Mario Draghi: “Forget the US —Europe has successfully put tariffs on itself”

Former President of the European Central Bank (ECB) and one-time Prime Minister of Italy Mario Draghi has suggested that Europe effectively subjected itself to tariffs before the USA’s recent moves in this direction.

Draghi, who oversaw the widely-referenced analysis on the future of European competitiveness that has become known as the Draghi Report, recently wrote a relevant article in The Financial Times entitled, 'Forget the US —Europe has successfully put tariffs on itself.'

In his article, Draghi noted that the past weeks had provided a stark reminder of Europe’s vulnerabilities. “The eurozone barely grew at the end of last year, underlining the fragility of the domestic recovery. And the US began imposing tariffs on its major trading partners, with the EU next in its sights.”

This prospect, he continued, had cast further uncertainty over European growth, given the economy’s dependence on foreign demand.

“Two major factors have led Europe into this predicament — but they can also lead it out again if it is prepared to undergo radical change,” Draghi suggested, going on to explain, “The first is the EU’s long-standing inability to tackle its supply constraints, especially its high internal barriers and regulatory hurdles. These are far more damaging for growth than any tariffs the US might impose — and their harmful effects are increasing over time.”

He referenced IMF estimates that Europe’s internal barriers were equivalent to a tariff of 45% for manufacturing and 110% for services, continuing, “These effectively shrink the market in which European companies operate: trade across EU countries is less than half the level of trade across US states. And as activity shifts more towards services, their overall drag on growth becomes worse.”

The expert also noted that, at the same time, the EU had allowed regulation to track what he described as the most innovative part of services, digital, “hindering the growth of European tech firms and preventing the economy from unlocking large productivity gains.”

Draghi gave the the costs of complying with GDPR as an example, pointing out that they are estimated to have reduced profits for small European tech firms by up to 12%.

“Taken together, Europe has been effectively raising tariffs within its borders and increasing regulation on a sector that makes up around 70% of EU GDP,” he said.

The former ECB President suggested that this failure to lower internal barriers had also contributed to what he described as Europe’s unusually high trade openness. “Since 1999, trade as a share of GDP has risen from 31% to 55% in the eurozone, whereas in China it rose from 34% to 37% and in the US from 23% to just 25%. This openness was an asset in a globalising world. But now it has become a vulnerability,” he explained.

Draghi went on to note that, “The paradox is that while internal barriers remained high, external barriers fell as globalisation accelerated. EU companies looked abroad to substitute for lack of domestic growth and imports became relatively more attractive.” He gave the example that, since the mid-1990s, trade costs in services were estimated to have dropped by 11% within the EU but by 16% for non-EU imports. Draghi continued, “This helps explain why trade in services inside and outside the EU is about the same today as a share of GDP — unthinkable in a fully integrated large economy.”

Draghi said that the second factor he believed was holding Europe back, “is its tolerance of persistently weak demand, at least since the global financial crisis of 2008.”

According to the expert, “This has exacerbated all the issues caused by supply constraints. Until the crisis, domestic demand as a share of GDP in the eurozone was near the middle of the range of advanced economies. Afterwards, it fell to the bottom and stayed there. The US has remained at the top throughout.”

Draghi suggested this widening demand gap helped turn high trade openness into high trade surpluses explaining, “The eurozone current account has shifted from broadly balanced until 2008 to persistent surpluses thereafter. And weak demand has fed back into exceptionally weak total factor productivity growth after recessions, a pattern not seen in the US.”

As he stated, this is something that can partly be explained by the effect of demand on the innovation cycle.

“Research finds that policy-driven demand shocks have a significant effect on R&D investment, especially for disruptive technologies. While the demand gap has different drivers, the most significant has been the relative stance of fiscal policies. From 2009 to 2024, measured in 2024 euros, the US government injected over five times more funds into the economy via primary deficits — €14tn versus €2.5tn in the eurozone,” Draghi said.

He continued, “Both these shortcomings — supply and demand — are largely of Europe’s own making. They are therefore within its power to change.”

According to Draghi, “An unyielding drive to remove supply constraints would help innovative sectors to grow and, by redirecting demand back into the domestic market, reduce trade openness without raising trade barriers.”

He suggested that the European Commission’s new Competitiveness Compass provides a road map to achieve this.

“At the same time,” Draghi continued, “more proactive use of fiscal policy — in the form of higher productive investment — would help lower trade surpluses and send a strong signal to firms to invest more in R&D. But this path calls for a fundamental change in mindset.”

“Up to now, Europe has focused on either single or national goals without counting their collective cost. Conserving public money supported the goal of debt sustainability. The spread of regulation was designed to protect citizens from new technology risks. Internal barriers are a legacy of times when the nation state was the natural frame for action. But it is now clear that acting in this way has delivered neither welfare for Europeans, nor healthy public finances, nor even national autonomy, which is threatened by pressure from abroad. That is why radical change is needed,” the former ECB President and Prime Minister of Italy concluded.