The Draghi and Letta Reports: Overloaded Messages and Limited Impact

Differences in Focus

Before going into a qualitative discussion of the two reports, a simple quantitative measure can illustrate differences in focus. The table below shows the frequency with which certain words appear amongst a set of 25 economic policy terms. The measure is relative; it thus abstracts from the different lengths of the two reports.

A first key difference is that global competition plays a much larger role in the Draghi report, where the United States and China are mentioned over six times as frequently as in the Letta report.

A second key difference is the frequency of the word social, which is four times more prevalent in the Letta report.

The terms energy and industry are also much more prominent in the Draghi report, whereas services appear more frequently in Letta. Finally, the word count also shows the relative importance of innovation, a term that appears as frequently as energy and industry in the Draghi report, but much less frequently in Letta (Appendix A).

Draghi on Competitiveness1

The basic argument of the Draghi report is that the growth of the EU economy has fallen below that of the main comparator, the United States, and that deep economic reforms are needed to stop Europe's relative decline.2

The report is divided in two parts, a shorter Part A entitle “A competitiveness strategy for Europe” outlining a number of broad policies and a longer Part B of over 300 pages with in-depth analysis and recommendations. The report contains hundreds of detailed policy recommendations in part B spread over 10 sectoral and five horizontal policy areas.

Given its length, one key aspect of the Draghi report is that one can often find support for two sides of a policy debate. For example, Draghi emphasizes the key role of competition, but also the need to use competition policy as a tool for industrial policy. A similar tension pervades the discussion of trade policy, which emphasizes the importance of the rules-based trading system for the EU, but also the need to protect strategic industries.

The starting point of the report is the weakness of innovation in the EU, and the report lays out the well-known lamentable state of Europe's high-tech industries. Draghi recognizes that European enterprises are caught in a ‘middle tech trap’. This term reflects the observation that most large EU companies are in middle tech sectors and remain there because these are the fields they know. Radical, breakthrough innovation is much weaker in Europe and very few European tech start-ups have become global champions.

Draghi proposes a number of small, but significant steps that should strengthen innovation, like the creation of a European equivalent to the US Defense Advanced Research Project Agency (DARPA) that has been credited with fostering key innovations like the internet. Unfortunately, this part of the report has received little public attention, but it was taken up, at least in general terms, in the Competitiveness Compass.

The report recognizes that EU companies are relatively strong in clean tech innovation and then concentrates on the threat to the EU clean tech industry from China. It recommends abandoning some sectors like solar panel manufacturing, where the Chinese cost advantage is too big – even if that advantage was due to subsidies.

But it considers the automotive industry too important to be exposed to unfettered Chinese competition. It recommends a mixture of tariffs and measures to ensure that Chinese investment in this sector leads to a transfer of technology, if needed, including by requiring foreign companies that want to produce in Europe to enter into joint ventures with local companies. This represents an example of the contradictory messages mentioned above because this is exactly the approach China has used for a long time and which the EU has always criticized.

More in general, the idea that some sectors should be left exposed to global competition, even if unfair, but others should be protected because they are strategic, lends itself much less to a clear message. There are no clear criteria where the dividing line is between strategic and non-strategic ones; and what specific measures should be used to protect the strategic ones.

A major surprise for the reader comes at the end of the supporting analysis where, the report concludes that ‘a minimum annual additional investment of EUR 750 to 800 billion is needed’ to reach the goals set out in the report. This is the part that attracted, at least initially, most attention, but it is also the least convincing.

The 300 pages of supporting material provide little justification for this extraordinary call for more investment. There is no analysis of why this amount would be needed in addition to existing investment and what concrete projects should be financed. Moreover, the report does not say directly what part of the 800 billion euro annually should be financed by the EU through common debt, only that private financing will not be sufficient, and that some common public debt would be desirable. But the message that caught on is naturally the figure, as can be seen in the headline of the Financial Times.

This is a case where careful economic analysis would have been essential to create broad support. But an economic rationale for additional investment of this magnitude would at any rate be difficult to find given that the overall investment rate of the EU is similar to that of the US (Blanchard and Ubide, 2024; Gros et al., 2024) kind. It is thus very much debatable whether Europe needs more investment as opposed to investment in different sectors. Gros et al. (2024) show that investment in the EU is higher as a share of GDP than in the United States. It thus does not make sense to call for a large increase in investment without specifying what kind of investment is missing.

The Commission has not taken up the 800 billion euro figure for additional investment. It is not mentioned in the Competitiveness Compact; nor has there been much support amongst member states. This is thus one aspect that is unlikely to be implemented.

Letta: Much More Than a Market

Completing the internal market is the theme of a previous report by Enrico Letta. The Single Market Act of 1986 had been based on the simple idea that harmonization of regulation had been hampered by the need for unanimity and the perceived need to fully harmonize product standards. These two obstacles could be overcome by switching to majority voting and the combination of minimum harmonization with mutual recognition (Dougan, 2000).

The Letta report argues that the approach of the Single European Act has run its course and that a shift is needed because of the tendency towards “gold plating” – whereby member states add additional requirements to EU directives, further complicating and fragmenting the regulatory landscape.

For Letta, it follows that Regulations that are directly applicable should be used in internal market legislation to restrict the freedom for national regulators to protect their national markets.

This strategic proposition has received little attention in public debate and little traction amongst member states. The Single Market Act had been acceptable because the shift towards majority voting had been accompanied by the widespread use of directives that allowed them some discretion in the application of Union rules.3 The implicit argument of the Letta report is that this method has run its course and that a shift towards ‘maximum’ harmonization (via Regulations) is needed.

That integrating markets, especially capital markets and network industries, yields benefits is uncontroversial amongst economists. What is missing in the Letta report is an analysis of the political economy obstacles to market integration, and a way to overcome them as was done in the Cockfield report. Given the lack of support amongst member states, it is unlikely that this approach will be implemented. The Commission has also, at least in public, not backed up the idea of using more Regulations (instead of Directives) to limit the freedom of member states.

National authorities want to keep control over the sectors that are most heavily regulated, including the capital market and network industries, including national telecommunication networks. The only way to circumvent this opposition to further harmonization seems to be to create an additional Union legal regime that would bypass the fragmented patchwork of national regulators. This is frequently called the 28th regime and endorsed by the Letta report. The Commission has taken it up in the Competitiveness Compass.

However, this is not a new idea. Already almost 60 years ago, Storm (1967) surveyed a vast literature on this issue. An exploratory study on a European civil code started 25 years ago at the EUI. That early study revealed the need for much further detailed work on how the 28th regime would interact with the 27 national regimes. Establishing a 28th regime is thus also not something that can be expected any time soon.

An example for a 28th regime (at least for incorporating enterprises) is provided by the statute of 'societas europea' (SE) created already 20 years ago. An SE can be created only by combining at least two existing enterprises from two different member states (incorporated under their respective national regimes).4 Very few large corporations have adopted the SE regime. This example suggests that a piecemeal approach can only lead so far, even amongst large European firms. It is surprising that this existing example of a partial 28th regime is not mentioned in either report.