Europe’s Competitiveness Moment

Why the “Draghi Report” Sparked Reform Talk—Yet Little Real Change

Just over a year ago, a high-profile report authored by former European Central Bank President Mario Draghi landed in Brussels with the force of a political shockwave. It did not merely recycle familiar concerns about Europe’s sluggish growth, fragmented markets, and lagging technology sector. It did something more unusual in the language of EU policymaking: it spoke plainly, even bluntly, about failure. The core message was not that Europe faced challenges—every strategy paper says that—but that Europe was falling behind, and that the causes were internal, structural, and largely self-inflicted.

For many observers, the significance of Draghi’s intervention was not only the substance of the diagnosis, but the tone. Earlier landmark assessments had already warned that Europe risked underperforming the United States in productivity and innovation. Yet they often arrived wrapped in reassurance: Europe was different by design, social models could compensate for weaker tech champions, and there was little appetite to assign responsibility. Draghi’s approach was sharper. He did not present the gap as an unfortunate by-product of global forces. He treated it as the predictable outcome of policy choices—particularly those that made energy expensive, capital scarce, and scaling a business within the Single Market harder than it ought to be.

In the months that followed, European institutions appeared to respond. Headlines suggested a new mood: a willingness to cut red tape, revisit flagship regulations, and talk openly about competitiveness. New “omnibus” reform packages were announced with the stated aim of deregulating parts of the economy, revitalising venture capital, and advancing a genuine Single Market. A new “competitiveness compass” was rolled out, accompanied by lists of initiatives—dozens of them—promising to close the innovation gap with the United States in fields such as artificial intelligence, quantum technologies, robotics, and biotechnology.

Yet beneath the political theatre, the central question remains: has Europe truly changed course, or has it merely adopted the rhetoric of urgency while preserving the underlying constraints? The uneasy conclusion many analysts have reached is that the post-Draghi reform wave, while real in parts, is largely concentrated in the safest areas: tweaks that generate press releases without provoking entrenched interests or forcing trade-offs. The hardest reforms—those that would meaningfully reshape incentives, reallocate resources, or challenge domestic lobbies—either move at glacial speed or are quietly left aside.

To understand why, it helps to start with what the Draghi diagnosis actually implies, and then examine what the EU is currently doing—both the measures that look like progress and the fine print that can render them far less transformative than advertised.

The Gap Europe Can No Longer Explain Away

For years, Europeans have held competing narratives about the United States. One view dismisses America as a country of inequality whose prosperity is overstated by a small group of high earners. Another argues that Americans are richer because they work longer hours, implying the difference is mostly a choice: Europe prefers leisure, the US prefers labour.

Neither story stands up as a full explanation. Differences in hours worked matter, but they do not account for most of the gap. The larger and more stubborn factor is productivity: how much economic value is produced per hour. Even when adjustments are made for the fact that additional hours tend to be less productive at the margin—those end-of-day hours when attention drifts and energy fades—the evidence still points in the same direction. Americans, on average, produce significantly more per hour than Europeans.

That observation changes the policy debate. If the gap were simply about work-life balance, Europe could treat lower GDP per person as a trade-off for social wellbeing. But if the gap is mainly productivity, the consequences are harder to avoid: slower wage growth, weaker public finances, less fiscal room to fund social programmes, and a diminished ability to invest in defence, infrastructure, and strategic technologies. In an era defined by geopolitical rivalry, industrial policy, and technology shocks, productivity is not merely an economic statistic. It is a measure of power.

Europe’s challenge is especially striking because it is not a continent devoid of strong companies. There are globally dominant European firms in semiconductors, industrial manufacturing, and pharmaceuticals. The problem is not that Europe cannot produce winners. It is that Europe does not reliably produce enough of them, especially in the sectors that currently shape the frontier of innovation: advanced software, platform businesses, and high-growth technology. Moreover, when European firms do succeed, they often struggle to scale at home with the speed and flexibility seen in the United States, and they face a financing environment that is less supportive of rapid expansion.

Draghi condensed the core of the problem into two big constraints: energy and financing. The first affects industry directly; the second determines whether Europe can create and scale innovative firms across sectors.

Energy: The Long Shadow Over Industry and Strategy

Europe’s energy costs have been a structural disadvantage for years, and the problem has become more acute in the wake of geopolitical shocks. Without affordable and predictable energy, industrial competitiveness erodes. Energy-intensive sectors either shrink, relocate, or survive only through subsidies that strain public budgets. Expensive energy also creates strategic dependencies: if domestic production is not cost-effective, supply chains become reliant on imports from geopolitically complex partners for natural gas, critical minerals, and industrial inputs.

The economic effects are straightforward. Higher energy costs raise the baseline cost structure of European production, compress margins, discourage investment, and weaken the appeal of building new capacity in Europe. The political effects are just as significant. Energy policy becomes entangled with climate commitments, national energy mixes, and public fears about price volatility. Reform is rarely only technical; it is deeply political, and often contested along national lines.

Draghi’s argument is not simply that Europe pays too much for energy, but that the cost structure interacts with other weaknesses—especially regulatory complexity and fragmented markets—to make it harder for European firms to respond competitively to global shifts.

Financing: Europe’s Venture Capital Deficit

Draghi’s second constraint is capital—specifically the kind of risk capital that funds innovation, scaling, and experimentation. By comparison with the United States, Europe has a shallow venture capital ecosystem. Venture capital as a share of GDP is dramatically lower in Europe, and European start-ups receive far less funding than American peers. That difference matters because early-stage and growth-stage firms in technology and advanced services often require substantial investment before they become profitable. Without financing, promising firms remain small, sell early, or relocate to ecosystems where capital is abundant.

Why is venture capital weaker? One answer points to Europe’s financial architecture. Capital markets are fragmented along national lines, shaped by different legal regimes, tax systems, and supervisory practices. In such an environment, scaling a fund or deploying capital across borders is harder. Another answer points to incentives: heavy regulation, risk aversion in savings allocation, and limited pathways to large exits can make venture investment less attractive. If pension funds and institutional investors are not structured or encouraged to allocate meaningful capital to high-growth assets, the start-up ecosystem remains starved.

This is one reason Europe produces fewer “scale-ups”—companies that grow rapidly into global leaders. It is also why many of Europe’s corporate giants have deep historical roots. They are often the products of earlier industrial eras rather than the outcome of today’s digital and biotech revolutions. Europe can generate excellence, but it has struggled to build a system that consistently converts innovation into globally competitive firms at scale.

Regulation and the Cost of Complexity

A crucial part of the post-Draghi conversation has focused on regulation. Europe’s regulatory state is often defended as a strength: it protects consumers, restrains corporate abuses, and embeds values such as privacy and fairness into the design of markets. Yet regulation also carries costs, particularly when it becomes layered, slow, and unpredictable in application.

The practical effects can be seen in technology markets. Many Europeans have noticed that certain AI-enabled features and services arrive later in Europe or are withheld entirely. Part of the reason is compliance: companies must adapt products, data flows, and infrastructure to meet EU data protection rules. The General Data Protection Regulation (GDPR) is the most famous example, not least because of the ubiquitous cookie consent banners that have become a daily irritation for users.

These banners are not merely a minor inconvenience. They symbolise a wider system in which compliance obligations can raise costs, slow deployment, and reduce the attractiveness of investing in European operations. Research has suggested that GDPR has been associated with reduced investment inflows into the EU, with a particularly marked effect on US investors. Compliance also has direct operational costs: storing and processing data in Europe can be more expensive due to regulatory requirements, and start-ups without extensive legal resources can feel the burden most acutely. If a regulation consumes a meaningful share of revenue—especially for smaller firms—it can reduce hiring, suppress experimentation, and push entrepreneurs to build elsewhere.

This does not mean privacy protection is inherently incompatible with innovation. It means that the design and application of rules matter. When regulation becomes an ecosystem of bureaucratic layers—multiple authorities, overlapping interpretations, and specialised courts that may lean towards the most restrictive reading—the result is uncertainty. Firms do not just pay compliance costs; they pay the cost of not knowing how rules will be applied in practice.

The New Reform Push: Deregulation and the Promise of Momentum

In response to competitiveness concerns, European leaders have signalled an intent to reduce red tape. There has been talk of simplifying cookie consent and revisiting aspects of GDPR, alongside adjusting or delaying some AI regulatory measures to encourage investment and speed up deployment. The broader reform branding suggests a significant pivot: Europe is serious about rebalancing its policy mix so that innovation and growth are not perpetually subordinated to precaution and process.

The political significance of this shift should not be dismissed. Simply acknowledging the innovation gap—and treating it as a problem requiring action—is a change from the complacency that sometimes characterised earlier debates. Messaging matters, because it shapes what becomes politically possible.

However, the emerging critique is that many reforms are narrow, partial, or wrapped in caveats. For example, rather than eliminating the cookie consent regime, proposals may introduce limited exceptions for specific categories of data or specific uses. The everyday user experience may change little, and the underlying compliance architecture could remain largely intact.

Even more importantly, exceptions in EU law are not always exceptions in practice. If enforcement bodies and courts interpret them narrowly, firms may still avoid relying on them, fearing legal exposure. The problem, then, is not simply what Brussels writes on paper, but the multi-layered machinery that determines how rules are implemented across member states and over time.

From this perspective, the new reform packages risk becoming symbolic: a signal that Europe has heard the critique, without a willingness to dismantle the institutional dynamics that create high compliance costs and slow decision-making.

The Pattern: Implement the Easy Recommendations, Avoid the Hard Ones

A recurring claim in the post-Draghi debate is that European institutions are adopting the report “to the letter”, listing dozens of initiatives inspired by its proposals. Yet counting initiatives is not the same as delivering outcomes. The more important question is which recommendations are being implemented—and whether they are the ones that would actually change Europe’s trajectory.

The pessimistic view is that policymakers are selecting reforms that involve minimal sacrifice and minimal controversy. These are the measures that can be announced quickly, create an impression of activity, and avoid confronting politically sensitive trade-offs. By contrast, reforms that would disrupt national prerogatives, threaten protected sectors, or create visible losers are postponed, diluted, or quietly ignored.

There are signs of this dynamic in the pace of change. Major policy reviews move slowly, sometimes stretching over years. Even when a roadmap is commissioned, the output may be an analysis rather than binding legislation. Meanwhile, Brussels often celebrates projected savings from deregulation that, in macroeconomic terms, are modest—far smaller than the scale of the competitiveness challenge suggests is necessary.

This is not to say that small reforms are worthless. But in a context where Europe faces a widening productivity gap, major technological transitions, and a harsher geopolitical environment, incrementalism risks becoming a form of denial: activity without transformation.

The Unspoken Trade-offs: Climate, Labour, and Political Limits

One of the most revealing aspects of the competitiveness debate is where it stops. Many of the policies that could raise productivity—at least in the short to medium term—would force hard conversations about trade-offs.

Environmental policy is a prominent example. Europe’s climate ambitions are among the most advanced in the world, and they are often framed as a source of competitive advantage: by pushing decarbonisation early, Europe can lead in clean technologies. Yet there are costs, especially when carbon pricing and regulatory burdens interact with high energy prices and global competition. If industrial firms face rising costs while competitors operate under less stringent regimes, Europe risks deindustrialisation or an increase in imported emissions rather than a reduction in global emissions.

A politically comfortable approach is to treat these tensions as temporary, assuming that higher carbon prices will automatically drive sufficient innovation to offset the burden. In effect, it is a wager: that the pressure will produce breakthroughs quickly enough to preserve competitiveness. The danger is that this becomes a “worse is better” strategy—accepting economic pain now in the hope that it catalyses future gains, while underestimating how quickly industries can relocate or shrink.

Labour market reform is another taboo area. Policies that increase business dynamism often require flexibility: the ability for firms to restructure, to hire and fire more easily, and to reallocate labour towards more productive uses. Many European countries have historically prioritised employment protection, and for good reasons tied to social stability and fairness. But rigidities can also make it harder for young firms to grow, and they can slow the reallocation of talent towards innovative sectors.

Some policymakers point to models such as “flexicurity”, where firing is easier but the safety net is stronger. The obstacle is political. Even with generous protections, telling voters that it should be easier to dismiss employees is toxic in many contexts. Here, the Draghi-style competitiveness agenda collides with the electoral realities of European democracies.

The result is that Europe often searches for reforms that promise “win-win” outcomes—higher productivity without painful transitions. Yet the deepest structural problems rarely dissolve without costs, at least for some groups. When politics cannot accommodate that fact, reform packages drift towards the superficial.

The Single Market: Europe’s Best Idea Still Not Fully Built

If there is one reform area that ought to be both economically powerful and politically defensible, it is the completion of the Single Market. In principle, reducing barriers between member states should increase competition, lower prices, improve productivity, and allow firms to scale. It is one of the rare reforms that could benefit the overwhelming majority of Europeans.

Yet the persistence of internal barriers—especially in services—remains one of Europe’s most damaging self-imposed constraints. The effective friction between national regulatory regimes can be so high that it resembles the economic impact of large tariffs. In such a setting, even firms that could be globally competitive struggle to achieve continental scale, because Europe is not truly one market in practice.

The political economy explains why. Completing the Single Market threatens entrenched interests: domestic lobbies, protected professions, and regulatory fiefdoms that benefit from fragmentation. These groups may be small in number but highly organised, with strong connections to national politics. The beneficiaries of reform are diffuse—millions of consumers and potential entrepreneurs—while the losers are concentrated and loud. This asymmetry consistently biases outcomes towards inaction.

The worrying indicator is that intra-European trade has not surged in response to the new rhetoric. If anything, measures of internal trade intensity have fallen rather than risen. That suggests that, despite the strategic conversation about competitiveness, the core integration project is still stalled.

If Europe cannot push through even these “broad benefit” reforms—ones that do not obviously demand austerity or dismantle the welfare state—it raises a serious question about whether the EU system is capable of delivering the deeper structural shifts Draghi implied were needed.

Research and Innovation Funding: Bigger Numbers, Modest Changes

Competitiveness strategies often highlight research and innovation spending. Budget plans increasingly use the language of productivity and technological leadership, with larger allocations to programmes aimed at R&D, start-ups, and industrial innovation.

At first glance, this looks encouraging. But two problems repeatedly emerge: the risk of overpromising and underdelivering, and the challenge of spending effectively rather than merely spending more.

One common pattern in EU budget politics is to announce ambitious totals early, then reduce them when negotiations tighten. Even when funds are allocated, the design can remain overly bureaucratic. If grant processes take many months and reforms only reduce timelines marginally, the system is still too slow for fast-moving technology sectors. A one-month improvement on an already lengthy process is not the kind of change that produces a surge in innovation.

There is also a deeper strategic question about excellence versus distribution. One of Draghi’s recommendations was, in effect, to concentrate resources to create world-leading institutions—such as by directly funding a small number of universities to propel them into the top global tier. This approach mirrors how global leadership often emerges: not through evenly distributed mediocrity, but through concentrated excellence.

Yet Europe has historically resisted this. Concentration of funding would be politically controversial because it would disproportionately benefit already strong institutions, often in wealthier member states. It would force politicians to explain why a country should support a “champion” university in another member state. The same logic that weakens integration also weakens excellence: national politics prefers fairness between jurisdictions over the ruthless focus required to build global leaders.

As a result, Europe risks funding many programmes that are defensible and inclusive but insufficiently transformative—supporting a broad ecosystem without producing enough world-class outcomes.

The Capital Markets Problem: Savings Without Scale

Perhaps the most consequential structural issue is the absence of a unified capital market. Europe is wealthy, and Europeans save substantial amounts. Yet a significant portion of those savings does not translate into productive investment at scale. Money remains in low-yield instruments, national banking systems, or conservative assets rather than flowing into high-growth enterprises and innovative projects.

Estimates suggest that mobilising even a modest share of European savings could unlock hundreds of billions of euros in investment. This illustrates the scale of the opportunity. Europe is not necessarily short of money; it is short of the mechanisms that turn money into risk capital and long-term investment.

This is where the conversation often turns to joint financing instruments, including common debt issuance. Advocates argue that Euro-level borrowing could fund strategic investment and reduce fragmentation, if paired with credible fiscal discipline. Yet joint debt quickly becomes politically contentious when member states do not trust one another’s budgetary behaviour. If rules are weak or unevenly enforced, common borrowing turns into a perceived transfer mechanism: some countries appear to benefit while others carry the risk.

Without a shared framework of discipline and trust, instruments that could in theory support investment become zero-sum battles. That dynamic makes bold policy harder, not easier.

The Underlying Problem: Europe’s Politics Struggle With Power

Across all these domains—regulation, energy, capital markets, the Single Market, research funding—the same structural obstacle recurs. Policies that could genuinely raise European productivity and competitiveness often create visible conflicts between interests, sectors, and member states. They produce winners and losers. Even when the net benefit is positive, the distributional politics are hard.

Europe’s institutional model is designed for consensus and constraint. That model can protect against rash decisions and safeguard rights. But it can also make decisive reform difficult, especially under time pressure. When the need is urgent and the external environment is shifting rapidly, a system optimised for compromise can end up delivering too little, too late.

This is why some commentators argue that Europe has absorbed the Draghi report rhetorically but not structurally. It is willing to adopt the language of competitiveness and announce packages of initiatives. It is less willing—or less able—to implement reforms that would alter the underlying “rules of the game”: deep market integration, truly unified capital markets, faster and clearer regulatory enforcement, and politically uncomfortable trade-offs in climate and labour policy.

A Moment of Choice, Not a Finished Story

It would be easy to conclude that Europe’s competitiveness agenda is doomed: another cycle of reports, summits, and glossy infographics that change little. That may ultimately be the outcome. But it is not yet inevitable. The very fact that senior European politics now speaks openly about the innovation gap, about the costs of bureaucracy, and about the need to mobilise investment is not nothing. In Europe, acknowledgement can be the first step towards change.

The danger is that Europe mistakes acknowledgement for action, and action for impact. A package of reforms that looks busy but avoids the central constraints will not reverse a multi-decade productivity gap. Small deregulatory savings, marginally faster grants, and narrow exceptions to complex rules will not create the conditions for a European wave of scale-ups, breakthrough technologies, and industrial resilience.

If the Draghi report represented an “earthquake” in political language, the aftershocks must show up in economic outcomes: higher investment, more cross-border scaling, faster innovation diffusion, and greater productivity growth. Those are difficult to engineer, and they require political courage and institutional reform.

Europe’s predicament, in the end, is not a lack of diagnosis. The continent has no shortage of reports. The challenge is implementation—especially when implementation means confronting concentrated interests, abandoning comforting illusions of painless progress, and accepting that strategic renewal inevitably involves hard choices.

The question for Europe is whether it can move beyond the safest reforms and address the deeper barriers that keep it from behaving like a single, dynamic, innovation-driven economy. If it can, the Draghi moment may be remembered as a turning point. If it cannot, it will join the long list of warnings that were widely praised—and quietly filed away.