The new and essential connection between competitiveness, climate policies, and EU growth

Under Ursula von der Leyen’s presidency, the European Commission has introduced a new agenda focused on economic growth and productivity, aligned with the recommendations from the report by Mario Draghi, former President of the European Central Bank, for Brussels. The mission letters proposed by von der Leyen after her re-election reflect these priorities, with a particular emphasis on the close connection that must be established between competitiveness, climate policies, and economic growth.

The new organisational chart of the Commission embodies the commitment to competitiveness in Europe and prosperity outlined by Draghi. In his report, the Italian economist warns that excessive regulation could hinder decarbonisation efforts. As a result, the new composition of the European Commission seeks to carefully balance regulation with sustainable development, ensuring that both objectives can progress hand in hand.

The Draghi report has also influenced other areas of Brussels’ agenda, such as the drive for defence to strengthen Europe’s industrial competitiveness and the support for research and innovation in artificial intelligence and telecommunications. These initiatives reflect a clear strategy for the future, which will need to be translated into specific actions.

The EU faces a crucial challenge in maintaining its competitiveness in a global environment dominated by the United States and China. The interrelationship between industrial policy and innovation is fundamental to addressing this challenge. While the former sets the framework to foster the latter through investments in R&D, incentives, and public-private partnerships, advances in innovation often require adjustments in these policies to capture new technological opportunities and adapt to a constantly changing environment.

The former Italian Prime Minister also stresses the urgent need for a profound review of European industrial policies. Draghi warns that without radical transformation and significant investment, the EU could face a “slow agony” and lose its relevance on the international stage.

To avoid this, he proposes an ambitious investment plan amounting to €800 billion annually, involving joint debt issuance, a review of competition rules, and their relaxation to allow European companies to grow and innovate more effectively. Draghi also highlights the inequalities in productivity and technology, pointing out that the innovation gap is a key factor in the stagnation of European competitiveness.

These proposals undoubtedly pose a governance challenge for the EU. On the one hand, these objectives will need to overcome resistance from countries like Germany, the largest beneficiary of EU state aid (one in every two euros devoted to this purpose). On the other hand, southern European countries are expected to support greater flexibility in state aid and public financing. The role of private investment – traditionally viewed more favourably by Nordic countries – is another point of discussion.

Barriers to innovation in Europe

In his report, Draghi highlights several challenges limiting Europe’s capacity for innovation compared to the US and China:

Static industrial structure. In the US, investment has shifted to innovative sectors like digital technology, whereas in Europe, it remains concentrated in mature industries such as automotive, limiting growth in emerging sectors. This creates a productivity problem for the EU, which could become severe in the medium term. AI is set to radically transform key sectors like pharmaceuticals, vehicle design and manufacturing, logistics operations, predictive maintenance, demand forecasting, and smart grids, among others.

Weak innovation cycle. There are obstacles in bringing innovations to market. The lack of public support focused on disruptive innovations and fragmented funding limits the EU’s ability to scale advanced technologies.

Lack of infrastructure and coordination. The EU lags in providing next-generation infrastructure, such as fibre networks and 5G. Market fragmentation and lack of coordination hinder the development of large infrastructure projects and the commercialisation of new technologies.

Regulatory issues. Europe’s regulatory barriers are complex and vary between countries, discouraging tech companies from operating at scale in the EU. Fragmented laws and regulations also generate high compliance costs.

Disadvantages in financing and growth. Venture capital funding in the EU is low compared to the US and China. Many European startups relocate to the US in search of better opportunities.

Pharmaceutical sector. The EU invests less in R&D and has a slower regulatory process compared to the US.

The role of innovation and the Framework Programme for R&D

Innovation is essential for developing clean and sustainable technologies that will enable the EU to achieve its decarbonisation goals. This includes the manufacture of advanced batteries, renewable energy, and other green technologies that reduce reliance on fossil fuels. The EU must decouple fossil fuel prices from those of renewables and other sources in electricity pricing. Policies that promote research and development and the adoption of new technologies can increase the productivity and competitiveness of European companies in the global market.

To capitalise on the momentum of decarbonisation, Draghi proposes focusing support on clean technology manufacturing where the EU has a strategic advantage, such as batteries. Funds from the upcoming multiannual financial framework should focus on this type of technology with great growth potential.

To achieve 3% of Member States’ GDP in investment for innovation, financial incentives, coordination, and collaboration are needed, along with strengthening the next framework programme (FP10). As proposed by Draghi and many business organisations, large corporations, public administrations, and universities, the current programme’s budget should be doubled.

As for Horizon Europe – the largest innovation funding programme – Draghi firmly calls for reducing common priorities, increasing the budget for disruptive innovations, and reforming the European Innovation Council (EIC) to support high-risk projects. His recommendation is to double the budget to €200 billion for the next period.

Other suggestions for innovation policy focus on improving the coordination of public R&D, supporting the commercialisation of results through simplifying intellectual property rights management, adopting a unitary patent, regulating small businesses, and introducing a new legal status for innovative startups.

The EU has a unique opportunity to reduce the cost of AI deployment by increasing computing capacity and leveraging its EuroHPC Joint Undertaking network of high-performance computers.

Competition policy: the cornerstone of the strategy

In the newly unveiled organisational chart of the European Commission by von der Leyen, Spain’s third Deputy Prime Minister, Teresa Ribera, renowned for her impeccable track record in climate policies, will take on the portfolio for Competition, one of the fundamental pillars of the Draghi report. The task ahead of her will be immense, as climate policies, industrial and decarbonisation strategies, and competition policy will need to converge to achieve Draghi’s ambitious goals.

Ribera will thus need to lead the modernisation of the EU’s competition policy, a complex and essential challenge. Framed within the Clean Industry Deal, these policies will include new state aid that ensures the development of green technologies.

The growing importance of Important Projects of Common European Interest (IPCEIs) will continue to reinforce their strategic role, facilitating cooperation between Member States. However, tensions related to power balances will also arise. These disputes have already been seen in some strategic infrastructures developed by the EU, where different national interests have clashed.

Ribera, who will become the most influential European socialist in the new organisational chart proposed by von der Leyen, will work closely with Stéphane Séjourné, a French liberal and Executive Vice-President for Prosperity and Industrial Strategy, and the Dutch conservative Wopke Hoekstra, Commissioner for Climate.

This cooperation will be crucial in designing a strategy that combines competitiveness, productivity, and decarbonisation. Together, they will manage the Innovation Fund (€40 billion for the 2020-2030 period); the Social Climate Fund (€86 billion for 2026–2032); the Just Transition Fund, with €17.5 billion for 2021–2027; the CEF mechanism (Connecting Europe) for building sustainable trans-European networks in transport, energy, and digital services, with a budget of over €5 billion for 2021-2027, according to an analysis by the Spanish Elcano Royal Institute; and InvestEU, of which the European Investment Bank is the main partner, with a guarantee from the European budget of €26.2 billion for 2021-2027 to stimulate investments.

Innovation, alongside the appropriate allocation of resources, will be central to achieving these objectives, ensuring that European policy moves towards a greener and more competitive economy.