A year ago, the European Union released the "Draghi Report" aimed at enhancing competitiveness. Deutsche Bank's latest research indicates that Europe has delivered mixed results after one year.

On September 9th, Deutsche Bank published a report noting that over the past year, Europe has been pragmatically balancing national interests with common objectives. While the reform path faces obstacles, the direction remains clear. Specifically:

**Defense Sector Shows Clearest Opportunities**: With EU member states significantly increasing defense spending, such as Germany's 2025 budget rising to €109 billion, and the launch of the €150 billion SAFE loan program, Europe's defense industry is entering a definitive growth cycle.

**Structural Reforms Progress Slowly but Steadily**: The EU has made some progress in streamlining regulations (expected to save businesses €9 billion in costs) and deepening the single market, which will benefit pan-European operating companies, particularly small and medium enterprises, in the long term.

**Fiscal Discipline Takes Priority, Large-Scale Stimulus Unlikely**: The report clearly states that while the new seven-year budget proposal increases competitiveness and defense spending from 14% to 23%, it does not include plans for new joint debt issuance. This means investors should not expect massive fiscal stimulus similar to "Next Generation EU (NGEU)," with policy focusing more on "spending wisely" rather than "spending big."

**Innovation and Capital Markets Remain Weak Points**: Despite initiatives like InvestAI, the EU continues to struggle in bridging the innovation gap with the United States and integrating fragmented capital markets, limiting the efficiency of risk capital and the explosive potential of high-tech industries.

Overall, after one year, Europe has not seen disruptive "game changers," but substantial progress has been made in certain areas, particularly the expansion of defense industries under geopolitical pressure, which stands as the most notable achievement.

**Defense Industry Shows Most Significant Results Under Geopolitical Pressure**

Deutsche Bank's report indicates that among all reform areas, progress in expanding defense industry scale and reducing external dependencies has been most significant, driven by "the strongest sense of urgency."

Over the past year, doubts about U.S. security commitments, hybrid attacks from Russia, and concerns about critical raw material shortages have jointly driven substantial EU action in the defense sector.

Specific progress is evident at both national and supranational levels:

**National Level:** Germany has taken a leading role, with defense spending plans increasing from €74 billion in 2024 to €109 billion in 2025. The increased spending has begun translating into actual capacity, with a major German defense company activating a facility that will become the EU's largest ammunition factory.

**Supranational Level:** The EU launched the €150 billion Strategic Autonomy for Europe Fund (SAFE) loan program, with 19 countries applying for these low-interest loans to enhance their defense capabilities.

The Critical Raw Materials Act (CRMA), aimed at securing critical raw material supplies, has also made progress. The EU launched a critical raw materials joint procurement platform in July and identified 47 domestic projects as "strategic projects," with total investment requirements reaching €22.5 billion.

The report emphasizes that despite challenges, the trend of expanding European defense industry is likely to continue.

**Progress Made in Streamlining Regulations and Reducing Single Market Barriers**

The second major area of progress is improving EU efficiency by cutting red tape and eliminating single market barriers. Facing an increasingly complex external trade environment, tapping internal potential has become particularly urgent.

The main action is a series of so-called "omnibus proposals" launched by the European Commission, aimed at simplifying regulatory requirements across multiple areas, particularly reducing reporting burdens for small and medium enterprises.

These proposals cover sustainable finance reporting, Carbon Border Adjustment Mechanism (CBAM), data protection, and other aspects, expected to save approximately €9 billion in costs for the overall economy.

One ambitious concept is introducing the "28th regime," allowing companies to voluntarily choose a unified set of EU regulations, thereby escaping diverse national legal constraints. This could significantly reduce compliance costs for cross-border business operations. Legislative proposals for this regime are planned for the first quarter of 2026.

However, the report notes that designing this regime faces a dilemma between being "too broad to gain political support" and "too narrow to be attractive."

**Innovation Gap: Limited AI Progress but Clear Direction**

Deutsche Bank's assessment considers EU progress in bridging the innovation gap with the United States as "limited."

A clear example is that R&D spending by top EU companies remains dominated by automotive companies, while in the United States, it's technology companies.

Nevertheless, the EU has begun taking targeted action, especially in artificial intelligence (AI):

**Launching the InvestAI Initiative**: This plan aims to mobilize €200 billion in AI investment, including a €20 billion European dedicated fund specifically for supporting AI superfactory construction. EU officials plan to release AI superfactory construction tender announcements in Q4 2025.

**Introducing the Applied AI Strategy**: Aimed at helping businesses, particularly SMEs, apply AI technology in their operations. However, AI adoption rates among EU companies remain low. In 2024, 13% of EU companies with more than 10 employees adopted AI technology, with notable differences between companies of different sizes.

**Publishing the Start-up and Scale-up Strategy**: This strategy aims to create a more friendly development environment for innovative SMEs through simplified rules and introducing "regulatory sandboxes." The fund is planned to launch in 2026, with specific scale yet to be determined (targeting "billions of euros").

**Savings and Investment Union Struggles, New Budget Emphasizes "Spending Wisely"**

Progress in the two major "horizontal factors" of capital markets and common budget has been equally uneven.

First, progress in capital market integration has been slowest.

The much-anticipated "Savings and Investment Union" (SIU, formerly Capital Markets Union CMU), while published, still faces enormous obstacles due to national differences in supervision, pensions, taxation, and bankruptcy rules.

According to IMF estimates, remaining barriers in EU financial services are equivalent to 100% tariffs, hindering effective mobilization and allocation of private investment.

Notably, research shows that if 10% of household savings were shifted from deposits to insurance and pension sectors, it could bring €416 billion in investment funds to EU capital markets.

Second, regarding the much-watched next EU seven-year long-term budget (2028-2034), while the total amount increases, the report believes the focus is on the EU needing to "spend better."

The European Commission's proposed €1.8 trillion budget draft significantly increases funding allocation for competitiveness and defense from the current budget's 14% to 23%, totaling €410 billion.

However, new common debt schemes face strong resistance from "frugal countries" within the EU, with the final budget scale expected to be compressed to €1.5 trillion.

**Reform Path: Uneven Progress, Obstacles Remain Ahead**

Deutsche Bank notes that at the EU level, the European Commission is the main driving force, but related processes remain quite complex and time-consuming.

The European Commission will continue implementing its "competitiveness compass" and promoting reforms through legislative proposals. However, coordination with member states, the European Parliament, and other stakeholders is often a complex and time-consuming process.

The standard legislative procedure is the most common pathway. This means the Commission's competitive proposals need majority support in the European Parliament and qualified majority votes among Council member state leaders.

The good news is that most reforms won't be blocked by any single member state. Therefore, even if a key member state experiences political deadlock (such as due to government changes, like France's situation after this week's failed no-confidence vote), reforms can still proceed through standard legislative procedures.

The less favorable news is that complex political negotiations between the Council and Parliament often lead to lowest-common-denominator compromise solutions with a certain tendency to maintain the status quo.

Deutsche Bank concludes that many key structural reforms, such as labor markets and tax policy, remain under member state authority, while domestic political contexts in various countries (such as France's political situation and rising right-wing forces) are not conducive to implementing major structural reforms.

Looking ahead, the reform path is destined to be long, filled with compromises and negotiations.