The Draghi Report: how the EU can boost investments and liquidity for SMEs 

The long-awaited Draghi Report on European Competitiveness, unveiled in September, marking a pivotal moment for Europe as it faces a critical crossroads. 

The nearly 400-page document outlines the continent’s deep-rooted challenges and calls for urgent, decisive action to prevent a painful and inevitable decline—one that could see Europe losing its global influence and eroding its cherished way of life. 

Supporting SMEs and helping them understand and navigate the EU legislative process is a primary objective of ours at Lykke Advice. That is why we chose to study some aspects of the Draghi Report more closely, as the report puts forward interesting suggestions and insights for helping SMEs, especially when it comes to removing red tape and reporting obligations. 

It is worth noting that the Draghi report was published a few months after the Letta Report, written recently by another former Italian Prime Minister, Enrico Letta. The Letta report is a comprehensive analysis of the European Single Market, addressing issues such as financing, integration, sustainability, regulation, and global competitiveness and it aims to strengthen the EU Single Market and foster collaboration and trade between its Member States. However, where the Letta report offers a political roadmap for solving joint-European issues, the Draghi Report provides detailed financial solutions on how to reform the EU’s financial market to boost investment and promote credit. 

A Careful Analysis and a Detailed Escape Path 

When the Draghi Report was published in September 2024, there was great anticipation of how it would identify, explore and propose financial solutions to some of the EU’s most long-standing challenges.  

Mario Draghi is a well-known expert on monetary and financial matters. However, with this report, he has provided the Commission with a detailed manual and practical guide that according to him, as former European Central Bank Chief, could help solve the EU’s most immediate problems.  

There is little doubt that the Report will continue to influence EU-level debates on future legislation, both among its supporters—who will seek to use its recommendations, sometimes even stretching its content, to justify or legitimise their proposals—and those who challenge the Report and its conclusions, aiming to weaken or dilute new proposals or legislation. However, this is also a political document, and nobody expects that the Draghi-report will just be adopted as such, so we are expecting a number of discussions on the content of the report, the legal implications and as well the way forward. 

How to Boost Investments: Completing the EU Financial Structure 

It is a well-established fact that Member States have often prioritized spending on areas with immediate returns, such as subsidies, over long-term investments. While research and development, critical for economic growth, require significant upfront investments and time to yield results, subsidies offer short-term benefits but come with even higher long-term costs. 

Yet, the Draghi Report debunks a common misconception: the sharp decline in investments is not solely due to government spending cuts. According to Draghi, there are deeper structural issues within the EU’s financial system that limit investment. These are: an overly bank-centric financial system, an incomplete and fragmented Capital Markets Union, and insufficient, EU-level spending. 

The Report highlights that Europe’s excessive reliance on bank financing over capital markets hinders economic growth and innovation. Since the mid-20th century, European businesses have preferred bank loans over issuing bonds or equity, limiting the development of non-bank finance. This particularly penalises innovative and growing firms, which require patient, risk-tolerant capital—something difficult to obtain through banks, especially under strict regulatory constraints. 

Furthermore, the fragmentation of Europe’s banking system makes it less competitive compared to the United States. European banks, smaller and less profitable than their American counterparts, struggle to provide the capital necessary to finance major investments. Additionally, fragmentation, due to the incomplete implementation of the Banking Union, limits credit market integration, hampers cross-border operations, and prevents banks from fully exploiting economies of scale. 

To overcome these limitations, the Report suggests completing the Banking Union and accelerating the development of the Capital Markets Union. This would not only enable greater financial integration but also create a more conducive environment for issuing equity and bonds, allowing European businesses to access a broader range of funding sources. 

According to the ECB, completing the CMU would offer numerous benefits for the European economy. First, European firms would have access to more diversified funding sources, enabling them to adapt more effectively to changing market conditions. Easier access to market-based financing would reduce firms’ reliance on banks during times of stress, such as the COVID-19 crisis. Second, progress toward the CMU would enhance private risk-sharing across countries, providing macroeconomic stabilization benefits and making economies more resilient to local shocks. In the case of asymmetric shocks affecting one country, private risk-sharing could serve as a stabilizing mechanism by redirecting capital from one country to another. Third, strengthening capital markets through policies that encourage equity financing would spur growth and innovation. Research suggests that firms with high growth potential tend to rely more on equity financing, and capital markets are better equipped to finance innovation and new growth opportunities. 

Lastly, the Report emphasizes that investment in Europe is not only constrained by capital market fragmentation but also by the inefficiencies and limitations of the EU’s budget and spending. According to Draghi, the EU not only spends too little—its budget is just 1% of its GDP—but also does so inefficiently. EU investments are fragmented and lack clear strategic priorities, with over 50 uncoordinated spending programmes leading to overlaps or duplication. Additionally, accessing these funds is bureaucratically complex, placing an excessive administrative burden on SMEs. The EU budget is also highly rigid, as it is based on a multi-year framework that is difficult to modify once agreed upon. 

The Case for a Well-Functioning Risk-Sharing Instrument 

The Draghi Report highlights a major shortcoming in the EU’s ability to mobilize private investment through risk-sharing mechanisms, particularly within the InvestEU programme. While InvestEU aims to foster investment in strategically important areas, its implementation—primarily through the European Investment Bank (EIB)—remains overly cautious, focusing on low-risk projects. Draghi argues that the EIB’s approach is insufficient to provide the necessary liquidity to stimulate growth and innovation. Although there have been efforts to target riskier investments, the programme still lacks the boldness needed to absorb higher risks, where public funding can have the greatest impact. 

Therefore, the Report calls for the creation of a common European safe asset. This would facilitate the completion of the CMU, integrate the banking system, and improve access to credit for businesses. A common safe asset would not only unlock more capital for investments but also help release the untapped potential of private investment in Europe, which has been significantly reduced in recent years. 

Misleading Critiques 

Despite strong criticism from some Member States traditionally opposed to debt mutualization, it is important to clarify that the debt-sharing mechanism proposed in the Draghi Report is not an end in itself but a temporary solution to achieve more ambitious goals, or an alternative in their absence

If anything, the main weakness of the report lies in its assumption that these steps are straightforward and easy to achieve, taking for granted that member states, based on these recommendations alone, will embark on this path after years of inaction. What is lacking are sufficient reassurances and guarantees to overcome the long-standing resistance that has hindered progress, both from southern and northern countries alike. 

The Way Forward: Challenges for the Commission 

Draghi offers a valuable guide to reform the EU financial structure to the European Commission, which now is facing the extreme challenge of implementing crucial reforms that have been long overdue. 

For businesses, especially SMEs, that are often constrained by regulatory hurdles and limited liquidity, these reforms, if coupled with effective simplification, could provide the financial stability necessary for innovation and growth. As the European financial landscape evolves, SMEs that are prepared to navigate these changes, while benefiting from a streamlined regulatory environment, will be well-positioned to capitalize on the new opportunities. Understanding these potential shifts early could offer a competitive edge in the market, making this a particularly relevant development for potential clients and stakeholders.  

The mission letter sent by President von der Leyen to the designated Commissioner for Financial Service and the Savings and Investments Union, Maria Luis Albuquerque, is promising. It echoes many of the recommendations of the Report, with the top priority being the development of a European Savings and Investments Union, including banking and capital markets. Additionally, the letter mentions other steps that, if realized, would have significant positive impacts, such as advancing risk-absorbing measures to crowd in private funding from commercial banks, exploring ways to increase the availability of venture capital and other risk capital, improving the supervisory system at the EU level, and completing the long-awaited Banking Union through a credible path forward for the European Deposit Insurance Scheme

This strong foundation now requires clear and decisive implementation, and Maria Albuquerque may be the right person at the right time. Known in Portugal for her management of the financial crisis, Albuquerque appears well-equipped, with a solid financial and economic background, to tackle the challenges ahead.  

Hopefully, she will once again demonstrate the decisive leadership that helped guide Portugal through the crisis by making tough, sometimes unpopular decisions, putting aside populism that seeks a more divided and less sovereign Europe. In the end, as Draghi rightly stated, if Europe does not undertake these measures, the risk of losing sovereignty could become a reality – rather than just an electoral campaign slogan. This time, our European way of life is truly at stake and the risk that the Draghi Report will remain yet another dream books is very high.  

If you are interested in reading our analysis on different EU topics, we have plenty more articles in our Opinion section.

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