Less than two weeks ago, I wrote about anemic economic performance in Europe. So I was very interested to see that the European Commission just issued a report about improving European Competitiveness.
Here’s one of the first charts in the 65-page report, and it shows the big gap between U.S. and E.U. when comparing per-capita GDP.
Unfortunately, the Draghi report is also like Zakaria’s column in that it has a decent diagnosis about what’s wrong, but a largely misguided prescription of how to fix the problems.
Here’s some of what Draghi wrote in the foreword.
…a wide gap in GDP has opened up between the EU and the US… On a per capita basis, real disposable income has grown almost twice as much in the US as in the EU since 2000. …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. … This report identifies three main areas for action to reignite sustainable growth. … First – and most importantly – Europe must profoundly refocus its collective efforts on closing the innovation gap with the US and China, especially in advanced technologies. … The second area for action is a joint plan for decarbonisation and competitiveness. … EU companies still face electricity prices that are 2-3 times those in the US. Natural gas prices paid are 4-5 times higher. … The third area for action is increasing security and reducing dependencies. …we will need a genuine EU “foreign economic policy” to retain our freedom.
These are mostly reasonable observations.
And the report is quite sound when analyzing the problem of excessive red tape. Here are some more excerpts.
…we continue to add regulatory burdens onto European companies, which are especially costly for SMEs and self-defeating for those in the digital sectors. More than half of SMEs in Europe flag regulatory obstacles and the administrative burden as their greatest challenge. …The stock of regulation remains large and new regulation in the EU is growing faster than in other comparable economies. While direct comparisons are obscured by different political and legal systems, around 3,500 pieces of legislation were enacted and around 2,000 resolutions were passed in the US at the federal level over the past three Congress mandates (2019-2024). During the same period, around 13,000 acts were passed by the EU. … a Business Europe gap analysis of 13 pieces of EU law flagged duplication across 169 requirements, including differences (29%) and outright inconsistencies (11%).
That’s the good news.
Now let’s focus on the bad news by grading the policies listed (or ignored) in the report.
Fiscal policy: Europe’s biggest economic weakness is an excessive burden of government spending, accompanied by stifling taxation and heavy debt. Based on current trends, another fiscal crisis is very likely, probably starting with Italy. Remarkably, there is no discussion of this looming problem in the report. That’s sort of like writing the history of World War II and making no mention of Pearl Harbor or D-Day! To make matters worse, the report actually endorses a bigger fiscal burden, calling for more “investment-related government spending.” Most worrisome of all, it calls for ” joint funding of investment at the EU level” financed by “issuance of common safe assets” (all of which exacerbates the over-spending problem at the national level with more spending at the pan-European level).
Grade: F
Monetary policy: The report makes no mention of the European Central Bank and there is no discussion of monetary policy, even though inflation has been a major problem in the eurozone thanks to reckless and short-sighted decisions by the European Central Bank. This is a sin of omission. As an aside, Mario Draghi is infamous (or should be infamous) for sacrificing the European Central Bank’s independence when he was in charge. His “do-whatever-it=takes” commitment was supposedly about saving the euro, but he actually diminished the currency by making good monetary policy secondary to propping up the eurozone’s welfare states. In Draghi’s defense, he can’t be as bad as the current head of the ECB.
Grade: F
Regulatory Policy: As cited above, the report correctly points out that red tape is a major problem in the European Union. And the report calls for the creation of a Commission Vice President for Simplification. This person supposedly would “streamline” regulation and create some sort of system for measuring the cost of new rules. Unfortunately, the report also embraces more centralization of regulatory authority. Worst of all, it fails to endorse “mutual recognition,” which would give businesses the ability to operate under the rules of the E.U. countries with less red tape. Last but not least, the report mentions that energy prices in Europe are much higher than in the United States, yet the report says the E.U. should double down on costly green energy (does Draghi not know what happened in Germany?).
Grade: C
Trade Policy: There are two main trade-related issues covered in the report. The first deals with the role of China, which is hard to grade because there are national security implications, as well as the vexing issue of how to respond to China subsidizing its exporters. But the second issue, industrial policy, is easy to grade because there is so much evidence that governments do a terrible job of picking winners and losers. Sadly (but predictably), the Draghi report embraces industrial policy.
Grade: D
Quality of governance: The report does not address issues such as property rights, the quality of court systems, or the level of government corruption (factors are important if the goal is to have strong economic performance). I am worried that some of the policies in the report – most notably fiscal centralization and industrial policy – will enable and encourage more corruption. That being said, let’s give Draghi the benefit of the doubt.
Dan Mitchell is co-founder of the Center for Freedom and Prosperity and Chairman of the Board. He is an expert in international tax competition and supply-side tax policy.
