Mario Draghi warns EU at risk without €800bn a year investment boost; Germany ‘facing three-quarters-long recession’– as it happened

PS: Investment bank ABN Amro have just published their “initial take” on Draghi’s competitiveness report.

They point out that the “ambitious proposals” are effectively a plan for the future of EU integration. The call for common eurozone debt will be a political hot potato too, while Draghi’s points about mis-aligned government policies are well made.

Here’s what ABN Amro say:

Ambitious proposals are no less than a blueprint for the future of EU integration

Former ECB president and Italian prime minister Mario Draghi’s long-awaited report on competitiveness was finally unveiled this morning, and it was unexpectedly substantial and concrete in its proposals. The report tackles a host of critical competitiveness issues facing Europe, from energy and decarbonisation, to lowering regulatory and other barriers for high-innovating tech unicorns (which typically move to the US to achieve sufficient scale), to strengthening industrial capacity (which also has implications for defence – a topic of increasing geopolitical importance). Its flagship proposal is for €800bn in additional EU investment annually, to be partly funded by the common issuance of new common debt. Crucially, the case for common debt issuance rests not only on financing need, but also to “make the [Capital Markets Union] much easier to achieve and more complete,” by: 1) facilitating the uniform pricing of corporate bonds, 2) providing a safe collateral instrument for member states, 3) a “large, liquid market” for global investors “enhancing the role of the euro as a reserve currency.”

The proposals face an uphill political struggle, to put it mildly

In the press conference accompanying the report, European Commission president Von der Leyen was immediately asked for her views on the call for new common debt issuance. Her response was understandably neutral, given the political sensitivity of the topic. She stated that the first priority was to identify the ‘common projects’ where member states could cooperate, and then decide whether these should be financed through higher contributions or through ‘new own resources’. When Draghi himself was pressed on this topic, he pointed to the possibility of using the EU’s enhanced cooperation mechanism – or even a separate intergovernmental agreement outside the EU structures – to allow a ‘coalition of the willing’ to forge ahead on debt issuance if unanimity could not be achieved on the issue. Given the political momentum of populist, anti-EU parties at present (see also here), the environment is hardly conducive to the proposals being adopted as they are. A memorable moment in the press conference came when a journalist asked if the report represented a ‘do or die’ moment for the EU; Draghi responded it was rather a ‘do, or slow agony’. Typically, crises are needed to push EU integration forward, and it could be that the ‘slow agony’ of the EU’s competitiveness problem will not be enough to galvanise the political will to overcome it.

But there is much more to the report than common debt

While this was the most headline-grabbing proposal, the report made many pertinent observations with less controversial, actionable measures. For instance, in the press conference Draghi pointed out that the mandate to phase out internal combustion engine cars was not accompanied by investment in energy infrastructure to support the roll-out of EVs. Or the fact that energy taxation in Europe is relatively high as well as uneven across member states, aggravating the impact of the rise in wholesale energy prices. Policy goals are often misaligned and even compete with one another, with decarbonisation an impediment to growth rather than the growth impulse that it could be.

Time for a recap:

The EU should fear for its self-preservation as it faces a “slow and agonising decline”, according to a hard-hitting report by the former Italian prime minister Mario Draghi that calls for an €800bn-a-year spending boost to end years of stagnation.

Warning that the Covid pandemic and Ukraine war had changed the rules of international trade to the EU’s detriment, he said the bloc needed additional investment of €750bn-€800bn a year – equivalent to 5% of the EU’s annual economic output – to build a more resilient economy and regain previously high rates of productivity growth.

“We are already in crisis mode and to ignore this is to slide into a situation you don’t want to have,” said Draghi, who is also a former head of the European Central Bank.

In a wide-ranging report, Draghi said Europe should start regularly issuing “common safe assets” to fund joint investment projects among Member States, co-ordinate better on defence spending, and improve its access to raw materials.

And in a stark warning, he said:

“We have to understand we are becoming ever smaller relative to the challenges we face. For the first time since the cold war we must genuinely fear for our self-preservation.”

German economy minister Robert Habeck welcomed the proposal, saying:

“The whole of Europe is facing existential challenges that we can only overcome together.”

But, the Dutch government cautioned that public investments must not be seen as an “end in themselves.”

In a gloomy day for European economic news:

• Swedish manufacturer Northvolt is to cut a large number of jobs and sell or seek partners for its energy storage and materials businesses.

• Germany has entered a three-quarter-long recession, according to investment bank Nomura

Elsewhere today….

In the financial markets, shares have rallied in New York and across Europe, following losses on Friday when the latest US jobs report came in below forecasts.

The UK is missing out on billions of pounds of revenue each year from small retail businesses that exploit weaknesses in government systems to evade paying tax, the public spending watchdog has warned.

Aldi has said the price of a basket of its goods is lower than a year ago despite ongoing grocery inflation, as the discount chain tries to fight back against increasing pressure from rivals’ price-matching schemes.

Barratt and Lloyds Banking Group have launched a £150m joint venture with the government body Homes England that will lead to the UK’s largest housebuilder and mortgage provider capitalising on Labour’s plans to build 1.5m new homes.

The Bank of London, the fledgling clearing bank backed by the Labour grandee Lord Mandelson, has announced it has raised another £42m from investors days after being hit by a winding-up order by tax authorities.

The oil and gas supermajor BP is to use artificial intelligence to speed up the decision-making of its engineers, after signing a five-year deal with the US spy technology company Palantir.

Japanese bank Nomura has a worrying prediction – they believe Germany has entered a three-quarters-long recession.

It would be a relatively shallow downturn, though – Nomura predict a 0.4 percentage point drop in GDP, followed by stagnation.

We already know that Germany shrank slightly in April-June; Nomura predict this contraction will continue.

They say:

Q2 2024 GDP growth contracted against expectations, with the expenditure breakdown indicating that the decline in domestic demand was more pronounced than expected.

Official data suggest that Q3 is off to a poor start; July factory sales and industrial output fell materially, with August manufacturing surveys indicating further deterioration. Services surveys, too, have materially weakened in Q3 thus far relative to Q2.

Germany’s recession, in addition to France’s stagnation, will weigh on euro area GDP growth, they predict – while the eurozone periphery will likely outperform due to tourism.

Back in London, the FTSE 100 continues to rally.

It’s now up 71 points or 0.87% at 8252 points, more than recovering all of Friday’s drop.

That’s despite analysts at UBS downgrading their view on UK shares to Neutral from Most Preferred.

In a research note this morning, UBS says there are several reasons to be positive about UK equities – including the return of political stability, last month’s interest rate cut by the Bank of England, and a likely return to earnings growth this year.

Another advantage – UK stocks still suffer from “undemanding valuations”, with shares trading at a lower price/earnings ratio than the long-running average.

So what’s the problem? UBS analyst Dean Turner reckons these positive developments seem to be “largely priced in”, adding:

….which suggests that UK equities will struggle to outperform their international peers in what we expect to be a positive year-end for stocks

Turner does predict UK stocks will keep rallying, pushing the FTSE to rise to around 9,000 by year-end. That would be a new alltime high (the previous best was 8,474 points back in May).

Over in Berlin, German economy minister Robert Habeck has vooiced support for Mario Draghi’s proposals.

Habeck says he agrees that the European Union needed massive investment, comprehensive reforms and strengthened resilience.

He said:

“The whole of Europe is facing existential challenges that we can only overcome together.”

Europe also needs to take steps to increase and secures its access to critical raw materials (CRMs), today’s competition report says.

Those CRMs include metals used in clean energy technologies such as lithium, cobalt and nickel.

China is the single largest processer of nickel, copper, lithium and cobalt, the report says, pointing to Beijing’s “willingness to use its market power”:

Export restrictions from the country grew by a factor of nine between 2009 and 2020. Little progress is being made so far with diversification.

Europe, the report concludes, is “falling behind” in the global race to secure supply chains:

Alongside its dominant position in processing and refining, China is actively investing in mining assets in Africa and Latin America and overseas refining via its Belt and Road initiative.

Its overseas investment in metals and mining through the Belt and Road Initiative reached a record high of $10bn in the first half of 2023 alone, and it plans to double the ownership of overseas mines containing critical minerals by Chinese companies.

The US has deployed the IRA, the Bipartisan Infrastructure Act and defence funding to develop at scale domestic processing, refining and recycling capacity, as well as using its geopolitical power to secure the global supply chain.

Japan is highly dependent on other regions for CRMs, and since the 2000s it has developed a strategic approach to increase access to overseas mining projects. The Japan Organization for Metals and Energy Security invests equity in mining and refining assets around the world, manages strategic stockpiling and, since the introduction of the recent economic security law, has powers to develop processing and refining facilities within Japan.

Europe, by contrast, has a comparable level of dependencies, being highly dependent on one or two countries for most of its critical mineral imports. However, it is not following a similarly coordinated approach. The EU is lacking a comprehensive strategy covering all stages of the supply chain (from exploration to recycling) and, unlike its competitors, the mining and trading of commodities is largely left to private actors and the market.

A key message running though Mario Draghi’s report into Europe’s competitiveness problems is that member states need to bolster their collective efforts and work together better.

That includes combining its spending power, winning foreign direct investment together, and using its bargaining power to negotiate cheaper energy.

But the most controversial part of the report could be the suggestion that Europe should start regularly issuing “common safe assets” to fund joint investment projects among Member States and to help integrate capital markets.

That would be a step towards eurobonds, in which member states issue collective debt.

Eurobonds were proposed as a solution to Europe’s debt crisis over a decade ago – the problem is that wealthier, more frugal Northern European countries fear being responsible for debt issued for their Southern neighbours.

The economic crisis in Germany, though, may mean those fears are less strong.

Some collective EU debt has already been issued in recent years, under the Next Generation EU (NGEU) project to fund the recovery from the pandemic.

Draghi’s report suggests the NGEU model can be “built on”, to issue common debt instruments, to finance “joint investment projects that will increase the EU’s competitiveness and security”.

You can read Mario Draghi’s new report into Europe’s economic problems here:

It explains that to digitalise and decarbonise the economy and increase defence capacity, the investment share in Europe will have to rise by around 5 percentage points of GDP.

That would take it back to levels last seen in the 1960s and 70s. And it’s much, much larger than the Marshall Plan – which between 1948-51 amounted to around 1-2% of GDP annually.

The report declares firmly that Europe faces an existential challenge, saying:

If Europe cannot become more productive, we will be forced to choose. We will not be able to become, at once, a leader in new technologies, a beacon of climate responsibility and an independent player on the world stage. We will not be able to finance our social model. We will have to scale back some, if not all, of our ambitions.

And in an eye-catching warning to European policymakers, the report warns that if the EU cannot deliver “prosperity, equity, freedom, peace and democracy” then it will have lost its reason for being.