There is a reason the European Commission tapped Mario Draghi to write a report on Europe’s ability – more precisely, inability – to compete as it is squeezed by U.S. and Chinese innovation and manufacturing prowess: The man has credibility, and a doomsday warning from him means something.

Mr. Draghi is a former president of the European Central Bank and a former prime minister of Italy. When he was at the ECB, he was credited with saving the euro from destruction. When he was running the show in dysfunctional Italy, he shook down the European Union for almost €200-billion ($299-billion) in pandemic-recovery funds.

On Monday, Mr. Draghi issued a sobering report that presented the EU as a laggard facing an existential crisis because of waning productivity and a lack of investment in crucial areas, from defence to energy.

He said the EU needs to invest as much as an additional €800-billion ($1.2-trillion) a year, issuing common bonds to finance the spending surge, to be more competitive on the global stage. “For the first time since the Cold War, we must genuinely fear for our self-preservation,” Mr. Draghi told reporters in Brussels Monday.

In the report itself, which runs to nearly 400 pages, he wrote, “Never in the past has the scale of our countries appeared so small and inadequate relative to the size of the challenges … We have reached the point where, without action, we will have to either compromise our welfare, our environment or our freedom.”

Mr. Draghi is not the first former government leader or high-ranking technocrat to warn that the EU is sleepwalking into industrial irrelevancy, that it might evolve into one massive, tourist-swamped Airbnb as one industry after another is outgunned by quick-moving competitors, many of them backed by governments from afar. As recently as April, former Italian prime minister Enrico Letta issued a broadly similar, though shorter, report on EU competitiveness. But since no one outside of Italy knows Mr. Letta, it received virtually no publicity.

Mr. Draghi’s report carries more weight – a lot more. The question is whether his plea for wholesale unity on industrial goals and spending will be met, or whether the response will be quarter-assed, as it usually is in the EU, where the 27 member states have trouble agreeing on milk or egg quotas.

His plea makes sense. His report calls for investment spending to rise to almost 5 per cent of GDP, a level not seen in Europe since the 1960s and 1970s, when the continent was still rebuilding industries destroyed in the Second World War and creating global champions ranging from Mercedes and Airbus SE to BASF and Roche. Today, some of these companies are going in reverse. Last week, once-mighty Volkswagen said it might close German car factories for the first time in its 87-year history.

Among his key recommendations: the dilution of competition rules to allow certain strategic sectors, such as telecoms and defence, to consolidate and create transnational powerhouses (he noted that almost two-thirds of all EU defence orders are placed with U.S. companies); the integration of capital markets to make investment flows more fluid; common energy infrastructure; and securing critical metals to make the energy transition viable.

But mostly it is about the spending, and here is where Mr. Draghi’s plan will run into trouble. He likes the idea of common debt – that is, debt backed by the EU member states. At the moment, there are no common bonds, though the EU took a tentative step in that direction in 2020, when it assembled a loans and grants package worth about €800-billion ($1.2-trillion) to finance pandemic-recovery programs.

Issuing hundreds of billions of euros in common bonds every year would be a step too far for some European countries, especially Germany and the Netherlands. Germany has always been wary of debt, all the more so when it is used to prop up weak EU countries. It sees common debt as another step toward fiscal integration, which it also opposes, fearing it might be on the hook for the debt repayments from any deadbeat countries. Even Ursula von der Leyen, the president of the European Commission, the EU’s executive arm, has hinted that drumming up the political will to endorse common bonds might be a bridge too far.

There is no doubt the EU cannot keep skirting the hard decisions. According to the International Monetary Fund, the EU accounts for just 14 per cent of global output on a purchasing-power basis, down from more than 20 per cent in 2000. It suffers from exceedingly high energy costs that are forcing manufacturers to flee, as well as a waning birth rate that will eventually shrink the tax base and the work force. There is a war on its border. Meanwhile, it is competing with lavish foreign programs such as the U.S. Inflation Reduction Act, which offers hundreds of billions of dollars in tax breaks and other subsidies to the clean-tech sector and other industries.

Mr. Draghi’s warning is not the first, but it is the most weighty and sober-minded. Dismissing it as unaffordable would be perilous, as Europe is caught in the Chinese-American pincer movement. “If Europe cannot become more productive, we will be forced to choose,” he said in his report. “We will not be able to become, at once, a leader in new technologies, a beacon of climate responsibility and an independent player on the world stage. We will have to scale back some, if not all, of our ambitions.”