The Draghi Report and the Future of the EU’s Industrial Strategy

Right now, the EU Commission is set to revamp its industrial strategy to compete, grow, and avoid falling behind in a world where geopolitics is reconfiguring trade and business dynamics. ??

This month, the former head of the European Central Bank and Italy’s ex-prime minister Mario Draghi delivered a set of recommendations and proposals about the future of the EU’s competitiveness.?

The So What? ?

The Draghi report was requested by the European Commission President Ursula von der Leyen, who has already used it to help shape her team’s priorities through mission letters to the Commission’s political leadership.?

The report describes a cycle of “low industrial dynamism, low innovation, low investment, and low productivity growth” across the EU’s 27 member states.?

“This is both a reckoning and a wake-up call. By clearly outlining how Europe can be left behind by both the US and China, the report has further pressed a much-needed sense of urgency for the EU,” says Cristián Rodríguez-Chiffelle, a BCG partner and director based in Geneva who is part of BCG’s Center for Geopolitics. ?

The report’s recommendations go beyond efforts to kickstart growth such as the Green New Deal in Europe or the CHIPS and Science Act in the US. Rather than seeing industrial policies through the lens of strategic priorities—such as the need to stockpile certain critical raw materials or the imperative for decarbonization—it takes a more unified approach to the sectoral reality and competitive advantages of the EU economy.?

For example, rather than only focusing on big bets such as AI and semiconductors, the report tackles the constraints for growth and investment across a breadth of industries from clean tech through telecoms to pharma, defense and space, or chemicals.

Crucially, the report also addresses tradeoffs among industrial policy objectives and horizontal challenges, such as overregulation and the innovation gap. ? ?

“This sector-by-sector, competitiveness-first approach could mark a watershed in the theory and practice of industrial strategy. If implemented successfully, this approach could differentiate the EU from other jurisdictions who are pursuing ‘made in’ policies to localize critical production and develop supply chains driven by a national security rationale,” explains Leandro Urbano, a BCG expert consultant in industrial strategy and geopolitics. ?

The report highlights the following areas where progress is needed within the EU:???

• The Innovation Gap. There are many challenges for innovators looking to move from R&D to commercialization. New ventures also struggle to scale across a fragmented single market with cumbersome regulation and inadequate funding. According to the report, no EU company with a market capitalization of €100+ billion has been set up from scratch in the last 50 years. In comparison, all six companies with a valuation of about one trillion euros in the US have been created during this period.??

• The Tradeoff Between Competitiveness and Decarbonization.?The report details how the decarbonization agenda needs to be further balanced with the competitiveness of the European industrial backbone, supporting green growth at scale and decarbonizing energy-intensive and hard-to-abate industries, but in a way that allows them to remain competitive on the international stage.?

• The Financial Gap. The report calls for investments of $750-800 billion a year, equivalent to about 4.5% of EU GDP, a higher proportion than the Marshall Plan in the aftermath of World War II. There is already active debate within and between member states about whether raising this amount is feasible, or even desirable. With pressure on the public purse, the balancing act between ambition and feasibility will be crucial to the success of the report’s recommendations.?

• The Need for Less Regulatory Complexity. The report puts policy coordination and simplification at the center of regulatory priorities, highlighting lack of coordination between member states, financing instruments, and policies. It proposes building a consolidated industrial strategy to balance coordination with competition priorities through a new EU-wide framework.??

Now What?

The new EU Commissioners have received clear direction from Von der Leyen, building on the Draghi report, in their mission letters.?

? These are some high-level implications for the private sector:???

• For companies and investors in sectors that are already a priority (such as AI or EVs) and others previously overlooked (such as telecoms and chemicals), this is an opportunity to integrate their growth visions and surface obstacles to investment, scale and innovation, across jurisdictions and policy areas.??

• Businesses looking to align their strategies and investment plans with the direction of this strengthened EU industrial strategy will be especially interested in placing emphasis on implementation, delivery of the funds, and sectoral and horizontal strategies leading to tangible changes in competitiveness and growth potential.??

• For innovators and investors in breakthrough technologies, this is an opportunity to highlight constraints to commercialization and scale. It’s a once-in-a-generation moment to catalyze R&D and innovation and move beyond national limitations.?

• For European firms that are considering relocating overseas to take advantage of other jurisdictions’ industrial support, this may be a moment to reevaluate such decisions, and eventually set a new path of growth within and from Europe.?

“This report is an important step in Europe’s mission to boost its competitiveness in a world where geopolitical dynamics and domestic narratives are altering the global trade and investment map. It’s also an opportunity for businesses to come to the table with the solutions,” says Marc Gilbert, Global Leader of BCG’s Center for Geopolitics.? ?

Learn more about BCG’s Center for Geopolitics?here. ?

For further reading:?

Jobs, National Security, and the Future of Trade?

Geopolitical Risk Is Rising. Here’s How CEOs Can Prepare?

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