The European Union (EU) is at a critical crossroads and must substantially increase its investment and rethink its industrial policies to avoid an "existential challenge", according to a scathing report it commissioned European Commission.

The review, led by former European Central Bank President Mario Draghi, warns that the bloc needs to increase spending by 800 billion euros a year or risk being overshadowed by powers like the United States and China. The report, published just before the confirmation of the new European Commission – a cabinet-like body – carries an alarming message: without increased productivity, European leaders will be forced to make difficult choices between climate goals, economic growth and foreign policy priorities.

Commission President Ursula von der Leyen, who was re-elected for a second five-year term in July, tasked Draghi, a former Italian prime minister, with the landmark review. The process of drafting the report has been shrouded in secrecy, raising expectations in Brussels, especially after months of delays.

The financial recommendations set out in Draghi's report are unprecedented, amounting to 5 trillion euros of EU GDP, exceeding the scale of the Marshall Plan that revitalized Europe after World War II. Without these significant investments, the EU could face the risk of undermining its social model and be forced to "reduce some, if not all, of its ambitions," the report warns.

The report's main proposals include expanding joint borrowing by EU member states to finance needed investment - a controversial proposal that could face resistance from some quarters. Speaking in Brussels after its publication, Draghi stressed the urgency of the situation: "For the first time since the Cold War, we have to truly fear for our existence, and the case for a united response has never been more compelling."

The report identifies slow productivity growth as one of the main challenges for the EU, with stagnant economic progress in the region leading to slower improvements in living standards compared to the US. Draghi highlighted that Europe is lagging behind in innovation, particularly in relation to the United States, which has produced several trillion-dollar technology giants. He said that Europe has “largely missed the digital revolution and is now ‘considered’ within a rigid industrial framework, with few new companies being created.

Innovative European companies are increasingly considering relocating abroad, where they are attracted by better financing opportunities and fewer regulatory hurdles. In addition, the EU is under increasing pressure from state-backed Chinese companies seeking to gain a foothold in emerging sectors such as electric vehicles and green technologies.

The report contains 170 proposals aimed at reducing regulatory burdens, improving decision-making processes and promoting greater cooperation between Member States, a historically challenging task for the EU.

Lorenzo Codogno, a visiting professor at the London School of Economics and former head of Italy’s treasury, warned in an interview with the BBC that getting the political will to implement Draghi’s “provocative and bold” recommendations would be “extremely challenging.” Criticism of the report was immediate, with German Finance Minister Christian Lindner arguing that joint borrowing by EU states would not solve the bloc’s structural problems and that the main problem lay in excessive bureaucracy and planned spending, not a lack of subsidies. (Co2AI)