PS: Investment bank ABN Amro have just published their “initial take” on Draghi’s competitiveness report.

They point out that the “ambitious proposals” are effectively a plan for the future of EU integration. The call for common eurozone debt will be a political hot potato too, while Draghi’s points about mis-aligned government policies are well made.

Here’s what ABN Amro say:

Ambitious proposals are no less than a blueprint for the future of EU integration

Former ECB president and Italian prime minister Mario Draghi’s long-awaited report on competitiveness was finally unveiled this morning, and it was unexpectedly substantial and concrete in its proposals. The report tackles a host of critical competitiveness issues facing Europe, from energy and decarbonisation, to lowering regulatory and other barriers for high-innovating tech unicorns (which typically move to the US to achieve sufficient scale), to strengthening industrial capacity (which also has implications for defence – a topic of increasing geopolitical importance). Its flagship proposal is for €800bn in additional EU investment annually, to be partly funded by the common issuance of new common debt. Crucially, the case for common debt issuance rests not only on financing need, but also to “make the [Capital Markets Union] much easier to achieve and more complete,” by: 1) facilitating the uniform pricing of corporate bonds, 2) providing a safe collateral instrument for member states, 3) a “large, liquid market” for global investors “enhancing the role of the euro as a reserve currency.”

The proposals face an uphill political struggle, to put it mildly

In the press conference accompanying the report, European Commission president Von der Leyen was immediately asked for her views on the call for new common debt issuance. Her response was understandably neutral, given the political sensitivity of the topic. She stated that the first priority was to identify the ‘common projects’ where member states could cooperate, and then decide whether these should be financed through higher contributions or through ‘new own resources’. When Draghi himself was pressed on this topic, he pointed to the possibility of using the EU’s enhanced cooperation mechanism – or even a separate intergovernmental agreement outside the EU structures – to allow a ‘coalition of the willing’ to forge ahead on debt issuance if unanimity could not be achieved on the issue. Given the political momentum of populist, anti-EU parties at present (see also here), the environment is hardly conducive to the proposals being adopted as they are. A memorable moment in the press conference came when a journalist asked if the report represented a ‘do or die’ moment for the EU; Draghi responded it was rather a ‘do, or slow agony’. Typically, crises are needed to push EU integration forward, and it could be that the ‘slow agony’ of the EU’s competitiveness problem will not be enough to galvanise the political will to overcome it.

But there is much more to the report than common debt

While this was the most headline-grabbing proposal, the report made many pertinent observations with less controversial, actionable measures. For instance, in the press conference Draghi pointed out that the mandate to phase out internal combustion engine cars was not accompanied by investment in energy infrastructure to support the roll-out of EVs. Or the fact that energy taxation in Europe is relatively high as well as uneven across member states, aggravating the impact of the rise in wholesale energy prices. Policy goals are often misaligned and even compete with one another, with decarbonisation an impediment to growth rather than the growth impulse that it could be.

Time for a recap:

The EU should fear for its self-preservation as it faces a “slow and agonising decline”, according to a hard-hitting report by the former Italian prime minister Mario Draghi that calls for an €800bn-a-year spending boost to end years of stagnation.

Warning that the Covid pandemic and Ukraine war had changed the rules of international trade to the EU’s detriment, he said the bloc needed additional investment of €750bn-€800bn a year – equivalent to 5% of the EU’s annual economic output – to build a more resilient economy and regain previously high rates of productivity growth.

“We are already in crisis mode and to ignore this is to slide into a situation you don’t want to have,” said Draghi, who is also a former head of the European Central Bank.

In a wide-ranging report, Draghi said Europe should start regularly issuing “common safe assets” to fund joint investment projects among Member States, co-ordinate better on defence spending, and improve its access to raw materials.

And in a stark warning, he said:

“We have to understand we are becoming ever smaller relative to the challenges we face. For the first time since the cold war we must genuinely fear for our self-preservation.”

German economy minister Robert Habeck welcomed the proposal, saying:

“The whole of Europe is facing existential challenges that we can only overcome together.”

But, the Dutch government cautioned that public investments must not be seen as an “end in themselves.”

In a gloomy day for European economic news:

• Swedish manufacturer Northvolt is to cut a large number of jobs and sell or seek partners for its energy storage and materials businesses.

• Germany has entered a three-quarter-long recession, according to investment bank Nomura

Elsewhere today….

In the financial markets, shares have rallied in New York and across Europe, following losses on Friday when the latest US jobs report came in below forecasts.

The UK is missing out on billions of pounds of revenue each year from small retail businesses that exploit weaknesses in government systems to evade paying tax, the public spending watchdog has warned.

Aldi has said the price of a basket of its goods is lower than a year ago despite ongoing grocery inflation, as the discount chain tries to fight back against increasing pressure from rivals’ price-matching schemes.

Barratt and Lloyds Banking Group have launched a £150m joint venture with the government body Homes England that will lead to the UK’s largest housebuilder and mortgage provider capitalising on Labour’s plans to build 1.5m new homes.

The Bank of London, the fledgling clearing bank backed by the Labour grandee Lord Mandelson, has announced it has raised another £42m from investors days after being hit by a winding-up order by tax authorities.

The oil and gas supermajor BP is to use artificial intelligence to speed up the decision-making of its engineers, after signing a five-year deal with the US spy technology company Palantir.

Japanese bank Nomura has a worrying prediction – they believe Germany has entered a three-quarters-long recession.

It would be a relatively shallow downturn, though – Nomura predict a 0.4 percentage point drop in GDP, followed by stagnation.

We already know that Germany shrank slightly in April-June; Nomura predict this contraction will continue.

They say:

Q2 2024 GDP growth contracted against expectations, with the expenditure breakdown indicating that the decline in domestic demand was more pronounced than expected.

Official data suggest that Q3 is off to a poor start; July factory sales and industrial output fell materially, with August manufacturing surveys indicating further deterioration. Services surveys, too, have materially weakened in Q3 thus far relative to Q2.

Germany’s recession, in addition to France’s stagnation, will weigh on euro area GDP growth, they predict – while the eurozone periphery will likely outperform due to tourism.

Back in London, the FTSE 100 continues to rally.

It’s now up 71 points or 0.87% at 8252 points, more than recovering all of Friday’s drop.

That’s despite analysts at UBS downgrading their view on UK shares to Neutral from Most Preferred.

In a research note this morning, UBS says there are several reasons to be positive about UK equities – including the return of political stability, last month’s interest rate cut by the Bank of England, and a likely return to earnings growth this year.

Another advantage – UK stocks still suffer from “undemanding valuations”, with shares trading at a lower price/earnings ratio than the long-running average.

So what’s the problem? UBS analyst Dean Turner reckons these positive developments seem to be “largely priced in”, adding:

….which suggests that UK equities will struggle to outperform their international peers in what we expect to be a positive year-end for stocks

Turner does predict UK stocks will keep rallying, pushing the FTSE to rise to around 9,000 by year-end. That would be a new alltime high (the previous best was 8,474 points back in May).

Over in Berlin, German economy minister Robert Habeck has vooiced support for Mario Draghi’s proposals.

Habeck says he agrees that the European Union needed massive investment, comprehensive reforms and strengthened resilience.

He said:

“The whole of Europe is facing existential challenges that we can only overcome together.”

Europe also needs to take steps to increase and secures its access to critical raw materials (CRMs), today’s competition report says.

Those CRMs include metals used in clean energy technologies such as lithium, cobalt and nickel.

China is the single largest processer of nickel, copper, lithium and cobalt, the report says, pointing to Beijing’s “willingness to use its market power”:

Export restrictions from the country grew by a factor of nine between 2009 and 2020. Little progress is being made so far with diversification.

Europe, the report concludes, is “falling behind” in the global race to secure supply chains:

Alongside its dominant position in processing and refining, China is actively investing in mining assets in Africa and Latin America and overseas refining via its Belt and Road initiative.

Its overseas investment in metals and mining through the Belt and Road Initiative reached a record high of $10bn in the first half of 2023 alone, and it plans to double the ownership of overseas mines containing critical minerals by Chinese companies.

The US has deployed the IRA, the Bipartisan Infrastructure Act and defence funding to develop at scale domestic processing, refining and recycling capacity, as well as using its geopolitical power to secure the global supply chain.

Japan is highly dependent on other regions for CRMs, and since the 2000s it has developed a strategic approach to increase access to overseas mining projects. The Japan Organization for Metals and Energy Security invests equity in mining and refining assets around the world, manages strategic stockpiling and, since the introduction of the recent economic security law, has powers to develop processing and refining facilities within Japan.

Europe, by contrast, has a comparable level of dependencies, being highly dependent on one or two countries for most of its critical mineral imports. However, it is not following a similarly coordinated approach. The EU is lacking a comprehensive strategy covering all stages of the supply chain (from exploration to recycling) and, unlike its competitors, the mining and trading of commodities is largely left to private actors and the market.

A key message running though Mario Draghi’s report into Europe’s competitiveness problems is that member states need to bolster their collective efforts and work together better.

That includes combining its spending power, winning foreign direct investment together, and using its bargaining power to negotiate cheaper energy.

But the most controversial part of the report could be the suggestion that Europe should start regularly issuing “common safe assets” to fund joint investment projects among Member States and to help integrate capital markets.

That would be a step towards eurobonds, in which member states issue collective debt.

Eurobonds were proposed as a solution to Europe’s debt crisis over a decade ago – the problem is that wealthier, more frugal Northern European countries fear being responsible for debt issued for their Southern neighbours.

The economic crisis in Germany, though, may mean those fears are less strong.

Some collective EU debt has already been issued in recent years, under the Next Generation EU (NGEU) project to fund the recovery from the pandemic.

Draghi’s report suggests the NGEU model can be “built on”, to issue common debt instruments, to finance “joint investment projects that will increase the EU’s competitiveness and security”.

You can read Mario Draghi’s new report into Europe’s economic problems here:

The future of European competitiveness

It explains that to digitalise and decarbonise the economy and increase defence capacity, the investment share in Europe will have to rise by around 5 percentage points of GDP.

That would take it back to levels last seen in the 1960s and 70s. And it’s much, much larger than the Marshall Plan – which between 1948-51 amounted to around 1-2% of GDP annually.

The report declares firmly that Europe faces an existential challenge, saying:

If Europe cannot become more productive, we will be forced to choose. We will not be able to become, at once, a leader in new technologies, a beacon of climate responsibility and an independent player on the world stage. We will not be able to finance our social model. We will have to scale back some, if not all, of our ambitions.

And in an eye-catching warning to European policymakers, the report warns that if the EU cannot deliver “prosperity, equity, freedom, peace and democracy” then it will have lost its reason for being.

Mario Draghi then warns reporters in Brussels that Europe faces very serious challenges.

Explaining the importance of taking the steps outlined in his new report, Draghi says:

We have to understand we are becoming ever smaller relative to the challenges we face.

For the first time since the Cold War we must genuinely fear for our self-preservation.

The third part of Draghi’s report looks at increasing security and reducing dependencies.

That includes economic dependencies – as the raw materials Europe needs are in the hands of a few suppliers….

…and also security dependencies, even though geopolitics have “significantly worsened” in the last 10 years.

Draghi’s solution – Europe must develop a “foreign economic policy”.

That means….

Cordinating preferential trade agreements and direct investments with resource-rich countries, building up stockpiles in selected critical areas, and creating industrial partnerships to secure the supply chain for key technologies.

And, we need to build our defence industrial capacity.

Draghi concedes that these goals are not new – member states are doing this on their own. But they are punching ‘under our power’ – Europe coould be more effective if it combined its resources and coordinated policies, he argues.

Europe’s problem is not that it lacks smart people, or good ideas, Mario Draghi continues.

The problem, he argues, is that there are too many barriers to commercial innovations, and to scaling them up.

Draghi then points out that since 2008, 30% of unicorns - tech firms that grow to become worth over €1bn – which started in the EU have left.

The majority went to the US, Draghi adds:

30% of our most succesful innovators have moved, and this has to change.

Europe must become a place where innovation flourishes, especially for digital tech.

A weak tech sector will rob Europe of the growth opportunities of the AI revolution, and also hamper companies in the rest of the economy too, he warns.

Mario Draghi then outlines the steps Europe must take – starting with closing the innovation gap with the United States.

Innovation is the first pillar of the report, he explains, citing Europe’s failure to keep up with Big Tech firms.

Giving a gloomy assessment of the situation, Draghi says:

Europe is nowaways stuck in a static industrial structure, populated by mid-technology companies which are already mature.

The leading firms in research and investment spending are the same ones we had 20 year ago – our cars.

Draghi adds that it was the same picture in the US 20 years ago- where their big R&D spenders were "autos and pharma”. Now, though, it’s all digital at the top, Draghi adds.

Over in Brussels, Mario Draghi is calling for coordinated industrial policy and a huge increase in investment to improve the economic situation in the European Union and lift competitiveness.

Draghi, the former European Central Bank chief and Italian prime minister, is presenting a new report on the future of EU competitiveness, which he has been working on for the last year.

In it, he calls for a much more coordinated industrial policy, more rapid decisions and massive investment to stop Europe falling further behind the US and China.

Draghi says that Europe needs to boost its investment by up to five percentage points of GDP – or up to €800bn a year - and much closer coordination between European countries to ensure the money is spent effectively.

Draghi says his report proposes a “new industrial strategy for Europe”, and is granular with 170 different topline proposals.

Speaking in Brussels now, Draghi warns that Europe’s productivity is “weak, very weak”, and point out that growth has been slowing down for a long time.

World trade is slowing, and become less open to European countries, Draghi says, adding that Europe has also lost its main supplier of cheap energy, Russia. Also, it needs to invest more in defence, for the first time since second world war.

Another hurdle, Draghi adds, is that this is the first year that Europe cannot count on population growth to lift growth.

Draghi’s report is likely to influence the debate on EU competitiveness, one of the priorities of the next European Commission, which is due to take office later this year.

Introducing Draghi, EC president Ursula von der Leyen said there is a “wide consensus” that the issue of improving Europe’s competitiveness must be “at the top of our agenda and at the heart of our action”.

Investor morale across the euro area has fallen for the third month in a row.

The Sentix Investor Confidence Index has dropped to -15.4 this month, down from -13.9 in August, and lower than forecast.

Sentix warns that the eurozone economy is “threatening to tip into recession”, and blames the economic problems in Germany.

It says:

The eurozone is struggling with dangerous recessionary tendencies ‘thanks to Germany’. The situation in the rest of the world is also weakening, but investors here are somewhat more optimistic in their expectations.

Germany is on the brink of recession after its GDP shrank in the second quarter of this year. Its economy has been hit by high energy costs since Russia’s invasion of Ukraine, and its car sector has struggled to cope with competition from cheaper Chinese-built electric vehicles.

We also have worrying signs that the US jobs market is cooling.

The latest UK Report on Jobs from KPMG and REC shows that the UK labour market softened in August, with vacancies falling for both permanent and temporary staff.

The number of permanent staff positions fell at the fastest rate since March, for the 23rd month in a row, with reports of “reduced demand amongst companies for new staff”.

This has led to a slowdown in earnings growth – permanent salaries meanwhile continued to rise, but at the weakest pace since March.

Pay for temporary positions rose at the weakest pace for three-and-a-half years.

Bad news for workers – but it may cheer the Bank of England, as it looks for signs that inflationary pressures have eased.

Jon Holt, chief executive and Senior Partner of KPMG in the UK, suggests the gloomy tone from the new Labour government may be deterring firms from taking on staff.

Holt explains:

“Recent Government warnings that the UK’s economy may weaken further before improving add to the overall sense of uncertainty, affecting recruitment plans. Firms holding back from hiring led to a sharp contraction in the number of people placed into permanent roles in August amid continued decline in demand, extending the downturn in the UK’s labour market.

“The news that while salaries rose last month it was at the weakest rate since March could help make the case for more rate cuts when the [Bank of England’s] Monetary Policy Committee meets to decide the future path of interest rates.

A second survey from accountancy firm BDO also shows the UK jobs market weakening.

BDO’s employment index has fallen for the fourteenth consecutive month, to its lowest reading since January 2013.

BDO says:

This reflects ongoing concerns in the job market, including falling job vacancies and more people claiming unemployment-related benefits, which reached its highest level since December 2021 according to the Office for National Statistics.

Elsewhere in the airline industry, Boeing may have struck a deal to avoid a strike which would have added to its list of problems.

Boeing said yesterday it has reached a tentative agreement with a union representing more than 32,000 workers in the US Pacific Northwest.

The proposed four-year contract includes a general wage increase of 25%, a commitment to build the next commercial airplane in the Seattle area, and better retirement benefits.

If ratified by Boeing factory workers near Seattle and Portland on Thursday, the deal could help avert a possible crippling strike set for as early as 13 September.

The International Association of Machinists and Aerospace Workers District 751 called it “the best contract we’ve negotiated in our history”.

The deal also gived the union greater input in the safety and quality of Boeing’s production system – an area in the spotlight following the crashes of two 737 Max jetliners, and the loss of a cabin panel in a midair blowout.

In the airline industry, Ryanair boss Michael O’Leary has issued a fresh call for the chief executive of air traffic control (ATC) provider Nats to resign.

O’Leary urged Martin Rolfe to step down and “allow someone competent” to take over after flights were disrupted at Gatwick Airport on Sunday due to “Nats staff shortages”.

The Ryanair chief declared:

“UK Nats staff shortages caused multiple flight delays and cancellations at Gatwick Airport yesterday, Sunday September 8.

“This is the latest in a long line of cock-ups by UK Nats, which has yet again disrupted multiple flights and thousands of passengers at Gatwick. Airlines and passengers deserve better.

“Ryanair again calls on UK Nats chief executive Martin Rolfe to step down and allow someone competent to run an efficient UK ATC service, which airlines and passengers are entitled to expect.

“If he won’t go, then (new Transport Secretary) Louise Haigh should sack him.”

Nats was hit by criticism last year, when a single piece of rogue data in a flight plan caused thousands of flights to be cancelled, and when staff illness forced flights to be grounded at Gatwick:

Economic slowdown worries hit the oil price last week, sending it to its lowest level in almost 18 months.

This morning, though, Brent crude has gained almost 1%, rising to $71.10 per barrel.

This is partly due to concerns over a potential hurricane system approaching the U.S. Gulf Coast, which could possibly cause disruption to supplies.

A weather system in the southwestern Gulf of Mexico is forecast to become a hurricane before it reaches the northwestern U.S. Gulf Coast, the U.S. National Hurricane Center said on Sunday. The U.S. Gulf Coast accounts for some 60% of U.S. refining capacity, Reuters reports.

However, Morgan Stanley has cut its forecast for oil prices in the final quarter of this year. It now predicts Brent crude will average $75 a barrel in October-December, down from an earlier projection of $80/barrel.

Aldi’s UK boss has also revealed that its shoppers are treating themselves to more expensive products as cost of living pressures start to ease.

The supermarket reports that customers are “trading up” to its premium own-label products such as Wagyu steak, premium cheese, ready meals, brioche buns and smoked salmon.

Aldi UK chief executive Giles Hurley has told the BBC:

“It’s still tough out there for millions of families but inflationary pressures are easing for some.

“For others, it’ll be a decision not to use hospitality but to celebrate at home instead.”

Aldi is to open a further 23 stores this year after profits more than doubled last year to almost £537m.

The supermarket has just announced it would invest £800m in the UK market through the rest of this year including opening 23 more stores, and had signed a £750m deal with Kent-based grower AC Goatham & Son including establishing the first ever ‘Aldi Orchard’ on a 200-acre plot on New Green Farm in Gravesend dedicated to growing fruit for the chain.

The supermarket – which opened about 30 stores last year – said sales increased 16% to £17.9bn in 2023, its highest ever period of sales growth.

However, since then sales growth has slowed as all the traditional grocers, including Tesco and Sainsbury’s, have introduced schemes to price match Aldi on key items. The group will open about 30 stores again this year in total, down from about 50 per annum in the years before 2023.

The retailer, which currently has over 1,000 stores, has previously announced plans to scale to 1,500 stores across the UK.

The retailer, which aims to be the cheapest in the UK, said it had invested almost £100m in over 300 price cuts in the last three months on items including fish goujons, chicken breasts, potatoes and basmati rice.

Giles Hurley, the chief executive of Aldi UK and Ireland, said:

“For every £1 of profit generated last year, we’re investing £2 this year - opening more stores and building the supply infrastructure to bring high-quality, affordable groceries to millions more families the length and breadth of Britain.”

Chinese producers continue to slash their prices, new data today shows, in a sign of weak demand.

China’s producer price index (PPI) – which tracks prices at the factory gate – fell by 1.8% in August compared with a year earlier.

That’s the largest fall in four months, and a bigger decline than expected – which will add to concerns over the health of the global economy.

Junyu Tan, North Asia Economist at Coface, explains:

“The ongoing deflationary pressures boil down into a broader problem of production surplus, which is still outstripping demand.”

However, this did not immediately feed through to consumers’ pockets. China’s headline CPI inflation rate rose to 0.6% in the year to August, up from 0.5% in July.

Good morning, and welcome to our rolling coverage of business, the financial markets, and the world economy.

Here we go again (again). Investors are experiencing another bout of angst over the health of the US economy, creating a chilly feel in the markets.

Spirits are low after Friday’s disappointing US employment report, which showed that fewer jobs were created last month than hoped.

Non-farm payrolls rose by just 142,000 in August, while the payrolls for June and July were slashed, leaving traders fretting that the US jobs market – and the wider economy – was cooling.

In better news, the unemployment rate dipped to 4.2% – but the report overall has left investors baffled as to how the US Federal Reserve will react. An interest rate cut later this month feels inked in – but will it be a gentle quarter-percentage point (25 basis points) reduction, or a dramatic half-point cut?

Instinctively, investors would like a larger cut in borrowing costs – except, if that happens, it implies the Fed has serious concerns over the health of the US economy.

Stephen Innes, managing partner at SPI Asset Management, explains:

For traders, this means more of the Fed’s favourite guessing game. The report wasn’t bad enough to scream “panic mode,” but indeed not good enough to keep the 50 bp rate cut whispers at bay.

The problem? This delicate balancing act leaves everyone wondering: will the Fed take a cautious 25 bps step, or does a bigger 50 bps cut suddenly feel more necessary?

One thing’s for sure: whatever the Fed does, the markets are left doing the one thing they hate most—waiting in uncertainty.

And we can see the impact of this in the markets. On Friday, the US S&P 500 share index fell by 1.7%, while the tech-focused Nasdaq Composite tumbled by 2.5%.

This has knocked Asia-Pacific markets today, where China’s main stock indices are down over 1%, the Hong Kong Hang Seng is down almost 2%, and the South Korean Kospi index is off 0.7%.

Disappointing economic growth figures from Japan have added to the gloom; Japan’s Q2 GDP growth rate has been revised down to an annualised rate of 2.9% for April-June, down from a preliminary estimate of 3.1%.

Japan’s Nikkei share index began the session with a 3% drop, but actually managed to claw its way back to finish 0.5% lower.

European markets, which fell on Friday, are set for a slightly higher open:

The agenda

• 9.30am BST: TUC Annual congress in Brighton

• 9.30am BST: Sentix survey of eurozone investor confidence