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Former European Central Bank president Mario Draghi has warned that the EU will not survive as anything other than an economic bloc unless it deepens its integration, as he forecast a recession in Europe by the end of this year.
Draghi’s warning comes as the EU economy struggles to recover from the consecutive crises caused by the coronavirus pandemic and Russia’s ongoing war against Ukraine, both of which exposed frailties in the bloc’s supply chains, energy market and global dependencies.
“Either Europe acts together and becomes a deeper union, a union capable of expressing a foreign policy and a defence policy, aside from all the economic policies . . . or I am afraid the European Union will not survive other than being a single market,” Draghi told the FT’s Global Boardroom conference.
Draghi has been tasked by the European Commission to prepare a report on how the EU can tackle its eroding global competitiveness, particularly in comparison to the US and China, which have invested heavily in supporting their economies’ green transition.
“We should worry very much about this,” Draghi said. “The European economy has been losing competitiveness in the last 20-plus years, with respect not just to the United States but Japan, South Korea and, of course, China.”
“In many, many technological areas, technological fields, we have lost presence, we have lost footprint,” he added.
This came, Draghi said, as the EU’s past model of broadly relying on the US for defence, China for trade and Russia for energy had ended.
“The geopolitical, economic model upon which Europe rested since the end of the second world war, is gone,” he said.
The former Italian prime minister singled out Europe’s low productivity, high energy costs and lack of skilled labour as weaknesses.
“To have an economy capable of supporting an ageing society at the rhythm we have in Europe, we have to have much higher productivity,” he said. “Where we need to get our act together is energy. We are going nowhere paying energy twice or three times what it costs in other parts of the world.”
Draghi, who left the ECB four years ago, expected a contraction in output in the region over the coming quarters. “It is almost sure we are going to have a recession by the year-end,” he said. “It is quite clear the first two quarters of next year will show that.”
Although Draghi said the recession was unlikely to be “deep” or “destabilising”, his assessment was more downbeat than the recent forecasts of the ECB or the IMF, which both expect a rebound of European growth from the final months of this year.
The eurozone economy shrank 0.1 per cent in the three months to September compared with the previous quarter, according to the preliminary flash estimate published by the EU’s statistics arm last week, and many economists are predicting a further contraction in the fourth quarter.
However, the ECB’s latest eurozone forecast is for a rebound in quarter-on-quarter growth to 0.1 per cent in the final three months of this year, 0.3 per cent in the first quarter of 2024 and then a period of 0.4 per cent growth. The IMF this week forecast broader European growth would make a modest rebound from 1.3 per cent this year to 1.5 per cent next year.
Draghi said the impact of the expected recession on Europe’s economy was likely to be cushioned by the relatively low level of unemployment, which rose slightly in September after hitting a record low of 6.4 per cent earlier this year.
“The starting point of this recession is pretty high — we never had such low unemployment,” he said. “So we may have a recession, but maybe it is not going to be destabilising.”
