MNI INTERVIEW: Risk Draghi Report Ushers In EU Protectionism

MNI (BRUSSELS) - There is a danger that forthcoming Draghi Report on the European Union’s future economic policy will be used to usher in a new era of subsidies and protectionism, James Watson, recently departed chief economist at Brussels industry lobby BusinessEurope, told MNI.

With the report by the former European Central Bank chief now expected after July 18, when Ursula von der Leyen hopes to be confirmed for a second term as head of the European Commission by the European Parliament, Watson said he feared that it would be used to justify greater protection for traditional manufacturing.

“How the former ECB President will balance the demands of the EU’s traditional industrial power houses such as Germany, France and Italy against those member states, particularly in Scandinavia and the Baltics, with a greater focus on emerging technological sectors, will be a key question,” said Watson, who argues that EU decision makers are vastly underestimating the implications of the bloc’s rapidly increasing technology gap with the U.S. and China. (See MNI: Watered-Down EU Deal Points To Resistance To Draghi Plan)

Watson, also a former senior economic adviser to the UK’s department of Business, Innovation and Skills and the EU Commission’s DG ECFIN, pointed to recent ECB analysis showing that between 1996 and 2017 productivity in information and communications technology increased by over 320% in the U.S. compared to a gain of 80% in the EU, accounting for much of the productivity gap between the two economies. The EU should focus its energies in this space, he argued in an interview, adding that the bloc’s moves towards imposing permanent tariffs on Chinese electric vehicles may be ill-conceived.

EUROPEAN SOCIAL MODEL

“What start out as high-technology products at high prices can quickly become low-tech and low-priced commodities. Like EV batteries, they can quickly become commoditised as we have seen previously with products like digital cameras, LCD screens and solar panels. The EU needs to think where it wants to be in the value chain on something like batteries.” 

In a speech in April, Draghi said the EU lacks a strategy to “shield our traditional industries from an unlevel global playing field caused by asymmetries in regulations, subsidies and trade policies’”

Another big hurdle to transformation of the EU economy will be reform of the European social model. Voters’ appetite for this is low and politicians have set their face against change, he said, noting that arguments from both right and left for reducing the retirement age has been a focus of the French election.

“Nobody is having an honest discussion about the fiscal challenges we face, and France is the most obvious example,” he said.  “Many companies, if they want to compete globally, are going to have to introduce AI technology to get the cost down and I am not sure our social model or unions are going to help us facilitate the quite disruptive labour market transitions that will be required. The circle has been squared in recent years by running larger deficits, but it is still not entirely squared.”