The future of innovation in Europe: the response to the Draghi report

Three reports on threats to Europe

Throughout 2024 three reports highlighted European weaknesses in the current economic and geopolitical context: Enrico Letta's report on the single market, Mario Draghi's report on European competitiveness and Sauli Niinistö's report on European security.

Of the three, probably the best known and the one that has generated the greatest impact is the Draghi Report, presented in September 2024, which makes a devastating analysis of European competitiveness (or its limitations) in comparison with the United States and China.

Draghi identifies three major challenges:

1. reducing the innovation gap with these countries
2. to reconcile European sustainability policies with competitiveness policies
3. improving the EU's economic security, including reducing dependencies in critical sectors

As far as innovation is concerned, Draghi highlights European difficulties in turning research into market products, i.e. true innovation, and identifies a set of barriers:

• the low European investment in R&D, especially private investment
• the lack of a clear focus in terms of public funding, which leads to a dispersion of resources
• the fragmentation of the European market, while the concept of the single market remains a theoretical concept in terms of innovation and entrepreneurship
• regulatory barriers, with a large proliferation of regulatory instruments that are not adequately integrated
• lack of trained personnel

To solve these problems, Draghi proposes focusing R&D on strategic EU priorities, improving program coordination, facilitating the commercialization of innovation, increasing private investment in R&D and simplifying the regulatory framework.

But what will the EU do in the face of these challenges?

The compass for EU competitiveness

The EU's first formal response to the set of challenges identified by Draghi is A Competitiveness Compass for the EU, presented on January 29, 2025, a communication from the European Commission defining a strategic proposal with the main actions to be taken in the next five years to revive the economy and reduce the competitiveness gap.

The compass focuses on these three pillars already advanced to boost competitiveness and a set of cross-cutting actions needed to underpin competitiveness in all sectors: closing the existing innovation gap, developing a joint roadmap for decarbonization and competitiveness, and reducing overdependencies in critical sectors while improving security.

Among the proposed actions, we can highlight:

• focusing investments in key sectors (e.g. renewable energy, artificial intelligence, biotechnology, etc.)
• establishing cohesion policies that reduce regional disparities in the EU and facilitate balanced development on the continent
• Simplify and modernize the regulatory framework to make it more efficient and market-driven.
• strengthening the single market, eliminating and improving the integration of the internal market to facilitate trade and investment
• to drive innovation and digitalization, encouraging the adoption of advanced technologies and supporting research and development
• promoting sustainable practices and reducing carbon emissions, aligning with the European Green Pact
• skills and talent development by investing in education and training to prepare the workforce of the future
• supporting small and medium-sized enterprises (SMEs) by facilitating their access to financing and reducing their administrative burden

Where does the innovation compass point?

There are significant barriers in Europe to turning research and innovation into market products. A Competitiveness Compass for the EU proposes a series of measures to alleviate this deficiency:

• the development of a strategy that facilitates the growth of start-ups and scale-ups by eliminating current obstacles, including regulatory barriers (and the lack of sandboxes that allow emerging companies to experiment with their solutions). Also the limited ability of companies to access venture capital funds to innovate (especially SMEs), the lack of a true single market for talent and knowledge (which manifests itself in the flight of talent to other regions with better job opportunities) or the lack of focus on innovation policies that manifests itself in an excessive dispersion of public aid. The EU proposes to deploy the European Innovation Act, a legislative package that can alleviate these deficiencies.
• instead of facing 27 different legal regimes in each Member State, a harmonized legal regime is proposed at EU level, making it easier for innovative companies to benefit from a single set of rules across the Single Market. This is the concept of the 28th legal regime referring to the European Commission's proposal to simplify and harmonize European regulation of start-ups.
• the need to increase investment in R&D, coordinating high-impact projects and supporting advanced technologies such as artificial intelligence, quantum computing, biotechnologies, clean energy production, robotics, space technologies or connected and autonomous mobility. In short, the aim is to create a more favorable environment for innovation and the growth of technology-based companies in Europe.
• boosting digitalization and the application of artificial intelligence in companies and, especially, in the public sector.
• new technologies require infrastructures (for data management, cloud computing, quantum computers, 6G technology, fiber optic networks, satellites, etc.) that must be provided to create a single connectivity market.
• a specific strategy should be developed for each of the EU's future technologies.
• and to finance innovation, the development of the TechEU investment program is proposed, which would be developed in collaboration with the European Investment Bank (EIB) and private investors and would support disruptive innovation and strengthen Europe's industrial capacity.

A realistic analysis of what the EU is proposing

The implementation of all these proposals will not be easy. In fact, some critics consider it unfeasible.

Take regulatory simplification, for example.

This is not the first time that the EU has proposed a process of regulatory rationalization. In May 1996, the SLIM (Simpler Legislation for the Internal Market) Initiative was launched to identify which legislative packages in the Single Market could be simplified. Almost 30 years later, regulatory proliferation has become (should I add regrettably?) an identifying feature of the EU. Not for nothing has the expression “The US invents, China replicates and Europe regulates”, of which I have not been able to identify the origin, been repeated ad nauseam in recent times. Nor does it help to give confidence in this simplification that the implementation of metering implies the development of new legislative packages in addition to the existing ones.

Increasing the funds dedicated to R&D&I is a relevant initiative, but there are other European programs, such as defense and security, that are also demanding additional funds. And funding is finite. In fact, the recent European Commission communication The road to the next multiannual financial framework published on February 11, 2025, mentions research and innovation as a priority, but it also mentions the aggression against Ukraine and the need to increase defense and security budgets, inequalities within the EU, irregular immigration, nature protection, climate disasters, the green, digital and social transition, etc.

In this document the Commission highlights the key principles for the next Multiannual Financial Framework 2028-2024, which should be:

• a budget based on policies rather than programs
• simpler, with fewer programs and a country-specific plan linking key reforms with investments, focusing on shared priorities such as economic, social and territorial cohesion
• have a greater impact, in particular by leveraging the EU budget to attract additional national, private and institutional funding
• more flexible, enabling rapid responses to crises

But some of these key principles are not aligned with the insights of A Competitiveness Compass for the EU. For example:

• if the budget is based on policies rather than programs, it will be more difficult to target funding, since policies are generally more generic than programs.
• if a country-specific plan is developed, it will be more complicated to plan innovation at the European level and avoid national dispersion among the 27 states

And let's not forget that in the next multi-year financial period, NextGenerationEU funds and interest will have to start being returned. Yes, it may come as a surprise to some, but perhaps not enough emphasis has been placed on the fact that the much-maligned recovery and resilience mechanism funds are not a gift from Europe to the member states.

The development of the European Competitiveness Fund, which will invest in strategic sectors and technologies critical to EU growth, including research and innovation, and major projects of common European interest, is clear. But the origin of the funds remains unclear, although the need to significantly increase the private contribution to all European programs seems clear. The Commission intends to present the next financial framework in July 2025. Perhaps by then...

Better coordination of R&D policies and their integration with the national policies of the different Member States clashes head-on with the interests of the States themselves, which are increasingly pushing for national management of the funds allocated to them, under EU guidelines, it is true, but adapting them to the special features of each country. This, as we have already seen, translates in the Multiannual Financial Framework into the proposal of a specific plan for each country.

Finally, a cultural change will be necessary throughout the entire European research and development apparatus. Universities and research centers on the continent base their livelihood, in most cases, on public funding, for which a clear market orientation is not essential.

Conclusion: more action

The diagnosis has been made. And the recipe is also clear: if Europe really wants to reduce the innovation gap with the United States and China, it must initiate structural changes in its R&D&I policy: regulatory simplification, more public and, above all, private investment, greater coordination, focus on strategic sectors?

How it will realistically implement all these policies remains the great unknown. Even more so given the tumultuous geopolitical scenario ahead.

But the time for ideas is running out, the time for action has come.

Is Europe ready?