By Glenn Agung Hole, Ph.D.
Mario Draghi's report on the future of European competitiveness has rightly been described as one of the most significant contributions to European economic policy in recent years. Its central argument is both compelling and difficult to dismiss: Europe is losing ground. Productivity growth has slowed, innovation has become increasingly fragmented, capital markets remain underdeveloped compared with those of the United States, and Europe's ability to translate scientific excellence into globally competitive industries has weakened.
Draghi is right.
Yet his report also exposes a deeper question that deserves greater attention.
Why are these structural weaknesses emerging simultaneously?
Much of the current debate assumes that Europe faces a collection of separate challenges. Weak productivity is analysed independently from industrial policy. Innovation is discussed separately from financial markets. Energy security is treated as a geopolitical issue, while competitiveness is framed as an economic one. Demographic change, technological leadership and regulatory complexity are each assigned to their respective policy domains.
This compartmentalised approach may itself be part of the problem.
It risks explaining Europe's challenges individually while failing to explain why they increasingly reinforce one another.
This is where conventional macroeconomic analysis reaches its limits.
Over the past century, economic theory has provided remarkably powerful explanations for how societies generate prosperity. Robert Solow demonstrated that sustained economic growth depends primarily on productivity rather than the accumulation of labour or capital. Joseph Schumpeter showed that innovation and creative destruction continuously reshape competitive advantage. Paul Romer fundamentally changed growth theory by demonstrating that ideas and knowledge are themselves engines of long-term economic expansion. Meanwhile, Douglass North reminded us that institutions determine whether economies are capable of converting opportunity into sustained prosperity.
These theories remain indispensable.
However, they were largely developed during a period in which economic globalisation expanded under relatively stable geopolitical conditions. The world they helped explain is no longer the world we inhabit.
Today's international economy is increasingly characterised not by liberal integration, but by strategic competition. Trade has become geopolitics. Industrial policy has returned. Technology has become an instrument of national power. Supply chains are evaluated not only for efficiency, but also for resilience. Economic policy can no longer be separated from questions of national security, strategic autonomy and geopolitical influence.
This transition demands more than new policy instruments.
It demands a different analytical perspective.
My argument is therefore not that Draghi's diagnosis is wrong.
On the contrary, it is one of the most important diagnoses of Europe's economic condition in recent years.
The question is whether productivity, innovation, fragmented capital markets and industrial decline should be understood primarily as individual policy failures—or whether they are symptoms of something more fundamental.
I believe they are symptoms of a deeper institutional challenge.
Europe's greatest problem is not simply that productivity has slowed.
It is that the institutional capacity required to continuously reproduce productivity, innovation and long-term competitiveness is becoming increasingly difficult to sustain in an era defined by permanent geoeconomic competition.
From Productivity to Institutional Adaptability
The defining geoeconomic question of the twenty-first century is therefore no longer simply why some economies grow faster than others.
It is why some institutional systems adapt more effectively to structural transformation than others.
This distinction is subtle, yet profound.
For decades, competitiveness was largely explained through productivity, innovation and capital accumulation. These remain essential variables. However, they increasingly describe outcomes rather than the underlying mechanisms that generate those outcomes.
Productivity does not emerge spontaneously.
Innovation does not occur in isolation.
Competitive industries are not created by individual firms alone.
They emerge from institutional ecosystems capable of continuously translating scientific knowledge into commercial innovation, entrepreneurial activity into globally competitive firms, and long-term investment into sustained industrial renewal.
This is precisely where Europe's challenge becomes increasingly apparent.
The issue is not that Europe lacks talent, scientific excellence or financial resources. European universities continue to rank among the world's best. European companies remain global leaders across numerous advanced industries. European societies possess high levels of human capital, sophisticated legal systems and comparatively strong public institutions.
Yet these strengths are producing diminishing strategic returns.
This paradox cannot be explained by productivity statistics alone.
It requires a broader institutional perspective.
Over the past decade, Europe has witnessed widening productivity gaps with the United States in several high-value sectors, slower commercialisation of research, fragmented venture capital markets and increasing dependence on external suppliers for strategically important technologies. At the same time, geopolitical fragmentation has fundamentally altered the environment in which European firms compete.
These developments should not be viewed as isolated trends.
They increasingly reinforce one another.
Fragmented capital markets constrain the scaling of innovative firms.
Regulatory complexity slows technological diffusion.
Weak commercialisation reduces returns on research investment.
Slower productivity growth limits future investment capacity.
Industrial dependence increases geopolitical vulnerability.
Each challenge amplifies the next.
This represents a systemic rather than sectoral problem.
In this respect, the transition from globalisation to geoeconomics fundamentally changes the nature of economic competition.
During the post-Cold War period, comparative advantage was largely understood through the efficient allocation of production across global markets.
Today, competitive advantage increasingly depends upon institutional adaptability.
Economic resilience, strategic coordination, technological sovereignty, implementation capacity and long-term policy coherence have become central determinants of national competitiveness.
Markets remain indispensable.
But markets operate within institutional frameworks.
When those frameworks struggle to adapt to structural transformation, competitive advantage gradually erodes—even in societies that remain wealthy.
This is why Europe's challenge should not primarily be interpreted as an industrial problem or a productivity problem.
Those are consequences.
The deeper question is whether European institutions remain sufficiently adaptive to reproduce competitiveness under conditions fundamentally different from those in which much of Europe's post-war prosperity was created.
Institutional Capital as an Analytical Perspective
This brings us to what I believe is the central challenge confronting advanced economies.
The critical question is no longer whether societies can create prosperity.
History has demonstrated repeatedly that they can.
The more difficult question is whether they can continuously reproduce the institutional conditions from which prosperity emerges.
This distinction may appear academic.
It is not.
Economic history suggests that periods of national decline rarely begin with the disappearance of wealth. They begin when institutions gradually lose the capacity to adapt to changing technological, geopolitical and economic realities. Wealth accumulated over previous generations can sustain prosperity for decades. Yet inherited prosperity should never be confused with reproduced competitiveness.
This is why I find it useful to think in terms of Institutional Capital.
Institutional Capital should not be understood as another economic indicator, nor as a substitute for established economic theory. Rather, it provides an analytical lens through which apparently disconnected developments can be understood as parts of a broader institutional system.
From this perspective, productivity is not merely an economic outcome.
Innovation is not merely the result of research spending.
Industrial competitiveness is not simply a function of labour costs or exchange rates.
They are all expressions of a society's capacity to organise institutions capable of learning, adapting, coordinating and renewing themselves over time.
This perspective does not contradict the insights of Solow, Schumpeter, Romer or North.
It builds upon them.
Productivity remains fundamental.
Innovation remains indispensable.
Knowledge remains the principal driver of long-term growth.
Institutions remain central to economic development.
The additional question is whether those institutions retain the adaptive capacity required by an international system that increasingly rewards resilience alongside efficiency, strategic coordination alongside market competition, and long-term institutional learning alongside short-term optimisation.
In this respect, Draghi's report should perhaps be understood as more than a diagnosis of Europe's competitiveness problem.
It should be read as evidence that Europe has entered a new phase of economic history in which institutional adaptability becomes a decisive strategic variable.
The implications extend well beyond Europe.
Every advanced economy now confronts the same fundamental challenge.
Not simply how to increase productivity.
But how to sustain the institutional conditions that make productivity possible.
This may ultimately become the defining question of twenty-first century political economy.
The societies that succeed will not necessarily be those with the largest economies, the lowest labour costs or even the greatest technological capabilities.
They will be those most capable of continuously renewing the institutions that transform knowledge into innovation, innovation into competitiveness, and competitiveness into long-term prosperity.
That, ultimately, is the challenge of the new geoeconomic age.