20/07/2026

Draghi: Europe is Entering its Moment of Truth

Head of Europe Program

The implementation of the Draghi report, presented in September 2024 to bridge the competitiveness gap between the EU and both the US and China, serves as a litmus test for Europe's ambition. While the shift in approach is genuine, marked by a novel prioritization of producer interests over consumer welfare, a systematic European preference, and targeted investment strategies, it risks stalling against national interests. These divides threaten to restrict action to the lowest common denominator, which remains wholly inadequate given the accelerating pace of global change. What is the true extent of the transformation underway, and what are the primary obstacles standing in its way?

Two years after Mario Draghi’s stark and irrevocable diagnosis of Europe’s competitiveness decline, perceptions of inertia have gradually taken root across the continent, fuelling widespread pessimism and defeatism. Yet Institut Montaigne's recent study, tracking the implementation of the recommendations laid out in the Draghi Report to pull Europe out of its lethargic state, offers grounds for optimism. The study’s findings show the legal implementation rate of Draghi’s reform agenda to be approximately 30 percent. Eighteen months after the report’s publication, and sixteen months after the official inauguration of the new College of Commissioners, this result suggests that Europe remains broadly in line with the schedule outlined by Draghi.

Europe’s Real Test Begins Now

More encouraging than the prevailing narrative suggests, this figure offers little cause for complacency. Europe’s challenge now is to translate this new political momentum into collective, rapid, and effective action. The geopolitical environment having only become harsher since, Europe has equipped itself with the means to implement the bulk of the Draghi report over the next eighteen months. It must learn, however, to overcome national divergences and institutional inertia.

So far, the Commission has been the principal driver of progress, with two-thirds of implementation to date attributed to actions that fall within the remit of the Commission alone. However, only 3 % of the more ambitious reforms identified in the report, those requiring the involvement of both the Parliament and Member States, have been fully implemented. The report’s most significant figure, nevertheless, lies in the proportion of recommendations that will formally become the subject of legislative proposals under negotiation in the coming months: more than 60 %.

The interinstitutional pact, One Europe, One Market Roadmap, signed in April, lists 42 priority legislative files that the Commission has committed to proposing and that the co-legislators have pledged to adopt by the end of 2027. Combined with legislation already under discussion, this text offers a level of joint commitment hitherto unseen and demonstrates a growing awareness among European leaders of the urgency of the situation. Beyond the high-profile but ultimately unlikely reforms of EU governance or further common borrowing, several key policy areas will be indicative of Europe’s ability to deliver ambitious reforms.

Beyond the high-profile but ultimately unlikely reforms of EU governance or further common borrowing, several key policy areas will be indicative of Europe’s ability to deliver ambitious reforms.

Three Decisive Areas for European Competitiveness

European Preference: To What Extent Should We Pay More to Support Our Producers?

Indicative of a new balance that increasingly favours producer interests over those of consumers, who may be required to accept higher prices in exchange for strengthening European production, the Draghi Report strongly advocates the development of a European preference in a number of critical sectors. Faced with the Donald Trump’s second mandate, Europeans moved quickly to establish a first precedent in the defence industry.

Under the European Defence Industry Programme (EDIP), EU funding requires that 65 % of procurement be sourced from European suppliers or associated countries. Since then, the Industrial Accelerator Act (IAA) has proposed a similar principle for key sectors involved in the green transition, while the Cloud and Artificial Intelligence Development Act seeks to apply comparable rules to strategic segments of the digital economy. The Multiannual Financial Framework for 2028-2034, currently in trilogue negotiations, goes further by proposing to generalise this across all EU funding instruments.

Two years ago, such an approach would have been considered unimaginable. Today, the EU verges on embracing an economic logic long viewed with hostility in Brussels. The litmus test of this conceptual shift will be the breadth of its scope: who is recognised as "European" (which partners are automatically included), who determines these affiliations, and under what conditions European operators may be exempted from such requirements, particularly in cases involving significant price differentials.

The Multiannual Financial Framework and the Concentration of Common Resources on Techno-Industrial Priorities

The 2028-2034 Multiannual Financial Framework (MFF) and its proposed European Competitiveness Fund (ECF) represent perhaps the clearest embodiment of Draghi’s ambition for Europe’s prioritising of technological and industrial capabilities. This seven-year EU budget framework, proposed by the Commission in 2025, has been redesigned to concentrate European funding on support for critical sectors.

Under the proposal, the ECF would consolidate fourteen existing funding instruments into a single framework dedicated to strategic areas, including artificial intelligence, semiconductors, clean technologies, defence, space, and critical raw materials. The share of total EU funding allocated to these priorities would be nearly tripled compared with the previous period. By supporting projects across the entire innovation cycle, from R&D to industrial deployment, the ECF aims to move beyond funding only research and innovation stages and instead address the needs of the entire critical industrial ecosystem.

The extent to which the EU’s priorities will be redirected away from redistribution and towards critical sectors will provide a far more meaningful measure of the strength of European commitments than all the grand speeches about the need for a Europe that can act as a power.

Financial Markets: Building an Integrated European Market

In the short and medium term, the primary vehicle for financial integration and increased investment in Europe’s productive economy is likely to be the capital markets.

Given political sensitivities and national specificities, particularly in Germany, the prospects for completing a genuine Banking Union remain limited. In the short and medium term, the primary vehicle for financial integration and increased investment in Europe’s productive economy is likely to be the capital markets.

Policymakers are aware of the migration of innovative firms to the United States and have thus launched extensive discussions on harmonising financial market regulations. While parallel negotiations are expected both among all 27 Member States and within a smaller group of more ambitious countries, the ultimate test will be Europe’s ability to create a truly integrated single capital market. More than twenty-five years after the removal of the last restrictions on capital flows between States, Europe’s financial reality is largely national marketplaces, still only partially integrated. Simultaneously, fragmented regulatory frameworks overseen by separate supervisory authorities hamper the development of riskier financial activities capable of providing funding to Europe’s most dynamic and innovative firms.

Europe’s ability to align approaches and move beyond the vested interests of established national actors will be telling of its capacity for collective action in support of competitiveness. The stakeholders consulted as part of Institut Montaigne’s research lead to a cautiously optimistic conclusion on this front. The study projects that implementation of the financial recommendations contained in the Draghi Report could exceed 80 % by the end of 2027.

Beyond the Lowest Common Denominator : a New Method ?

The Draghi Report provided Europe with both a wake-up call and a detailed roadmap for narrowing the competitiveness gap with the United States and China. At the end of 2024, Europe might have been satisfied with the prospect of achieving the 60 percent implementation rate by the end of 2027 that Institut Montaigne’s results foresee. But, alas, the world has not stood still and threats to our freedoms continue to increase. The accelerating changes Draghi identified must compel Europe to make quicker and stronger decisions. To do so, Europe must, alongside its reform agenda, develop new ways of forging compromises that enable it to move beyond the constraints of the lowest common denominator.

Copyright NICOLAS TUCAT / AFP

Former European Central Bank president Mario Draghi, Brussels, on September 16, 2025.