Mario Draghi’s big report on the state of the European economy is entitled ‘The future of European competitiveness’. His conclusion about Europe’s competitiveness: it isn’t, especially compared to the dynamism of the Chinese and the US economies.  

The former ECB president’s proposed solutions are various, including regulatory reform to encourage tech innovation and better coordination to enhance the continent’s academic intuitions. But the bottom line is that Europe needs to spend more. A lot more:  

“To meet the objectives laid out in this report, a minimum annual additional investment of EUR 750 to 800 billion is needed, based on the latest Commission estimates, corresponding to 4.4-4.7% of EU GDP in 2023.” 

The report helpfully puts these amounts in historical perspective: “For comparison, investment under the Marshall Plan between 1948-51 was equivalent to 1-2% of EU GDP.” 

Finalto Chief Market Analyst Neil Wilson – host of the Overleveraged podcast – has suggested that with Draghi’s ambitions to restore Europe’s fading glory, we ditch the ‘Super Mario’ epithet and call him MEGA Mario – the Make Europe Great Again guy. I’ll suggest an alternative: Marshall Mario, though depending on your perspective, you may see those as two sides of the same coin. (And admittedly the Marshall the plan was named after was a General, but let’s not get bogged down in semantics.) 

Will Marshall Mario restore Europe to a Trente Glorieuses or should we be stuffing Krugerrands in our mattress? Well, first he needs to finance the thing. 

On cue, Germany’s finance minister has already rejected a proposal for common EU debt. The Dutch finance minister was similarly frugal: “More money is not always the solution”. 

The euro stops here? 

Meanwhile, EU officials are reportedly trying to work out how to roll over billions in Covid-era bonds. As reported by the FT, the challenge facing Brussels bureaucrats is “how to design a solution that would overcome staunch opposition from capitals such as Berlin and significant legal constraints, as well as win over investors.” 

Are Germans policymakers about to find out that in the (supposedly) post-neoliberal era, ‘there is no alternative’ means something quite different? 

From an investment perspective, the FT suggests, allowing the EU to roll over the debt could make EU bonds more attractive as an asset class. 

Both MSCI and ICE have recently decided to exclude EU Bonds from their sovereign bond indices. Reversing these decisions could be a ‘game changer’, some analysts suggest, increasing demand and liquidity.  

With Draghi’s exhaustive technocratic case for ramping up investment in the background, the politics the European bond market will remain a priority issue in Brussels.  

Whose debt is it, anyway? 

So stagnation or spiralling debt? Any industrial policy document worth its salt will lay out why it will just about pay for itself: “The required stimulus to private investment will have some impact on public finances, but productivity gains can reduce the fiscal costs.” This may or may not mean tightening of some belts: “if the investment-related government spending is not compensated by budgetary savings elsewhere, primary fiscal balances may temporarily deteriorate before the investment plan fully exerts its positive impact on output.” 

In the end, though, “if the strategy and reforms outlined in this report are implemented in parallel, the investment push should be accompanied by a significant increase in EU total factor productivity (TFP).” 

The extent to which you believe this (and how much of the investment programme will actually be implemented) I leave to the reader. 

Project EUnicorn 

However, it is worth noting that Draghi isn’t concerned only with the size, but also with the sources and quality, of investment, and how investors identify opportunities. The EU relies too heavily on bank financing, the report suggests, and there is critical dearth of angel financiers, venture capitalists and private equity investors who will fund risky, innovative, cutting-edge moonshots.  

Could it be that Draghi’s achingly technocratic policy infrastructure recommendations – create a single securities market regulator, simplify clearing and settlement, and iron out difference on withholding tax and insolvency rules to build a robust Capital Markets Union – turn out to be a catalyst for finally building some world-beating European unicorns?  

Simon Shear

Content Writer at Finalto

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