The much anticipated “Draghi-report” published earlier this month has by now made its way into most parliaments, cabinet offices and boardrooms. The almost 400 pages of analysis and recommendations provide a stark warning for the EU to clean up its economic and industrial act.
The conclusions from the main report (section A) have already been covered in op-eds, policy briefs and essays, but section B of the report, which contains sector-specific in-depth analyses, still contains valuable nuggets of information.
Many of the sectors mentioned in the report are direct research areas of The Hague Centre for Strategic Studies. In this Draghi Report Series, we decided to ask our experts for their views on specific sections of this high-profile report.
For the third article in our Draghi Report Series, HCSS director of political affairs Han ten Broeke and strategic analyst Ron Stoop give their take on the report’s section on the Automotive sector.
– Which policy recommendations do you think are the strongest, and why?
Han ten Broeke: The automotive sector remains essential for Europe’s growth and earning power. Over the past decade, much of the automotive industry—especially German carmakers—has focused on reducing CO2 emissions through improvements in existing technologies like gasoline and diesel engines. This strategy seems akin to betting on an old horse, as the world, particularly China, has rapidly shifted toward electric vehicles (EVs). China now leads the global market in both EV sales and innovation, having fully embraced battery technology.
It is encouraging that the recommendations from Mario Draghi advocate for innovation, specifically in batteries, as well as synthetic fuels. However, Europe’s approach to China cannot rely solely on tariffs and protectionism. The European Commission has wisely tailored its response to Chinese car manufacturers by differentiating its actions based on the level of state aid these manufacturers receive. For Europe, the way forward lies in supporting innovations, such as the EU’s battery industry, and moving away from subsidies toward fiscal incentives.
Ron Stoop: The most important recommendation of the Draghi report is the realization that without support the western automakers will not be able to withstand the onslaught of Chinese EV-imports. The European car sector has indeed dropped the ball on EVs, but the cost of losing the European automotive sector is too dear. As Draghi rightly notes, about 12 million people are directly and indirectly employed in the automotive sector. Additionally, it is a strong motor of technological innovation and automation.
The middle term strategy should be different. Within Europe signs of a return to national technological favoritism has already become apparent, with larger member states such as Germany and France pouring vast sums of money into their domestic industries. This risks distorting the internal market and does not create an integrated set of rules for European car manufacturers. Most importantly is that a clear, and likely narrow, path to competitive sustainable automaking will be laid out to the European manufacturers.
– Is there anything missing in the policy recommendations? What would you add?
Ron Stoop: What’s missing from the report is a clear recommendation in terms of policy tools: tariffs, product standard measures, fiscal incentives or subsidies all create their own dynamic, either supporting the fledgling European EV-industry or throttling the adoption of EVs. In terms of EV uptake by consumers fiscal incentives and subsides have shown to work in Norway, where EVs dominate new car sales. On the producer side, fiscal incentives such as the US Inflation Reduction Act have altered the cost calculations of producers along the value chain, steering towards more production within the borders of the NAFTA. The exact impact of the EU import tariffs on Chinese EV production is uncertain, but first signs of a geographic shift from Chinese carmakers towards Europe or near-Europe are already visible. Close monitoring and realistic appraisal of all existing measures is essential to preserve the good and shed the bad.
Han ten Broeke: Draghi proposes three key solutions: short-term protection for Western car manufacturers, medium-term support for innovative sectors, and vertical integration of industries like the battery sector (from mining to production). However, the European Commission has yet to act decisively on any of these fronts.
One additional recommendation from Draghi is the importance of further standardizing the EV market, particularly in infrastructure. For example, in the Netherlands, e-LAAD is setting the standard for EV charging infrastructure. It is crucial that this system doesn’t end up like Philips’ Video 2000—an innovation that failed to gain widespread adoption. Another warning from Draghi is to ensure that consumer prices, including fuel and energy costs, do not rise too steeply. This concern impacts not only the industry but also consumers, who are increasingly facing what could be termed “mobility poverty.”
– Which figure or data point in the report did you find most insightful, and why?
Ron Stoop: Figure 4 is quite telling. It shows the massive scale-up that China is going through in automotive production. Between 2020 and 2021, China installed more robot capacity in the car industry than all other major automotive countries (Japan, US, Germany, Korea) combined. This serves as a reminder that the EU should be prepared to compete not only with differing labour costs, energy costs and environmental standards in East Asia, but also with production sites that are technologically advanced and highly automated. This makes the challenge for the EU even harder, and necessitates a strong focus on innovation and automation of the sector.
– How do you view the feasibility of these plans in a European context?
Han ten Broeke: In the Netherlands, the policy shifts under the Schoof government have raised concerns. They have cut subsidies, including those for EVs, and retracted fiscal benefits like the road tax (motorrijtuigenbelasting, red.) incentives. This move risks alienating consumers, as promises of financial advantages are now being revoked without any clear alternative policies in place. Simply offering temporary relief, such as a one-year reduction in fuel taxes, will not suffice. It risks leaving car owners unprepared for future fuel price hikes, driven by taxes like RED and ETS2, without providing affordable options for CO2-neutral vehicles.
In the Dutch car market, which relies heavily on imports, the share of EVs has now stabilized at around 30%. This suggests that the country is unlikely to meet its goal of having 100% of new car sales be net-zero by 2030, or even by 2035, which is the EU-wide goal. The Dutch market, therefore, seems to be heading in the wrong direction, both in terms of EV adoption and in alternatives to fossil fuels, such as synthetic fuels promoted in Draghi’s recommendations.
Unfortunately, the Schoof government has no clear strategy to mitigate the impact of ETS2, the European Commission’s carbon pricing mechanism. Although 75% of ETS revenues are earmarked for measures to make mobility more CO2-neutral, the new Dutch government’s coalition agreement lacks any measures to address this pressing issue.
Stay tuned for the next issue of the Draghi Report Series by HCSS, where we invite experts to discuss other sectorial policies in Mario Draghi’s report “The future of European competitiveness”.
Read the previous installments here:
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