Economy: The Draghi report is a wake-up call for Germany

The report by former Italian Prime Minister and ECB President Mario Draghi for the EU Commission ruthlessly exposes Europe's economic and institutional weaknesses. Draghi calls for more investment and market-based solutions, fewer national unilateral actions and a strengthening of European institutions. The demands are likely to meet with a lot of resistance, especially in Germany. The German economy would be the biggest beneficiary of such reforms and they would be the only chance to prevent a major deindustrialization of Germany.

None of Draghi's findings and none of his demands are new; all of his weaknesses have been known for a long time. The state and companies are investing far too little. The result is an inadequate education system, destroyed infrastructure, too little innovation and a lack of adaptability on the part of companies. The providers of key global digital platforms come from the USA or China. When it comes to digital services and artificial intelligence, Europe is in danger of falling behind. And when it comes to green technologies, American and Chinese companies could also increasingly leave Europe behind.

National solo efforts instead of common interests

Many of the new technologies require a large domestic market and deep capital markets in order to mobilize sufficient private capital. However, Europe is characterized by national solo efforts. In Germany in particular, it has been repeatedly emphasized that “national champions” must be created, promoted and protected. The German and French heads of government would rather travel to China alone to negotiate individual deals for national companies and be celebrated at home for doing so, than to act together and pursue common interests.

National governments allow autocrats from China, Russia and two individual EU member states to play off against each other instead of taking a common line, even if it does not help their own national interests in the short term – for example, with the countervailing tariffs on Chinese electric cars.

Mario Draghi is calling for fewer national solo efforts and a strengthening of European politics and its institutions. He is therefore calling for the completion of the internal market for services and, in particular, a capital markets union and the completion of the banking union. He is calling for deregulation so that individual sectors can be consolidated – from telecommunications to financial institutions. And he is proposing a strengthening of public procurement so that national governments can, for example, ensure better quality in defence spending at significantly lower costs.

There is no alternative to prevent deindustrialization

The Draghi report identified a Europe-wide investment gap of 800 billion euros per year, which corresponds to 4.5 percent of European economic output. This sounds like an exorbitant sum, but it is realistic. Germany in particular has had a large private and public investment gap for a long time, which the DIW Berlin has been documenting and criticizing since 2013. Germany in particular could fill this investment gap on its own. The net savings of the German economy (measured by the so-called current account) amount to around 250 billion euros, or more than six percent of economic output.

In other words, Germany could close the vast majority of its investment gap with private capital from Germany if it were to use part of its net savings here instead of exporting them. However, for this to happen, German companies and financial institutions would have to do more to meet the investment needs in Germany and identify opportunities. This requires courage from companies and better framework conditions from the state – from an efficient infrastructure to a significant reduction in bureaucracy and the mobilization of skilled workers.

To achieve this, we need significantly more public investment, especially in European public goods such as energy infrastructure and a common industrial policy. And to achieve this, we absolutely need a European financial policy and the creation of a common, secure bond, at least to a limited extent. This is a red flag for many in Germany, but if deindustrialization is to be prevented and competitiveness improved, there is no alternative.

Germany has been living in an illusion of the 1980s for years

But significantly more public investment must also be mobilized at the national level, for example for the education system and for research and innovation. Unlike in Greece or Italy, the hurdle to this in Germany is not excessive national debt, but a harmful debt brake that prevents extensive public investment. And in the long term, it does not even reduce the debt ratio, but rather reduces the competitiveness and performance of the economy and thus prosperity, thereby even increasing debt in the long term.

Mario Draghi expresses what is actually a truism: without significantly more private and public investment, productivity and growth will become even weaker, jobs and innovative companies will move away and much of the prosperity will be lost. However, every federal government of the past 25 years has rejected a systematic strengthening of Europe and a shift of important competencies from the national to the European level. We still live in the illusion of a small, open economy of the 1980s, in which our national, export-oriented economic model will ensure competitiveness and prosperity. This was already a misconception ten years ago and is even more so today in a digital world with increasingly nationally active countries such as China and the USA.

The hope remains that responsible politicians in Berlin, Paris and elsewhere in Europe will finally remove their national blinkers, strengthen Europe and thereby prevent major deindustrialization and ensure economic competitiveness.