Draghi Report makes wide-ranging recommendations to boost European competitiveness

In a report on the future of European competitiveness published on 9 September 2024 (Report), Mario Draghi, the former Italian Prime Minister and former European Central Bank (ECB) President, has emphasised the urgent need for Europe to bolster its competitiveness, warning that failure to do so could lead to a slow and agonising economic decline.

According to the Report, Europe must increase its innovation efforts to bridge the gap with the US and China. This would require an annual investment of €750-€800 billion – about 4-5% of EU GDP.

Ursula von der Leyen, the recently re-appointed European Commission President who commissioned Mario Draghi to write the Report, stated at the press conference launching the Report that this work has informed her political guidelines for 2024-2029. It is therefore likely that it will feed into a European strategy on competitiveness expected later this year.

The Report includes a general analysis of European economic competitiveness and recommendations for the direction of future industrial strategy, as well as some potentially quite radical proposals for reform of EU competition policy and tailored recommendations for key sectors.

We draw out the key takeaways in terms of general industrial strategy and reform of competition policy, and the main recommendations for the telecoms, computing and artificial intelligence (AI), energy, and pharma sectors.

A competitiveness strategy for Europe

The Report notes that, since the early 2000s, Europe has struggled with slow growth resulting in a widening GDP gap with the US. This has resulted in lower living standards, with US real disposable income growing almost twice as much as in the EU. Europe's growth has been hampered by geopolitical instability, loss of energy supplies, and missing out on the digital revolution. With a shrinking workforce and rising investment needs, the Report concludes that radical change is essential.

The Report highlights three key areas to boost sustainable growth, namely:

• closing the innovation gap with the US and China;

• having a unified plan for decarbonisation and competitiveness; and

• enhancing security and reducing reliance on external suppliers for critical raw materials and technology imports.

Simultaneously, the Report identifies three key barriers preventing Europe from reaching its full potential:

• Europe lacks focus, failing to set clear priorities and follow through with coordinated actions; regulatory burdens hinder innovation, especially for small and medium-sized enterprises (SMEs), and a fragmented Single Market reduces competitiveness, driving high-growth companies overseas and limiting capital market development.

• Europe is not effectively using its collective resources, diluting spending across various national and EU instruments. Collaborative defence procurement is low, with most spending going to non-EU suppliers. Additionally, there is insufficient collaboration on innovation, despite significant public investment in research and innovation.

• Europe lacks effective coordination in critical areas. Unlike the US and China, the EU's slow and fragmented policy-making process hinders the integration of multiple policies needed for industrial strategies. Decision-making rules have not evolved with the EU's enlargement, leading to lengthy legislative processes and delayed implementation.

To address these challenges, the Report presents a new industrial strategy for Europe. It identifies the underlying reasons for the EU's declining position in crucial strategic sectors and offers a range of proposals to regain competitive strength, including specific recommendations in a wide range of sectors.

'Revamping Competition' – Potential for radical reform?

The Report proposes "a new approach to competition policy supporting a new Industrial Deal". This new approach includes the following ten measures, some of which would involve radical changes compared to the current rules.

• Emphasise innovation and future competition in DG COMP's decisions. The Report advocates for a more forward-looking approach, less focused on the current level of market shares. In particular, the Report recommends updating the merger guidelines with greater emphasis on innovation and future competition. The revised merger guidelines should explain (i) how DG COMP assesses the impact of competition on the incentive to innovate, and (ii) what evidence merging parties can present to prove that their concentration increases the ability and incentive to innovate, allowing for an "innovation defence", to be monitored ex-post.

• Provide clear guidance and templates on novel agreements, coordination and co-deployment between competitors. The Report highlights the need for a simple and streamlined process that companies can follow to work together to reach scale when it would benefit consumers and calls for further streamlining and simplification of the existing process to provide complete clarity to the companies concerned as to their liability for potential infringements of competition law.

• Develop security and resilience criteria by expert authorities and include them in DG COMP assessments. The Report proposes introducing a new security and resilience assessment into DG COMP assessments in certain areas, carried out by a separate body outside DG COMP (e.g. a Resiliency Assessment Body). DG COMP would then use this assessment as an additional public interest criterion in its own assessment. The Report suggests that the sectors in which this assessment would apply include security, defence, energy, and space.

• Use State aid control as a competition tool for efficiency-enhancing industrial policies. The Report notes that the increase in State aid, initially in response to the COVID-19 pandemic and subsequently to address the energy crisis, has fragmented the common market and distorted competition. The Report therefore calls for a return to the standard enforcement of State aid controls to restore market integrity, emphasising that the permissibility of aid should increasingly align with EU-wide industrial policies and consider its potential impact on innovation and resilience.

• Reform and expand Important Projects of Common European Interest (IPCEIs). The Report calls for this type of State aid to allow financing beyond breakthrough innovations as is the case today to other innovations "provided that they offer the potential for Europe to jump to the technological frontier in strategic areas where it is lagging behind and where State aid framework for research and development and innovation (RDI framework) is not sufficient". The Report also proposes the acceleration of the administrative process for IPCEI support to be approved.

• Incentivise the adoption of open access, interoperability, and adherence to EU standards through State aid and other competition tools. The Report suggests leveraging State aid and competition tools to promote open access, interoperability, and EU standards. This approach should extend beyond the Digital Markets Act (DMA), especially where network effects and data barriers hinder competition and may require additional regulations or incentives. State aid could be linked to these principles, particularly in sectors like energy and transport. The New Competition Tool (see below) could help identify markets needing such measures, with a specific focus on AI foundation models.

• Apply effectively the new powers associated with the enforcement of the DMA and the Foreign Subsidies Regulation (FSR). The Report emphasises the need for adequate resources for the European Commission to effectively enforce these two instruments. The Report underscores that the new powers granted to DG COMP are crucial for the EU, especially given the evolving economic and geopolitical landscape.

• Reinforce ex-post versus ex-ante regulation and monitoring. With a view to easing the enforcement of competition policy, the Report proposes that it would be reasonable to require addressees of competition decisions to provide data enabling DG COMP to evaluate the extent of competition ex-post. However, the Report suggests limiting this exclusively to: (i) cases posing the greatest concerns about future competition (e.g. repeated violations of competition law, mergers cleared with remedies or involving a dominant company or resulting in highly concentrated markets), and (ii) the minimum information required to evaluate competition concerns related to what the European Commission considered in its ex-ante assessment.

• Introduce a "New Competition Tool". The Report recommends introducing a New Competition Tool (NCT) - in essence a market study and market investigation tool - in the following four areas: (i) markets characterised by tacit collusion amongst competitors, (ii) markets where the need for consumer protection is more likely, (iii) markets where economic resilience is weak, and (iv) past enforcement action where the information/data received by the authority indicates that the remedies adopted are not delivering competition.

• Accelerate the decision-making processes and increase the predictability of decisions. The Report calls for the reduction of the burden on companies by streamlining the decision-making process and increasing the predictability of decisions. Noting the ambiguities around non-notifiable mergers being nonetheless subject to scrutiny, the Report suggests introducing a transaction value threshold to address the issues around killer acquisitions and powers to review non-notifiable mergers. The Report also states that the draft Article 102 Guidelines on exclusionary abuses released in August this year leave excessive discretion to DG COMP on the finding of exclusionary abuses – examples given are the fact that tying can be presumed to have exclusionary effects, but with no guidance on the conditions under which this will be the case, and the lack of a safe harbour for dominant firms setting prices above average total cost. Finally, in respect of digital markets, the Report states that prompt clarification is needed of Article 1(6)(b) of the DMA – which states that the DMA is without prejudice to the application of national competition rules that amount to the imposition of further obligations on gatekeepers – because this introduces uncertainties and risks fragmenting the regulatory landscape for EU digital markets.

Specific recommendations for the telecoms sector

The Report highlights the fragmentation of the EU telecoms sector compared to its US and Asian counterparts: in the fixed broadband market, the top three EU operators jointly hold a 35% market share, compared to 66% for the top three US operators and 95% for the top three Chinese operators. Whilst the Report notes the undoubted benefits of lower prices, it states that this fragmentation has gradually reduced industry profitability levels with EU revenues per subscriber and capital expenditure per capita being less than half of those in the US and Japan.

As a result, EU tech companies lack the scale and funds necessary to support research and development (R&D), as well as invest in telecoms, cloud computing, and semiconductors. This issue is compounded by the fact that the return on capital employed (ROCE) for telecom operators has remained below the weighted average cost of capital (WACC) for the last decade, making it challenging to raise capital for future investments.

The Report cites studies indicating that the "EU is above the optimal number of operators in the telecom sector" and claims that "regulation and competition policy has disincentivised consolidation, favouring a multiplicity of smaller players". In this light, the EU's national approach to regulation has led to a "costly proliferation" of regulatory obligations for EU telecoms operators.

To address this deficit, the Report proposes a "new EU Telecoms Act".

A "new EU Telecoms Act"

The Report particularly recommends the following:

Market Regulation Reform:

• Reducing national-level ex-ante regulation and moving towards ex-post competition enforcement in cases of abuse of dominance or other anti-competitive conduct.

• Adopting a "same rules for same services" principle across the EU "to remove regulatory arbitrage across providers from adjacent sub-sectors providing similar services".

• Creating a mandatory dispute resolution mechanism that ensures fair commercial outcomes for the transport of data traffic.

Merger Control:

• Developing a forward-looking approach by focusing more on innovation and future competition than on current market share levels (thus potentially allowing more consolidation than is currently the case).

• Defining the telecoms markets at the EU-level, as opposed to the national level, particularly when this facilitates cross-border integration and the creation of EU-wide players.

• Focusing remedies on "commitments to invest according to detailed schedules, launch of services or access to data or platforms, rather than partial de-consolidations or the transfer of physical assets".

Spectrum Licensing Procedures:

• Increasing EU-level control of spectrum harmonisation and spectrum auctions, with longer duration and decreased restrictions to encourage growth and cross-border investment opportunities across EU member states.

Specific recommendations for the computing and AI sector

The Report indicates that the EU’s struggle with tech innovation is evident in its difficulty to establish globally successful platforms. Despite some Member States promoting 'sovereign cloud' solutions, the EU continues to lose ground in the cloud services market to US-based companies.

The Report notes the EU's strong foothold in high-performance computing (HPC) and suggests leveraging this to boost AI adoption and private investment. However, slow progress in AI development threatens the competitiveness of EU companies, and regulatory hurdles like the General Data Protection Regulation (GDPR) and the AI Act could further stifle innovation.

Quantum computing also presents a unique opportunity for the EU to gain a competitive edge, although limited private investment in quantum technologies hampers progress towards EU quantum leadership.

To remain competitive, the Report emphasises that the EU should aim to lead in AI development across key sectors, regain control over data and sensitive cloud services, and build a robust financial and talent foundation to support innovation in computing and AI.

To achieve these goals, the Report suggests adopting a 'new EU Cloud and AI Development Act' aimed at enhancing European HPC, AI, and quantum capabilities and infrastructure, harmonising cloud architecture requirements and procurement processes, and coordinating priority initiatives to scale up private involvement and financing.

A "new EU Cloud and AI Development Act"

The Report notably recommends:

• Increasing computational capacity dedicated to the training and fine-tuning of AI models and creating an EU-wide framework to provide 'computing capital' to innovative SMEs in the EU.

• Identifying priority AI vertical applications for the EU and encouraging EU companies to participate in their development and deployment in key industrial sectors.

• Leveraging EU-wide coordination and harmonisation of national AI sandbox regimes and ensuring harmonised and simplified implementation of the GDPR.

• Defining a single EU-wide policy and residency requirements for public administrations' cloud services, as well as EU-wide sensitive data security policies for collaboration between private cloud providers and hyperscalers.

• Adopting a Single Market 'passporting' regime for all EU-provided cloud services.

• Supporting data brokers as pre-approved data intermediaries with regulatory clearance ensured by a Data Ombudsman.

• Improving cooperation between the EU and the US to ensure access to cloud and data markets.

Specific recommendations for the energy sector

The Report highlights a significant competitiveness gap in energy prices between the EU and its global trade partners, which has been exacerbated by the recent energy crisis. Gas prices in the EU are three to five times higher than in the US, and electricity prices in the EU are two to three times higher than in the US and China.

This gap is driven by several key issues: reliance on gas imports, volatile spot markets, high carbon costs, and marginal gas and coal power prices driving up electricity costs. Additionally, progress is hindered by under-developed long-term contract solutions, physical network bottlenecks, and a lengthy permitting process for new power supply. The Report emphasises that energy cost volatility further impacts investment levels, making the EU's energy sector less globally competitive, with costly imports and price instability draining EU resources.

The Report suggests that decarbonising the energy system offers the EU a key opportunity to reduce dependence on fossil fuels, thus enhancing the sector's competitiveness, affordability, and energy security. AI may accelerate the EU's shift to a cleaner and more decentralised energy system, improving energy efficiency and reliability, although the full benefits of this transition will take time to materialise.

The Report emphasises that reducing energy costs and accelerating decarbonisation must be pursued simultaneously, making several suggestions on how this can be achieved:

• In the natural gas sector, by leveraging the EU's market power to deliver cost benefits to consumers while transitioning to green gases in an efficient and affordable manner.

• In the electricity sector, by accelerating the supply of cheaper power generation sources by:

  • Simplifying and streamlining the permitting and administrative processes for renewables, flexibility infrastructures and grid deployment.

  • Fostering network upgrades and investments in grids to address the electrification of the economy and avoid bottlenecks.

  • Decoupling the remuneration of renewable energy sources and nuclear energy from fossil-fuel generation through long-term contracts to limit the impact of natural gas on electricity prices.

  • Promoting the role of carbon capture, utilisation, and storage (CCUS) technologies as one of the tools needed to accelerate the EU's green transition.

Additional proposals focus on taxation, price support schemes, and the governance of the energy sector from a 'horizontal' perspective, including:

• Lowering and levelling the energy taxation playing field and strategically using taxation measures to reduce the cost of energy.

• Harmonising price reliefs and avoiding distortions in the Single Market.

• Developing the governance needed for a true Energy Union.

Specific recommendations for the pharma sector

Despite the EU’s strong historical presence in the pharma sector, particularly in trade and on-patent areas, it is falling behind in the most dynamic segments of the global market. The Report identifies several factors contributing to this competitive gap, including fragmented public R&D spending, a weaker innovation environment, and a slow, complex regulatory framework further complicated by the challenging development of a European Health Data Space (EHDS).

The Report notes recent EU reforms and proposals in the pharma sector that aim to enhance innovation and simplify the regulatory process:

• On April 26, 2023, the European Commission proposed a new directive and regulation to update existing pharmaceutical legislation, including measures such as regulatory sandboxes for innovative medicines, electronic submissions, and e-leaflets.

• In January 2022, the Clinical Trials Regulation came into effect, designed to foster a more favourable environment for large-scale clinical research in the EU.

• By January 2025, the EU Health Technology Assessment (HTA) Regulation is expected to streamline national pricing and reimbursement decisions and facilitate quicker access to medicines.

• The EHDS Regulation aims to unlock health data for research and innovation and the use of 'real-world evidence' may improve patient recruitment and data collection.

Despite progress being made, the Report highlights the need for further efforts to close the competitiveness gap and strengthen the EU's R&D sector. It proposes several key initiatives, including:

• Maximising the impact of the EHDS, e.g. by facilitating access to and the sharing of electronic health records, leveraging the DARWIN EU® network and scaling up genome sequencing capacities.

• Streamlining multi-country trial management to make the EU a more attractive location for clinical R&D.

• Expediting market access by coordinating actions by medicines agencies, HTA authorities and public players to provide industry guidance, pricing, reimbursement, and procurement.

• Providing clear and timely guidance on the use of AI in the lifecycle of medicines.

• Fully implementing the HTA regulation and ensuring the necessary resources are allocated to deliver joint clinical assessments by 2025, with the long-term goal of establishing an EU agency.

• Increasing public R&D investment, e.g., by supporting world-class innovation hubs in life sciences for advanced therapy medicinal products (ATMPs) and mobilising private R&D investment.

• Developing strategic international partnerships to enhance the EU’s global trade position in pharmaceuticals.