What could we expect from Letta and Draghi’s EU Reports?

The recent reports by Enrico Letta and Mario Draghi have provided comprehensive analyses and recommendations concerning the European Union's economic and political landscape. Both reports highlight critical areas for reform and suggest strategic measures to enhance the EU's stability and growth. Let's look at these two reports, produced by Italians who are experts in their field, and see what our future should look like, and what European weaknesses we need to overcome. The financial and digital aspects are obviously important. At the same time, the new Vonder Leyen BIS Commission is taking shape, with a clear focus on the Capital Market Union (CMU).

Main Conclusions of the Letta Report

The Draghi report, like the Letta report, was welcomed. It confirms an exhaustive diagnosis that is widely accepted. However, it is on the method of treating the patient that Dr. Vonder Leyen and her Commission are likely to face a cliff. The task is a delicate one. But just because the cliff is high doesn't mean it can't be tackled quickly.

Strengthening Economic Governance

Enrico Letta's report emphasizes the need for stronger economic governance within the EU. It calls for enhanced fiscal coordination among member states and the establishment of a common fiscal policy to address economic disparities.

Enhancing Political Integration

The report suggests deeper political integration to ensure more cohesive and effective decision-making processes. This includes proposals for more substantial roles for the European Parliament and the European Commission in shaping policies.

Sustainability and Green Transition

Letta underscores the importance of sustainability and the green transition. The report advocates for increased investment in renewable energy and green technologies to meet the EU's climate goals and reduce dependency on external energy sources.

Main Conclusions of the Draghi Report

M. Draghi hopes to save Europe from itself. He talked about an “existential challenge” for EU. “EU cannot change the world. But it can – and should – change itself, to cope with It”.

Economic Resilience and Recovery

Mario Draghi's report focuses on boosting the EU's economic resilience post-pandemic. It highlights the significance of the Next Generation EU fund and suggests mechanisms to ensure its efficient allocation and utilization across member states.

Digital Transformation

Draghi's analysis points to the critical need for accelerating digital transformation within the EU. The report recommends investing in digital infrastructure, fostering innovation, and ensuring digital literacy among the EU population.

Reinforcing Global Competitiveness

The report also addresses the EU's position on the global stage. Draghi calls for strategic policies to reinforce the EU's competitiveness, including trade agreements, research collaborations, and a focus on advanced manufacturing sectors.

“Never in the past has the scale of our countries appeared so small and inadequate relative to the size of the challenges. (…) The reasons for a unified response have never been so compelling – and in our unity we will find the strength to reform”. (Mario Draghi).

What for treasurers in these reports?

The Draghi Report, officially titled “Report of the High-Level Group on the Future of the European Economic and Monetary Union (EMU)” focused on reforms necessary to strengthen the EMU's resilience and integration. The report contains several elements related to finance and treasury that are relevant for corporate treasurers, national governments, and the broader financial system in the European Union (EU). The main key points are:

1. Fiscal Policy and Integration

European Fiscal Capacity: The report calls for a dedicated fiscal capacity at the European level, suggesting that EU institutions should have the ability to issue common debt instruments. This would help respond to asymmetric shocks (shocks affecting one or a few countries but not the entire EU).

Stability Mechanism: It emphasizes the need to enhance the European Stability Mechanism (ESM) and create a more centralized European fiscal instrument to support fiscal transfers during crises.

Budgetary Rules Reform: The Draghi Report recommends revisiting the Stability and Growth Pact (SGP), allowing for more flexibility in national fiscal policies to accommodate growth-stimulating investments.

2. Common Safe Assets

Eurobonds or Safe Assets: The report advocates for the creation of safe euro-denominated assets, such as Eurobonds, that would provide a liquid, stable investment for European investors. This is particularly important for corporate treasurers who manage large portfolios and seek low-risk instruments to park excess cash.

3. Banking Union

Completing the Banking Union: The Draghi Report strongly supports the completion of the EU’s Banking Union, emphasizing the need for a European Deposit Insurance Scheme (EDIS). This would ensure that deposits are safeguarded across the EU, reducing risks for corporate cash holdings and improving financial stability.

Single Resolution Fund (SRF): Further development of the Single Resolution Mechanism (SRM) and the associated fund is recommended to deal with failing banks in a coordinated way, minimizing systemic risks.

4. Capital Markets Union

Deepening the CMU: A key financial aspect is the proposal to further integrate European capital markets, making it easier for businesses to raise capital across borders and reducing reliance on bank financing. This will help corporate treasuries diversify funding sources and reduce financing costs.

Cross-Border Investment: The report highlights the need for a stronger regulatory framework to facilitate cross-border investments, improving liquidity, and fostering a more integrated European financial market.

5. Sovereign Debt and Market Stability

Debt Sustainability: The Draghi Report emphasizes the importance of ensuring that national debt levels remain sustainable, particularly in the aftermath of crises. It calls for better surveillance and coordination of national fiscal policies, which could affect sovereign bond markets and the cost of funding for both governments and large corporations.

6. ECB and Monetary Policy

The report outlines a stronger role for the ECB in managing liquidity crises, suggesting enhanced powers to intervene in bond markets and maintain monetary stability. This provides a more predictable environment for interest rate management, a key concern for treasury operations.

7. Green Finance and Sustainability

Sustainable Finance: The report aligns with broader EU objectives on green finance, suggesting a greater role for sustainable bonds and instruments that finance the green transition. This would impact corporate treasuries by expanding access to ESG-linked financing.

8. Digital Finance and FinTech

A significant financial innovation discussed is the potential introduction of a digital euro, which could transform how payments are made within the EU and affect treasury management in terms of liquidity, payment systems, and currency risk.

In a nutshell, we can summarize issues as followed: (1) Diversified funding sources through deeper capital markets; (2) Lower sovereign risks with better fiscal integration and euro-denominated safe assets; (3) Enhanced liquidity management and safety of deposits through the banking union; (4) New opportunities and frameworks for sustainable finance aligned with the EU’s green transition goals; (5) Potential changes in monetary policy tools affecting interest rates and currency hedging; (6) The Draghi Report presents a vision for a more integrated and resilient financial system in the EU, directly impacting both public sector financial stability and private sector treasury operations.

Both reports by Letta and Draghi provide valuable insights and practical recommendations aimed at strengthening the EU's economic and political framework. By focusing on economic governance, political integration, sustainability, recovery, digitalization, and global competitiveness, these reports lay out a roadmap for a more resilient and unified European Union. However, we must keep our fingers crossed, as the projects seem immense and sometimes particularly complex. This type of report is more a guideline and a wish list than a validated program. The “green” transition is obviously a major point, and ESG will remain a key focus for the European Union. Digital transformation is also at the heart of our need for change. No treasurer can deny this. Our dependence on American or Asian technologies and on production in these same regions is very, even too strong. Resilience requires autonomy, even if this cannot be total. Harmonization of rules, measures, standards and taxes could contribute to resilience and greater efficiency. But we are a long way from achieving this. The CMU, a major objective of the Vonder Leyen 2 Commission, is a good example. Competitiveness should be strengthened vis-à-vis the outside world and annihilated vis-à-vis the inside of the single market. The wishes are pious, the objectives laudable, and the conclusions not surprising. On the other hand, the means and the way to achieve them are trickier to define. Let's be ambitious but reasonable. Let's take these reports as electroshocks for those who were unaware of them.

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Fran?ois Masquelier, CEO of Simply Treasury – Luxembourg September 2024

Disclaimer: This article was prepared by Fran?ois Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).