Tariffs, faltering global institutions, sluggish economic growth, and deepening political divisions have left the European Union increasingly vulnerable to outside shocks, according to former European Central Bank governor Mario Draghi.
Speaking at the closing session of the Cotec symposium in Portugal on Wednesday, Draghi, who also served as Italy’s prime minister until 2022, painted a grim picture of the EU’s future unless it undertakes serious reforms to reduce its dependence on external demand and address longstanding structural issues.
“Changes have been underway for several years, and the situation was deteriorating even before the recent increase in tariffs,” Draghi said, referencing the ongoing trade war between U.S. President Donald Trump’s administration and the European Commission. “Therefore, internal political fragmentation and weak growth have made an effective European response more difficult.”
In particular, he pointed to a decisive breakdown in the global trading relationships as a turning point. “The massive use of unilateral actions to resolve trade disputes and the definitive disempowerment of the WTO have undermined the multilateral order in a way that is difficult to reverse,” he warned.
As reported by Il Giornale, Draghi emphasized that the EU’s openness to international trade increases its vulnerability. “This greatly increases the exposure of our growth and employment to the policy measures of our trading partners and to political cycles that originate outside Europe,” he said. He noted the importance of the United States as both a direct and indirect economic partner, describing it as Europe’s “main export market, with more than 20 percent of our exports of goods destined for overseas. And we are also exposed indirectly, as the United States is the main source of demand for our trading partners.”
He said that research from the European Central Bank indicates that indirect economic shocks from the U.S. can have a greater impact on the eurozone than direct ones. “The recent actions of the U.S. administration will certainly have an impact on the European economy, and even if trade tensions ease, it is likely that the uncertainty remains and acts as a headwind for investment in the EU manufacturing sector.”
Despite these risks, Draghi was skeptical that Europe could quickly pivot away from the U.S. economically. “We should ask ourselves why we have stopped being in the hands of U.S. consumers to drive our growth. And we should ask ourselves how we can grow and generate wealth on our own,” he said. “But realistically, it will not be possible to diversify from the U.S. in the short term.” He added that anyone hoping to find alternative markets would “probably be disappointed.”
Draghi also criticized the EU’s overemphasis on external competitiveness instead of boosting internal productivity. “Since 2000, annual labor productivity growth in the EU has been just half that of the United States, causing a cumulative productivity gap of 27 percentage points over the entire period,” he said. “But instead of trying to reverse the productivity trend, we have adapted our labor policies to it. Especially after crises, we have made a deliberate effort to suppress wage growth and increase external competitiveness. Our real wages have failed to keep pace even with our slow productivity, while U.S. real wages have risen by 9 percentage points more than those in the eurozone over this period.”
On energy, Draghi said Europe paid a “high price” for its dependence on Russian gas, losing over a year’s worth of growth. While efforts are underway to accelerate the shift to renewable energy, he warned of systemic obstacles. “This requires a fundamental transformation of our energy system that we have not been able to achieve,” he said. “High energy prices and grid shortages are, first and foremost, a threat to the survival of our industry, a major obstacle to our competitiveness, and an unsustainable burden on our households.”
He tied these issues to geopolitical challenges, such as the war in Ukraine. Despite Europe’s significant military support, Draghi suggested the EU had been relegated to the sidelines in diplomatic efforts. “We will probably be passive spectators in a peace negotiation that concerns our future and our values,” he said.
Finally, Draghi turned to the digital economy, lamenting Europe’s failure to keep pace with the U.S. in critical areas like artificial intelligence. “We have continued to create an environment that hinders radical innovation,” he said. “The fragmentation of our single market has prevented tech start-ups from reaching the scale needed to succeed in this area.” He added that “over 270 regulators active in digital networks” across member states have made it nearly impossible for small firms to thrive, unlike their American competitors.
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