HIKMA SUMMIT
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On November 8th the Heads of State of the European Member States met in Budapest for an informal summit, where they promised to simplify European rules that apply to businesses. European competitiveness has become central in Brussels, sparking debates over how the European Union can safeguard its industrial base while advancing its ambitions. Since September 2024, when Draghi's report was released, renewed focus was brought to Europe’s global economic position, particularly with the upcoming European Commission for the 2024-2027 mandate, and Trump’s return to the White House. The report, following on from Letta’s earlier work, outlines a strategic vision for the EU, emphasizing the urgency to address the new geopolitical and economic pressures. These include the global climate crisis, shifting energy dynamics, and the rapid advancement of clean technologies. In an increasingly unstable world, where dependencies are becoming vulnerabilities, Europe must react by rethinking its innovation strategy, which will be essential for strengthening Europe’s economic stability and safeguarding its position on the global stage.

Climate change, energy and public funding

Draghi’s report critically examines the EU’s ambitious decarbonization targets, highlighting the economic challenges for energy-intensive industries (EIIs) and the transport sector. While Europe’s climate goals are among the most stringent globally, they impose high short-term costs on key industrial sectors. The projected decarbonization costs for Europe’s four largest EIIs — chemicals, basic metals, non-metallic minerals, and paper — will reach around €500 billion over the next 15 years. For “hard-to-abate” transport sectors, including aviation and maritime, achieving decarbonization targets will demand annual investments of approximately €100 billion from 2031 to 2050. Draghi pointed out that, despite these hefty investments, EU public funding to support EIIs in this transition is limited. Emissions Trading System funds are largely channeled toward residential energy efficiency, renewable development, and energy affordability, thereby leaving only a small share to assist heavy industries bearing the brunt of decarbonization costs. The report also notes a policy gap for transports, as they account for roughly one-quarter of the EU’s total greenhouse gas emissions, which are still higher than 1990 levels. Yet, policy on this subject is excluded from the EU’s National Energy and Climate Plans (NECPs) - which outline member states’ climate strategies. The preclusion, coupled with current funding priorities, renders climate goals more difficult to achieve without overburdening industries. Draghi’s report calls for a recalibration of public support mechanisms, to ensure that industrial sectors, vital both to the EU’s economy and green transition, receive sufficient resources, ultimately promoting a climate policy that aligns sustainability with competitiveness.

The Chinese challenge 

Competition from China is posing a new substantial threat to European growth. Chinese firms benefit from a vast state-funded industrial policy, as well as control over raw materials, and cost-effective large-scale production. Thanks to these advantages, Chinese businesses are able to dominate the clean-tech and electric vehicle sectors, which are key players in the EU’s decarbonization efforts. Reliance on Chinese technology raises security-related doubts, especially in light of the recent Russian-caused energy crisis. The Russian invasion, indeed,  highlighted how energy dependency expose Europe to external shocks, and in the same way, dependence on Chinese tech could undermine Europe’s autonomy, making it susceptible to shifts in Chinese policy or market disruptions. Moreover, the risk of a market influx from redirected Chinese overcapacity represents another threat. Following other countries’ imposition of trade barriers against China, Europe could face an increased flow of Chinese clean-tech goods, which undermine local industries, depress prices, and create an uneven competitive playing field. As a consequence, the transition to green technologies can be disrupted, threatening the stability of EU manufacturing sectors already struggling with high energy costs and global competition.

How to respond to Chinese competitiveness? The quickest and easiest solution is to systematically exclude Chinese technology, yet this strategy could slow down the energy transition and increase costs. On the contrary, an open approach may threaten European jobs, productivity, and economic security. Draghi’s report advocates for a mixed approach: one that balances selective protection with cooperation, encouraging open trade where feasible, while supporting critical industries domestically.

High-tech investments

The tech sector competitiveness gap with the US is increasingly growing. According to the report, only four of the world’s top 50 tech companies are currently European, hence there is urgent need for Brussels to accelerate innovation. Without faster progress, Europe risks falling further behind, especially as digital technology becomes the key driver of global productivity. Innovation is critical not only to maintain Europe’s manufacturing leadership but also to spur economic growth and increase household incomes. The report focuses on Europe’s technological sovereignty, particularly in sectors like security and encryption, where “sovereign cloud” solutions are becoming essential. A weak tech sector will affect innovation across other critical industries, from pharmaceuticals to defense. However, Europe still holds a strong position in areas like autonomous robotics and AI services, but struggles to scale its digital companies due to limited investment and a focus on mature, slower-growing technologies. To remain competitive, the EU must reform its Framework Programme for Research and Innovation, aligning it with emerging technologies, improving funding, and creating a more dynamic environment for innovation. This is Europe’s opportunity to boost productivity, foster new industries, and reclaim leadership in the global tech race.