The Draghi Report’s Mixed Picture for Central and Eastern Europe

Ahead of an EU meeting on Thursday to discuss Mario Draghi’s recent report on EU competitiveness, ministers from countries in Central and Eastern Europe (CEE) complained that the views of the region had not been taken into account during its preparation, which was reflected in its recommendations. The report, requested by the European Commission, is a blueprint for a Clean Industrial Deal to achieve a competitive, climate-resilient, and secure union through an EU-wide industrial policy. However, for the member states in CEE, the picture is mixed when it comes to their efforts at economic convergence with Western Europe. Many of the proposals would solidify the gap between the two regions, some may widen it, and only a few try to address it directly.

Draghi argues that changes to the EU’s budget and its Cohesion Policy, which alongside state spending are fundamental engines of CEE’s convergence, are necessary. At the same time, as countries in the region become wealthier, and especially if there is further enlargement, some of them will become net contributors to the EU budget. The report calls for member states to contribute to joint funding mechanisms that would directly benefit the economy of some in the short term but would have positive indirect effects for each one of them later. For the CEE countries, this could mean, for example, contributing to keeping Germany competitive because it should ultimately benefit them also.

Draghi calls for a new EU competitiveness framework, an EU-wide industrial policy, and a dedicated EU budget for manufacturing. The report also argues that the Cohesion Policy should reflect the new EU priorities and focus on financing dedicated areas of industrial policy, including education, digital technologies, and infrastructure. Moreover, Draghi urges the launch of new competitiveness-related Important Projects of Common European Interest as one of the primary tools of the EU’s industrial policy. This would be co-financed by new EU-wide joint funding, a follow-up to the first common borrowing for post-pandemic recovery. Such funding could prevent subsidy races between member states and enable securing finance for CEE countries, which have less fiscal leeway for state spending.

This will put pressure on the limited budgets of CEE countries, which will likely argue that they cannot finance the transition to clean technology and will therefore lose out relative to Western Europe.

The report states that, in the long run, public support to industry should move completely to the EU level with a centralized mechanism. But, until then, individual state aid will be needed for the key sectors of a more competitive EU, such as energy, energy-intensive industries, and clean-technologies manufacturing. This would be through existing mechanisms—continuing a situation that has largely been to the advantage of richer member states in Western Europe. Moreover, Draghi argues that all public support—whether from the EU or national state aid—should now broadly address scaling up manufacturing capacities in industries that need high capital investments. This will put pressure on the limited budgets of CEE countries, which will likely argue that they cannot finance the transition to clean technology and will therefore lose out relative to Western Europe.

Draghi proposes that any manufacturing project keeping the EU close to the innovation frontier should be welcome. One area is the semiconductor industry, for which he offers a dedicated strategy, including fast-track financing. While EU countries have been able to attract new capital-intensive investments in this area recently, this has been conditioned on the provision of state aid, in something like a subsidy race. In some cases, CEE countries have been able to benefit from this approach, but it is not always desirable for them. 

As I wrote in a recent report, Czechia is well placed within the semiconductor industry across specialized and skill-intensive value chain activities with focus on innovations, which could benefit from increased state aid. But there is no reason for it to devote more state aid to compete with, say, Germany to attract large chips production factories. 

Another area is the battery industry, where Draghi sees great potential for achieving a domestic supply matching the EU’s demand in 2030. Hungary and Poland already play crucial roles in European battery production for electric vehicles, and more state aid would be good for the prospects of the automotive industry in the EU. However, the battery industry does not automatically bring high value-added jobs or knowledge spillovers from foreign companies to local businesses, and Hungary has struggled to gain such benefits so far.

CEE countries will struggle to sustain their ongoing convergence process and at the same time support greater EU global competitiveness. And, although the next EU budget could see more significant funding for manufacturing industries, the green and digital transition will for now remain heavily dependent on state aid by member states—something that CEE countries have not yet been very successful at. At the same time, there is a likelihood that more EU funding for new projects will not so much benefit CEE member states as richer Western European ones, where more “champions” will be selected due to the strength of theses countries’ state aid and to existing network and agglomeration effects in new technologies, innovations, and skills. 

Despite all these issues, overall, a clear strategy and a new set of priorities for the EU, centralization of public support to industry at the EU level, and more significant EU contributions to supporting manufacturing and innovations in the member states could all help improve the region’s prosperity. But, to make the most of the potential opportunities, the CEE countries must update their national industrial policies to adhere to the new Clean Industrial Deal, including their innovation strategies, as well as rethink their priorities and positions regarding the upcoming EU budget negotiations and the new European Commission’s agenda.

Michal Hrubý is an economist based in Czechia and a ReThink.CEE Fellow 2023 of the German Marshall Fund of the United States. He is a PhD candidate at Prague University of Economics and Business, as well as a scientific assistant at Škoda Auto University, and the author of Rethinking Industrial Policy for Central and Eastern Europe.