for a more integrated and efficient European energy market, reducing fragmentation and promoting competition.

Unanswered Questions and Contradictions

While the Draghi report offers valuable insights and solutions, it leaves some important questions unanswered.

The feasibility of debt-driven EU funding and the accountability for productive investments remain concerns.

The report also avoids addressing the cost of Europe’s social model and its impact on investment and competitiveness.

It’s also missing some clear answers on how to attract and retain top talent while maintaining Europe’s egalitarian values.

What’s Next? 

Mario Draghi’s report serves as a wake-up call for Europe, highlighting the urgent need for reform and investment.

It proposes a more assertive industrial policy, increased public investment, and regulatory reforms to address the challenges facing the European economy.

But the report’s silence on the cost of the European social model and the complexities of attracting top talent leaves some crucial questions unanswered.

The future of European competitiveness hinges on addressing these challenges and striking a balance between social welfare and economic dynamism.

By Michael Kern for Oilprice.com

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