The European Union must embrace “pragmatic federalism” to respond to mounting global and internal challenges, said outspoken critic, former Italian prime minister Mario Draghi, of Europe’s failure to face an accelerating slide into irrelevance due to the lack of reform, on October 25, Politico reported.

Draghi authored an influential report last year that warned that Europe was losing its competitive edge, warning that the bloc’s current governance structure is no longer fit for purpose. He said that the EU had already fallen well behind the global leaders of the US and China and needed to invest €800bn a year in order to catch up.

“Almost all the principles on which the Union was founded are under strain,” Draghi said during a speech in Oviedo, Spain, after receiving the Princess of Asturias Award for International Cooperation. “We built our prosperity on openness and multilateralism, but now we are faced with protectionism and unilateral action” and the “return of hard military power,” he added.

His message has shaken the EU to its foundation, but the European Commission (EC) has been struggling to respond as it is distracted by supporting Ukraine after the US de facto withdrawal from the war, and has been rocked by a string of mounting economic crises amongst its leading members, starting with France, where the government collapsed, unable to reign in budget spending.

European Commission President Ursula von der Leyen tried to address some of the issues highlighted by Draghi in her EU State of the Union address (video, transcript) on September 10, but these efforts fell short. She offered to cut some red tape, but failed to announce any major investment programmes to revitalise European industry, which has been suffering from accelerating deindustrialisation.

The half-formed nature of the EU’s federation means that decision making has become bogged down by the unanimity rule that gives every member state a veto. That has been a problem in passing sanctions packages on Russia, which have been frequently vetoed by Hungary, a Russia-supporter – and has also made it impossible to push through a plan to issue Reparation Loans to tap the frozen Central Bank of Russia (CBR) $300bn in reserves held in Europe.

Draghi, a former president of the European Central Bank, argued that the EU has not kept pace with a rapidly evolving world order. “Our governance has not changed for many years,” Draghi said. “The European structure that exists today simply cannot meet such demands.”

Draghi has called for institutional reform and treaty changes to enable a faster, more cohesive response to economic, social and security challenges, dropping unanimity and switching to qualified majority voting. “A new pragmatic federalism is the only viable path,” he said.

He proposed that coalitions of member states willing to move forward together on shared strategic interests should be allowed to do so without being held back by others.

“All those who wanted to join could do so, while those trying to block progress could no longer hold others back,” he said. “The diverse strengths that exist in Europe do not require all countries to advance at the same pace.”

Such a model, Draghi suggested, could foster European industrial champions in sectors like semiconductors and network infrastructure, while lowering energy costs and spurring innovation.

However, any move toward federalism would require member states to relinquish their veto powers — a longstanding point of contention, particularly for smaller countries wary of being marginalised.

In the meantime, EU leaders are trying to find workarounds. EU foreign policy chief and former Estonian prime minister Kaja Kallas has suggested a Plan B to break the deadlock created by Hungary and suggested that in the case of accelerating Ukraine’s EU accession that member states informally start the cluster negotiations and simply wait for Hungarian Prime Minister Viktor Orban to leave office before voting on them. In a more extreme scenario she has suggested invoking the EU charter’s Article 7 and stripping Hungary of its voting rights.