EU leaders are gathering in Budapest for an informal summit on the bloc’s ailing competitiveness – a task given added urgency by the threat of protectionist “America first” trade policies promised by the US president-elect Donald Trump.

“Don’t ask what the US can do for you, ask what Europe should do for itself,” the Italian prime minister, Giorgia Meloni, said as the meeting got under way. “Europe must find a balance. We know what we have to do.”

European officials are alarmed by Trump’s impending return not just because of his hostility to Nato and ambivalence towards Ukraine, but also the economic consequences of his threat to make the EU “pay a big price” for not buying enough US imports.

The European parliament president, Roberta Metsola, said competitiveness was “not just a buzzword … If we’d had the same growth as the US since the turn of the century, Europe would have 11m more jobs. We cannot just react to the US elections, we must act.”

Leaders will focus on discussing a series of radical reforms proposed in a major report published in September by the former Italian prime minister and European Central Bank chief, Mario Draghi, who warned the bloc faced a “slow and agonising decline” unless it acted fast and decisively to end years of stagnation.

The EU’s response to its economic woes - and Trump’s re-election - is, however, hampered by the fact that its two biggest powers are weakened by political crises at home. Germany’s coalition government collapsed on Wednesday, while France’s president, Emmanuel Macron, has no parliamentary majority.

Saying that the Covid pandemic and Ukraine war had changed the rules of international trade to the EU’s detriment, Draghi’s report called for a massive €800bn a year in additional investment in the bloc’s economy – equivalent to about 5% of the EU’s annual economic output.

But its 170 main recommendations, outlining how the EU could boost growth while moving towards a greener and digital economy that would be competitive at a time of rising global trade tension and conflict, contained some difficult choices.

Draghi’s proposals for funding the urgently needed extra investment include more common borrowing – a prospect that is anathema to the traditionally more “frugal” nations in the bloc such as Germany and the Netherlands.

Draghi, who was due to present his report in detail to the 27 EU heads of state and government attending the summit, said on Friday the bloc could no longer stave off vital decisions, adding that the “sense of urgency today is greater” than it was a week ago.

“We have postponed too many important decisions in order to find consensus [among EU member states],” Draghi told reporters. “That consensus did not come, and as a result we have suffered lower economic growth, and now stagnation.”

He said common borrowing, first undertaken by the bloc to finance its pandemic recovery funds, would be indispensable. “But it is not the priority – that has to be a true single capital market,” he said, to get investment and savings flowing across all member states.

The summit was expected to approve a four-page “new European competitiveness deal” recognising the broad conclusions of Draghi’s report and calling for efforts to cut red tape, boost key sectors such as defence, biotech and artificial intelligence, secure a level trade playing field, and explore public and private financing options.

Diplomats and analysts saw an upside and downside to Germany’s continuing government crisis, triggered when the chancellor, Olaf Scholz, fired his liberal finance minister, Christian Lindner, collapsing the three-party coalition.

Many were heartened by the departure of the fiercely frugal Lindner. “With Lindner there, there was no way to have a discussion about a more ambitious long-term budget or strengthening defence financing on an EU level,” one diplomat said.

Others held out the hope that a new German government might prove more constructive on the European stage than the current coalition, whose constant internal disagreements and in-fighting often led Berlin to abstain on key votes.

The hope was that the next German government would be “more coherent” and “therefore finally capable of having more clearcut positions on European initiatives”, said Sylvie Matelly, of the Institut Jacques Delors thinktank.

However, with Europe’s biggest economy likely to be mired in political limbo for several months to come, there was little hope of any concrete steps being adopted to stimulate Europe’s economy in the immediate future, diplomats said.