EU Financial Regulation - What's in Draghi's report for the financial sector?
Which demons the EU faces?
Context and Draghi's EU economic outlook
Ursula von der Leyen appointed Mario Draghi as a special advisor to the European Commission (EC), tasking him with reporting on enhancing European Union's (EU) competitiveness. Published in September 2024, his report presents a rather bleak outlook for the EU economy and its futureIt urges the EU Commission to take decisive actions to prevent the EU from losing its remaining competitive advantage.
One of the primary statements is clear: inputs in the EU economy are expensive, which directly impacts its outputs. For instance, energy prices in the EU are significantly higher compared to other regions. This is largely due to the geographical constraints of the EU, adding the recent breakaway from Russian's gas. Unfortunately, this situation leaves little option to EU actors other than importing energy, which negatively affects prices. Draghi highlights gas and electricity as major factors. The EU also faces shortages in critical raw materials, which are essential for the green transition.
Additionally, EU labor market costs are high, primarily due to Member State social model, including high social costs of hiring and rising expenses associated with pension financing — exacerbated by an aging EU population. Regarding demographics, pressure is mounting warns Draghi. The EU is on the verge of a shrinking workforce, with a potential decrease of 2 million workers annually starting in 2040.
Moreover, the EU is lagging in the digital transition by relying too heavily on its industrial production infrastructure and lacking listings of 'EU champions'. These issues are further aggravated by a growing investments gap in research and development. It hinders proper innovation and fosters a low-risk appetite among investors. Operating in the EU business environment is perceived negatively due to cumbersome regulations that add layers of complexity. Raising capital is challenging with fragmented EU capital markets, navigating 27 markets for a single IPO requires 27 different administrative processes. The same process in the US is much more streamlined for CEOs looking to scale up. One of the main reason why Spotify has fled the EU to list in the US.
Nevertheless, as of now, private investment still represents 80% of investment in the EU. Increasing debts incurred by public authorities enabled growth at a slower pace. To achieve more competitiveness, Mario Draghi identifies three main economic challenges that the EU must address:
- Closing the innovation gap,
- Transferring the benefits of energy price reductions to end-users,
- Increasing security by reducing dependencies on critical raw materials. It will be paramount for the EU to maintain its position as a leader in sustainable transition.