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Draghi Urges Reform, Investment Drive to Revive Lagging EU

Italian former prime minister and economist Mario Draghi speaks during a press conference about the future of European competitiveness at the EU headquarters in Brussels on September 9, 2024. (Photo by Nicolas TUCAT / AFP)
Italian former prime minister and economist Mario Draghi speaks during a press conference about the future of European competitiveness at the EU headquarters in Brussels on September 9, 2024. (Photo by Nicolas TUCAT / AFP)
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Draghi Urges Reform, Investment Drive to Revive Lagging EU

Italian former prime minister and economist Mario Draghi speaks during a press conference about the future of European competitiveness at the EU headquarters in Brussels on September 9, 2024. (Photo by Nicolas TUCAT / AFP)
Italian former prime minister and economist Mario Draghi speaks during a press conference about the future of European competitiveness at the EU headquarters in Brussels on September 9, 2024. (Photo by Nicolas TUCAT / AFP)

The European Union needs far more coordinated industrial policy, more rapid decisions and massive investment if it wants to keep pace economically with rivals the United States and China, Mario Draghi said on Monday in a long awaited report.
The European Commission asked the former European Central Bank chief and Italian prime minister a year ago to write a report on how the EU should keep its greening and more digital economy competitive at a time of increased global friction.
"Europe is the most open economy in the world so when our partners don't play according to the rules, we are more vulnerable than others," Draghi told a news conference.
In the opening section of a report set to run to some 400 pages, Draghi said the bloc needed additional investment of 750-800 billion euros ($829-884 billion) per year, up to 5% of GDP - far higher even than the 1-2% in the Marshall Plan for rebuilding Europe after World War Two.
"Growth has been slowing down for a long time in Europe, but we've ignored (it)," Reuters quoted Draghi as saying.
"Now we cannot ignore it any longer. Now conditions have changed: World trade is slowing, China is actually slowing very much and is becoming much less open to us... we've lost our main supplier of cheap energy, Russia."
EU countries had already responded to the new realities, Draghi's report said, but it added that their effectiveness was limited by a lack of coordination.
Differing levels of subsidies between countries was disturbing the single market, fragmentation limited the scale required to compete on a global level, and the EU's decision-making process was complex and sluggish.
"It will require refocusing the work of the EU on the most pressing issues, ensuring efficient policy coordination behind common goals, and using existing governance procedures in a new way that allow member states who want to move faster to do so," the report said.
It suggested so-called qualified majority voting - where an absolute majority of member states need not be in favor - should be extended to more areas, and as a last resort that like-minded nations be allowed to go it alone on some projects.
While existing national or EU funding sources will cover some of the massive investment sums needed, Draghi said new sources of common funding - which countries led by Germany have in the past been reluctant to agree to - might be required.
"If the political and institutional conditions are met, these projects would also call for common funding," the report said, citing defense and energy grid investments as examples.
EU growth had been persistently slower than that of the United States in the past two decades and China was rapidly catching up. Much of the gap was down to lower productivity.
Draghi's report comes as doubts emerge over the economic model of Germany, once the EU's motor after Volkswagen weighs its first ever plant closures there.
Draghi said the EU was struggling to cope with higher energy prices after losing access to cheap Russian gas and could no longer rely on open foreign markets.
The former central banker said the bloc needed to boost innovation and bring down energy prices while continuing to decarbonize and both reduce its dependencies on others, notably China for essential minerals, and increase defense investment.

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Turkish Firms Face Wave of Closures Amid Economic Reckoning 

Leftover textile materials are seen outside a shut-down textile factory at the organized industrial zone in Corum, Türkiye, August 23, 2024. (Reuters)
Leftover textile materials are seen outside a shut-down textile factory at the organized industrial zone in Corum, Türkiye, August 23, 2024. (Reuters)
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Turkish Firms Face Wave of Closures Amid Economic Reckoning 

Leftover textile materials are seen outside a shut-down textile factory at the organized industrial zone in Corum, Türkiye, August 23, 2024. (Reuters)
Leftover textile materials are seen outside a shut-down textile factory at the organized industrial zone in Corum, Türkiye, August 23, 2024. (Reuters)

It is hard for Dogan Duman to see how he can keep his garment factory in central Türkiye running much longer, even after firing a third of his staff to cut costs that have soared for companies nationwide, generating a wave of bankruptcies and closures.

Idle sewing machines are pushed to the side of his factory floor in Corum, where outside "For Sale" signs and padlocked gates dot the small city's once-buzzing industrial zone.

Such sober scenes are spreading across Türkiye as part of the fallout from a more than year-long policy-tightening effort, including a 50% benchmark interest rate, to rein in years of soaring inflation and overheated demand.

Thousands of companies like Duman's - which makes coats and jackets for global fashion brand Zara - are squeezed by inflation that topped 75% earlier this year, an overvalued lira, hikes to electricity and gas prices and dwindling export orders.

"The orders are shrinking daily because we are losing our competitiveness... and I think they will shrink even more," he said of his 27-year-old company that is now down to 60% capacity and 210 employees.

Türkiye is one of the world's top five garment manufacturers and a critical source for Europe's top brands. But despite its advantage of proximity to Europe, its main trade partner, Duman says swelling energy, labor and FX costs have left him trailing rivals in Vietnam and Bangladesh.

"Considering the current lira exchange rate and the expected further rise to minimum wage next year, I think we won't be able to compete," he said. "We will be at a point of shutdown."

These days, Turkish households and business are facing the economic consequences of a cumulative 41.5 percentage points of rate hikes that began in June last year and are now finally beginning to cool inflation, which dipped to 52% last month.

Last year's dramatic policy U-turn, including fiscal steps, aims to leave behind years of soaring prices and currency crashes under President Recep Tayyip Erdogan's formerly unorthodox approach of monetary easing to stoke growth.

But with credit now out of reach for many, and lira depreciation badly lagging monthly price rises, companies, especially apparel and textile exporters, are in a crunch.

Almost 15,000 companies closed down in the first seven months of the year, up 28% from 2023, according to the Union of Chambers and Commodity Exchanges of Türkiye.

Other data suggest bankruptcy stress is brewing.

Monitoring outlet konkordatotakip.com says 982 companies were granted initial court protection from debt in the first eight months of the year, almost double last year's total.

Construction and textile firms have made the largest number of such applications to suspend debt payments to banks and suppliers to continue operations, and also for bankruptcy proceedings.

Such company strains have knock-on effects, slowing or halting payments across the economy and lifting joblessness.

There may be "heavy costs," said Erdal Bahcivan, chairman of Istanbul Chamber of Industry. "While trying to save a company, dozens of (creditor) firms may end up in dire straits."

Some economists say that given the aggressive tools used to slay inflation, rising unemployment and bankruptcies are all but certain.

"This is a serious dilemma for the government," said Seyfettin Gursel, director at Bahcesehir University Center for Economic and Social Research. "It is trying to put the monster it created back into its lair, but doesn't know how to do it".

STREWN GARMENTS

In Corum, 500 kilometers east of Istanbul, some factories have broken windows and one had dozens of colorful rain-drenched garments strewn across its grassy yard.

Bulent Demirci, co-owner of a yarn factory in the city with 50 workers, said he shut it down a couple of months ago due to an "unpredictable economic outlook".

"We had production cuts from time to time in the past. But this time it is all doom and gloom," he said.

Ankara's latest hike to the minimum wage was to 17,002 liras ($500) in January, which is up 100% from a year earlier and 500% from the end of 2021, when a historic lira crash rocked Türkiye.

Gas and electricity prices have risen about sevenfold and threefold respectively since 2021 for small to mid-scale manufacturers.

Türkiye’s overall production costs are now almost 40% higher than in competing Asian countries in dollar terms, according to interviews with exporters, who also blame barriers to financing and dwindling working capital.

Exporters have lobbied for more currency depreciation given that, year-to-date, inflation is 32% while the lira has fallen only 13% to the dollar. Authorities however have urged lira holdings, helped along by high deposit rates.

Istanbul-traded Mega Polietilen and garment manufacturer 3F Tekstil are among those that applied for court protection from debt payments.

An executive at 3F who requested anonymity said the move helped as it struggled to survive with a total 600 workers, and to continue supplying fashion brands such as Mango and H&M.

"But our suppliers and those who have receivables will suffer more in this process," amounting to roughly 10,000 workers at outsourced manufacturers across the country, the executive said.

"When interest rates reached 60-70% the companies could not bear it. They cannot manage their debt," he said. "Businesses have paid for high inflation in Türkiye."