In a recent report, Mario Draghi, the former President of the European Central Bank, has called for the European Union (EU) to emulate the U.S. model in terms of productivity and innovation. This recommendation has sparked debate among EU economic planners, who are now considering the implications of such a shift. The Wall Street Journal has reported on this development, highlighting the complex economic and political landscape that Draghi’s proposal faces.
The Call for a Shift
Draghi’s report, published in September 2024, aims to address the economic stagnation exacerbated by increased competition from China and the end of cheap Russian energy. He advocates for increased joint debt and emphasizes the need for the EU to catch up with the U.S. in productivity and innovation. According to Draghi, this means focusing on sectors like technology, which have been key drivers of U.S. productivity growth over the past two decades.
The U.S. Advantage
The question of why the U.S. has higher productivity has been debated for decades. Allyn Young, a U.S. economist, proposed in 1928 that the largest domestic market in the U.S. enabled more efficient and profitable production methods that were not feasible elsewhere. Over time, this led to the emergence of complex industries in the U.S., which required significant investments in productivity.
In contrast, European companies have historically focused on traditional industries, such as automotive. According to data, European companies have not produced any listed companies with a market capitalization exceeding 100 billion euros in the past 50 years. In the U.S., companies like Apple, Microsoft, NVIDIA, Amazon, Alphabet, and Meta have market values exceeding 1 trillion dollars.
Challenges and Opportunities
However, the path to emulating the U.S. model is not straightforward. Scale economies create a natural barrier for new entrants in these complex industries. Moreover, the current global winner-takes-all dynamics, persistent trade imbalances, and the concentration of business activities in a few large urban centers cannot be fully explained by comparative advantages or exchange rate and capital flow imbalances.
Historically, countries that have sought to catch up economically have often adopted protectionist policies. In the 19th century, the U.S. was a proponent of industrial protectionism as it caught up with Britain. Similarly, Japan and South Korea have relied on state-supported industries and export markets to achieve their success.
The U.S. itself has shifted from being a proponent of multilateral free trade in the latter half of the 20th century to a more protectionist stance in recent years. The rise of China as a direct competitor has led to measures like tariffs and federal funding for domestic industries, such as the Chips and Science Act and the Inflation Reduction Act.
The EU’s Response
Despite these global trends, the EU has not made the same level of response. This is due to fragmented governance, Germany’s vested interests in China and Russia, and an over-reliance on free market rhetoric. Draghi, as a technocratic official, aims to change the EU’s status quo without resorting to protectionism.
His report outlines a trade policy based on case-by-case analysis to identify factors that can boost productivity growth. It also proposes an industrial strategy that focuses on sectors where Europe has advantages, such as automotive and network equipment, rather than picking specific winners.
For instance, the report suggests that European semiconductor manufacturers, particularly those focused on automotive and network equipment, could be eligible for subsidies. In the space economy, it advocates for targeted incentives to expand domestic companies. In the solar technology sector, it recommends countering Chinese trade practices and overcapacity, while cautioning against overly harsh retaliation that could jeopardize the EU’s trade surplus in wind energy technology.
Lessons from History
Airbus, which was a loss-making joint venture of multiple European countries in the 1990s, is a prime example of how government support and strategic vision can transform an industry. With government backing and a clear business strategy, Airbus has become the world’s largest aircraft manufacturer.
Conclusion
While the U.S. model presents a compelling case for increased productivity and innovation, the EU faces significant challenges in implementing such a strategy. The success of the U.S. model in recent decades, coupled with the need for a more cohesive and strategic approach, offers a path forward for the EU. However, overcoming the existing barriers and fostering a more supportive environment for innovation will be crucial for Europe to catch up with the U.S. in the global economy.
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