The future of European competitiveness: Analysis of the Draghi Report from a competition and trade law perspective

In early September 2024, former ECB President and former Italian Prime Minister Mario Draghi published his highly anticipated report (the Draghi Report) of more than 300 pages on the future of European competitiveness. It follows Enrico Letta’s analysis of the future of the single market in April, and the European Commission’s report on the evolution of competition in the EU over the past 25 years. The Draghi Report comes at a crucial time: less than two weeks after its publication, the newly appointed Competition Commissioner Teresa Ribera was introduced to the public. It stands to reason that the Draghi Report will influence Ribera’s actions and, by extension, the EU Commission as a whole.

The list of economic problems for the EU to solve is long: according to the EU Commission’s report on the evolution of competition in the EU, the intensity of competition and thus the growth in productivity has decreased, which has led to a decline in competitive-ness in the EU. Concentration has increased in many markets and the gap between the market leaders and the competitors in terms of markups, profits and productivity has widened. The EU Commission predicts economic growth of just 1 % for the year 2024, and despite various measures taken by EU Member States, stronger economic growth is not expected in 2025 either. At the same time, the EU is falling further and further behind the US and China economically, while technological change is gaining significant momentum. On top of that, geopolitical and geoeconomic tensions, for example with China, are not abating. There are growing indications of a fundamental shift in the international economic order. Therefore, Draghi identifies three areas for action: firstly, the EU should close the innovation gap with the US and China; secondly, it should accelerate decarbonisation; and thirdly, it should increase security and reduce dependencies.

Against this backdrop, according to Draghi, investment of EUR 750 - 800 billion is needed to maintain competitiveness.

This article examines the main political proposals from a competition law (A.) and a trade law perspective (B.) before drawing a conclusion and offering an outlook (C.).

A.  Recommendations for competition law

Draghi maintains that the full implementation of the single market is crucial for a successful industrial policy and stronger economic growth. The undistorted functioning of the single market is ensured above all by competition policy, which protects companies and consumers in the EU from abuses of economic power. However, the global economy has shifted towards innovation-intensive sectors (e.g. technology), where competition is generally based on digital technologies and where economies of scale, in addition to low prices, are crucial for competitiveness. These markets are characterised by high fixed costs, strong data and network effects and a ‘winner takes all’ mentality, leading to overall market concentration. Draghi therefore advocates for competition law reforms to address this radically changing world, and (Chinese and US) ‘superstar companies’ with adequate policy instruments.

Draghi proposes adapting the prevailing merger control practices. He recommends that innovation potential be taken into greater account in the effects of contemplated mergers. The EU Commission should assess these effects in terms of incentives for innovation and explain what evidence companies could provide to demonstrate that their merger would increase the innovation capability and incentives for innovation so that an ‘innovation defence’ would be possible. This assessment is certainly more complex than the assessment of price effects, but could be managed by increasing the resources made available to the EU Commission (in particular in the Directorate-General for Competition) which should also operate on a more agile and forward-looking basis. Draghi does not see any major obstacles to the practical implementation of his suggestions. All that is needed is a change in working methods and more up-to-date guidelines to make the current merger control regime fit for the future and more focused on innovation.

This proposal tallies with his critical analysis of past proceedings in which, in his opinion, mergers were prohibited that would have created sufficiently large companies to compete with Chinese or US companies. Draghi thus draws on a long-running debate that culminated with the prohibition of the planned Siemens/Alstom merger in 2019. The two companies wanted to merge to be better positioned in the international market, especially compared to the world’s largest Chinese train manufacturer CRRC. Draghi suggests that EU merger control could be used to foster ‘European champions’ which can compete with Chinese or US superstar companies.

Other competition policy recommendations include enabling the EU Commission to analyse mergers ex post and intervene if necessary. The ex post analysis could be integrated into a New Competition Tool. This tool could be deployed by the EU Commission to conduct market studies to identify structural problems in specific markets, and to resolve them as part of a market investigation together with companies. The idea of a New Competition Tool is not new; Draghi is taking up an EU Commission proposal that was introduced in an expert report back in 2020 but was not pursued further. Finally, Draghi suggests using guidelines and templates, particularly for simple cases, to reduce the duration of proceedings, make the outcomes of proceedings more predictable, and thus reduce the overall burden on companies.

B.  Recommendations for trade law

Following major geopolitical tensions and the resulting changes in the international composition of states as well as the backlog of WTO reforms, Draghi advocates for a uniform EU industrial policy. The lack of coordination between the EU Member States, for example, leads to overlaps and different standards. This is identified by Draghi as one of the reasons why the EU lags behind the US and Chinese economies, which have both implemented a coherent industrial policy.

Draghi’s trade policy recommendations are essentially based on aspects of the EU Economic Security Strategy. This marked a drastic change in direction for the EU’s trade strategy back in summer 2023: the EU Commission’s focus shifted from multilateral and plurilateral cooperation to increased concentration on EU’s unilateral goals and interests. This concerns, among other things, the areas of dumping, economic coercion on the EU, and the prevention of technology loss. At the same time, Draghi endorses the targeted expansion of bilateral trade partnerships that are in line with the EU’s unilateral objectives. Part of this strategy is to decrease international dependencies to reduce the EU’s vulnerability to other states.

On the one hand, Draghi emphasises that a certain trade policy openness is necessary in order to dismantle trade barriers, for example with regard to innovative technologies. On the other hand, in other areas or even in relation to certain trading partners, the EU should maintain level playing fields or even take protectionist measures. The latter is particularly necessary in relation to decarbonisation measures. Draghi therefore supports moving away from a one-size-fits-all approach to trade policy and favours a more flexible and individual approach to EU trade policy. Trade policy measures should also be used pragmatically and to support the EU’s competitiveness, demonstrate continuity and meet consumer interests.

Draghi calls for more coordination of investment screening. The EU Commission already took up this point in January 2024, adding it to the EU Economic Security Strategy. Since then, an amendment to the EU Investment Screening Regulation has been expected to be made. It is intended to introduce the obligatory investment screening in all EU Member States, to strengthen the EU Commission’s role in investment screening and to increase Member States’ accountability to the EU Commission.

C.  Conclusion and outlook

The Draghi Report is likely to have a major impact on the work of the EU Commission in the coming years and could shape the EU’s international relations. Draghi’s message is clear: Europe as a business location must not put companies at a significant competitive disadvantage compared to other markets. In the Political guidelines for the new European Commission 2024-2029, EU Commission President Ursula von der Leyen called for a ‘new approach to competition policy’ that is more conducive to companies expanding in global markets. This approach should also be reflected in the EU Commission’s assessment of mergers, so that innovation and resilience are fully considered. The mission letter addressed to the designated EU Competition Commissioner Teresa Ribera includes a mandate to modernise competition law, thereby taking into account many of the proposals put forward in the Draghi Report. She is expressly tasked with reviewing the guidelines for assessing horizontal mergers to ensure that factors crucial to the EU economy, such as innovation, are given sufficient weight.

From a trade policy perspective, the Draghi Report supports many of the measures already initiated by the EU as part of the EU Economic Security Strategy and places them in the wider context of EU competitiveness. The mission letter to the designated EU Trade Commissioner Maroš Šefčovič refers emphatically to the EU Economic Security Strategy, while emphasising the EU’s continued commitment to the WTO and its belief in free and fair trade to secure prosperity.

Overall, the Draghi Report’s remarks on competition law and trade policy demonstrate that the EU not only faces complex challenges, but also must address them.