The
Semafor
View

When Mario Draghi, the former European Central Bank chief and Italian prime minister, presented his report last September on how to boost Europe’s economic competitiveness, many hailed it as courageous and ambitious... and unlikely to spur much action. Europe’s political winds were blowing in another direction.

Not anymore. European leaders probably expected the second Trump administration to pressure them to increase their defense spending, but not for Defense Secretary Pete Hegseth to call them “freeloading” and “pathetic” in a leaked Signal group chat. Nor did they foresee Donald Trump’s apparent determination to provoke a full-blown trade war.

It’s still possible that Trump’s bark is worse than his bite, and that some modest efforts to voluntarily reduce the continent’s large bilateral trade surplus with America will get the US president to temper his most aggressive policies. Nonetheless, there are encouraging signs that these shocks may finally prompt Europe to coalesce around reforms that could greatly strengthen its economy.

The Draghi report highlighted several factors that have undercut Europe’s growth and productivity. While the EU, in the aggregate, is a very large economy, it still functions like a bunch of separate, medium-sized ones. That is because of how it is structured fiscally, regulatorily and in key areas that underpin innovation.

To benefit fully from its size, Europe needs to remove remaining national barriers and regulations, especially in services. It may be too much to hope that Brussels will change its image from an overbearing regulator to an enabler of innovation, but it certainly needs to strike a better balance between regulating and supporting risk-taking. Integrating Europe’s capital markets may hold the key to (or at least help with) growing more local corporate giants and increasing private-sector R&D spending and investment.

“Europe’s economy, properly integrated, could have the advantages of scale that the US and China enjoy.”

European public spending on basic research is similar to the US’s, but it is mostly not funded and administered centrally. Far too much of it is done at the country level, which leads to underfunding and dilutes its efficiency and impact. Research funding does not cross borders regardless of the scientific merit. In the US — at least before the current administration — funding from the federal government has been meritocratically allocated by experts in the field and sent directly to principal investigators and their labs. Smarter, more centralized funding like this could unleash European talent in science and technology, and keep more of it at home. This would also help attract top researchers from America, some of whom may be more willing to move abroad given the Trump administration’s threats to research funding.

Many European countries have also increased their planned spending on defense. Germany in particular, is going far bigger than would have seemed possible pre-Trump. Modern warfare, of course, has a strong digital component, so that should help grow Europe’s tech sector, and close the digital deficit relative to the US and China. And the less European governments feel they can count on Washington, the more they may try to diversify away from the Silicon Valley giants that currently provide most of Europe’s cloud computing capacity, and switch to non-American “sovereign AI.”

This agenda is unlikely to be delivered through the traditional slow process of building unanimous support across the EU. Instead, privately, leaders of the bigger economies — Germany, France, and (though now ex-EU) Britain — are said to be exploring building coalitions of the willing to drive it forward quickly.

This should not mean giving up on European ideals and values, as the Draghi Report makes clear. The continent’s leaders will still try to ensure free or affordable access to fundamental services like education and health care, even as they try to make their economies more dynamic. Europe does not have to become America to make progress.

In that respect, it may be in a much stronger position than, say, Canada, with its much smaller economy and much closer ties to the US. Europe’s economy, properly integrated, could have the advantages of scale that the US and China enjoy. It has a lot of underutilized resources. In the Draghi report, it has a road map. Thanks to Trump, it may now be having its moment, too.