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An Agenda for the EU and some implications for the UK: the Letta and Draghi Reports

The European Commission, which  embarked  on its new mandate on 1 December 2024, has on its agenda two key reports completed earlier in 2024, the Letta Report on the Single Market (April 2024) entitled “Much more than a Market: Speed, Security, Solidarity: Empowering the Single Market to deliver a sustainable future and prosperity for all EU Citizens”, and the Draghi Report (September 2024) entitled “The Future of European Competitiveness”.  This paper considers both, the challenges involved in implementing them, and some implications for the United Kingdom.

 

The two Reports

The two reports have in common that they are the latest in a long line of such reports.  Former Italian Prime Ministers are a particularly popular choice of author, reflecting no doubt their quality and quantity. For example, in October 2009, the then President of the European Commission, José Manuel Barroso, asked Professor (and former European Commissioner, later Italian Prime Minister) Mario Monti to investigate options for the re-launch of the Single Market.  After conducting broad-based consultations with business and other stakeholders, the Monti Report, “A New Strategy for the Single Market”, was issued in May 2010. It concluded that the Single Market was still handicapped by many market distortions and market failures, and proposed ways of tackling them, and of better enforcing Single Market rules. The Monti Report characterised the Single Market as labouring under “integration fatigue” and “market fatigue”, adding that member-states had lost a degree of confidence in its working.  Reform would require both regulatory and non-regulatory change, as a basis for renewed EU growth and competitiveness leading to renewed trust in the Single Market.  In the event, the Monti Report’s recommendations could not easily be implemented in circumstances including the wake of the global financial crisis of 2008-09, the first Trump US presidency, UK withdrawal from the EU, the disruption resulting from Covid-19, and the Ukraine war.  In turn, these factors have themselves altered the EU’s competitive position, both internally and vis-à-vis a changed world.  The Letta and Draghi Reports are a response to these ongoing challenges.

At the same time, the two reports have slightly different origins and ‘ownership’, and their terms of reference were only loosely coordinated, although the two former Italian Prime Ministers are sure to have talked to each other about their respective tasks.  Usually such reports are made at the Commission’s instigation, but the Letta Report was requested by the European Council in September 2023, to provide a basis for the Council’s strategic agenda for the next institutional mandate, and was presented to EU leaders, after little more than six months, at a summit in Brussels in April 2024.  By contrast, the Draghi Report was instigated by Ursula von der Leyen, as President of the European Commission, in her State of the Union address in September 2023, and took a full year before submission in September 2024.  Perhaps as a result, the reports differ greatly in length: the Letta Report is a single document of under 150 pages1 while the Draghi Report, totalling nearly 400 pages, comes in two parts: ‘A. A competitiveness strategy for Europe’ (66 pages)2 together with ‘B. In-depth analysis and recommendations’ (327 pages).3

The two reports cover distinct fields, the Letta Report dealing mainly with the Single Market (but extending beyond it, as its title implies) while the Draghi Report treats broader competitiveness questions.  But, inevitably, there are areas of overlap, as both deal with competition as a key motor of the efficient allocation of resources, whether as the basis for a more efficient Single Market or for the EU’s global competitiveness.  Neither report presents a clear roadmap for implementation, leaving the prioritisation and sequencing of implementing measures to be decided through the EU’s institutional processes.  Both therefore allow a good deal of latitude for decisions within the EU’s new institutional mandate.  But this comes with the challenge of finding a smooth decision-taking process for progress to be made.

 

The Letta Report

The Letta Report aims at covering all Single Market sectors of significant interest, including financial services (greater centralized financial supervision,  an EU ‘auto-enrolment long-term savings product’, the Digital Euro as a ‘paradigm shift for retail payments’, and an EU Stock Exchange for Deep Tech); other tech (including a new regulatory architecture for digital markets, and a dedicated EU fund for financing cross-border digital infrastructure); energy (reinforced FDI screening of the EU energy market); defence (including Defence Eurobonds, as a way to finance rearmament); and ‘horizontal’ changes of approach to Single Market regulation as a whole (including the creation of a European Code of Business Law, as a parallel alternative to national regimes (a similar logic to that of  the European Company), a statute for a Simplified European Company, greater use of Regulations rather than Directives (to ensure harmonisation with less ‘gold-plating’), and greater harmonisation of different forms of EU-level bond issuance (creating a single EU asset class of bonds issued by the Commission, EIB, ESM).

 

Letta: Context & Analysis

The Letta Report is both a call to action – with some ideas more practically attainable than others – and an overview of political areas of focus in the realm of economic policymaking.  This is reflected in the Report’s title, “More than a Market”.  Rather than focusing solely on Single Market integration, Letta also envisages an enhanced economic security and industrial policy agenda, on the basis that all these are bound up with the EU’s future prosperity in a much-changed geopolitical environment.  Similarly, Letta also ventures into enlargement policy and defence.

In this context, Letta spells out specific sources of unease regarding current third-country relations, noting: that “a concerning trend is the annual diversion of European resources towards the American economy and US asset managers”; that the EU needs to “reduce dependence on digital services from third countries” and needs to build its own champions; that its approach to defence procurement creates too many jobs abroad and not enough at home, and that the legitimacy of EU trade policy is suffering from “potential erosion”.

Letta also covers a wide horizon of sectors – including healthcare, space and transport alongside financial services, energy, and the digital economy.  At the same time, there is an element of prioritisation, with the greater integration of “financial, energy and electronic communications sectors” identified as key, given that current fragmentation is “a primary reason for Europe’s declining competitiveness”.

 

Letta: An Assessment

Letta can only be right in titling his Report “More than a Market”.  It would be wrong to view the Letta Report as yet another traditional commentary on how to improve the regulatory and other mechanisms underlying the Single Market.  It goes far further, ranging widely across many aspects of EU economy and society, extending to how features of the European economy can be harnessed – including through industrial policy – to meet EU needs going as wide as strengthening external defence.  The implications of this will be examined below.

 

The Draghi Report

The Draghi Report analyses why Europe has fallen behind the US and China in growth, productivity, and innovation, noting a wide range of obstacles to EU growth. It is far more strategic and ambitious than the Letta Report, addressing three key challenges for the European Union: (1) closing the innovation gap with the US; (2) combining decarbonisation with a growth in competitiveness; and (3) enhancing economic security by reducing dependencies.  The Report underlines that the era of cheap Russian energy, boundless Chinese markets, and US-led security, has ended, and that the EU must completely re-think of its growth model, taking into account the EU’s declining competitiveness and its persistent lagging in the data and digital field – the fourth industrial revolution.  Draghi’s detailed proposals outline a potential road map for the next five-year term.

 

Draghi: Context and Analysis

Draghi proposes an economic paradigm shift for the EU, noting that there are significant economic deficiencies in the EU’s economic makeup, including insufficient investment (both public and private), the effect of post-2008 austerity economics in undermining growth, and the lack of a significant EU fiscal capacity.  Additionally, there are gaps in the Single Market, notably an integrated capital market.

Draghi sees innovation as the EU’s first challenge, highlighting that, while the EU has strong innovation capacity, over one-third of its corporate “unicorns” relocate abroad, primarily to the US, because of the EU’s regulatory, financial, and training barriers.  As a remedy, Draghi proposes ways of attracting fresh investment: these include creating a European Advanced Research Projects Agency (ARPA), incentivising business angels and seed capital, involving the European Investment Bank, reforming pensions to harness European savings for investment, simplifying the EU’s research and development (R&D) framework programme, and moves towards a more innovation-friendly regulatory ecosystem.

Draghi focuses on aligning decarbonization with competitiveness as the EU’s second challenge, given that the EU’s higher energy costs are undermining its competitiveness.  The Report highlights that decarbonisation is an economic necessity that can enhance competitiveness if well-managed but may undermine it if badly done with over-dependence on state-aided Chinese technologies.  To ensure that clean energy drives lower prices, Draghi recommends reform of the European electricity market and EU-level industrial policies in clean technologies over a range of sectors including electric vehicles.

Draghi sees defence as the third challenge, analysing the backward state of the EU’s defence industrial sector as fragmented and unscaled, while as much as 80 per cent of EU defence procurement is sourced from outside the EU.  Draghi calls for more EU funding, plus an EU Defence Industry Authority to procure on behalf of EU countries with some kind of “buy European” principle.

Economic security is the fourth challenge, for which Draghi recommends greater EU strategic autonomy to reduce the scope for third country economic coercion, matched by increased EU defence spending, a more autonomous EU defence industry, and a critical minerals policy.  To mitigate the higher costs of autonomy, Draghi suggests greater cooperation among EU member states and further free trade agreements with the EU’s key trade partners, backed by a “foreign economic policy” involving joint investments and purchases reflecting the EU’s large internal market.

 

Draghi: An assessment

The Draghi report starkly itemises EU economic ills and prospective remedies, in the widest economic terms, underlining the urgency of reform over some wide areas.  Where it deals with the need for greater EU integration it shows, unsurprisingly, some close parallels with the Letta Report.  But Draghi Report, as an economist’s analysis, is not bounded by the EU’s existing structures, and its proposed remedies – including defence, traditionally avoided by economists – arguably go far further than advocating simple improvements that might be easily achievable within the EU’s existing Treaty structure.

 

The two Reports

There is no doubt that the two reports will be taken seriously in Brussels and in member-state capitals, coinciding as they do in identifying similar remedies to the EU’s current ills.  And the Draghi Report, given Draghi’s own eminence as an authoritative policymaker, and given that it was instigated by President von der Leyen, will no doubt be taken particularly seriously by the Commission.  Procedurally, it is likely to lie with the Commission to propose ways of implementing both: indeed, the Commission can probably be expected to allude to one or both reports when making any proposal with any kind of link to a Letta or Draghi recommendation.

At the same time, both reports underline the need for difficult and challenging trade-offs, and both call for a greater degree of EU integration to achieve them.  This call was echoed on 22 November 2024 in an unusual joint statement by the Governor of the Banque de France and the President of the Bundesbank, ‘A common call for a Franco-German revival’, putting the case for France and Germany to act together to spur EU economic recovery and specifically highlighting Letta’s and Draghi’s recommendations as areas for action.4  Will there be the political will within the EU – and particularly among certain member-states – to take this forward at this time?  Both reports demand far greater centralisation of EU regulation and rulemaking than before in certain areas (the European digital market, an EU Stock Exchange for deep tech, a true EU cross-border electricity market, mechanisms for the green transition, a digital Euro by 2027, a savings and investments union, a cross-EU approach to financing defence).  There would therefore be logic in responding to EU weaknesses by a greater cross-EU federalising effort pooling resources and sacrificing national institutions, in the interests of the greater strength of the EU as a whole in both economic and defence terms.  But the past history of Capital Markets Union seems to provide one example of the difficulty of doing so in practice; and the EU governments may genuinely find it difficult to summon up the collective will and resources to act.

It is also a fact that both reports have been delivered at a juncture when, for both economic and geopolitical reasons, the EU is at one of its centrifugal moments, when right-wing movements are on the rise in a number of member-states, with domestic pressures for assertions of individual governmental strength (“taking back control”).   Greater EU integration, and granting greater powers to the EU institutions, is currently at a discount.  Among member-states, the present tendency is towards favouring national champions, and market location, as against market efficiency at the EU level.  To overcome these forces will require statecraft and determination from the EU institutions, in cooperation with the member-states, the more so as neither report comes with a ready-made and priorities implementation plan.  Both reports have the potential, for instance, to lead to a more forceful EU competition policy, with a greater focus on promoting innovation and on EU champions, in line with Draghi’s call for “revamping” of competition policy.  However, a considerable degree of continuity is likely, as trends already perceptible in the analysis of innovation and international competition receive greater emphasis in the EU, the US and the UK; all in all, explicit protectionism seems unlikely in this field, where decades of case law act as a guard rail.  And early signals about market consolidation in practice in a pan-European market remain mixed.  Where individual member-states are involved, there seems to be a pragmatic case-by-case approach: Lufthansa has merged with the Italian flag carrier ITA (formerly Alitalia), but UniCredit’s interest in Commerzbank has been rebuffed so far in Germany.  At the EU level, there are few indications so far; but – as a straw in the wind – the Council’s conclusions on 6 December 2024 on the White Paper ‘How to master Europe’s Digital Infrastructure Needs?’ appeared to endorse an approach that would bring a greater degree of intergovernmental cooperation between member-states while falling well short of transformative progress to deeper EU integration in this policy area.5

If the Reports are to be implemented, much will depend, as Mario Draghi has recently pointed out, on member-states’ willingness to make the necessary investment.6  As he says, “the cumulative investment needs […] are massive. Conservative estimates by the European Commission and the European Central Bank put the figures at €750bn-800bn per year. Meeting these needs would require investment to rise to 27 per cent of EU GDP, from 22 per cent today.”  Turning to the lessons of the recent UK Budget, he adds “The UK government has chosen to significantly raise public investment over the next five years and has adopted precise rules to ensure that borrowing is used only to fund this investment.”  As for the current evidence of EU governments’ attitude to following such a path, he concludes “The EU may have a stated preference to be a climate leader, a digital innovator, and a geopolitical player. But for now, the revealed preference of its members is different. Without using its fiscal space and reforming its markets, it is hard to see how Europe will achieve its ambitions.”

 

Challenges for the UK

The two reports could present both challenges and opportunities for the UK, in terms of the UK’s present and future relationship with the EU.  The present relationship is governed largely by the EU-UK Trade and Cooperation Agreement (TCA), and it has to be said that the TCA says little or nothing about growth or cooperation between the parties in the interests of growth.  So the outlook for positive cooperation on Letta’s and Draghi’s main recommendations may be limited, even though the strength of UK capital markets within Europe will no doubt remain important.  As for the future, much depends on how far the two reports can be implemented, depending on political will within the EU.  However, even if full implementation proved an objective too far, a halfway house based on lesser measures could pose challenges for the UK’s relationship with the EU.  For instance, in the area of financial services, energy, and electronic communications, such a halfway house might focus, where possible, on adding new features rather than wholesale transformation of existing structures such as defence procurement.  Even so, the result would probably be further measures for EU strategic autonomy, with a possible focus on (1) greater centralised financial supervision by the European Securities and Markets Authority (echoing recent calls from France and Germany), with changes in prudential rules to make EU-based financial providers more competitive; (2) creation of fresh EU pensions, savings and investment products; (3) support for the Digital Euro for retail payments; (4) an EU stock exchange for deep tech; (5) more centralised digital market regulation; and (6) industrial policy approaches favouring new technologies.

Any such EU moves would reflect a tilt towards greater strategic autonomy, either potentially incompatible with the reset for the UK-EU relationship which the UK Government is seeking or not capable of being easily adapted to it.  They could well have in common a number of factors bearing on the relationship, including (1) significant regulatory divergence, of a kind not envisaged in the EU-UK TCA; (2) a fresh degree of EU preference or protectionism, with measures potentially breaching GATT or GATS rules; (3) new EU market infrastructure institutions, possibly threatening UK or global rival institutions; and (4) some erosion of EU’s role upholding the global rules-based system, with further weakening of the Commission’s traditional Common Commercial Policy role supporting open markets.

All such factors could have a bearing on any reset of the UK-EU relationship, and the UK would do well to address them early and proactively in discussions with the EU.  As reset discussions deepen, they are likely to have to reopen issues from the Brexit settlement, including how far the UK could accept a degree of “dynamic alignment” with the EU on, for example, sanitary and phytosanitary (SPS) measures, or with the EU REACH Regulation on chemicals, and how far the UK might be ready to accept a role for the EU Court of Justice (CJEU) in certain aspects of a new relationship.  And, while these could entail some hard decisions, there may also be areas, such as energy cooperation, where EU pursuit of the Letta and Draghi recommendations on sustainability and decarbonisation could prove a positive spur to a deeper relationship in which both sides can address demonstrably shared interests in, for instance, the North Sea.  Going still wider, shared interests might also include technology, strategic industries, and geoeconomic resilience, and the case for creating institutions such as an EU-UK Trade and Technology Council.

Even if Letta, and more particularly Draghi, had not addressed security and defence questions, the stark urgency of both speaks for itself.  Here, at least, a UK-EU conversation has already started, and there are some signs that the EU and its member states have embarked on some fresh policy thinking on plans to strengthen the European defence industry, and about how to cooperate with UK.  It was noteworthy that towards the end of November 2024 France dropped its opposition to non-EU businesses accessing EU-funded financial incentives for Europe’s defence industry, as the EU pushes to develop a stronger domestic arms industry less dependent on the US.7  The UK should take the opportunity to respond to this concession, all the more so given that US defence businesses, represented in Brussels by the American Chamber of Commerce to the European Union (AmCham EU), are already lobbying MEPs to provide more scope for US arms suppliers in the procurement policies to be followed in the European Defence Industrial Programme (EDIP).8  Beyond defence procurement, there should also be opportunities to revive cooperation in justice and home affairs.  This was complicated when the UK was a member, but ways were found to make progress, particularly when terrorism and cross-border crime made it manifestly necessary to move forward.  Today’s defence and security imperatives are even more pressing and it is therefore to be hoped that pragmatism will prevail once again.

 

The future

Much is therefore riding on the extent to which the Letta and Draghi reports are implemented, the speed of implementation, and the direction that it takes.  In particular, as Mario Draghi has himself emphasised, collective willingness among EU governments to make the necessary investment will be a driving factor.  The European Commissioners taking office in December 2024 were at pains to echo Draghi’s diagnosis in their hearings before European Parliament committees.  However, the very process of confirming them in office and the political shenanigans among the shifting alliances at both EU and national levels as election results are digested and implemented demonstrate the difficult context in which challenging decisions have to be taken.  On the one hand, there are analogies with the creation of the Single Market in the 1990s as a response to perceptions that the EEC, as it then was, was falling behind the rest of the world.  On the other, although the same perceptions are evident now, the international circumstances are far more adverse, with a new US President threatening a trade war, a Russian President waging real war on European soil, the Middle East in flames, and international organisations weaker and less respected than at any time since 1945.  None of this is conducive to the more serene policy-making that, in retrospect, characterised the EEC’s approach to greater market integration in the 1990s.

The EU therefore faces a critical challenge at a watershed moment.  The coming months and years will test its strength as never before, and will also test the flexibility and adaptability of both the UK and the EU in coming together to frame a new post-Brexit UK/EU relationship.

John Cooke is a member of the European & International Analysts Group and was a member of the UK Permanent Representation to the European Communities, 1969–1973 and 1976–77; Under-Secretary, International Trade Policy Division, Department of Trade and Industry, 1992–96; and Chairman, OECD Trade Committee, 1996–97

 Sir Jonathan Faull KCMG is Co-Secretary of the European & International Analysts Group; Chair of European Public Affairs at the Brunswick Group; and was a Director General in the European Commission, 2000–2016

  1. Enrico Letta, Much more than a Market: Speed, Security, Solidarity: Empowering the Single Market to deliver a sustainable future and prosperity for all EU Citizens, European Council, April 2024
  2.   Mario Draghi, The future of European competitiveness: A competitiveness strategy for Europe, European Commission, 9 September 2024
  3.   Mario Draghi, The future of European competitiveness: In-depth analysis and recommendations, European Commission, 9 September 2024
  4.   Joachim Nagel & François Villeroy de Galhau, A common call for a Franco-German revival, Banque de France, 22 November 2024
  5.   European Council, Conclusions on the White Paper “How to master Europe’s digital infrastructure needs?” – Council Conclusions, 16644/24, 6 December 2024
  6.   ‘Europe can learn fiscal lessons from the UK on how to achieve its goals’, Mario Draghi, Financial Times, 1 November 2024
  7.   ‘France drops buy-EU demand for Brussels defence fund’, Henry Foy & Paola Tamma, Financial Times, 25 November 2024
  8.   See American Chamber of Commerce to the European Union, ‘Bolstering Europe’s defence base through transatlantic cooperation’, 11 December 2024