Position Statement
Marqués de Villamagna 3, 11º
T: (+34) 917 373 200
28001 Madrid
www.circulodeempresarios.org
"Position Statement – Madrid, November 2023
El Círculo on the Draghi Report: Trump accelerates the need to transform the European economy.
In the current context of elevated geopolitical instability and global macroeconomic uncertainty, the rise of phenomena such as deglobalization, protectionism, and the strengthening of strategic autonomy by certain economic blocs is redefining trade relations and power dynamics. In this environment, Europe has fallen behind in terms of economic dynamism, innovation, productivity, and competitiveness, particularly compared to the United States and China. The recent Report commissioned by the European Commission to Mario Draghi highlights this reality, identifies the main challenges faced by the European Union (EU), and proposes measures to foster a shift in the European growth model to strengthen its global position. This report complements the one prepared a few months earlier by Enrico Letta, whose primary goal is the strengthening of the single market as an essential driver of prosperity and progress, and its adaptation to tackle the major challenges of today's world.
Given the significance of this Report in Spain, Círculo de empresarios wishes to assess some of its conclusions from a business perspective and in defense of economic freedom. However, we are aware that, although the Report has generated considerable interest in national media, it would be worthwhile to understand its impact on the main EU countries, as well as the level of participation by Spanish institutions and companies in its development.
The document identifies a series of challenges that the EU must address to reduce its lag in productivity and competitiveness compared to other economies:
- Reducing the technological and innovation gap with the United States and China. The Report suggests reforming the innovation ecosystem by promoting academic excellence, simplifying the regulatory framework, establishing financial incentives for disruptive innovation, investing in research and technology infrastructure, and increasing research and development spending at the European level, among other measures. However, all these initiatives are hindered by the lack of market unity, both in commerce and capital markets, which prevents the necessary productivity increase. To ensure effective European integration within a single market, this integration should also manifest clearly within the individual member states.
Furthermore, Círculo de empresarios believes that Europe must undertake a general deregulation process in all areas where excessive regulation negatively impacts the competitiveness of the economy. In driving innovation, the role of the market and private initiative is essential, as opposed to economic dirigisme, serving as a source of progress and well-being for society as a whole.
- Aligning decarbonization with increased competitiveness. The Report states that “if Europe’s ambitious climate objectives are accompanied by a coherent plan to achieve them, decarbonization will represent an opportunity for Europe.” An opportunity to enhance its energy independence and security. For Europe, decarbonizing the economy is strategic—not only for the potential environmental benefits, which are constrained by the decisions of other global competitors—but fundamentally because Europe lacks fossil fuel energy sources. As a result, it must seek alternatives to achieve energy independence, maintaining constant dialogue with external suppliers. Competing with major powers such as the United States and China will require Europe to strengthen a common energy policy, as a critical component of the European Energy Union. To achieve this, it is vital for the EU to uphold the principle of technological neutrality in energy production, in order to reach decarbonization goals without prematurely excluding any generation technology.
- Improving defense and economic security by reducing strategic dependencies. The Report proposes increasing defense spending and supporting a stronger and more autonomous defense industry. Additionally, it advocates for a common external economic policy, with joint investments and initiatives. The decisions made by the United States and China regarding tariffs, technological barriers, and trade agreements have a direct impact on Europe, reducing its freedom.
In the face of these challenges, it is essential to adopt a strategic approach that strengthens European economic autonomy and resilience. To achieve this, the Draghi Report leans more towards intervention by European authorities to enhance competitiveness rather than creating a business environment with greater freedom and less regulation.
Recognizing Europe's backwardness and inefficiencies compared to global competitors without reflecting on the degree of business freedom is a contradictory exercise. It is not credible that European institutions present themselves as champions of deregulation after decades of intense regulatory intervention, despite their statutory mission to defend competition.
Círculo de Empresarios advocates for economic freedom as the fundamental basis for business development, which supports free societies' economic prosperity. Solid economic strategies emerge from business logic and are built "bottom-up," in adequate understanding of the European principle of subsidiarity, not from a bureaucratic orientation of European construction. In our view, it is a mistake to think that prosperity depends exclusively on political guidelines, always subject to short-term and circumstantial interests. Between a dirigiste model without political freedoms, like the Chinese one, and one centered on economic freedom and market primacy, like the U.S., the European Union should look to the latter and free itself from overregulation, supported by the strength of its values and achievements in social well-being. Therefore, it is not about eliminating all regulation, but about rationalizing it and defining what is truly necessary to strengthen Europe and make it more competitive. Economic dirigisme will not bring Europe to the level of the United States in the coming generations.
On the other hand, it is encouraging that the Report acknowledges the existence of issues in the governance system of the European Union, a key aspect to attracting and retaining capital in an increasingly competitive global environment. This acknowledgment represents progress within an institutional structure that is not accustomed to self-criticism and often appears rigid and unyielding. However, the Report falls short in the depth of its analysis. The European governance structure requires urgent reforms to enable more efficient and agile decision-making, especially in a global context where speed in decision-making is crucial. If decisions could be made through qualified majorities, significant reforms could be unlocked, and a tool like the 'enhanced European semester' could oversee national economic policies, boosting investor and trade partner confidence. These reforms require changes to the EU treaties and, despite facing considerable resistance—especially from countries that fear surrendering sovereignty over their economic policies—they are absolutely essential to achieving Europe’s strategic objectives.
Despite the ambition of the Draghi Report, its practical implementation presents serious challenges, especially regarding the financing required to carry out the necessary investments. According to the Report itself, the current per capita income growth rate in the EU would not be sufficient to generate the resources needed to finance the necessary transformation while maintaining the current level of social protection.
The green and digital transitions, along with defense autonomy, would require an additional investment of around 800 billion euros annually over the next decade, equivalent to approximately 5% of the EU's GDP. This level of funding seems unfeasible without an agreement on mutualizing public debt, a politically controversial issue in Europe. The reluctance of northern countries to accept the fiscal role of the European Commission limits the viability of this proposal, which has found more acceptance in southern countries like Spain. Additionally, the Report does not clearly define the degree of responsibility and commitment each country should assume. The adoption of common criteria for tax policies and moderation and efficiency of public spending, in addition to debt and deficit criteria, is essential for achieving this goal. On the other hand, financing these investments will require greater participation from the private sector, which would require further development of European capital markets and progress in Banking Union. The Letta Report already emphasized the importance of mobilizing private capital. European households' savings are high, reaching approximately 13% of their gross disposable income in 2023, compared to 8% in the U.S. Harnessing these resources is crucial to finance the productive investments Europe needs. However, it should be noted that Europeans prefer more liquid and low-risk products, reflected in the fact that 30% of these savings are kept in cash and deposits. Furthermore, the fragmentation of financial markets in Europe limits the efficient utilization of savings. Nearly 300 billion euros of European households' savings are diverted each year to markets outside the EU, especially to the U.S. Greater integration of European financial markets would facilitate the channeling of these funds toward local financial markets and the investment needed in strategic sectors to transform and strengthen the European economy.
As we have seen, Europe faces challenges and weaknesses but also possesses fundamental values that it must preserve to move toward deeper integration: liberal democracy with solid and independent institutions, prosperity, social balance, and welfare states. Protecting this social model requires a committed society that prioritizes the principle of equality of opportunity over equality of outcomes and is capable of protecting the most disadvantaged. A society that can develop a unique and prosperous European public sphere, both socially and economically, and that understands that there is no alternative to effort and work to increase innovation. While the Draghi Report is a very useful reference for building a more competitive Europe, it lacks a detailed strategic plan and an execution proposal based on efficiency and prioritizing measures.
Círculo de empresarios insists that for Europe to recover and consolidate its position in the new world order, it is essential that actions be based on principles of economic freedom that generate a favorable environment for business activity. We believe the EU must undertake the necessary structural reforms to promote growth and integration. It must defend citizens' interests by reducing bureaucracy and excessive regulation, as well as carry out governance reforms that allow progress in building a single market. Greater integration of economic and fiscal policies is necessary, with greater scrutiny of public accounts and efficiency in national spending policies to achieve greater financial cohesion. It is important to move toward a common foreign policy that ensures secure supply chains for key raw materials and technologies, increases productive independence in strategic sectors, and strengthens industrial capacity in defense and space. Decarbonization, in addition to its environmental value, should be promoted rationally as a driver of energy independence in an unstable geopolitical context and of economic prosperity and technological innovation in new areas of action.
In this context, Spain must also make a great effort to adapt to the emerging world, betting on competitiveness, talent, and strengthening our role in the future European project. Círculo de empresarios has repeatedly emphasized the need to implement key structural reforms so that the Spanish economy can move toward more sustainable and inclusive growth, many of which are mentioned in this note. To achieve this transformation, it is essential to overcome political fragmentation and recover the capacity to build consensus to move forward together.
Unfortunately, if we do not act quickly in the direction we just outlined, there is a risk that the Draghi Report will remain a mere theoretical exercise with very limited impact on the European economic reality. Moreover, none of this will be possible if we do not continue advancing toward a Political Union based on the ethical values of our liberal democracy. It is up to the new European Commission to propose the programmatic lines of action in a decisive historical circumstance, requiring the effort and commitment of all — governments and civil society, public and private sectors. The inauguration of the new U.S. president and the implementation of his economic proposals make the adoption of these measures even more urgent. Europe has shown at certain stages that it is capable of emerging stronger from the most difficult crises, but swift and determined action is necessary. Our freedom and prosperity are at stake.
Madrid, January 21, 2025
