The Competitiveness of Europe
An evaluation of the Draghi Report
20 January 2025
Mario Draghi’s report “The Future of European Competitiveness” of 9 September 2024 makes an important contribution to the debate on how to secure the economic strength and stability of Europe for the long term. In times fraught with weak growth, global instability, geopolitical tensions and intensifying international competition, particularly from the United States and China, this report is a wake-up call for Europe.
The stark analysis shows that Europe’s competitiveness is under increasing pressure Over the last thirty years, the EU has fallen markedly behind the United States and China in terms of growth, productivity and innovative strength. Europe is at risk of being left behind in key technologies such as artificial intelligence and quantum computing. Inflated energy prices and heavy dependence on third countries for critical raw materials pose an additional burden. At the same time, the EU must further decarbonise its economy in order to reach its climate targets
The EU needs an industrial policy strategy that drives key technologies such as artificial intelligence and green innovations forward. Research and development efforts have to be stepped up to increase resilience to shocks. The parameters for European businesses must be radically improved by lowering energy prices, establishing an ambitious Capital Markets Union, improving access to skilled workers and, above all, by reducing red tape Further necessary steps are intensifying cooperation between Member States and deepening the Single Market. Many recommendations set out in the Draghi Report are also included in the Mission Letters to the new European Commissioners
December 2024, when the new European Commission takes office, is a good point in time to take a comprehensive look at the key findings of the Draghi Report. This statement provides a summary of the report from the perspective of German industry and an evaluation of its central recommendations. It follows the structure of the Draghi Report and further contains one excursus on taxation and one on planning and permitting, topics which are not covered in separate sections in the Draghi Report but are referenced in many instances throughout and thus discussed separately in this statement Governance and financing are addressed in the first part of this statement.
General Recommendations / Part A
General economic and economic policy issues
Summary of analysis:
▪ The gap in economic growth between the European Union (EU) and the United States (US) has gradually widened over the last 20 years, in the level of GDP from 15 percent to 30 percent, on a purchasing power parity (PPP) basis from plus four percent to minus 12 percent (down 16 percentage points), on a per capita basis in PPP terms from 31 percent to 34 percent
▪ The main cause of the widening gap in growth is Europe’s lack of innovative strength in digital technologies, which has been the biggest driver of productivity growth in the United States.
▪ Europe is also harder hit by the low growth in global trade, the energy shock triggered by the Russian war of aggression and the need to increase defence spending. Further compounding Europe’s situation is its pioneering position in decarbonisation coupled with very high energy costs
Summary of recommendations:
▪ The Draghi Report identifies the need for a coherent climate, industrial and trade policy as well as a resilience strategy. The Single Market, industrial policy, governance and financing all need to be deepened and improved. Sectoral policies are also necessary. External security, open markets and decarbonisation must be addressed with a very differentiated, case-by-case strategy
▪ In financing, all relevant building blocks need to be improved: more focussed and higher volume schemes targeting competitiveness, increased risk-taking by the European Investment Bank (EIB), more use of guarantees to reduce risks for the private sector, credit programmes dedicated to cross-border grids, research and development for defence, new Important Projects of Common European Interest (IPCEIs) for strategic areas of competitiveness (including energy-intensive industries, automotive sector, space) and modulated repayment of NextGenerationEU. The lion’s share of momentum will need to come from national investment incentives for the private sector (e.g., in the form of tax incentives and grants)
▪ In the area of governance, the Draghi Report proposes establishing a new ‘Competitiveness Coordination Framework’ to address the EU-level strategic priorities formulated by the European Council. This framework should be established alongside the European Semester for fiscal policy reforms and be defined at the beginning of each policy cycle for a four to sevenyear period and encompass the National Energy and Climate Plans. An action plan should be developed for each strategic priority with well-defined objectives, governance and financing In future, the action plans should be included as a separate item in the EU budget. All mechanisms available to accelerate decision-making (including qualified majority voting (QMV), enhanced cooperation) should be exploited more The report further recommends installing a new Commission Vice-President for Simplification, prior review of any new regulatory burdens, and further reducing reporting obligations for small and medium-sized enterprises (SMEs) and mid-caps by 50 percent.
Evaluation:
▪ The report’s analysis of the EU’s economic and competitive position is largely coherent, though with some shortcomings in its presentation of the energy markets. The solutions proposed in many areas (e.g., competition policy, simplification, degree of regulation, digital policy) diverge from the policy approach taken to date by European institutions, in general, and by the European Commission, in particular In other areas, proposals are presented that are known to have failed so far on account of the strong conflicts of interest in the Council (banks, capital markets union). By and large, however, the report contains many concrete and viable recommendations, most of which would not require amendments to the treaties or any extensive institutional restructuring
▪ The Draghi Report makes a correct diagnosis of Europe’s position in terms of growth and competition and particularly emphasises the innovation and productivity gap between the EU and the United States and, increasingly, the People’s Republic of China. The report identifies well-known weaknesses in innovation (too little R&D, innovation and commercialisation thereof, venture capital, new enterprises, artificial intelligence (AI) and skills), the unaligned climate and industrial policy, and the frail, underdeveloped components of Europe’s resilience strategy. The report addresses all major areas of economic policy. The recommendations for financial policy go in the right direction but are comparatively conservative and not fully quantified
▪ A positive attribute of the Draghi Report, which underlines its strategic coherence and political differentiation, is its recognition of the significance of cooperation among small, mediumsized and large companies across regions and industries in value and supply chains. The report thus refrains from focusing too narrowly on SMEs and, for good reason, includes midcaps in its proposals for financial incentives and lower reporting obligations
Innovation
Summary of the analysis:
▪ According to the Draghi Report, Europe’s industrial momentum is lacking behind due to weaknesses along the ‘lifecycle of innovation’ that prevent new sectors and market actors from emerging. In 2021, EU companies spent about half as much on research and innovation in share of GDP as US companies. One of the biggest weaknesses along the pipeline of innovation is the limited transfer of research to products offered on the market that increase value added in Europe. The report identifies weak transfer as a major contributor to Europe’s lack of industrial momentum
▪ Furthermore, the report shows that the EU has remained static over the last two decades with research taking place in the same sectors. Since 2000, the top three R&D spenders in the EU have been from the automotive sector, while, in the United States, the sectors with the highest R&D spendings have shifted dynamically during this period from automotive and pharma to the digital sector
▪ In addition, the report concludes that public spending on research and innovation (R&I) in the EU is inefficient because it is insufficiently focused on strategic objectives and strategic innovations, and the financing is fragmented. All these factors prevent innovations from gaining
traction. Even though the EU has a budget of close to 100 billion euros for research under its research framework programme Horizon Europe, these funds are spread across so many different fields that the programme ultimately fails to nurture breakthrough innovations. Many innovative enterprises seek venture capital in the United States and prefer to scale up in the US as it offers higher and easier growth prospects than the fragmented EU market
▪ The report also analyses the disadvantages that innovative start-ups face in founding, financing and market penetration in Europe compared to the United States, concluding that the fragmented European markets puts EU start-ups and consequently Europe as a start-up location at a considerable competitive disadvantage in terms of financing, market reach and regulations
▪ In all phases, but particularly in later-stage financing, the volume of venture capital available in Europe is only around 20 percent of that in the United States. The venture capital funds in the United States are also substantially larger and can make bigger investments. This means that the scale-up of innovative, promising start-ups is financed only too often by US-American market actors. Between 2008 and 2021, 30 percent of European unicorns relocated their headquarters abroad.
Summary of recommendations:
▪ The report recommends increasing the volume of European funding for disruptive innovation, increasing the volume of European venture capital financing and facilitating stock launches (IPOs) in the EU.
Evaluation:
▪ Research and innovation must become the strategic focus of European economic, industrial and innovation policy to significantly strengthen the innovative and economic power of Europe. The finding that considerable concrete policy measures are required to close the digital gap between the EU and both the United States and China is certainly correct
▪ The report underlines that innovative activities in the EU are primarily concentrated in sectors with medium and low R&D-intensity with the risk that it will drive the EU into the so-called ‘middle technology trap’ A stronger focus on excellence and scale is therefore a good step
▪ Increasing the FP10 budget to 200 billion euros, thus doubling the current budget, is necessary and should already have taken place in the current Multiannual Financial Framework (MFF). The analysis that national and regional research initiatives are not sufficiently aligned with the EU programmes is correct. Individual measures should be better coordinated to increase their impact. The analysis of the research framework programme Horizon Europe is accurate, particularly regarding its excessive complexity.
▪ Whether a research and innovation union would ultimately improve the situation depends on its structure. In any case, a union of this kind should be linked with the already existing European Research Area
▪ The ties between higher education and the business sector certainly need to be strengthened. Inventors have so far had little incentive to become founders, according to the report. The awareness of potential advantages of cooperating with industrial research should
indeed be increased along with better management of intellectual property rights (IPR) and higher commercialisation of research results
▪ Deep-tech start-ups, in particular, face disadvantages caused primarily by the fragmentation of European markets. The proposals of this report (in Part B) therefore rightly aim to reduce the disadvantages that arise from this lack of scale
Decarbonisation
Summary of analysis:
▪ The analysis of the current situation and challenges in this area largely concord with the BDI study “Transformation Paths”.
- The EU’s high energy costs are curbing investment and growth and have already weakened demand in energy-intensive industries. The high volatility of energy prices represents an additional challenge. Many factors have driven energy prices up in the EU, including Europe’s sparsity of natural resources, inadequate investment in infrastructure and high energy taxation
- Lengthy and uncertain permitting processes are a major obstacle. The time required for environmental impact assessments account for a substantial proportion of the difference between best and worst performers among the EU Member States
- The climate targets of the EU and its main competitors are asymmetric, causing high additional costs for EU industry in the form of massive near-term investment needs. (Energy-intensive) industries in other regions do not have the same decarbonisation targets and receive more generous state support, harbouring a risk of carbon leakage
▪ Decarbonisation also opens up opportunities. Europe is still leading in clean tech innovations (global market here growing fast). Furthermore, the massive (and cost-efficient) scale-up of low-carbon energy in Europe would increase its energy supply security
▪ Individual Chinese technologies (such as photovoltaics) may represent the lowest-cost route to achieving some of the EU’s climate targets and significant overcapacities are likely to persist for some time to come. An increasing number of countries are raising tariff and non-tariff barriers against China, which will re-direct Chinese overcapacity towards the EU market Europe’s leadership role in the clean tech sector is also facing fierce competitive pressure, particularly in hydrogen and fuel cell technologies.
▪ Europe needs to change tack on decarbonisation to avoid deindustrialisation Banning certain Chinese technologies would increase costs and could trigger retaliatory measures, but Europe must become more self-confident
Summary of recommendations:
▪ Europe needs to deploy a mixed strategy that combines different policy tools and approaches for different industries
- In some industries where Europe’s cost disadvantage is too large, it makes sense to import technology and, at the same time, diversify suppliers to limit dependencies
- In industries in which jobs have to be protected from unfair competition, the EU should encourage foreign direct investment (FDI), while deploying trade measures to offset the cost advantage gained by foreign subsidies
- Regarding industries of strategic interest, the EU must ensure that European companies retain relevant know-how and manufacturing capacity, for instance by applying local content and joint venture requirements to ensure the technological sovereignty of the EU
- In the case of infant industries with high future growth potential, the EU can apply trade protection measures temporarily until the industry reaches sufficient scale
▪ The report also specifies three priority areas that need to be addressed:
- Lowering energy costs for end users (see chapter Energy in Part B),
- Capturing the industrial opportunities presented by the green transition – ranging from remaining at the forefront of clean tech innovation to manufacturing clean tech at scale to leveraging the opportunities from circularity (see chapter Clean Tech in Part B),
- Levelling the playing field in sectors more exposed to unfair competition and/or with more exacting decarbonisation targets (see chapter on Energy-Intensive Companies and Mobility in Part B).
Evaluation:
▪ The analysis is accurate and largely concords with the BDI’s study “Transformation Paths”. Regarding the solutions proposed, we welcome the general conclusion that a mixed approach is required in the development of a European industrial strategy. The individual proposals are evaluated in the respective sections in Part B.
Security and resilience
Summary of analysis:
▪ The report identifies high dependencies particularly in the supply of critical raw materials and new technologies. Around 40 percent of Europe’s imports are sourced from a small number of suppliers and difficult to substitute. Around half of these imports originate from countries with which it is not strategically aligned. These dependencies increase Europe’s exposure to any sudden stops in trade and also to geopolitical pressure.
Summary of recommendations:
▪ To reduce these precarious dependencies, companies are already diversifying their suppliers Over and above this, reducing dependencies in key strategic areas will require significant investment and spending
▪ To become more independent, Europe needs a comprehensive and coordinated approach which may initially increase cost pressure (by creating an ‘insurance cost’), but these costs can be mitigated by strengthening cooperation within the EU and with non-EU allies
Evaluation:
▪ The report rightly underlines that Europe needs a strategy to reduce its dependencies, such as in raw materials and technologies.
▪ In terms of regulatory policy, the focus should be on four objectives: securing supply chains, developing and expanding technology capabilities, strengthening industrial capabilities to maintain own scope for action including national security, and maintaining international competitiveness, such as with fair and effective trade rules
▪ At the same time, the EU needs to launch concrete projects, including projects to:
- Boost semiconductor production and development capabilities
- Coordinate the expansion of renewable energy infrastructure
- Diversify the sources of critical raw materials through imports, domestic mining, recycling and substitution, and their further processing also in Europe
- Strengthen the European standard-setting process, above all by prioritising critical projects such as technologies for transport, the energy industry and artificial intelligence.
Financing (research, banking and capital markets)
Summary of analysis:
▪ The report describes the European capital markets as still fragmented Despite ample private savings, the markets are not managing to channel these into productive investments. The main reason for the undersupply of long-term capital is the underdevelopment of the supply of pension funds.
▪ The financing potential of the European banking market is still below its potential, mainly on account of lower profitability, too high costs and substantially smaller effects of scale compared, in particular, to US banks. In addition, European banks cannot rely on securitisation to make their balance sheets more flexible to the same extent as their US counterparts
▪ The Draghi Report criticises the current MFF. The budget is not aligned with the EU’s strategic priorities and the shares allocated to cohesion (30 5 percent from 2021 to 2027) and agriculture (30 9 percent) are excessive Horizon Europe, the largest individual programme, is spread across too many areas and the access to it is too complex and too bureaucratic. It is also not sufficiently focused on disruptive innovation. NextGenerationEU is judged to be good and has helped lift funds to just under two percent of GDP. Repayment will start in 2028 and, according to Bruegel figures, account for just under 14 billion euros in principal repayments and initially between 8 billion euros and 13 billion euros in interest, which will then gradually
tail off until 2058. Repayments and interest will thus amount to between 22 billion euros and 27 billion euros in 2028, the start of the new MFF, which currently has a total annual budget of 192 billion euros. Repayments of this level will prove difficult to shoulder if total resources are not increased. According to the report, the MFF is too static and not flexible enough. The close to 50 spending programmes are too many, too complex, overlap and are not sufficiently aligned to the EU’s strategic priorities.
▪ The report identifies the sustainability reporting of ‘sustainable finance’ as a root cause of the excessive reporting obligations. Ambiguities in the legal stipulations and the combination with other requirements make sustainability reporting very complex. Exempting SMEs from these reporting obligations, however, deprives them of the opportunity to benefit from the positive aspects of sustainable finance (the ‘greenium’)
Summary of recommendations:
▪ Overall productive investment in the EU needs to be scaled up massively, by around 4.4-4.7 percent of EU GDP per year and by 750 to 800 billion euros by 2030 (450 billion euros for energy and transport, 150 billion euros for digital technologies, 50 billion euros for defence and 100 to 150 billion euros for radical innovations). Three-quarters of these investments will need to be undertaken by the private sector. The public sector will be subject to increasing public investment activity, setting tax incentives and providing subsidies for the green transition and innovation.
▪ Programmes in the next MFF should be more focused, with simplified access and enhanced flexibility. Environmental stipulations need to be harmonised and simplified. The report also recommends establishing a Competitiveness Pillar to direct funding towards priority projects with dedicated funding schemes for digital technologies, semiconductors, grids, the decarbonisation of industry, space and other strategic priorities.
▪ According to the report, the InvestEU programme is too risk-averse and this must change. The risk distribution tools should be used much more. The EU guarantee should be substantially increased in size to leverage significantly more private investment. In addition, the EIB should establish a dedicated equity arm to support investment in companies and funds.
▪ National promotional banks need to be more coordinated and aligned to common priorities.
▪ European energy grids and R&D spending for defence should be financed with debt instruments. In the event that overall economic momentum does not pick up, the financing of other areas will need to be considered. This report does not go into detail about the precise modalities. The easiest and most reliable route would be for the European Commission to issue EU bonds against the EU budget in return for the provision of equity or pledges towards debt service payments. In parallel, the viability of national budgets needs to safeguard through stringent EU fiscal rules for its Member States.
▪ The report recommends establishing and cofinancing competitive IPCEIs in further areas, including automotive technologies, cross-border grids and semiconductors
▪ The debt service payments for NextGenerationEU should be postponed (2028-2058), to make space in the EU budget
▪ The Banking Union should be completed, particularly through creating a separate jurisdiction for European banks with substantial cross-border operations. This should improve the internal capital and liquidity allocation within banking groups, resolve the stalemate in European deposit insurance schemes and improve the resolution options of large banks
▪ European financial market regulation should be freed from gold-plating, and, by thus strengthening the single market and creating new large-scale projects, drive demand for financing solutions
▪ Advance the building of a genuine Capital Markets Union (CMU) in the EU with several measures: strengthening the securitisation market, harmonising functions for all security trades (single central counterparty platform and a single central securities depository), establishing a single market oversight for large companies, stock markets and central counterparty platforms, harmonising taxation and insolvency regimes and promoting the development of pension funds
▪ The EU taxonomy should be simplified. This would make it less complex and also improve comparability. SMEs should also be required to use the taxonomy with the provision of tools (IT applications) to calculate a sustainability score.
Evaluation:
▪ The report contains many long-known proposals, but also puts forward new and good ideas and a possible route out of the current deadlock in debt servicing.
▪ Positive aspects are the clear focus of the budget on strategic priorities, the proposals for the next Multiannual Financial Framework with a clear, simple and powerful Competitiveness Pillar in the budget, a doubling of Horizon funds with simplified access for beneficiaries, the increased use of risk distribution instruments by the EIB, the creation of new IPCEIs alongside administrative simplification and more relaxed competition policy, and anchoring central instruments of climate and industrial policy in the budget using, e.g., Contracts for Difference (CFDs)
▪ Some of these proposals, particularly a reference to IPCEIs, are already included in the Mission Letters of Stéphane Séjourné and Piotr Serafin, though formulated rather vaguely.
▪ The proposals for renewed debt financing are aimed initially at cross-border grids and defence R&D (spending 2022: 10 7 billion euros), and are formulated very much on the conservative side, given their moderate potential financial dimension. At the same time, they trigger political debate. The postponement of the debt service payments for NextGenerationEU seems to be more of an emergency solution as the institutions have not reached a decision on the equity issue. From a legal perspective, anchoring debt instruments is also possible outside of emergency situations. Their economic scale needs to be gauged in relation to the EU-wide agreed spending priorities, the EU budget and possible decisions on equity. A certain degree of flexibility in EU financing at this level is the necessary counterbalance to the stringent regulations that are already in place for national budgets
▪ The Mission Letter to Piotr Serafin on the EU budget aims for a “simpler, more focused and responsive budget”, moving from a “programme-based budget” to a “policy-based budget”. The Mission Letter also highlights the importance of introducing new own resources.
▪ The Draghi Report also mentions several proposals that are designed to mobilise financing by the private sector. The proposals include many appropriate and well-known approaches that have emerged from debate on the Banking Union and the Capital Markets Union. The proposal to establish a separate jurisdiction for European banks with substantial cross-border operation is interesting, even though more difficult to implement from a political perspective This could well lead to a solution, particularly to pave the way for a uniform European deposit insurance system. Proposals to strengthen the European capital markets through establishing pension funds seem appropriate. Converging the regulation and monitoring of the fragmented European capital markets is generally laudable
▪ Proposals pertaining to the Banking Union and Capital Markets Union need to be weighted according to their impact on European competitiveness. The focus of implementation should therefore be on proposals that have the biggest leverage here, which, in the opinion of industry, are especially improvements in venture capital financing.
▪ Many of the proposals on the capital and banking markets are included in the Mission Letters We particularly welcome the focus on pension funds, venture capital and the completion of the Banking Union. Separating the regulations for small and large banks has not been addressed and should be added
▪ The report comes to the correct and important conclusion that sustainability reporting is too complex and too extensive. The report’s proposal to simplify the EU taxonomy is not going to lead to a satisfactory solution, which would be a manageable number of relevant environmental, social and governance (ESG) KPIs. To achieve this, it would be necessary to streamline the Corporate Sustainability Reporting Directive (CSRD) and make the EU taxonomy available to businesses as a voluntary tool. Extending the obligation to apply the EU taxonomy to SMEs is a step in the wrong direction completely. As the EU taxonomy is not a good tool to make a solid assessment on the sustainability profile of a business it would not be sensible to make the application mandatory even in simplified form.
▪ Concerning sustainable finance, the Mission Letter only says that the application of the sustainable finance framework should be simple There is no mention of simplifying the framework itself, which is, however, greatly in need of simplification.
Governance
Summary of analysis:
▪ The Draghi Report establishes that the legislative activity of the European Commission has increased enormously over the last few years which has resulted in massive overregulation
▪ At several points, the report criticises the resulting massive regulatory and administrative burdens for European industry, above all for SMEs and small mid-caps. The report further concludes that measures taken to date have not (yet) succeeded in tangibly reducing these burdens
Summary of recommendations:
▪ Setting policy priorities:
- The Draghi Report generally recommends doing less at the EU level, but better and with a much stronger focus on the implementation and enforcement of the acquis Policies and legislation which will enable the EU measures to unfold the greatest added value should be prioritised
- That means “more Europe” in areas where it is really important, while at the same time granting more leeway and accountability to Member States and the private sector in line with the subsidiarity principle.
▪ Regulatory restraint:
- The report calls on the European Commission to practice more restraint by applying ‘a self-restraint principle’
- Concerning the reduction of regulatory and administrative burdens, the report recommends fully implementing the announced 25 percent cut in reporting duties (50 percent for SMEs) and appointing a new Commission Vice President for Simplification to streamline the acquis
- At the start of each Commission mandate, before adopting new EU legislation, a fixed period of at least six months should be devoted to systematically assessing and stress-testing all existing regulation by sector of economic activity, followed by codification and consolidation. Priority should be given to those economic sectors where Europe is particularly exposed to international competition
- The Draghi Report also calls for a single, clear methodology to quantify the cost of the new regulatory flow to be adopted by all three institutions, also during the whole legislative procedure (in the case of substantial amendments to Commission proposals by the legislator).
- The report also recommends a competitiveness test All new legislative proposals should be subjected to a revamped competitiveness test with a clear, strong methodology to measure the cumulative impact, including both compliance costs and administrative burden. These checks should be performed by involving committees of industrial operators
▪ To combat gold-plating, the Draghi Report recommends adding a new standard requirement in the article on the transposition of directives requiring Member States to systematically assess the impact of their implementing measures on affected parties (including in cases of gold-plating) using the same methodology as the EU institutions. The results of this assessment should be published to enhance transparency and combat gold-plating.
Evaluation:
▪ This chapter is very solid, and we support all its proposals. The report identifies and supports many weaknesses long called out by the BDI. As always, what really matters is how efficiently and consistently these proposals are implemented in practice
▪ We particularly welcome the recommendation to review legislation and where appropriate make simplifications and cut out contradictions Contradictory legislation is a major problem, particularly in the area of the ‘European Green Deal’. Regulatory objectives, especially those of the Green Deal, must be better harmonised to make them feasible. That was not always achieved in the last legislative period. In the area of environmental policy, the Industrial Emissions Directive and Ambient Air Quality Directive are negative examples of this. Their revisio will lead to significantly more bureaucracy for companies with ever more extensive and lengthy permitting procedures for the conversion of industrial facilities, jeopardising the timely meeting of climate targets and the transition overall.
Sector Recommendations / Part B
Energy
Summary of analysis:
Draghi commences with a general stock-take: In late 2023, industrial retail power prices in the EU were more than 150 percent higher and industrial gas prices almost 350 percent higher than in the United States. In summary, the report’s ensuing analysis identifies the following four major problems
▪ First, high gas prices represent a major problem in and of themselves. The prices are high, in part, due to the low availability of natural resources in the EU, which has always made energy costs in the EU higher than in the United States. However, this gap has widened substantially following the reduction of pipeline supply from Russia. Since 2021, the proportion of LNG imports more than doubled from 20 percent to over 42 percent in 2023. As LNG is more expensive than pipeline gas (additional costs for liquefaction, transport and global competition, etc.) this has increased industrial gas prices and exacerbated price fluctuations. The Draghi Report also criticises the high margins of the major commodity traders, which expanded especially in 2021 and 2022. Financial aspects (e.g., concentration in trading markets) and behavioural aspects of gas derivate markets (e.g., algorithmic trading) can exacerbate volatility and amplify the impact of demand and supply shocks, especially in conjunction with tighter market conditions as in the EU
▪ Second, Draghi criticises the European electricity market system and its marginal pricing Natural gas drives the price during a much larger share of hours in proportion to the share it provides of the power mix. In 2022, for example, natural gas was the price-setter 63 percent of the time, despite accounting for only 20 percent of the European electricity mix. This dynamic is not set to change much until the mid-2030s as the proportion of natural gas could remain stable despite the anticipated increase of renewable energy in the electricity mix (optimistic estimate is from 46 percent to 67 percent by 2030).
▪ The third major problem identified by Draghi is the slow expansion and rising costs of transmission grids Overloaded grids already constrict the amount of renewable energy that can be transmitted today, which leads to higher redispatch costs. Up to 310 TWh of renewable generation could be curtailed due to these limitations in the grid by 2040 causing redispatch costs of up to 100 billion euros. Transmission system operator TenneT anticipates an increase in grid fees in Germany of 185 percent by 2045.
▪ The fourth major problem identified in the report is the higher average energy taxation in the EU. The Member States collected around 85 billion euros in 2022, including 13 billion euros from industrial electricity consumption alone. The level of taxation varies greatly among the Member States, with Germany only slightly above the EU average. On a global comparison, EU energy taxation is substantially higher. In contrast to the EU, the United States does not levy any federal taxes on electricity or natural gas consumption.
▪ In summary, Draghi emphasises that it will take time before we see a major downward effect on energy prices from decarbonisation. In the short-term, Europe will face the challenge that the full benefits of the clean transition for EU competitiveness will only materialise when renewables combined with nuclear are regularly price setting and relevant investments in grids, storage and flexibility are completed and amortised
Summary of recommendations:
Gas
▪ Develop a comprehensive EU-level gas strategy for the procurement of natural gas to ensure a stable supply in the long-term. This should focus on developing long-term partnerships with reliable and diverse trading partners. The role of domestic gas production for EU supply security and price stabilisation should also be reassessed
▪ The report recommends moving away from spot-linked sourcing of gas. Based on an indepth analysis of gas production and transport rates, the European Commission could recommend moving towards a coordinated EU approach of ‘production costs plus mark-up’ for EU industries when negotiating contracts with third parties. This recommendation could help companies to secure long-term contracts with exporters directly and avoid, as much as possible, intermediaries and spot market purchases.
▪ The EU should develop the EU instrument AggregateEU into a single EU buyer entity that could purchase pipeline gas and/or LNG for base quantities and run auctions for its volumes at predetermined fixed prices (‘production costs plus mark-up’) to EU companies. Pursuing such a model would make the risks of the energy transition (e.g., diminishing volumes of gas demand falling faster in some countries compared to others, stranded long-term contracts) more manageable
▪ The report recommends the further development of selective strategic (LNG) import infrastructures and an extended and improved coordination of EU-wide gas storage management.
▪ The quality of data and forecasts should be improved, among other things, by centralising all public and open energy data sources (e.g., ENTSO-G, ENTSO-E, ACER and Eurostat) in
a common platform for energy data. This could provide greater accessibility to existing quality public data to support a better understanding of energy markets by industries.
▪ Further regulate the financial markets for energy under a single EU trading rule book and limit speculative behaviours (e.g. price regulations for gas derivatives with financial position limits, dynamic caps for prices and improved supervision of the over-the-counter market) In future, a coordination body comprised of energy and derivative market regulators at the European level (the Agency for the Cooperation of Energy Regulators (ACER) and the European Securities and Markets Authority (ESMA)) should coordinate integrated supervision of energy and energy derivatives markets. This coordination body should have both the powers to prevent, detect and prosecute anticompetitive conduct, market abuse and other practices which disrupt orderly trading in energy.
▪ Increased use of the revenues of the Emissions Trading System (ETS) auction to promote the early-stage production and application of hydrogen.
▪ Ensure that the price formation mechanisms for natural gas are more cost-reflective of different sourcing conditions. During the energy crisis, the EU created an LNG benchmark based on real deliveries approximating the actual cost of LNG in the EU. Building on the ACER benchmark, new benchmarks on EU pipeline import prices and on EU industry purchasing prices could help to improve price formation mechanisms and better reflect sourcing conditions. This could also support more competitive gas contract indexation, hedging strategies and enhance negotiation power for industry and other gas consumers by promoting transparency. Furthermore, currently, cross-border gas trading is currently charged several times which results in the so-called ‘pancaking’ of network tariffs. New mechanisms, similar to the Inter-TSO compensation (ITC) mechanism for electricity, might better reflect true network costs
▪ Develop gas price comparison tools to provide transparent information on industrial retail prices offered by different retailers in Member States to increase retail market competition. More transparency on contracts offered by retailers could increase the competitiveness of industrial players not sourcing natural gas themselves to assist them in making informed decisions. Retailers would have greater incentives to pass on a fall in wholesale prices to protect their market share in more competitive and transparent markets.
Electricity, infrastructure and CCU/S:
▪ Decouple remuneration of renewable energy (and nuclear power) generation from fossilfuel generation (using long-term contracts such as Power Purchase Agreements (PPAs) and two-way Contracts for Difference (CFDs)). Marginal pricing should be maintained to ensure the efficient balance of the energy system. Suppliers should be required to supply a predefined share of their publicly subsidised production through PPAs at ‘production cost plus mark-up’ to specific industries exposed to international competition. Furthermore, industrial consumers should be encouraged to pool demand for renewable power through corporate PPAs to reduce prices. This could be achieved by a public body acting as a single buyer and seller for participating companies.
▪ Simplify and streamline permitting and administrative processes to accelerate renewables, flexibility infrastructures and grids deployment For example, through the inclusion of exemptions in EU environmental laws (e.g., Habitats Directive, Birds Protection Directive) until climate
neutrality is achieved. Every Member State should appoint a last-resort national authority to ensure the permitting of projects if no answer has been received from local authorities after a predetermined time. The EU could extend acceleration measures from the Renewable Energy Directive (RED) and emergency regulation to heat networks, heat generators, hydrogen infrastructure (including storage) and carbon capture, utilisation and storage (CCUS) infrastructure.
▪ Foster investments in grids, to drive the electrification of the economy and avoid bottlenecks. Develop a comprehensive strategy for strategic EU-wide infrastructure development needs such as interconnectors and hybrid offshore projects with the provision of a separate regulatory regime (outside of the 27 national jurisdictions) for interconnectors and for certain large-scale renewable energy projects (such as big offshore grids in the North Sea) to shorten the length of the associated procedures and prevent the possibility of projects being blocked by individual national interests. Furthermore, the Connecting Europe Facility for Energy budget should be increased to fund projects such as interconnections.
▪ Encourage self-generation by energy-intensive users, including by further removing barriers in the Member States.
▪ Reinforce energy storage and demand flexibility to keep total system costs competitive. Introduce a standard compensation mechanism for industrial demand flexibility (the market price of ‘voluntary demand flexibility’ is not clear from the perspective of the Single Market). Accelerate the authorisation process of capacity mechanisms and flexibility instruments and further progressively develop locational price signals (e.g. in renewable auctions and in the design of network charges).
▪ Maintain nuclear power supply and accelerate the development of new nuclear power stations.
▪ Promote the role of CCUS technologies (“as one of the tools needed to accelerate the EU’s green transition”). ETS revenues could help to support the development of CCUS solutions in those sectors under the scope of the ETS, including power generation.
▪ Lower and harmonise energy taxation A possible measure is the introduction of a common maximum level of taxes, levies and network charges across the EU. Tailored tax credits should be introduced that are linked to the uptake of clean energy solutions by industry or accelerated depreciation regimes for such investments. Ideally, this would take the form of a harmonised EU legislative framework to address state aid concerns.
▪ Harmonise price relief (in times of crisis) and avoid distortions in the Single Market The European Commission should develop State aid guidelines harmonising the type of support that is allowed to be provided through State aid. A sector list should be established at the EU level which reflects two criteria: i) extra-EU trade intensity; and ii) energy-intensity Member States should not be able to guarantee an end price for their industry, but should offer a percentage discount on the normal market price to preserve relative price differentials between different national energy markets. Guidelines should be proposed to harmonise electricity grid tariff methodologies within the EU. With the anticipated rise in network tariffs due to the electrification of the economy, differences in national tariff structures will further affect the level playing field over time, calling for a higher degree of alignment on the nature and conditions of grid tariff exemptions and degressive tariff structures.
▪ Foster innovation in the energy sector more. R&D funding under the EU budget should be increased for specific key technologies (e.g., batteries, low-carbon hydrogen production, carbon separation, innovative grid technologies, lower-cost renewables).
▪ Develop the necessary governance structures needed for a true Energy Union. This could include central European oversight over all processes and decisions of cross-border relevance.
Evaluation:
▪ Some of the proposals are generally positive. The EU-wide lowering of energy taxation, in particular, would be an effective measure to lower energy costs for industrial users and thus compensate, at least in part, for the cost disadvantage compared to competitors. The proposal of tax credits or accelerated depreciation regimes for investments in ‘clean’ energy solutions in industry is strongly reminiscent of the US approach with its Inflation Reduction Act. It remains unclear how this kind of measure could be implemented at EU level as tax issues require the unanimous approval of all Member States making EU-level solutions relatively difficult.
▪ Considerably increasing investment in (cross-border) electricity grid buildout is also extremely important. The proposed increase of the Connecting Europe Facility budget is an important first step in this direction. The EU budget would need to be prioritised or increased accordingly. In this context, the proposals to further accelerate permitting and administrative processes are particularly commendable, especially the proposed exemptions in EU environmental laws until climate neutrality is achieved. A general revision of EU environmental law would also be necessary to effectively speed up procedures for the entire industry.Some of the report’s proposals would involve deep interventions in the European energy markets. Requiring publicly subsidised electricity suppliers to sell a certain amount at ‘production cost plus mark-up’ approximates a diluted ‘industrial retail power price’ at EU level. While this kind of instrument could provide stronger protection against carbon leakage, the impacts of such a potentially wide-reaching intervention in the electricity markets would need careful consideration
▪ The problem of high energy costs is clearly identified and addressed in the Mission Letters of the designated EU Commissioners. The new Energy Commissioner Dan Jorgensen, for example, has been instructed to put forward an “Action Plan for Affordable Energy Prices” and a “clean energy investment strategy” (also to mobilise investment in energy infrastructure). However, the Mission Letter is vague on this point and does not specify which concrete measures this initiative should entail. The Mission Letter of the Climate Commissioner Wopke Hoekstra refers much more specifically to the Draghi Report, making it part of his mission to incentivise the industrial uptake of clean technologies with taxation measures, as proposed in the Draghi Report.
Critical Raw Materials
Summary of analysis:
▪ The Draghi Report identifies Europe’s dependency on critical raw materials as one of the biggest risks to its economic and political stability.
▪ The analysis highlights that Europe is heavily dependent on imports from third countries, particularly China, for many strategic raw materials, including rare earths and metals for the high-tech industry
▪ This exposes the European economy to supply shortages and price fluctuations caused by geopolitical tensions or trade restrictions. The lack of alternative supply sources could seriously impair Europe’s competitiveness in the long run.
▪ While other regions have responded faster to secure critical raw materials, the EU is lagging behind in its efforts but has untapped potential
Summary of recommendations:
The recommendations of the Draghi Report are designed to increase the resilience of European industry by minimising its strategic dependence on critical raw materials through diversification, innovation and circularity Specifically, the report calls for the full and rapid implementation of the Critical Raw Materials Act (CRMA) and includes further additional recommendations:
▪ First, the report calls for the development of a comprehensive strategy at EU level from the mining to recycling of critical raw materials, building on the CRMA. This should consider the entire value chain (initial extraction, mining, processing, refining, alloying, manufacturing, in actual product use, recycling, reusing, closure, post-closure) in an integrated way and the relevant individual European and national policies and legal regulations. The use of the new European Economic Security Framework should ensure that different pieces of legislation (e.g. environmental, social, competition, economic security) at both the EU and national levels are not in contradiction.
▪ Second, the report recommends establishing an EU Critical Raw Materials Platform to support the implementation of the defined EU strategy and leverage market power by building on the experience of AggregateEU and of the Euratom Supply Agency and considering the Japanese model. The principal tasks would be the annual monitoring of supply chain risks and early alert dependencies building on the CMRA; the pooling of demand for the joint purchasing of critical raw materials; the design of financial products to invest in securing upstream supply in the EU and third countries and managing future strategic stockpiles in the EU.
▪ Third, the report recommends developing financial solutions to support the critical raw materials value chain (public-private partnerships; collaborating with the European Bank for Reconstruction and Development (EBRD); using free trade agreements and development cooperation / Global Gateway to secure raw materials; tax incentives and Contracts-forDifference to promote private investment; demand-based support of industrial production involving critical raw materials).
- Mobilise the EIB to provide co-financing and de-risk investment. Project finance and de-risking tools should be directly aligned with the Strategic Projects across the EU. Moreover, the addition of ‘Made in EU’ provisions to EIB loans should be considered. This would mean that EIB loans provided to, e.g., electric vehicle manufacturing and battery cell facilities are required to use a minimum amount of processed critical minerals coming from the EU.
- Set up a special ‘Fund of Funds’. Building on the experience of the European Raw Materials Alliance, the EU could bring together Member States, financial institutions, large capital investors, national promotional banks and export agencies, pooling resources in a fund-of-funds-type solution that could then be used to invest along the critical raw materials value chain.
- To make public financial support for deployment projects, such as wind and solar plants, conditional to a minimum percentage of EU materials being used, or beneficial terms if such conditions are met (according to a similar approach taken by the United States in its Inflation Reduction Act to incentivise US manufacturing uptake).
▪ Fourth, the report recommends further developing raw materials resource diplomacy by leveraging the benefits of cooperating with the EU, upgrading the Global Gateway and concrete projects in existing Strategic Partnerships.
▪ Fifth, the report recommends developing joint strategies with other global buyers in the G7/OECD (e.g. Japan) with the creation of a G7+ Critical Raw Materials Club to complement the US-led Minerals Security Partnership. A club for critical raw materials would provide four goods to its members:
- Free trade in critical raw materials extracted and processed in compliance with environmental and social standards
- Joint initiatives in technological transfers, research and development. The EU could provide cutting-edge equipment to mitigate the environmental and social impacts of mining
- A long-term perspective on fair prices for raw materials. This could be in the form of off-take agreements and include provisions on how to adjust prices to evolving market conditions and prevent back-selling via cheaper offers.
- A combination of instruments for investment in downstream and energy capacities. These enable resource-rich countries to refine their raw materials into value-added goods, thus creating new developmental opportunities through industry, jobs and tax revenues.
▪ Sixth, fostering domestic mining, also through the following proposals that go beyond the CRMA:
- Review the competition rules: currently, competition rules make it difficult to vertically integrate projects along the value chain. However, there is growing evidence that to promote investment in new sectors, the guarantee of off-take for a period of time is critical to the final investment decision (e.g. for a lithium processing factory close to Liion factories).
- Use of public procurement and requirements for domestic production targets: on the demand side, European and national administrations have an important role to play in creating the market through public procurement.
▪ Seventh, the Draghi Report recommends boosting European excellence in research and innovation in alternative materials or processes to substitute critical raw materials in various applications.
▪ Concerning circular economy, creating a true Single Market for waste and recycling in Europe, including by steering the secondary market: leveraging and effectively enforcing existing legislation and verifying that new provisions are not circumvented and coordinating EU export controls on waste.
▪ Ninth, accelerating the creation of a sustainable CRM market in the EU (e.g., import tariff measures and the development of European ESG standards).
▪ Tenth, the report recommends developing strategic stockpiles for selected critical minerals in the EU. This should operate on a rotating basis where minerals are procured, stored for a certain duration, then released to local industry. Stockpiling could be a tool to consider in the EU for minerals where market size is relatively small therefore prone to potential disruptions, where the level of supply concentration is high and pricing schemes are immature and opaque. A stockpiling scheme should be designed to avoid potential market distortion impacts:
- A framework for stockpiling both of global and recycled resources differentiated by type of rare material (building on the current strategic stocks for oil and the mandatory storage of gas) could shield the EU’s security of supply concerns and volatility in market prices. This framework could mainly benefit commodities for which markets are heavily concentrated and suffer from a lack of pricing transparency. Strategic stockpiles should be developed with clear and transparent rules for stock building and stock releases.
- The EU CRM platform could identify critical mineral needs and establish minimum stocks at the EU and national level. An integrated approach would bring benefits in balancing supply and demand shocks.
- Given the considerable costs associated with stockpiling, criteria for selective critical minerals stockpiling should be based on liquidity and concentration measures in assessing potential EU supply and price shocks.
- Procurement for stockpiling could be linked with projects in geographically diverse regions and with high ESG performance as an enabler for supply chain diversification. In some cases, procurement and release of the stockpile could provide information about market prices, which could be valuable for markets that are illiquid or opaque.
▪ Eleventh, the report recommends enhancing market transparency for critical mineral wholesale contracts in the EU (including by creating oversight for critical mineral wholesale contracts that are now unregulated and by developing EU metal price benchmarks).
Evaluation:
▪ The objective of the report’s recommendations to enhance Europe’s raw materials sovereignty is generally a positive one. The report addresses the core problems of being heavily unilaterally dependent, particularly on China, in the context of globally increasing
demand and intensifying competition between geopolitical systems for scarce critical raw materials.
▪ We welcome the report’s recognition of the EU’s need to invest in domestic capacities, circularity and innovation and to follow a coordinated external economic policy.
▪ Many of the proposed measures also seem to be going in the right direction. However, there are several open issues concerning implementation. As a general observation, the proposals are very ambitious as to the level of financing, local conditions and governance required for implementation
▪ The subject of stockpiling is certainly worth considering but also very challenging in practice. In Germany, companies have their own stockpiles, but this has been a disadvantage from a tax perspective until now. In terms of tax accounting, a reserve for the purchased raw materials should be introduced - a raw material storage reserve (“Rohstoffbevorratungsrücklage”) should be introduced to incentivise the stockpiling of critical raw materials.
▪ There are also many unresolved questions surrounding the EU Critical Raw Materials Platform and the joint purchasing foreseen. Companies already partly pool their purchasing in industrial purchasing groups. In all events, joint European procurement, storage and distribution would have to be discussed in detail with industry experts. Special factors would need to be taken into account for individual critical raw materials.
▪ Some of the proposals, such as the metal price benchmark are new and currently debated on the other side of the Atlantic as well. Demand-based instruments similar to the IRA (linking public sector support to minimum requirements of European raw materials) seem like a good idea but is viewed with controversy in German industry.
▪ The report does not address deep sea mining. The EU should carefully review the potential of an environmentally friendly extraction of minerals from the deep sea. The BDI recently published a discussion paper on this subject.
▪ According to his Mission Letter, the designated French Commissioner and Vice President for Prosperity and Industrial Strategy, Stéphane Séjourné, will lead the work on critical raw materials. He is tasked with setting up an EU Critical Raw Materials Platform to support joint purchasing, manage strategic stockpiles and drive implementation of the Critical Raw Materials Act.
Digitalisation and advanced technologies
Summary of analysis:
▪ The information and communications technology sector (ITC sector) accounted for 5.5 percent of EU GDP in 2021, employing 6.7 million workers.
▪ The Draghi Report emphasises that digitalisation makes a positive contribution to Europe’s open strategic autonomy, decarbonisation and social justice
▪ Europe’s industrial model so far does not reflect the current pace of technological change –as 70 percent of the new value created in the world economy in the next ten years will be digitally enabled, the risk of value loss for the EU keeps increasing.
▪ From 2013 to 2023, the EU’s share in global ICT revenues dropped from 22 to 18 percent, while the share of the US increased from 30 to 38 percent
▪ Furthermore, the EU relies on third countries for over 80 percent of its digital products, services, infrastructures and intellectual property (IP).
▪ The following section addresses the three main pillars of digitalisation in more depth. These are digital infrastructure, computing capacities as well as AI and semiconductors.
Digital Infrastructures
Summary of analysis:
▪ EU companies lack the scale required to provide citizens with ubiquitous access to fibre and 5G broadband and to equip businesses with advanced platforms for innovation
▪ While there are three mobile network operators in the United States, there are 34 in the EU; while in the United States, the top three fixed broadband operators have a combined market share of 66 percent, in Europe the top three operators have a combined market share of only 35 percent. Customers in the EU benefit from comparatively lower prices but this has also reduced the profitability of telecom infrastructure, and therefore, also the level of investment by companies. Overall, the EU has more than the ideal number of telecommunications operators
▪ The EU’s ‘ex-ante’ regulation and competition policy has prevented consolidation in the telecom sector.
▪ This is exacerbated in Europe by the non-coordinated allocation of frequencies among member states, which is geared towards revenue generation, the support of non-investmentorientated market participants and the regulatory jungle created by member states.
▪ Only 56 percent of households in Europe have access to fibre-to-the-premise
▪ In Europe, 5G population coverage stands at 81 percent compared to 95 percent in both the United States and China. In Europe, 200 billion euros in investment would be required to provide full coverage with gigabit connectivity
▪ Nokia and Ericsson (each with a global market share of 16 percent) are two of the three largest providers of telecom equipment vendors; only Huawei has a larger market share (30 percent). Turning towards Open RAN-based telecom networks may result in European operators losing more market share to software vendors from third countries.
▪ Satellite connectivity is becoming increasingly important. European companies have been largely absent so far from low earth orbit (LEO) constellations
▪ No European company has a significant share in the sector for communication device software – Google and Apple dominate the European market
▪ The market capitalisation of EU telecom operators and providers shrunk by 41 percent between 2015 and 2023. Only four of the 50 largest tech providers measured by market capitalisation are based in the EU (ASML Holding N.V., SAP SE, Siemens AG and Schneider Electric SE).
Summary of recommendations:
▪ The Draghi Report advises the EU to define a new ‘EU Telecoms Act’, which is intended to set a new strategic approach to telecommunication services with measures in seven areas
▪ Reform the EU’s regulatory and competition stance to complete the Digital Single Market for Telecommunications, harmonising rules and encouraging cross-border mergers and operations.
▪ Harmonise EU-wide regulations and procedures for spectrum allocation, also for satellite connectivity, and coordinate EU-wide auctions to create scale benefits and foster the consolidation of digital networks
▪ Simplify and harmonise the cybersecurity and lawful intercept architecture across national borders and improve cooperation among EU cybersecurity agencies This includes the introduction of proportionate, consistent and technologically neutral rules on critical national infrastructures.
▪ Incentivise the deployment of new infrastructure by defining cut-off dates for older technologies (e.g. copper networks) to enhance the return profiles of investments in new technologies.
▪ Introduce ‘passporting’ of business-to-business services to allow operators in one country to offer services across the EU. This will facilitate the creation of EU service providers regardless of the country of establishment. The regulation of ‘country of origin’ should be used as a harmonising factor to facilitate multi-country offers.
▪ Support EU-based telecom equipment and software providers to strengthen the EU’s strategic autonomy in technology procurement
▪ Encourage innovation and cooperation between EU players, coordinate EU-wide technical standards for the deployment of Network APIs, edge computing and IoT, as for roaming in the past, through appropriate EU bodies.
Evaluation of the recommendations:
▪ German industry welcomes the general stance presented by the European Commission in February 2024 with its White Paper “How to master Europe’s digital infrastructure needs?” with its focus on digital infrastructures. The Draghi Report takes up the basic idea of the second pillar with its recommendation to adopt an EU Telecoms Act, but fails to address the first pillar (financial support) and the third pillar (submarine cables).
▪ German industry in general welcomes the proposal for a simpler and more harmonised European regulatory framework. However, a broad and in-depth consultation with all relevant stakeholders, including telecom network operators, cloud service providers and user
industries, is necessary to assess the impact of changing the scope and objectives of the current regulatory framework.
▪ A more coordinated process for the allocation of frequencies in Europe is generally a welcome objective. The aim should be to encourage investment, expand rights of use, allocate suitable frequencies promptly and avoid inefficient or discriminatory auction design. The focus should not be on maximising revenue for the EU Member States. Given national differences, the national allocation procedures should not be harmonised
▪ We would strongly welcome a harmonisation of the European legal framework for cybersecurity and lawful interception
▪ We strongly oppose a mandatory phase-out of copper by 2030 as proposed by the European Commission, as well as the EU-wide but undefined date proposed in the Draghi Report, as it is too ambitious and does not take into account the different network characteristics in the individual EU member states.
▪ We are sceptical about the idea of introducing a ‘country of origin principle’. A more extensive country of origin principle would need to take into account a wide range of issues in order to avoid distorting the level playing field. The impact of such measures could even be detrimental and should therefore be carefully considered
▪ An industrial policy that supports European telecom equipment and software providers and fosters research in the areas of 6G, cloudification and virtualisation is of paramount importance and would significantly contribute to strengthening Europe’s digital sovereignty
▪ The coordination of EU-wide technical standards and EU-wide harmonised interfaces would be a good step towards reducing market barriers
▪ The proposals outlined in the Draghi report are expected to be included in the Digital Networks Act (DNA), which is a legislative proposal stated in Henna Virkkunen's mission letter. The first draft bill is expected to be published in the first half of 2025.
Computing and AI
Summary of analysis:
▪ The Draghi Report regards artificial intelligence as a catalyst that can open up a new ‘window of opportunity’ for Europe to regain its industrial competitiveness
▪ The EU is losing ground in R&D and in the creation of innovative tech companies with global reach.
▪ EU companies account for only seven percent of R&D expenditure in software and internet, compared with 71 percent in the United States and 15 percent in China
▪ The EU cloud services market is dominated by US-based players, the EU cloud providers’ share decreased to less than 16 percent (as of 2021).
▪ The EU has a strong international position in High Performance Computing (HPC) and could use this to stimulate private investment.
▪ AI is currently used by only eleven percent of EU companies, well below the target of 75 percent by 2030.
▪ The EU’s competitiveness depends on digitalisation across all sectors, but this in turn requires a modern infrastructure and other digital preconditions.
▪ The EU’s industrial model does not reflect the current pace of technological change and relies on third countries for over 80 percent of its digital products, services, infrastructure and intellectual property rights.
▪ EU tech companies lack in size to drive R&D and investment in telecommunications, cloud services, AI and semiconductors.
Summary of recommendations:
▪ Increase the computing capacity dedicated to the training and fine-tuning of AI models.
▪ Identify and promote priority AI applications in key industrial sectors.
▪ Simplify and enforce harmonised implementation of the General Data Protection Regulation (GDPR) and the EU AI Act.
▪ Develop an EU-wide policy on cloud services and data security
▪ Adopt an EU-wide ‘passporting regime’ for cloud services
▪ Support data brokers as preapproved data intermediaries.
▪ Strengthen cooperation between the EU and the United States in cloud and data markets
▪ Introduce a new ‘Tech Skills Acquisition Programme’ to improve the EU’s competitiveness in advancing technologies.
▪ Adopt a new ‘EU Cloud and AI Development Act’ to improve European HPC, AI and quantum capabilities and infrastructure, and harmonise cloud architecture requirements and procurement processes.
▪ Launch an ‘EU Vertical AI Priorities Plan’ to fund key vertical AI models across industrial sectors, based on data sharing and protected from anti-trust enforcement.
▪ Harmonise national ‘AI Sandbox Regimes’ to enable experimentation and the development of innovative AI applications in selected industrial sectors
Evaluation:
▪ The recommendations to increase computing capacities and promote AI applications could increase the competitiveness of EU companies.
▪ In addition to harmonising the GDPR and the AI Act, progress should also be made on harmonising EU digital legislation in general, including the Data Act, the Cyber Resilience Act and the Data Government Act
▪ Strengthening cooperation between the EU and the United States in cloud and data markets is a good idea in itself, but technologically sovereign solutions ‘made in Europe’ should be fostered to handle sensitive public data
▪ The recommendations regarding HPC centres are included in detail in the Mission Letters. The EU Cloud and AI Development Act has also been adopted, as recommended by the Draghi Report. Other industry-related measures, such as the harmonisation of national regulatory sandboxes and a harmonised and simplified implementation of the EU AI Act are not mentioned.
Semiconductors
Summary of analysis:
▪ The EU has strengths in selected segments of the chip market but is strongly dependent on non-EU players
▪ The global chip market is dominated by a small number of large players, with the EU leading in specific segments (e.g., sensors, power control, chips for the automotive industry, equipment and materials). At the same time, Europe is dependent on third countries in segments such as graphics processing units (GPUs)
▪ The EU has a strong position in the manufacturing of lithography equipment and other materials but this could be challenged by export controls.
▪ In particular, the EU lacks capacity to produce advanced processors and storage chips, which increases its dependence on US and Asian manufacturers
▪ The EU’s chips market is valued at 57 billion US dollars representing ten percent of the global value chain (520 billion US dollars), compared to 20 percent in the 1990s. The current market share is half of the 20 percent target for 2030 defined in the Chips Act.
▪ The EU Chips Act was a good first step, but public support at EU-level remains lower than in the United States (e.g., the US Chips Act allocated 52 billion euros, while the EU allocated 3.3 billion euros). Furthermore, national support is fragmented and subject to state aid regulations.
Summary of recommendations:
▪ Develop a new EU strategy for semiconductors with a dedicated budget and coordinated demand.
▪ Funding for innovation and testing labs near existing centres of excellence.
▪ Incentivise innovative design capabilities and fabless companies
▪ Subsidies for foundries focused on strategic segments.
▪ Support the innovation potential of mainstream chips and chiplets
▪ Promote an EU-wide innovation-friendly authorisation regime for chips
▪ Launch a long-term EU Quantum Chips Plan.
▪ Support the consolidation and leadership of excellent semiconductor companies in response to the export restrictions of competitors.
▪ Launch a chip sub-component of the ‘Tech Skills Acquisition Programme’ to attract worldclass competencies (e.g., special entry visas).
Evaluation:
▪ We welcome the recommendations in general
▪ However, to build sustainable resilience, EU microelectronics policy needs to take a more holistic approach, encompassing a holistic industrial policy, raw material policy and education policy, and establishing semiconductors as a pillar of the European Economic Security Strategy.
▪ A particularly positive recommendation are the proposed response measures against export controls, although this point is only addressed very briefly and vaguely and needs to be made more specific
▪ The Mission Letters to the designated EU Commissioners refer to semiconductors in the context of the implementation of the Chips Act. The EU Commissioners are also instructed to adopt an EU Quantum Chips Plan as proposed in the Draghi Report. None of the other recommendations are included in the Mission Letters
Energy-intensive industries
Summary of analysis:
▪ The Draghi Report first emphasises that energy-intensive industries (EIIs) are vitally important to the EU, contributing to employment and the strategic independence of Europe in areas such as food security and the defence sector.
▪ The report also shows that energy-intensive production in the EU dropped by twelve percentage points between 2021 and 2023, indicating that deindustrialisation is already underway in these industries. This trend is set to accelerate further if appropriate political measures are not taken.
▪ The report identifies two root causes for the challenges facing EIIs. These are high energy costs (see chapter on Energy) and much more stringent decarbonisation targets than international competitors. This diverging level of ambition means that, in the short term, European companies are facing substantial investments to meet decarbonisation targets requirements which their global competitors, by and large, do not. Decarbonisation in the four largest EIIs alone – chemicals, basic metals, non-metallic minerals and paper – is anticipated to cause costs of around 500 billion euros in the next 15 years. The Draghi Report also points out that the EU is still the only major economic region with a significant carbon price. While this cost factor has only had a limited impact on energy-intensive companies so far on account of free ETS allowances, this will change when the Carbon Border Adjustment Mechanism is
introduced. The success of the CBAM is, according to the report, “uncertain” because its design is complex and relies on robust international cooperation.
▪ A further problem identified in the report is the, in part, massive overcapacity in certain sectors, particularly in the steel sector Global excess steel capacity in 2023 was estimated at more than 611 million tonnes and is expected to increase further, particularly in view of new capacities in Asia based mostly on carbon-intensive BOFs.
Summary of recommendations:
▪ Ensure competitive energy prices (electricity, gas, hydrogen) for EIIs especially during the transition (see various proposals on this in the chapter on Energy).
▪ Simplify and accelerate permitting for EIIs. Reduce red tape and regulatory burdens. Many of the report’s proposals on this point are already included in the NZIA (‘one-stop-shop’, etc.). Among the other proposals is default approval (‘positive silence’).
▪ Improve the market financing conditions for EIIs, e.g., with financial guarantees by the EIB or national promotional banks such as the KfW in Germany.
▪ Scale up funding for the decarbonisation of EIIs, for example, by using ETS revenues. Funding programmes should fund both CAPEX and OPEX costs. Corresponding instruments should (also and above all) be adopted or expanded at EU level (European Hydrogen Bank, Carbon Contracts for Difference, etc.).
▪ Carefully monitor and (where necessary) improve the design of the CBAM during the transition phase The European Commission should also evaluate whether to postpone the reduction of free ETS allowances if CBAM’s implementation is not as effective as expected. A CBAM export solution would have to be assessed “against the rules of the international trading system” .
▪ Stimulate demand for green products by promoting transparency and introducing standardised low-carbon criteria in public procurement (‘green public procurement’).
▪ Improve the circularity of raw materials (through recycling targets, a single market for circularity, and stimulating demand where needed). Further comments on this point are included in the chapter on Critical Raw Materials.
▪ Trade agreements should have a more effective design. The EU must be able to react quickly when necessary. Trade defence instruments and anti-subsidy measures should be applied strategically and rapidly when necessary.
▪ Encourage the creation of green regional industrial clusters around the EU’s EIIs. The report refers to the example of Net Zero Acceleration Valleys under the Net Zero Industry Act.
Evaluation:
▪ Ensuring competitive energy prices for EIIs is absolutely and fundamentally essential for Europe to regain its competitiveness (an evaluation of the specific proposals put forward by the Draghi Report is included in the chapter on Energy).
▪ We welcome the understanding that the decarbonisation of EIIs will require financial support (not only CAPEX but also OPEX) on account of the foreseeable higher costs of many low-carbon production processes. To develop corresponding funding instruments at EU level, the EU budget would have to be prioritised accordingly or increased as there are currently no additional funds available.
▪ We also welcome the clear identification of the numerous problems and shortcomings of the CBAM. We as well welcome the call to review the reduction of free ETS allowances if the implementation is not as effective as originally anticipated.
▪ A welcome proposal is also the generation of demand for green products, primarily through green public procurement.
▪ On the point of reducing red tape and accelerating permitting procedures, however, the Draghi Report falls short of our expectations. Effectively accelerating permitting for industry would require an overall review of substantive EU environmental legislation, clear regulations on reference dates, and practicable standards.
▪ To get prices down, the new Energy Commissioner, Dan Jorgensen, is tasked with presenting an Action Plan for Affordable Energy Prices and developing an Electrification Action Plan. The Mission Letter remains vague, however, and does not specify which measures these initiatives should include. Beyond this, the designated Commissioner for Industry, Stéphane Séjourné, is tasked with developing an Industrial Decarbonisation Accelerator Act under the Clean Industrial Deal with the objective of accelerating permitting and creating lead markets, and adapting EU procurement directives accordingly.
▪ The report recommends establishing a European Competitiveness Fund to boost funds for decarbonisation. Whether this new fund will only simplify and pool existing programmes or have a higher overall budget remains unclear and will probably only be decided during the negotiations for the next Multiannual Financial Framework of the EU. Climate Commissioner Wopke Hoekstra is also tasked with driving a more effective use of ETS revenues.
▪ Unfortunately, the Mission Letters do not include either a clear instruction to address the numerous problems and shortcomings of the CBAM, or a willingness to consider postponing the pulled forward phase-out of free ETS allowances should the CBAM not prove effective.
Clean technologies
Summary of analysis:
▪ The Draghi Report initially underlines the economic opportunities of clean technologies (clean tech) and notes that the global clean tech market is expected to reach a volume of around 650 billion euros by 2030
▪ European manufacturers still have a strong market position in some technologies such as wind power, electric vehicles (BEV) and electrolysers. However, the EU faces increasing competition from international companies, particularly from China. In some technologies including photovoltaics, the EU has already largely lost its production base to China.
▪ China now has a dominant market position in the global export of clean technologies and is producing substantial overcapacities in some areas fuelled by lower production costs, independence regarding critical raw materials and substantial state subsidies These overcapacities could increasingly be redirected to the EU market as other countries impose trade barriers against China. The Draghi Report warns of the danger that the rising European demand for clean technologies triggered by its ambitious climate policy will be covered increasingly by (Chinese) imports, thereby considerably reducing new value added and jobs in the EU.
Summary of recommendations:
▪ To tackle this challenge, the Draghi Report recommends developing a single European industrial strategy. Alongside China, other major countries such as the United States have already massively supported investments in clean technologies and in strengthening domestic production (see Inflation Reduction Act). A sit-back-and-watch approach would therefore jeopardise European industry and could result, according to estimates of the European Central Bank, in, e.g., the production of electric vehicles in the EU falling by up to 70 percent if Chinese BEV manufacturers receive subsidies comparable to the Chinese solar industry. Mirroring the US strategy, on the other hand, and systematically excluding Chinese technologies could delay the energy transition and increase the costs for the European economy. Imposing reciprocal tariffs would also cost the EU, being an export-oriented region, a lot more. Europe therefore needs to take a mixed approach to protect its economic and strategic interests
▪ The Draghi Report also argues that the EU needs to align its research and development policy more closely to its industrial policy to enable the scale-up of innovations. Europe has so far not managed sufficiently to bring new technologies to market on a large scale and establish them for the long term.
▪ Ensure, in particular, swift and full national implementation of the Net Zero Industry Act (NIZA) The European Commission should also present an impact assessment and a legislative proposal to review and possibly increase the share of the (renewables) auction volumes subject to non-price criteria (currently at 30 percent per year) by 2026
▪ Where needed to reach NZIA/EU clean tech manufacturing targets and when the EU cannot (re-)gain autonomy in strategic industries, an explicit minimum quota for selected locally produced (innovative and sustainable) products and components (a kind of local content requirement) should be introduced in public procurement and CfD auctions. All funding programmes of the Member States, EU funding programmes and EIB programmes should take the same approach.
▪ Mobilise private and public financing for clean tech solutions, particularly by simplifying and accelerating access to EU funding, increasing available funds and expanding support to include OPEX. Furthermore, financing systems should receive targeted support to mobilise private capital (e.g., with the help of the EIB). As a concrete example, the report suggests introducing new Competitiveness IPCEIs, expanding the current instrument. IPCEIs should, in future, not just be limited to breakthrough technologies with the status of global state-of-theart in the sector but include industrial projects of common interest (e.g., infrastructure) and all forms of innovation that have the potential to take Europe to the lead in strategically important sectors and further strengthen the single market. In addition, the state aid for clean tech under
the Temporary Crisis and Transition Framework (TCTF) could be extended temporarily. Corresponding support measures should gradually be moved to the EU level
▪ Further diversify supply sources and establish industrial partnerships with third countries Alongside the implementation of the NZIA resilience criteria for public procurement and auctions for renewables, the report recommends the introduction of additional ‘import diversification targets’ per technology (similar to the approach adopted under the Critical Raw Materials Act). These targets should focus on a few product categories where there is significant dependence on individual third countries and the EU’s supply is highly concentrated. Targets also need to be balanced with a cost analysis to indicate the impact of diversification.
▪ Massively strengthen research and development in clean technologies (with many concrete measures).
Evaluation:
▪ We welcome the proposals to simplify and accelerate access to EU funding and provide additional funding However, the financing here is also completely unclear and is only likely to be clarified conclusively during the upcoming negotiations on the EU’s Multiannual Financial Framework. The same applies to the area of research and development.
▪ We take a sceptical view of the concept of introducing resilience criteria or explicit ‘local content requirements’ in public procurement (see section on Public Procurement, Part B). This kind of approach could be used in the design of Contracts for Difference and funding programmes but should, in all cases of application be carefully reviewed and considered to minimise negative consequences for European exports.
▪ Increasing the proportion of (renewables) auction volumes subject to non-price criteria under the NZIA is also a viable option Much depends on the exact formulation of these criteria, scheduled to be defined by 30 March 2025 in an implementing act.
▪ To boost funding for clean technologies, the report recommends setting up a European Competitiveness Fund It remains unclear, however, whether this new fund will simply simplify and pool existing programmes or if the overall budget will be increased. This issue will probably only be resolved in the upcoming negotiations on the EU’s Multiannual Financial Framework. In parallel, the designated EU Competition Commissioner has been tasked with adapting the EU legislation on state aid accordingly, building on the current Temporary Crisis and Transition Framework. This should be supplemented by a new Competitiveness Coordination Tool to improve coordination between European and national development programmes, increasing the harmonisation of objectives and unfolding positive synergy effects.
▪ Regarding localisation of new production, the EU has already made a start here with the introduction of resilience criteria under the Net Zero Industry Act. Another step in this direction was taken recently in the terms and conditions of the second round of auctions of the European Hydrogen Bank with the introduction of specific upper limits per project for electrolysers from China. The new European Commission plans to take this approach further in its efforts “to create lead markets”
Summary of analysis:
▪ The automotive industry is of central importance for European industry with a wide range of upstream and downstream linkages
▪ The sector is currently undergoing a swift and profound structural transformation This transformation encompasses a shift in demand towards third markets and shifts towards new value chains and business models such as digital technologies, e.g., software-based vehicles, green mobility and circularity. These developments have led to the erosion of the EU’s traditional global leadership role in the automotive sector
▪ The automotive supply chain in the EU is suffering from the EU’s emerging competitiveness gap, both regarding costs and technologies. The EU’s declining competitiveness in the automotive sector is due to several reasons:
- While EU climate policy sets ambitious greenhouse gas emission reductions for the automotive industry, the EU has failed to secure this path through a holistic approach
- There is a lack of consistently coherent legislation, the principle of technological neutrality and an impetus to convert the automotive supply chain in line with the market ramp-up of electric mobility.
- In contrast to the EU, China and the United States have successfully realigned their respective strategies for their domestic automotive sector
▪ The EU is at risk of accelerating its loss of ground in the EU automotive sector if it fails to rapidly adjust to this new competitive environment.
Summary of recommendations:
▪ The report recommends pursuing two key objectives with different time horizons to strengthen the European automotive industry and preserve jobs, R&D facilities and manufacturing within the region:
- In the short term, the EU should avoid the radical displacement of production away from the EU’s automotive sector or the takeover of EU plans and companies by statesubsidised competitors.
- In the medium term, the EU should direct its policy to re-establishing a competitive leading position for the EU in the ‘next generation’ of vehicles and maintain the European production base with its current technological advantages as long as demand on international markets holds up.
▪ The report sets out ten recommendations designed to contribute to reaching these two key objectives. The main ones are the following:
- Ensuring competitive transformation costs, in particular energy costs and labour costs. Additional recommendations are targeted at levelling the global playing field,
enhancing market access and supporting the required upskilling and reskilling of the workforce for the transition to electric mobility, digitalisation and further automation of automotive production.
- Developing an EU industrial action plan for the automotive sector to increase coordination both vertically and horizontally in the value chain. The objective is to produce a targeted and forward-looking industrial strategy for the automotive sector, addressing, in particular, the question of how to compete with China and the United States, which both support their automotive industries substantially. With the convergence of multiple value chains (electric vehicles, digital, mobility and circularity), a comprehensive approach is needed covering all stages from R&D to mining to supplying raw materials, refining, components, data sharing, manufacturing and recycling.
- The other recommendations are designed to encourage the establishment of reinforced Net-Zero Acceleration Valleys dedicated to the automotive ecosystem, to support common European projects in the most innovative areas (e.g. in affordable European electric vehicles, software-defined vehicles and autonomous driving, circularity), to continue to push standardisation through policy, and to develop the charging and refuelling infrastructure.
- Ensuring regulatory coherence. The report urges the EU to make the upcoming regulation coherent (across the entire value chain), predictable, and with appropriate timing (giving industry enough time to adapt products and processes) and based on consultations with the industry and other relevant stakeholders. This should include a review of the Fit-for-55 package following a technologically neutral approach. The report particularly emphasises the importance of adopting a coherent digital policy for the automotive sector by making this a separate proposal
Evaluation:
▪ The analysis and description of the major causes largely overlap with the conclusions of the joint study project of the BDI, BCG and IW “Transformation Paths for Germany as an Industrial Nation’ (September 2024).
▪ The recommendations tackle the right areas to take action in and outline suitable measures to strengthen the European automotive industry and preserve jobs, research and development infrastructure as well as production in the region.
▪ The Mission Letter to the designated EU Commissioner for Sustainable Transport and Tourism, Apostolos Tzitzikostas, contains the central recommendation of the Draghi Report to develop an industrial action plan for the automotive sector. While it is absolutely right to designate a leader to develop this plan, the Mission Letter does not specify how this work will be coordinated and consulted on with the other Commissioners responsible for the other main policy areas involved, although their involvement will be critical in achieving a holistic approach. These areas include CO2 fleet regulations, EU emissions trading, battery regulation and basic industrialissues such as energy, trade, digitalisation, raw materials and competition. EU Commissioner Tzitzikostas, in particular, is responsible for the regulation on the buildout of charging and refuelling infrastructure for alternative fuels.
▪ The Mission Letter to the designated EU Commissioner for Climate, Net Zero and Clean Growth, Wopke Hoekstra, rightly contains the mandate of the Draghi Report to ensure that the planned review of the CO2 fleet regulation follows a technologically neutral approach in its integration of e-fuels. This does not yet satisfy the overarching call of the Draghi Report for a coherent regulatory approach
Defence
Summary of analysis:
▪ To reach strategic autonomy, the EU needs to strengthen its defence sector to be able to respond to external threats, such as the Russian war of aggression against Ukraine and hybrid threats. This is all the more true given that the United States will possibly focus progressively on the Pacific Rim
▪ The report identifies the defence sector as an engine of innovation Historically, the defence sector has been the origin of key technological innovation (e.g., GPS positioning, internet, infrared surveillance) More recently, innovation and technological breakthroughs in civilian sectors are increasingly applied in the field of defence. In future, civilian and military innovation and development processes should be more closely interconnected. The report underlines the significance of SMEs and start-ups as drivers of innovation, particularly in relation to dual-use technologies.
▪ The report illuminates the weaknesses of the EU defence industry Despite being highly globally competitive in specific domains (e.g., battle tanks, submarines), the European defence industry suffers from structural problems such as inadequate public defence spending and insufficient standardisation
▪ The report’s section ‘Limited access to financing’ sets out the challenges facing the European defence industry, particularly its SMEs and mid-caps. These companies have problems securing private financing because, firstly, many financial institutions still apply a very narrow interpretation of the EU’s Environmental, Social and Governance (ESG) frameworks. Secondly, the complexity of the regulatory frameworks related to production, export and procurement. Thirdly, the exclusion policies of the European Investment Bank (EIB). The EIB excludes core defence activities from its funding and this practice is also copied by other public and private banks, thus greatly restricting the industry’s financing options.
Summary of recommendations:
▪ The report underlines the need to prepare the European defence industry for emerging challenges, particularly by stepping up investment, cooperation and innovation.
▪ The report calls for the swift implementation of the European Defence Industrial Strategy (EDIS) and the European Defence Industry Programme (EDIP).
▪ The report also recommends adopting stronger measures to better integrate start-ups and proposes launching programmes to foster cooperation between the civilian and military segments to drive innovation and facilitate the participation of start-ups.
▪ EU-wide funds should be used to finance new defence capabilities and cooperation in research and development. The report recommends amending the ESG frameworks so that defence industry investment is not automatically classified as problematic. It further recommends better tailoring EU-wide financing programmes to the needs of start-ups, SMEs and mid-caps in the defence industry, by, e.g., setting up dedicated funding programmes and providing guarantees. The report also calls on the EIB to reconsider its restrictive stance and loosen up its exclusion policies. Ways need to be found to support the defence industry without breaching the existing ESG stipulations. The report also recommends a more intensive use of public-private partnerships to mobilise investment and share risks.
▪ The EU should press on with the further standardisation and harmonisation of defence goods and the integration of SMEs in supply chains
Evaluation:
▪ The report’s position presented in the chapter on Defence overlaps that of the BDI and its member associations in many respects, particularly in the key issues of strategic autonomy, supporting innovation, the role of SMEs and financing. Differences lie in the weighting of the EU and national approaches, and in the stringency of ESG stipulations
▪ The importance of increasing Europe’s strategic autonomy is beyond dispute. However, this cannot entail an intervention in national sovereignty. While the development of European defence capabilities is essential, it must be remembered that cooperation with partners outside of the EU is both technologically and strategically necessary.
▪ The report also correctly underlines the importance of the defence industry as a driver of innovation, particularly in dual-use technologies, and calls for closer links between military and civilian research and development.
▪ Another positive recommendation is stronger integration of SMEs and start-ups in European defence programmes to drive innovation and develop a more robust European defence industry.
▪ The financing gap of the industry is currently a key issue among security and defence players. The financing models should be adapted to improve the industry’s access to capital. The capital market is currently adapting its treatment of defence industry products. The European securities and markets supervisory authority, ESMA, now permits arms manufacturers to classify as sustainable, apart from producers of banned weapons such as anti-personnel mines and cluster munitions. The EIB should stop excluding defence from its financing
▪ While the EU report calls for stronger leadership by the EU, we recommend national level programmes coordinated at EU level and programmes with clearly defined leadership. The overriding view within the industry is that national and European research and development projects mutually cannibalise each other in the fight for the budgetary funds available. To ease these tensions and also concretise the policy objective of cooperation at EU level, the national co-financing pillar of the European Defence Fund (EDF) should be increased Making co-financing a separate budget item would provide scope for national focuses with own leadership and further underpin the technological excellence of the German security and defence industry also in the European context. It must also be reviewed which innovations should be pursued exclusively at national level, which make sense to form
alliances for and which do not call for any cooperation. Industry believes that this situation calls for a ‘Key Innovation Strategy’ along the lines of the Key Enabling Technologies (KETs). The EU should focus on creating a competitive framework and coordinating joint procurement. Market interventions to encourage consolidation are contentious. Industry should be left to create its own champions.
▪ The specific budget structure of Germany, particularly the lack of a multiannual defence budget which many other European countries have, make long-term planning and close cooperation between the federal government and industry of paramount importance. The Draghi Report calls for swift implementation of programmes and measures. Although this objective is certainly positive, the fundamental problem remains the lack of planning certainty in Germany. This continues to be a barrier to the rapid ramp-up of production capacities.
▪ Many recommendations are already included in the Mission Letters. The key messages are that the security and defence industry needs planning certainty, the major Member States need to intensify and drive forward their cooperation projects, and the European Commission needs to create the parameters to make this happen. Furthermore, more attention needs to be paid to the issue of resilience, for example, the resilience of supply chains.
Space
Summary of analysis:
▪ The report concludes that the EU has lost its leading market position in commercial launchers and geostationary satellites. On account of the EU’s temporary loss of sovereign access to space, it has had to rely on private US rockets (SpaceX) to launch its strategic programme.
▪ The EU continues to lag behind the United States in rocket propulsion and mega-constellations for telecom and satellite receivers. This is particularly serious in view of the fact that this market is much larger than other space segments.
Summary of recommendations:
▪ The report recommends strengthening the space ecosystem by gradually removing the European Space Agency’s geographical return principle
▪ Concentrate resources on projects with the potential for significant scientific or technological advancement, regardless of the geographical location of the participating entities
▪ A central recommendation of the report is to create a functioning single market for space through common standards and the harmonisation of licensing requirements.
▪ The report also recommends setting up an EU Space Fund which would enable the Commission to act as an ‘anchor customer’ and jointly purchase space services and products and finance critical technologies.
▪ Support common strategic priorities in space research and innovation through enhanced coordination, financing and the pooling of resources to develop large new common EU programmes.
▪ Foster the growth of EU space SMEs, start-ups and scale-ups through improved access to financing and the introduction of targeted European preference rules
Evaluation:
▪ The analysis of the European space sector is accurate and the recommendations are largely suitable for improving competitiveness. However, the call to remove the geographical return principle is not well thought through. The geographical return principle ensures that contributions of the Member States largely flow back into national industries in the form of contracts. The ESA Member States are more inclined to participate in optional ESA programmes if geo return is applied. The geo return thus increases the willingness of national governments to invest in ESA. This is particularly true of the smaller Member States, contributing to the creation of a more diversified European space ecosystem. It also bolsters the position of the ESA vis-à-vis the EU and the European Union Space Programme Agency (EUSPA).
▪ At the same time, the geo return does make for a less efficient use of funds as contracts are not always awarded to the best and lowest-cost bidder It can also make programmes more complex which, in turn, makes them more lengthy and more expensive. In many cases, it is the small and medium-sized companies from the prime contractor’s Member States that are put at a disadvantage. The repeated call to remove the ESA’s application of the geo return principle fails to take account of the fact that this move would decrease the propensity of smaller Member States to invest in space.
▪ We also view with criticism the call to create a functioning single market for space with common standards and a harmonisation of licencing requirements This would coincide with the planned EU Space Law. All space legislation involves setting down additional permitting, liability, insurance and security duties that inevitably increases administration and costs for companies. Depending on the exact nature of the legislation, it can easily damage the new space ecosystem for the long term. A common EU Space Law cannot adequately accommodate the specific needs and strengths of the individual Member States and would therefore inevitably curb the competitiveness of national space industries. A one-size-fits-all approach is not suitable in this case.
▪ We are also opposed to weakening the ESA as the space agency of Europe. Large European space projects should continue to be based there and not under the European Commission.
▪ Ultimately, Europe does not just have a governance deficit in space but also insufficient investment, compared to the United States and China. Europe therefore needs both more competition within Europe and larger public investment, ideally in the form of contracts.
Transport
Summary of analysis:
▪ The transport sector constitutes a major pillar of the EU economy It accounts for five percent of GDP and five percent of all direct jobs. Transport plays a key role in economic development and territorial cohesion by enabling access to goods and services.
▪ At the same time, the sector has global operations and is of major importance for the EU’s transition to a climate neutral economy as it accounts for almost one quarter of greenhouse gas emissions. The EU has an ambitious decarbonisation plan with the target of cutting transport emissions by 90 percent by 2050.
▪ The European transport market also benefits from intense competition which has improved and lowered the costs of air, track and long-distance bus transport services within Europe
▪ The rising volume of passenger and goods transport, and increasing challenges relating to climate and security policy is making the resilience of the transport sector progressively more important
▪ The EU’s transport sector faces the following challenges:
▪ Strategic investment is needed to complete missing links in the European transport network and advance the modernisation of transport infrastructure. However, both public and private financing remains a challenge for the sector. Implementation is additionally burdened and projects delayed by high administrative barriers and national differences in legislation and in the willingness to implement reforms The EU is still far away from meeting its target of creating a sustainable integrated transport market as these obstacles are slowing down both competition between European players and their growth.
▪ The European transport sector has substantial potential for optimisation by rectifying its current fragmentation and lack of intermodality There is no cross-border air traffic management nor sufficient airport capacity, while rail, road and inland shipping markets remain fragmented. The development of intermodal freight transport is possible but is also slowed down by limited interoperability and the fact that harmonised digital solutions are not applied.
- The digitalisation potential in the European transport system is not yet being used to full potential. Rail transport lacks common digital standards as the individual systems of the Member States vary greatly. Only one percent of cross-border operations are fully digitalised, which means that physical documents are still required for the transport process making multimodal logistics more difficult. Digitalisation is progressing at a faster pace in other regions of the world with greater public support for technological innovation.
▪ The EU’s objective to decarbonise the transport sector is putting the sector under much pressure. Meeting emission reduction targets will require an annual investment volume of 61 billion euros from 2031 to 2050 in air transport, and 39 billion euros in international shipping. The automotive industry is struggling with challenges including a downward market for electric vehicles, an insufficient electricity supply infrastructure and a sluggish development of the charging infrastructure. The supply chains for alternative fuels, such as hydrogen, are also lacking in momentum, even though renewable and low-carbon fuel for air travel, maritime transport and, possibly, for heavy-duty vehicles has become indispensable.
- The EU transport sector is also under great pressure due to high local production costs and intensified global competition. Furthermore, the autonomy of EU’s transport sector is being jeopardised by the increasing foreign influence on its infrastructure, especially in shipping where the European share is dropping. The
situation is compounded by the lack of skilled workers and makes the reskilling of the workforce ever more urgent
Summary of recommendations:
▪ The EU should improve infrastructure planning to enhance competitiveness alongside cohesion and encourage multimodal transport. The focus should be on competitiveness, efficiency and climate resilience built on the Trans-European Transport Network (TEN-T) process and the cohesion policy for minimum connectivity. Better coordination and accelerated permitting procedures will be needed to meet the challenges presented by a greener and more intelligent transport system.
▪ Public and private financing needs to be mobilised to increase the cross-border connectivity, military mobility and climate robustness of EU’s transport infrastructure. The EU should prioritise EU funds towards projects with cross-border impact, particularly on military mobility and climate resilience. In addition, Member States should direct more public investments into transport and stimulate private financing through de-risking, public-private partnerships and special models for mobile assets, such as ships, while the EIB is called upon to expand its support to transport projects aligned with EU strategic priorities.
▪ To achieve integration and interoperability within the EU, national barriers need to be lifted. Competitive markets should be created using measures such as regulatory reforms, incentives and harmonised regulation The focus should be on capacity management in rail transport, the Single European Sky 2 Plus package in air transport and EU-wide standards for maritime and road transport
▪ The EU should accelerate digitalisation to enhance efficiency in the transport sector through incentives and standards, and motivate Member States and the industry to adopt digitalisation measures. Measures should include AI and cybersecurity measures, and the integration of transport data to a common EU space for data, also by means of paperless and centralised procedures. Digital solutions for rail, air, waterborne maritime and road transport should be further developed and implemented, e.g. through the European Rail Traffic Management System (ERTMS) for rail transport, the Single European Sky ATM Research Programme (SESAR) for air travel, the Maritime Single Window (MSW) for maritime transport and intelligent systems for road transport.
▪ Launch dedicated EU innovation projects leveraging public-private partnerships and crossborder cooperation to foster innovation until market deployment. Key segments are: rail (Automated Rail Operations, ERTMS), air (zero emission aircraft), maritime (autonomous ships), road (connected mobility). An additional objective is the promotion of sustainable renewable fuels and EU-wide demonstrator projects.
▪ The EU should take targeted measures to mobilise investment in decarbonisation in hardto-abate segments, such as aviation, maritime transport and heavy-duty vehicle transport, including Contracts for Difference, auctions to support renewable and low-carbon fuels, and the expansion of existing funding mechanisms such as the Alternative Fuels Infrastructure Facility (AFIF). The report also recommends dedicated sectoral calls under the Innovation Fund to accelerate the deployment of decarbonisation technologies.
▪ The EU should take measures to strengthen its transport industry and balance out global asymmetries in regulations and subsidies These include adopting public procurement procedures to reward innovative solutions, comprehensively investigating the business practices of foreign companies, and establishing an EU export credit facility. In shipbuilding, the EU should leverage synergies with industrial defence production, create financial incentives for ships made in the EU and secure the production of sustainable fuels. Important objectives in rail transport is maintaining the industrial base and boosting the export of automated trains. In aviation, the aim is to maintain the current leadership role and achieve autonomy along the supply chain while aiming for autonomy also in sustainable and lowcarbon fuels.
▪ The EU should strengthen international partnerships and develop strategic infrastructure to increase global integration in climate policy and resilience. The EU needs to further strengthen the Solidarity Lanes with Ukraine and Moldova through investment in infrastructure and optimising procedures at its borders. These countries and the Western Balkan partners should be embedded in the trans-European transport network and advance an international connectivity strategy that improves alternative transport connections. Further key measures to establish the EU as a leader in international collaboration and climate diplomacy are an EUwide crisis management system to secure trade routes and further efforts to establish global emission standards for air and maritime transport
▪ The EU should map the skillset needed in the future in the transport sector to guide education programmes and create diverse job profiles for the green and digital transition. This would support the needs of the transforming sector and help to attract a more diverse range of employees. The EU should also facilitate a smoother circulation of professionals by establishing a framework for the mutual recognition of certifications.
Evaluation:
▪ In general, the proposals put forward in the Draghi Report could make an important contribution to strengthening the European transport sector. The proposed measures outline promising approaches to intensify cross-border cooperation, increase the climate resilience of infrastructure, and make transport more sustainable overall. These approaches must now be further developed in-depth and in detail to reach the set objectives efficiently and for the long term.
▪ We expressly welcome the report’s proposal to lift national barriers and encourage interoperability within the transport sector even though it remains too vague on some points
▪ The report is correct in emphasising the importance of developing the charging and refuelling infrastructure and calling for more funding here. Regarding this issue, the Mission Letter to the designated EU Commissioner for Sustainable Transport and Tourism, Apostolos Tzitzikostas, tasks him with accelerating the electrification of road transport and monitoring a faster development of the charging infrastructure. From the perspective of industry, the report does not define how wide-reaching the ambitions of the new European Commission will be. However, to stimulate the further ramp-up of alternative drives, particularly electric mobility, the level of ambition of the Alternative Fuels Infrastructure Regulation (AFIR) must be adjusted with regard to the development of charging and hydrogen refuelling infrastructure for passenger cars and light commercial vehicles as well as for heavy-duty vehicles. The European Commission and the Member States should develop concrete support measures
and take these into account in the reviews of the CO2 fleet regulations, which are to be carried out at an earlier date than stipulated Measures are also needed for the development of charging and refuelling infrastructure for alternative drives at airports, seaports and inland ports.
▪ The BDI has been calling for the targeted use of ETS revenues to finance projects that contribute to reducing emissions, as recommended by the report, for many years now It still remains open to what extent the Member States will implement this earmarking of funds as they have largely been able to decide for themselves so far how to spend the ETS revenues.
▪ The Trans-European Transport Network and the development and digitalisation of rail infrastructure (including ERTMS) are highlighted in both the Draghi Report and in the Mission Letter as important building blocks to make the EU a competitive, efficient and sustainable location. While the Draghi Report outlines possible approaches and concrete proposals to mobilise the necessary financing coordinated at EU level, the Mission Letter remains vague on the implementation and financing of these set targets and measures. Furthermore, the Mission Letter does not cover all the important European innovation projects specified in the Draghi Report for the rail sector, for example, such as Digital Automatic Coupling (DAC).
▪ The Single European Sky (SES2+) agreement of March 2024 is still falling short of the expectations of the air transport industry. The swift implementation of the new regulation, as called for in the Draghi Report, will not be enough to realise possible efficiency gains under a Single European Sky, which would need further action to pass regulation with more ambitious targets. The Mission Letter to Commissioner Tzitzikostas also underlines this and calls on him to take further action to harmonise European airspace.
▪ Regarding the objectives set out for industrial policy in the transport sector, particularly for rail transport, air transport and shipbuilding, the report addresses key measures but does not go far enough in some points. The report rightly states that the European Industrial Maritime Strategy and EU Port Strategy must be swiftly enacted, a point which is also addressed in the Mission Letter. The particular challenges involved in strengthening the competitiveness of the automotive industry are addressed in a separate chapter (Chapter 6).
▪ While strengthening European industry and supporting innovation are always commendable, further considerations are necessary, particularly for renewable and low-carbon fuels for hard-to-abate modes of transport Despite the report’s clear focus on achieving greater autonomy for the EU along the supply chain, it does not take sufficient account of the fact that a significant proportion of these fuels, particularly Power-to-Liquid (PtL), still has to be imported.
▪ The Mission Letter also fails to address, or address with sufficient ambition, some points that are of central importance for the implementation of the recommendations set out in the Draghi Report:
- Measures need to be taken to prevent carbon leakage in international transport and to strengthen the competitiveness of European airlines and shipping companies, airports and sea ports
- Initiatives need to be taken to accelerate the deployment of sustainable fuels in all modes of transport
- Strategies to strengthen the European air transport industry need to be developed
- It is unclear how transport-related projects are to be coordinated with other Directorate-Generals, particularly in the case of climate protection regulations in transport in conjunction with, e.g., the ETS, Energy Taxation Directive, CO2 regulation for passengers and light commercial vehicles as well as heavy-duty vehicles, ReFuelEU Aviation, FuelEU Maritime, Renewable Energy Directive and the EU taxonomy.
Healthcare sector
Summary of analysis:
▪ The healthcare sector was not just because of the Covid pandemic important in the last legislative period in Brussels. The Draghi Report emphasises the special strategic importance of the pharmaceutical sector for Europe.
▪ The healthcare sector encompasses medical technology, biotechnology and digital healthcare solutions.
Summary of recommendations:
▪ Crucial factors to consolidate Europe’s global leadership position in life sciences are investments in research and development, and a stable regulatory framework. That includes coordinated measures from the European Union and Member States to promote key technologies and finance forward-looking projects in the healthcare sector.
▪ The report outlines eight central proposals for the healthcare industry, including:
- Enhance the European Health Data Space (EHDS) by ensuring EU-wide access to health records and further scaling up genome sequencing capacities in the EU.
- Facilitate multi-country pharmaceutical research
- Expedite access to markets through “coordinated action by medicines agencies, HTA (Heath Treatment Assessment) authorities and public payers” to issue guidance to industry and pricing
- Provide guidance on the use of AI in the development of medicines in the medium term
Evaluation:
▪ The report’s analysis of the pharmaceutical industry, particularly, is generally solid and the recommendations should be swiftly implemented. The EU is currently lagging behind the United States and China in pharmaceutical innovation (among other factors, because of lower expenditure on research and development and fragmentary regulation).
▪ The report delivers good approaches to support the further development of the healthcare sector, but conflict with the introduction of new obstacles. These include, for example, the
EU’s Urban Wastewater Treatment Directive adopted during the last legislative period of the European Parliament (European-wide introduction of a fourth treatment stage with the allocation of much of the costs to the pharmaceutical and cosmetics industry). The proposal of joint pricing and reimbursement negotiations for new drugs is also questionable as it is really the responsibility of the Member States and not within the scope of the European Commission
▪ Overall, the report focuses largely on the pharmaceutical industry, and barely covers medical technology and other areas of healthcare An overall assessment and recommendations for the whole healthcare sector would have been better. General measures such as reducing the administrative burden, securing skilled workers, preserving the European Single Market by not introducing special national regulations also apply to the medical technology industry. However, the report does not address the special needs of this industry, such as a targeted support of SMEs and a more efficient regulatory structure without duplicate structures. A swift conclusion of negotiations on free trade agreements and trade partnerships and agreements are of decisive importance to the strongly export-oriented medical technology industry. The urgently needed improvements to the EU’s Medical Device Regulation (MDR) are already constructively addressed in the Mission Letter of the EU Commissioner responsible for health.
Horizontal Recommendations / Part C
Accelerating innovation (on Proposal 6c: Introduce a new EU-wide legal statute for innovative start-ups – an ‘Innovative European Company’)
Summary of analysis:
▪ The Draghi Report shows that companies are currently limited in their ability to fully exploit the benefits of the European Single Market, due to significant differences in laws and regulations across Member States which affect the functioning of consumer, labour, and capital markets and curb a company’s business operations in other EU Member States, limiting firms’ ability to seamlessly operate across EU Member States. These restrictions in the freedom of establishment and mobility particularly affect innovative start-ups.
Summary of recommendations:
▪ The Draghi Report recommends establishing an ‘Innovative European Company’ (IEC) as a new EU-wide legal statute for innovative start-ups. The new legal statute of IEC could provide companies with access to harmonised legislation across Member States concerning corporate law, insolvency procedure as well as a few key aspects of labour law and taxation. Innovative European Companies could operate in all Member States through subsidiaries without needing to incorporate separately in each one. Companies will qualify as innovative, in the sense of the IEC status, based on criteria such as qualifications of their workforce, R&D expenditure and ownership of intellectual property rights
▪ Background to the proposal: In 2004 the EU introduced a legal status for public limited-liability companies at European level (Societas Europaea, SE). So far there is no comparable legal status for SMEs, since the European legislator has not yet succeeded in establishing a European private company (Societas Privata Europaea, SPE), due to the blocking position of the Member States in the EU Council. The idea of a new EU-wide legal statute for private
companies was recently taken up again in the form of an establishment of a ‘28th regime’ in the so-called Letta Report (April 2024) and in the political guidelines of EU Commission President von der Leyen (July 2024). It should be emphasized that the Draghi report refers solely to innovative start-ups.
Evaluation:
▪ In 2020, the BDI recommended establishing a European legal statute for SMEs and supported the proposal of a SPE. We generally welcome the proposal of the Draghi Report to establish a new legal statute for small and medium-sized enterprises, however we have reservations about restricting the new legal statute to innovative start-ups.
▪ The Mission Letter to Michael McGrath, Commissionerfor Democracy, Justice and the Rule of Law, also resumes the proposalto establish an EU-wide legal statute for innovative companies in the form of a 28th regime The new EU-wide legal statute will help innovative companies grow and allow them to benefit from a simpler, harmonised set of rules to fully exploit the benefits of the European Single Market.
Competition policy
Summary of analysis:
▪ The basic principle of free and fair competition to create a level playing field for companies operating in the Single Market still applies but needs to be adapted to the radically changing environment.
▪ Well-functioning competition generally delivers lower prices and stimulates greater productivity, investment and innovation. The challenge is to create a balance between upholding the basic principles of competition law and allowing sufficient scale and further incentives for European companies to be innovative
▪ The growing significance of digital technologies, data and network effects is changing the way in which competition works. Competition authorities need to develop the necessary technical expertise and make swifter forward-looking decisions. To manage this, the competition authorities will need increased resources.
Summary of recommendations:
▪ Commission decisions need to take greater account of innovation and future competition The approaches of the European Commission are sometimes too backward-looking, focusing excessively on price impacts on consumers and existing market shares. In many sectors, the focus should be much more on future potential competition and innovation aspects. The Commission needs to change its operating practices and update its merger guidelines. These guidelines should explain how the European Commission assesses the impact of competition on the incentive to innovate and which criteria are used to establish grounds for an ‘innovation defence’. The merging parties who use this defence strategy should commit to levels of investment that are monitored ex post
▪ Provide clear guidance and templates on novel agreements for the assessment of coordination and co-deployment between competitors. Horizontal cooperation and concerted practices are sometimes necessary to achieve the necessary volume of R&D investment and
sustainability transitions in the first place. An example of a sector in which there is hardly any coordination so far is the defence sector. Companies must be able to clearly recognise which collaborations they can undertake without any legal risks.
▪ Consider security and resilience criteria in assessments under competition law. A security and resiliency assessment could be performed by an external body, such as a Resiliency Assessment Body, when these dimensions are relevant and for those sectors and firms that are strategic (of which security, defence, energy and space are specified). The DirectorateGeneral for Competition of the European Commission should then use this assessment as an additional public interest criterion.
▪ The Draghi report further identifies state aid control as a competition tool for efficiencyenhancing industrial policy Crisis state aid over the past few years has largely taken the form of uncoordinated support measures which have led to a fragmentation of the Single Market. It is important to now return to a stringent enforcement of state aid control, on the one hand, and expanded coordinated aid at EU level to enhance productivity and growth in strategic sectors, on the other. Measures to achieve this goal include strengthening the IPCEI instrument, and ensuring that decisions on state aid take greater consideration of the new EU industrial policy and place greater emphasis on the potential impacts on both innovation and resiliency. Higher state aid should be allowed where national measures are coordinated at EU level.
▪ Reform and expand the IPCEIs They should become a central instrument of the new Competitiveness Coordination Framework. The conditions to finance projects need to be expanded to include not just breakthrough innovation but also industrial projects of common interest (such as infrastructure) and all kinds of innovations that offer the potential for Europe to jump to the technological frontier in strategic areas where it is lagging behind. It should be linked more to EU funding. A further essential step is speeding up and streamlining the administrative processes.
▪ Create incentives for the adoption of open access, interoperability, and adherence to EU standards. In suitable cases, State aid should be linked to the enhancement of open access and interoperable solutions and the development of EU-wide standards. This approach should not be limited to digital services, but could also involve sectors such as energy, connectivity and transportation. In digital markets, new requirements should be enacted alongside the Digital Markets Act (DMA) and in close coordination with the regulations related to data such as the Data Act and the Data Governance Act when the presence of strong network effects and barriers to entry related to data impede market competition. AI products and services have greater potential to benefit societies if they are developed to interoperate with each other.
▪ The Draghi Report recommends the effective enforcement of the Digital Markets Act (DMA) and the Foreign Subsidies Regulation (FSR) The necessary resources must be made available to ensure that these two new regulations are applied effectively and result in the intended benefits for EU consumers and businesses.
▪ In addition, the report calls for a reinforcement of ex-post versus ex-ante regulation and monitoring To ease the European Commission’s ex-post monitoring, new reporting obligations should be introduced for companies after certain competition decisions, particularly in cases in which there are wider concerns regarding future competition. The European
Commission can then store this data and take further steps if necessary on the basis of the submitted information.
▪ Introduce a ‘New Competition Tool’ . The European Commission should have the option of carrying out a market study to identify structural competition problems and then determine a solution ‘together with firms to solve it’. The focus should be on four areas in which current competition tools have been identified as being insufficient. These are:
- Tacit collusion
- Markets where consumer protection is more likely to be needed, for instance due to consumers belonging to sensitive categories
▪ Markets where economic resilience is weak, one cause of which could be the market structure (e.g. reliance on a single source of raw material)
- Past enforcement actions where the information received by the authority indicate that the commitments or remedies adopted are not delivering more competition
▪ Accelerate decision-making processes and increase the predictability of decisions The processes through which competition policy is enforced must be made faster and easier in all areas, reducing the burden on companies wherever possible. Initiatives like the 2023 Merger Simplification Package should be expanded to other areas of competition policy enforcement. Ex-ante regulation like the DMA should remain the exception and only be applied in cases of special structural impediments to competition. Ambiguities in the enforcement practice and in existing regulations and guidelines need clarification.
Evaluation:
▪ Many of the measures proposed in the Draghi Report correspond to proposals called for by the BDI. The Draghi Report quite rightly calls for swifter procedures with less red tape in the enforcement of competition policy, particularly in the regulation of mergers. Considerations concerning efficiency and including innovation factors must be more integrated and given greater weight in the analysis of competition. Companies must have the realistic option of putting forward corresponding defences. The conclusion that the European Commission must make forward-looking decisions and take account of future competition and dynamic market developments is very important. In cooperation projects with competitors, companies must be able to swiftly establish with legal certainty the permissibility of their project under antitrust regulation, either based on clear guidelines or with the option of informal consultation with the antitrust authorities.
▪ Increasing coherence between funding options under State aid regulation and the requirements of EU industrial policy is a very important point. A stronger coordination of State aid at EU level could counteract a subsidy race within Europe and combat the fragmentation of the Single Market that high subsidies in individual Member States can trigger. At the same time, however, this coordination, such as the ‘State Aid Contribution Mechanism’ proposed in the Letta report, must not result in further complicating and lengthening the already complex award of State aid. As long as there are no sufficient EU funds available, national subsidies remain necessary in many sectors. The State aid measures during times of crisis in the past few years were justified. The proposed simplification and acceleration of the IPCEI permitting
procedure and an expansion of the projects admissible under IPCEI provisions correspond to calls made by the BDI. With an improved structure, IPCEIs can become an option for many more economic areas than has been the case so far.
▪ However, we are strongly opposed to some of the proposals.
- We strongly oppose the introduction of ex-post reporting obligations for companies after competition policy decisions. We are generally critical of new reporting obligations. Further, it is not the task of businesses to support the European Commission in its ex-post market analysis.
▪ We take a very negative view of the proposal to introduce a New Competition Tool (NCT) at EU level The report does not mention that the NCT is an instrument that, similar to the intervention instrument introduced in Germany with the 11th amendment of the German Act against Restraints of Competition (GWB) in section 32(f) GWB, intervenes deeply in business operations and competition and can control market processes right up to an unbundling even if the companies actions are completely in line with antitrust rules. A cooperative procedure between the European Commission and companies, as outlined by the Draghi Report, is generally not associated with a NCT. It is not the task of a competition authority to restructure a market. The introduction of a NCT at European level was already reviewed and rejected in 2020. Instead, the Digital Markets Act was enacted, a sector-specific regulation only designed for large digital gatekeepers. No new reason has emerged since that time that would call for a new regulatory instrument for all industries and all markets. In case it does become necessary, targeted sector-specific instruments should be used, at most, to respond to special situations in individual industries. The Draghi Report does not specify sectors which require a NCT or give valid grounds for its proposal. To the contrary, the four specified examples are so vague that it could apply to almost any market. The report fails to address urgently needed procedural guarantees and defence options for companies.
▪ The Mission Letter to the Executive Vice President-designate Teresa Ribera includes several proposals on reforming competition policy
▪ In the area of merger control, Teresa Ribera is tasked with reviewing the Horizontal Merger Control Guidelines. The review should ensure that in the assessment of an intended merger, more weight is attached to aspects such as resilience, efficiency and innovation, the time horizons and investment intensity of competition in certain strategic sectors, and the changed defence and security environment. Overall, the procedures of the Directorate-General for Competition should be speeded up and improved, particularly in strategic fields, and ensure faster legal clarity in the case of cooperative ventures. The Foreign Subsidies Regulation (FSR) and the Digital Markets Act (DMA) should be vigorously enforced
- Regarding State aid rules, the Mission Letter goes beyond the proposals of the Draghi Report. As part of the Clean Industrial Deal, Ribera is tasked with developing a new State aid framework to accelerate the roll-out of renewable energy, to deploy industrial decarbonisation and to ensure sufficient manufacturing capacity of clean tech. This should build on the experience of the Temporary Crisis and Transition Framework (TCTF). Strong State aid control should continue to play a key role. The State aid framework should be simplified further while preserving the level playing field within the Single Market. IPCEIs should be promoted, simplified and accelerated and
possibly expanded to new sectors and the future European Competitiveness Fund aligned with State Aid policy.
▪ The proposals that we are most critical of are not included in the Mission Letter, such as the introduction of a New Competition Tool at European level and new reporting obligations for companies following competition policy decisions.
Public procurement
Summary of analysis:
▪ The Draghi Report contains proposals for certain amendments to provisions on EU public procurement law in different contexts. A particularly wide-reaching proposal is the recommendation made in connection with clean tech to introduce minimum quotas for the local production of specific products and components in public procurement.
▪ The report also contains commentson public procurement in the context of recommendations to improve framework conditions for start-ups and for cloud computing.
Summary of recommendations:
▪ In the context of fostering the production of clean tech goods in the EU, the Draghi Report proposes the introduction of an explicit minimum quota for the local production of selected products and components (see Part A, p. 47 f. of the report).
▪ For the area of start-ups, the report recommends that contracting authorities in public procurement should act as ‘launch customers’
▪ Problems in the EU related to cloud computing identified by the report include divergent procurement requirements as well as gold-plating by national legislators The report recommends, among other things, that the EU defines binding European standards for public procurement of cloud services.
Evaluation
▪ The Draghi Report’s declared intention to foster the production of clean tech goods in the EU is generally a good idea. The stipulation of minimum quotas for the deployment of selected materials can also be useful in encouraging resource-efficient and climate-friendly products, such as ‘green steel’, in public procurement. The approach taken must, however, be differentiated and in proportion. Minimum quotas are not suitable for all products and markets but should be reviewed with a view to specific individual industries and products. The introduction of minimum quotas must not cause an unintended narrowing of the market and less competition.
▪ The recommendation of the Draghi Report to set down an explicit minimum quota for the local production of selected products and components is, in contrast, not useful and should be rejected.
▪ Introducing a general quota for local production would restrict competition and shut-off local markets not only for competitors from non-EU countries but also for competitors from within the EU and from the respective Member State outside of the designated local region
- Another reason against the report’s recommendation is that this kind of quota would classify as constituting problematic local preference, which the EU has rightly repeatedly criticised in third countries that have introduced such regulations to shut off local markets.
▪ We still reject the introduction of minimum quotas for local production, even if, as the report further recommends, the quota is tied to criteria targeted at establishing the most innovative and sustainable solutions at EU level. We are also opposed to the report’s further recommendation to support this approach by the creation of joint ventures or cooperation agreements for knowledge transfer between EU and non-EU companies. Even with the application of this additional component, introducing minimum quotas for local production would still distort the market, shutting it off, possibly also within the EU and even within an individual EU Member State.
▪ For the reasons specified above, the minimum quotas should not be minimum quotas for local production but for production within the EU, i.e. a minimum quota for European bidders.
▪ Access to public contracts can be very helpful to start-ups However, the legislator must ensure that any regulations to this effect do not discriminate against other bidders
▪ The report’s criticism regarding the gold-plating practices of national legislators in public procurement law is accurate. The development of binding European standards in the cloud sector as recommended by the report might be useful but should only be undertaken after careful consideration and adequate EU-wide participation of the stakeholders.
▪ The Mission Letter to Executive Vice-President-designate Stéphane Séjourné tasked him with a revision of the EU’s public procurement directives and specifies that the revised rules should establish preference rules for European products in certain strategic sectors. This announcement of preferences is similar to Draghi’s recommendation to introduce minimum quotas but differs in one major respect. Similar to Draghi’s recommendation, the President of the European Commission wants to give European products preference over bids from third countries in sectors that are important to the EU. However, in the Mission Letter to Séjourné, the President does not specify “minimum quotas for locally produced products and components” as in Draghi’s recommendation but “preference to European products” without focussing on local production.
▪ The creation of preferences for European products in certain strategic sectors as set out in the Mission Letter to Séjourné is preferable to the minimum quotas for local production recommended by Draghi. Local preference as envisaged in the Mission Letter should also be applied selectively. While preference to European products in strategically important sectors for the EU can be useful for reasons of security of supply or similar aspects, excessively broad preference regulations, for which the EU has been criticising third countries, are not sensible as they tend to further exacerbate protectionism on the part of third countries.
▪ We welcome, in general, the intention stated in the Mission Letter to Séjourné to simplify the EU rules on public procurement particularly for start-ups and innovators Any such special
provisions must not, however, lead to a distortion of the market. Another very important point is that the objective of simplifying the rules must not be used as a pretext to lift the threshold values from which the EU public procurement directives apply. Increasing the threshold values would not be desirable as it would reduce the openness of public procurement markets in Europe and internationally which would be detrimental to the export-oriented German industry Another very negative consequence of increasing the EU thresholds would be that it would lead to a reduction of the scope of the necessary effective legal remedies system for public procurement which is applicable only above the thresholds.
Excursus: Taxation
Summary of analysis:
▪ The report defines the urgently needed strengthening of the EU Single Market and economic growth as the key priorities for the new legislative period.
However, the EU lacks a coherent strategy for a taxation policy that contributes to deepening the Single Market. A competitive taxation policy must go beyond targeted sectoral approaches It should foster an environment that encourages investment across all businesses.Summary of recommendations:
▪ Incentives and capping costs in the energy sector: The report advocates for tailored (and possibly transferable) tax credits and accelerated depreciation regimes to encourage investments in clean energy solutions. Additionally, it recommends reducing energy costs by introducing an EU-wide cap on surcharges
▪ Promoting strategic sectors: Tax incentives and grants should support chip design companies, critical raw materials, and circular business models. Benefits should also extend to ship purchases within the EU and companies prioritizing adult education and training.
▪ Fostering innovation: The report recommends national-level tax breaks for digitalisation measures in the transport sector and a provisional lowering of the tax rates for innovative automotive ecosystems. If capital gains from the sale of shares are reinvested in innovative start-ups then these should also be granted a provisory tax deferral.
▪ Promoting cross-border investment: The report also recommends reducing the tax barriers for cross-border investment as well as reducing the fragmentation in the taxation of capital
▪ Labour income taxation and pension schemes: To make the EU more appealing to workers, the EU should introduce tax incentives for young professionals. Tax-exempt pension contributions and reduced income taxation for low- to medium-income workers could encourage savings and enhance the EU’s appeal.
▪ Simplifying sustainability reporting and expanding it to non-listed SMEs: Sustainability reporting is identified as a regulatory burden. The report calls for simplified guidelines and tools to support SMEs while avoiding over-compliance. Extending ESG obligations to non-listed SMEs should be supported by harmonized reporting instruments.
Evaluation:
▪ Tax compliance costs: High compliance costs stifle innovation. Strong measures are needed to reduce administrative burdens, ensuring the “simpler and faster” promise in the Mission Letter to Wopke Hoekstra becomes a reality. Excessive reporting requirements must be curtailed, and harmonized taxation frameworks should be more interconnected. The implementation of the global minimum tax through the Anti-Tax Avoidance Directive (ATAD) and the Directive on Administrative Cooperation (DAC) necessitates a decisive ‘decluttering’ of redundant regulations. Despite some progress, the business environment remains burdened by insufficiently streamlined measures. Pragmatic, business-friendly solutions are required. The report lacks concrete proposals, which are, however, included in the Mission Letters.
▪ From a taxation policy perspective, the major proposals are in the area of energy and the Capital Market Union:
- Energy: Proposals to lower energy costs through EU-wide surcharge caps and tax incentives for clean energy solutions are appropriate. The Mission Letters also emphasize promoting clean technologies. However, neither the report nor the Mission Letters address tax incentives for transitional technologies or energy-intensive industries, such as aviation and waterborne transport, which are vital for European industry competitiveness.
- Capital Market Union: Reducing tax barriers for cross-border investments aligns with various Mission Letters. These efforts should establish a coherent framework benefiting all businesses, not just the financial sector. Improved coordination among Member States is essential to reduce bureaucracy, but tax sovereignty must be preserved. Direct taxes are crucial for national economic autonomy and flexibility. Extending qualified majority voting to taxation, as suggested by the Draghi Report, should be avoided. The European Commission is unlikely to pursue such initiatives.
▪ Labour income taxation and mobile work: The report highlights the need to attract skilled workers but does not address the taxation of mobile work. This issue, absent from the Mission Letters but included in the Tax Committee’s work program, is increasingly important for employers. A coordinated EU approach with international consensus at the OECD level is essential. Clear criteria are needed to define when mobile work constitutes a permanent establishment. Relief measures, such as exemptions from wage tax obligations for employers within a defined number of mobile working days, are crucial.
▪ We welcome the objective of simplifying the sustainable finance framework and improving access to financing, particularly for SMEs. However, SMEs exempted from ESG reporting obligations themselves are often indirectly obliged to report due to the trickle-down effect, meaning they are required to supply sustainability data to downstream companies in their value chain that are subject to ESG reporting. At the same time, the Voluntary Sustainability Standard for SMEs is an instrument to harmonise these requests for information to SMEs and also gives them the opportunity to draw up a voluntary sustainability report. On no account should ESG reporting be expanded to include SMEs that have so far been exempt. Wide swathes of SMEs and small mid-caps are already overtaxed by the new regulations.
Excursus: Planning and permitting procedures
Summary of analysis:
▪ The report shows that 83 per cent of companies surveyed by BusinessEurope in 21 Member States in 2023 cited the complexity and duration of permits as the main obstacles to investing in Europe compared to other regions.
▪ The report also clearly shows how overlapping regulations within and between product, chemical and waste legislation cause duplicate controls of compliance with the regulations and legal uncertainty.
▪ With regards to permitting, a gap analysis of 13 pieces of EU law identified duplication across 169 requirements, including differences (29 percent) and outright inconsistencies (eleven percent).
Summary of recommendations:
▪ Regarding the acceleration of permitting for industrial facilities, the report only makes proposals for permitting related to new renewable infrastructure and networks, the extension of acceleration measures to heat networks, heat generators, hydrogen infrastructure and carbon capture and storage infrastructure, and shorter permitting deadlines for ‘strategic projects’ related to select critical raw materials The report recommends additional measures for faster permitting in these areas, with measures including the increase of administrative capacities, training measures for permitting authority staff, increasing staff and digitalising procedures.
▪ The report also proposes making acceleration areas and strategic environmental assessments the rule for renewables expansion, replacing individual environmental assessments per project, as outlined in the NZIA. The report also proposes targeted updates to relevant EU environmental legislation with limited exemptions in EU environmental directives and default permitting until climate neutrality is achieved. This would only apply to renewable energy installations and grids.
Evaluation:
▪ The report analyses the problems related to complex permitting procedures that scare off investments sufficiently, but fails to provide any proposals that cover the manufacturing sector and transport infrastructure projects.
▪ European environmental legislation has become a corset that is several sizes too small to really be able to speed up procedures for the long term. The increasingly complex, opaque and, in part, outdated European legislation needs to be modernised urgently. The report’s proposal to review and make “targeted updates to relevant EU environmental legislation” is a step in the right direction, unfortunately, relatively vague. The attempts so far of European institutions to optimise existing planning and permitting procedures have been limited to renewables and clean tech and so are the proposals laid out in the report. The impact of these measures are not tangible across the whole industrial sector.
▪ It is also naïve to think that processes can be accelerated by more and better trained staff. The acute shortage of skilled staff also extends to the field of permitters and appraisers, making
the call for more staff a good idea in theory but not one that can be implemented in practice. The EU has no influence on the digitalisation of administrative processes so this call is superfluous on the European level.
▪ The designation of acceleration areas is unproblematic in itself as long as certain criteria are met (e.g. buffer zones) and all economic interests are taken into account. The fact that there is a need to designate acceleration areas at all is evidence that procedures are generally too slow. All procedures should be accelerated, not only the permitting of wind power plants.
▪ In the new legislative period of the EU, the acquis of environmental legislation must be reviewed and modernised by the European Commission without adopting any new directives or regulations.
▪ The Mission Letter to Commissioner Jessika Roswall does not address the topic of accelerating procedures but instead tasks Roswall with improving implementation and enforcement of existing European environmental legislation in the Member States. It does not include any concrete measures for the acceleration of procedures and completely disregards the fact that environmental legislation is a major contributing factor to making procedures longwinded
Imprint
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Editorial
Anna Baierl
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Dr. Klaus Günter Deutsch
T: +49 30 2028-1591 K.Deutsch@bdi.eu
Dr. Stefanie Espitalier
T: +32 2 7921010 S.Espitalier@bdi.eu
Nadine Fetzer
T: +32 2792-1012 N.Fetzer@bdi.eu
Kenneth Frisse
T: +49 30 2028-1736 K.Frisse@bdi.eu
Marta Gancarek
T: +49 30 2028-1588 M.Gancarek@bdi.eu
Polina Khubbeeva
T: +49 30 2028-1586 p.khubbeeva@bdi.eu
Frederik Lange
T: +49 30 2028-1734 f.lange@bdi.eu
Anne Lauenroth
T: +49 30 2028-1405 a.lauenroth@bdi.eu
Cora Loh
T: +49 30 2028-1790 c.loh@bdi.eu
Petra Richter
T: +49 30 2028-1514 p.richter@bdi.eu
Dr. Peter Schäfer
T: +49 30 2028-1412 P.Schaefer@bdi.eu
Sven Schönborn
T: +49 30 2028-1551 s.schoenborn@bdi.eu
Philipp Schweikle
T: +49 30 2028-1632 p.schweikle@bdi.eu
Catrin Schiffer
T:+49 30 20281582 c.schiffer@bdi.eu
Stefanie Stündel
T: +3227921015 s.stuendel@bdi.eu
Inga Waldmann
T: +49 30 2028-1554 I.Waldmann@bdi.eu
Dr. Carsten Wehmeyer
T: +49 30 2028-1580 c.wehmeyer@bdi.eu
Fabian Wehnert
T: +49 30 2028-1470 F.Wehnert@bdi.eu
Jonas Wilden
T: +32 2792-1004 J.Wilden@bdi.eu
BDI Publication Number: D 2015
This report is a translation based on the German statement ‘Die Wettbewerbsfähigkeit Europas | Eine Bewertung des Draghi-Berichts’ as of 27 November 2024.