Super Mario’s plan to save Europe

Mario Draghi, former President of the European Central Bank and former Prime Minister of Italy, recently published a report that caused quite a stir. In fact, Draghi was commissioned by the European Commission to write this report. The subject of the report is the cornerstones of a new competitiveness strategy for Europe. In this column, I provide a brief assessment of Draghi, nicknamed ‘Super Mario’, and his plan to save Europe.

We can start by identifying why Europe is in a situation that needs to be rescued. Draghi recognizes that the EU is lagging behind the U.S. and China, especially in technology. More specifically, he identifies the slowdown in labor productivity and economic stagnation as the two main problems that Europe faces compared to its competitors.

The report argues that Europe’s current problems will become even more chronic as we move from a period of peak globalization and trade and financial liberalization to a period of rising economic protectionism.

Another major problem area is the ageing population in Europe. On the one hand, the aging population creates a labor shortage, leading to losses in production, and on the other, it becomes a negative factor for productivity growth. Politically, replacing those who leave the labor market due to the aging population with migrant labor creates a more fertile political atmosphere for neo-fascist movements to flourish. Thus, the aging population is one of the main problem areas, both economically and politically.

Persistent stagnation

Draghi’s main focus is the economic stagnation in Europe. Indeed, on long-term averages, the EU’s growth rate lags far behind both the U.S. and China. In practice, we can talk about a prolonged economic stagnation, especially if we consider that the average growth rate in the EU has increased due to the high growth in Eastern European countries.

In fact, this is not a new issue. Marxist analyses of the tendency of the rate of profit to fall and the crisis of overaccumulation address the basic mechanisms of this protracted economic stagnation. Even from more mainstream approaches to critical Post-Keynesian analyses, persistent stagnation has been a major topic of discussion, especially after the global financial crisis of 2008. Draghi does not specifically refer to these debates, but the problem he is talking about is essentially the same.

The report attributes the reasons for low growth to international political economy developments. The report says that the European growth model depends on cheap energy from Russia, increased trade due to globalization and the security umbrella provided by the U.S., but all three of these areas are undergoing significant changes. The rise in energy prices, the slowdown in trade and the rise of regionalization trends, and the need to increase defense expenditures show that the post-WW2 conditions for Europe are gradually changing. Draghi believes that all three of these factors have contributed to the economic stagnation.

Multiple crises and new industrial policy

The report proposes a new industrial policy framework and a massive mobilization of public investment to overcome this multiple crisis of structural and cyclical problems. According to Draghi, the share of investment needs to increase by around 5 percent of GDP annually to digitize the economy, reduce carbon emissions and improve defense capacity. To compare the size of this call for investment mobilization, Draghi notes that the additional investments provided by the Marshall Plan in Europe between 1948-51 after the WW2 amounted to about 1-2 percent of annual GDP. So the proposed investment mobilization is more than twice the size of the Marshall Plan.

To this end, the report proposes the establishment of an investment fund of $800 billion per year. The Draghi report therefore argues that this persistent stagnation crisis can be overcome by investment-led growth. This proposal also implies a change in the growth model in Europe and a shift to an investment-led growth model.

I should point out that Draghi’s report will have no practical consequences. In other words, there is no sudden policy shift in Europe. If we look at the public debate, especially in Germany and France, we see that the ‘dying old’ -the outdated neoliberal policy framework, its political actors and arguments- are still influential.

Germany’s finance minister, for example, argues that Draghi’s proposal for a new investment fund will not solve the EU’s structural problems and that there is no shortage of incentives for firms. According to Lindner, ‘bureaucracy and the planned economy’ are at the root of the problem. As you can see, policymakers in Germany are still wasting time fighting an enemy that doesn’t exist (the planned economy). Despite the reactions to the report, so far only Spain has expressed a positive view. 

In this environment, especially when the rising neo-fascist movements define the public debate, we do not see a radical break with the ‘dying old’ when we look at the economic policy preferences of the majority of these political movements. The European Commission’s exit through Draghi can be seen as a search for a new growth model and a new consensus based on it, which the center politics is trying to establish in this environment of multiple crises.

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