Europe must embark on a massive investment drive if its economy is to keep pace with the United States and China, a new report says.

Compiled by former European Central Bank chief Mario Draghi, the report published on Monday called for joint borrowing to boost an investment rise of 750-800 billion euros ($829-885bn) annually to keep an economy boasting high environmental standards competitive amid rising global insecurity and economic challenges.

The increased investment demanded by the report, commissioned by European Commission President Ursula von der Leyen last year, is almost 5 percent of the European Union’s gross domestic product (GDP).

Playing by rules

“For the first time since the Cold War, we must genuinely fear for our self-preservation and the reason for a unified response has never been so compelling,” Draghi said during a news conference in Brussels presenting his report.

Introducing his blueprint for a “new industrial strategy” based on some 170 proposals, Draghi said, “the investment needs that all this entails are massive” but that “radical change” is needed if Europe is to keep its greening and more digital economy competitive at a time of increased global friction.

“Europe is the most open economy in the world so when our partners don’t play according to the rules, we are more vulnerable than others,” he said.

Warning that Europe is entering a new era, confronted by more competition from abroad but with reduced access to foreign markets as rivals increasingly throw up barriers to free trade, Draghi pointed to the “wide gap” in economic growth that has “opened up between the EU and the US, driven mainly by a more pronounced slowdown in productivity growth in Europe”.

“Growth has been slowing down for a long time in Europe, but we’ve ignored [it],” he continued. “Now we cannot ignore it any longer. Now conditions have changed: world trade is slowing, China is actually slowing very much and is becoming much less open to us … we’ve lost our main supplier of cheap energy, Russia.”

The report pointed to the EU’s weakness in emerging technologies that will drive future growth as a key issue.

“Europe must become a place where innovation flourishes,” Draghi insisted. “We could do much more if all these things were done as if we acted as a community.”

Political conditions

While few could argue with the challenges presented in the report, the call for the EU to issue new common debt to boost spending and investment is much more controversial.

The EU jointly borrowed 800 billion euros ($890bn) to support member states’ economies hit hard by the COVID pandemic, but the concept remains highly divisive.

France is the idea’s biggest supporter, but other countries, including Germany and the Netherlands, oppose it, fearing they will be forced to contribute more money to compensate Southern European countries.

Responding to the report, the Dutch government said while it agrees with some reform proposals, public investments must not be seen as an “end in themselves”.

German Finance Minister Christian Lindner said “joint borrowing will not solve the structural problems” in the EU, asserting that the main problem is not a lack of subsidies, but bureaucracy and a planned economy.

Aware of the challenge, Draghi said common loans would only be possible if “the political and institutional conditions are met”. Another solution, he said, is to better mobilise private capital in the bloc, advocating for progress on the long-stalled push for an EU “capital markets union”.