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 second piece in our Draghi Report Series, we ask Benedetta Girardi, Strategic Analyst, for her take on the report’s section on EU Semiconductor policy.
– Which policy recommendations do you think are the strongest, and why?
Draghi mentions several things in other sections of the report which are applicable to semiconductors as well. He makes the usual points: strengthen the sector, increase competitiveness, and reduce strategic dependencies. In this regard, he does not say a lot of things that are entirely new. However, what is interesting is that the report mentions the creation of a separate EU semiconductor strategy. Such a specialized strategy could work as it gives EU member states more coordinated guidance for the development of the sector.
Involvement of EU member states in the semiconductor industry is currently not equal. Some countries have a strong presence (such as the Netherlands), while other do not have any substantial role in the semiconductor industry. A new, integrated semiconductor strategy would allow for harmonized guidelines across every member state in a way conducive to reinforcing the European sector as a whole.
Importantly, Draghi focuses on the need for sufficient budgetary allocation and the efficient concentration of funding. This approach is essential. Considering the scarce probability of Europe being able to catch up with the US or with Taiwan when it comes to advanced semiconductors’ production capacity, it is vital, for Europe to strengthen the areas value chain in which the EU is already a player. It makes less sense to start investing in fabrication from point zero, but we can aspire to ramp up so-called “fabless” production instead. In terms of advanced semiconductor fabrication, however, Europe is already cut out of the market by the TSMC’s, Qualcomm’s an Intel’s of this world – and an Intel facility in Germany is still a US facility after all. Foreign semiconductor companies are also unlikely to move into Europe at a scale that competitive manufacturing in the EU requires. The chances of the EU catching up or overtaking the dominant semiconductor fabrication players are thus very slim: the amount of funds needed for this is enormous, EU regulation is currently too cumbersome and the labor market is not competitive enough.
– Is there anything missing in the policy recommendations? What would you add?
Generally, the report has some blind spots. For instance, while it addresses the dependency on China, it does not account for the potential risks of a deeper entanglement with the US. The implications of enhanced US dependency, considering the increasing protectionist turn of US semiconductor policy, should have been addressed to provide a more complete picture. The US has already implemented stricter regulations on semiconductors’ exports and fabrication in October 2022 and October 2023, following the declaration of the industry’s development as a matter of national security– Europe should thus take into account that US measures could have negative unintended side effects for Europe, especially given the uncertainty surrounding the November 2024 presidential elections.
– Which figure or data point in the report did you find most insightful, and why?
I think Figure 10 (see below) is important, as it shows the dependency on East Asia in the semiconductor value chain, as well as the major dependency on the US in almost every step of the value chain.
– How do you view the feasibility of these plans in a European context?
Overall, I think the policy recommendations on semiconductors have limited feasibility. Formulating a European strategy is relatively easy; we were able to come up with the CRM Act and CHIPS Act, for example. Making such a strategy concrete enough is the next step, which will require considerable efforts but it is still generally achievable in my opinion. For the EU, the real problem will come with the actual implementation of said strategy. This will require enormous amounts of capital, which Draghi suggests we finance partly through additional public debt. This has already resulted in an immediate response by the German Minister of Finance, who opposed this idea right after Draghi published his report. Further opposition of member states for this type of financing is likely. The other part should be provided through private funding, but where will this money come from stays unspecified. It is hence difficult to imagine how the EU can come up with a semiconductor strategy that is not only concrete enough, but also has clear sources of funding, in a very short timeline, given how fast everything moves when it comes to semiconductors.
In general, I think that this remains the main challenge for many of the EU documents – while they are good to get the discussion going, most of them and their recommendations are still just an indicative strategy. And when it comes to the semiconductor industry, the Draghi report makes no exception.
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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