Draghi’s long-awaited report will help shape the agenda of the incoming European Commission. Gone is the push for additional regulation. Gone, too, is a ringing endorsement of free trade. In is a need for increased support for European champions, European integration, investment, and deregulation. Whether the new recipe will prove effective — or politically palatable — remains in doubt. 

Draghi’s diagnosis is dire: ‘This is an existential challenge.” Since 2000, real disposable income has increased twice as fast in the US than in Europe, primarily because of low productivity growth. “Europe largely missed out on the digital revolution led by the internet and the productivity gains it brought,” Draghi writes, noting that only four of the world’s top 50 tech companies are European.  

To catch up, Draghi says the European Union needs more Europe. Instead of leaving most decisions to 27 national governments, the EU should boost centralized public investment, integrate its fragmented financial and capital markets, and reduce burdensome regulations. Draghi’s ambitious plan contains more than 170 proposals, spelled out in 328 pages.  

Although others have already suggested most of these ingredients, the Draghi recipe emerges at a crucial time. European Commission President Ursula von der Leyen will soon begin her second five-year term and is in the process of distributing critical portfolios. Tech-positive Finnish nominee Henna Virkkunen is touted as the next digital commissioner, replacing US Big Tech nemesis Frenchman Thierry Breton.  

Deregulation 

The EU has unleashed a regulatory tech tsunami. The Digital Services Act combats illegal content. The Digital Markets Act accelerates antitrust enforcement against the largest tech companies. The AI Act represents the democratic world’s first major effort to regulate the new technology. In total, the EU passed more than 13,000 pieces of legislation during the past five years. The US, in contrast, approved 5,500 federal laws.  

“The Commission’s legislative activity has been excessively growing,” Draghi writes. Restrictive privacy rules alone have reduced the profits of small tech companies by more than 15%. Indeed, “innovative companies that want to scale up in Europe are hindered at every stage by inconsistent and restrictive regulations,” the former Italian Prime Minister and European Central Bank president says.  

Instead of new laws, the EU needs to digest existing laws. Bureaucratic and administrative hurdles should be reduced, with 50% cuts in reporting obligations for small and medium-sized businesses. 

A New Industrial Strategy 

European startups attract capital early but need help to receive scale-up funding. Among EU unicorns valued at more €1 billion between 2008 and 2021, some 30% have moved abroad, the majority to the US. 

The report outlines a “new industrial strategy” characterized by protectionism and massive public spending. The EU’s public Horizon research budget should grow to €200 billion over the next five years, up from the €93.5 billion in the past five years. Draghi’s proposal would entail a 5% rise in the EU’s total investment-to-GDP rate.  

Boosting European Tech 

European companies specialize in mature technologies such as automobiles. Draghi focuses on advanced technologies and disruptive innovation, industries that now receive only 5% of Horizon’s current budget.  

Many proposals aim to create European autonomy — and could end up causing transatlantic tensions. On cloud storage, Draghi concedes that Europe’s market is “largely lost to US-based players.” Although he calls for increased ‘cooperation between the EU and the US to ensure access to cloud and data,’ he wants Europe to spend public money developing its cloud industry. 

EU Integration 

For Europe to facilitate scaling up startups, it must end the present patchwork of regulations. Tax and stock option policies vary across the continent. Cross-border fundraising remains problematic. The EU’s Capital Markets Union, proposed in 2014, still needs to be completed. Pension funds are unable to play to their full potential. Angel investing, government development investment, and private venture capital remain underdeveloped.  

In contrast, the US boasts a vast and unified domestic market. 

US Tech Should Pay European Telcos 

European telecom incumbents lack the size to compete with leading US providers. Whereas the EU has dozens of telcos, the US has a handful. European telcos struggle financially. US telcos charge higher prices and thrive. 

Strict competition laws prevent mergers. Draghi wants to allow consolidation.  

European operators want big, mostly American, online platforms to pay them for carrying traffic, what they call a “fair share.” Draghi agrees. Washington is opposed.   

Political Challenges 

Will the Draghi recipe be digestible politically? Doubts are widespread. Germany and France are politically paralyzed. The frugal Benelux and Nordics oppose massive new EU spending. Greens and Socialists essential for Von Der Leyen’s European Parliament majority, privilege fighting climate change and social equality over boosting competitiveness.  

Less than three hours after Draghi’s common borrowing proposals were released, German Finance Minister Christian Lindner said, “Germany will not agree.”  

But don’t count out Draghi or Europe. When Russia invaded Ukraine, the continent came together, imposing tough sanctions and funding Kyiv’s defense. As President of the European Central Bank, Draghi saved the euro with his mantra, “whatever it takes.” The question now is whether Europe will do “whatever it takes” to restore competitiveness. 

Padraig Nolan serves as Chief Operating Officer of ETPPA, a prominent EU fintech association. He is also an advisory board member of the Lisbon-based Europe Startup Nations Alliance. Padraig holds a bachelor’s degree in law and economics (University of Galway) and a Master’s in European law (Utrecht University). 

Oona Lagercrantz, an intern with CEPA’s Digital Innovation Initiative, provided research.