A divided Europe will not conquer the New Space Frontier: Mario Draghi’s Report

In the analysis presented to the European Commission by the former Prime Minister and President of the ECB, a harsh critique emerges: a continent that has lost its competitive edge. To regain it, Europe must aim for a unified market with harmonized laws.

BY EMILIO COZZI

Europe, in terms of space, boasts many centers of excellence and valuable know-how, but with the current structure, it is not prepared to face the challenges of the new space economy or seize the opportunities emerging beyond the horizon of the ongoing space revolution. There is no cohesion, no organization, no unity of purpose, no unified legislation, or market.

In his report, titled *The Future of Europe’s Competitiveness* — which has come to be known as the “Draghi Report” — the former Prime Minister of Italy and President of the European Central Bank outlines the scenario and the measures that must be taken to remain among the great space powers (alongside the United States, China, and Japan) and not fall behind in the so-called new space era, which has already taken off with great momentum. At stake are not only sovereignty and geopolitical relevance but also new technologies, applications, and markets. In a word, the future, which brings with it innovative drugs and materials, cutting-edge devices, economic growth, and military security.

Beyond analysis, Draghi’s report extends to several recommendations, summarized into ten key points of reform. These include moving towards more centralized decision-making, larger institutional investments, and greater ease of access to credit for startups and SMEs. Specifically, regarding the European Space Agency (ESA), the report highlights the need (within a short-term horizon of one to three years) to abandon the “geographical return” mechanism, which hinders growth.

In summary, according to Mario Draghi, Europe in space is not independent, it is not resilient, and with its current structure, it is destined for a secondary role. Moreover, the report seems to suggest a hidden “original sin”: being a union of States, or worse, a union of Nations, rather than a federation.

Three Trillion Dollars

On a global level, the space economy in 2023 reached a value of $630 billion, and by 2035, it could reach $1.8 trillion, with an average annual growth rate of 9%. These are the estimates published a few months ago by McKinsey & Company for the World Economic Forum. Still on the topic of numbers, the report also cites the European Space Policy Institute (ESPI), which predicts that by 2035, the space economy could even reach $3 trillion. This apparent discrepancy is explained by the inclusion of related sectors, i.e., the “broader economy in which space plays a crucial enabling role for other core industries — in terms of creating new markets and generating added value.” Given the economic scenario, it is also not insignificant that the Draghi report acknowledges Europe’s industrial capabilities in system design and integration.

A critical infrastructure like Galileo, the most accurate global navigation, positioning, and timing (PNT) constellation in the world, supports 10% of the Union’s GDP, as well as 69% of agricultural machinery. Copernicus offers the most comprehensive Earth observation data available today and translates it into strategic applications such as environmental and climate change monitoring, disaster management, and security.

The Earth observation market is led by the United States and Europe, with respective market shares of 42% and 41%, according to the report. It also mentions the upcoming Iris² constellation for “highly resilient” satellite connectivity, supporting government applications such as surveillance (e.g., of borders), crisis management (such as humanitarian aid), and the connection and protection of critical infrastructure (secure communications for Union embassies).

Europe, the reflection continues, remains competitive despite public funding being far lower than that of its main competitors (the United States and China). Its space industry contributes positively to the trade balance, thanks to the global export of complete satellite systems, launch services, equipment, and subsystems. The EU is the second-largest region in the world in terms of its ability to attract investments in new space enterprises, although it significantly lags behind the United States. Unfortunately, the report also highlights some significant drawbacks.

Europe Has Lost (and Is Losing) Ground

The report first notes that Europe has lost its global leadership in launch vehicles, a position once held by the Ariane (4 and 5) rockets, which is now firmly in the hands of SpaceX (which the Union had to rely on recently, just a few weeks ago in September, for the launch of two Galileo satellites). The same applies to leadership in geostationary satellites, although this market is currently in a deep crisis. As for SpaceX, Starlink is “disrupting European telecommunications operators and manufacturers,” the report recalls, reiterating Europe’s lag in these two critical segments: access to space and telecommunications.

Regarding the first issue, the problem is actually related to demand, as the internal market is not large enough — as the following sections will explain.

Looking at the numbers: according to the report, Europe represents about 12% (€5.6 billion) of the global upstream market, which includes satellite hardware, launch services, and satellite management, and 23% (€83 billion) of the downstream market, which includes services related to satellite data. The EU’s internal market is relatively large, but it is also fragmented, representing the primary market for the European space industry. Another key issue is Europe’s dependence on imported high-end electronic components (semiconductors) and detectors. These factors reduced final sales from €8.6 billion in 2021 to €8.3 billion in 2022, with the main losses occurring in launch systems and satellite application systems. The conclusion is stark: the profitability of the European space sector is rapidly declining.

Spending and Defense, Not Just Numbers

Public spending is also secondary when compared once again to that of the United States and China. In 2023, the European Union allocated $13 billion to space activities, slightly less than China and one-fifth of the amount spent by the United States ($73 billion). Moreover, while European space spending is expected to remain stagnant in the coming years, U.S. spending will continue to grow, and “China is expected to reach $20 billion by 2030.”

In 2022, the United States invested $37 billion in defense-related space applications, about 60% of its total space spending. China’s total space spending in 2023 is estimated at nearly $14 billion, of which 62% is allocated to the civilian space budget and the remaining 38% to defense. The higher institutional space spending in the U.S. and China generates a larger market for their companies, which typically apply national preference approaches in procuring space services and solutions. Europe represents only 10% of the approximately 6,500 institutional satellites (civilian and defense) expected to be launched globally between 2023 and 2032.

It is also significant that European investment in research and development (R&D) is insufficient: between 2020 and 2023, despite the activity of some excellent research centers in Europe, the EU, ESA, and major spacefaring nations (France, Germany, Italy, Spain, and the UK) spent an average of €2.8 billion per year on R&D, compared to $7.3 billion by the U.S. and $2.3 billion by China. This is a figure the Union will need to increase if it aims to develop strategic capabilities and maintain technological leadership.

To be fair, this is not a new issue. It was ASD Eurospace, the association representing Europe’s leading space companies, that raised these concerns following the ESA-EC Space Council held in May. Among the concerns was the historic lack of institutional investment, which has long been the foundation on which the space economy is built. Likewise, defense investments drive the market and fuel research and development, which can only come from the public sector. However, in a European ecosystem lacking a common defense, the outlook remains unclear, if not shaky.

A Union, Not a Federation

Draghi’s comparison of Europe to the United States and China highlights the very different political (and cultural and social) entities at play. He laments Europe’s fragmentation and lack of coordination in space investments and missions. It is a warning to abandon, for the common good, a system in which nations, each with their priorities, needs, and sometimes divergent approaches, operate even beyond the atmosphere. For this reason, alongside ESA and EUSPA (and EUMETSAT, which the report does not mention), individual states, such as Italy, France, and Germany, boast their own autonomous space agencies with significant budgets. But without coordination toward a shared goal, this leads to inefficiencies.

Europe remains a union of States, not a federation like the United States, nor a country with a government capable of centralizing and coordinating decisions like China or India. This situation affects spending coordination, scalability of production, and the dispersion of resources and research into too many, often diverging, streams.

The “geographical return” mechanism fuels this spiral. It is a principle within the European Space Agency, whereby contracts are awarded to industries in member states proportional to the amount of capital invested in ESA’s mandatory programs (minus management costs). This “amplifies the fragmentation of the EU’s space industrial base,” the report reads. “It has proven inefficient and even counterproductive (especially in key segments such as launchers and space telecommunications). This policy leads to economic inefficiency and undermines the competitiveness of the European space industry due to a number of factors, including the formation of complex industrial networks, the artificial fragmentation of supply chains caused by the obligation to source from specific member countries, the needless duplication of capacity in relatively small markets, the imbalance between the most competitive industrial players and the actual allocation of resources driven by geographical distribution), constraints on supplier choice, and the inability to change suppliers in the event of poor performance, impacting both project timelines and costs.”

A Single Market and Unified Laws: Buy European

To improve the situation, Draghi and his team write that the goal must be to create a single space market, to coordinate spending, harmonize standards, and align licensing requirements. A common fund for space initiatives is also necessary to act as a unified entity for major future programs. To this end, the report calls for the adoption of a European Space Law that would harmonize national regulatory frameworks. Within this optimal ecosystem, public capital would then be able to support (as happens in the U.S. and China) demand for hardware and service suppliers.

In other words, Europe must aim for an organic mechanism that protects Made in Europe and promotes Buy European, the continental version of the practices followed by its “competitors,” who benefit from the vertical decision-making that Europe lacks. The report points specifically to U.S. export regulations, such as the International Traffic in Arms Regulations (ITAR), the Export Administration Regulation (EAR), and the recent Foreign Direct Product Rule, which safeguard American technology. Not to mention the Buy American mandate, which requires sourcing from American suppliers and drastically limits the participation of European companies in the large U.S. space market. Conversely, European industry relies on foreign suppliers when it comes to strategic technology, especially raw materials for electronic components. In other words, Europe needs to protect its own interests with a more protectionist policy, rather than leaving individual states to fend for themselves.

In this context, two other critical issues arise. The first concerns access to credit for startups and small and medium-sized enterprises (SMEs). There are incubation and scale-up initiatives to help them meet investors, but these need to be strengthened. In 2023, U.S. private investments in space amounted to approximately $4 billion, compared to just €1 billion in Europe. The private investment gap in the Old Continent is estimated at €10 billion over the next five years. Compared to previous years, starting in 2023, private investments in the space economy will become more selective and targeted, reducing access to financing for many emerging players.

There is still much to be done, planned, and worked on to ensure that Europe remains a great space power and not a loosely coordinated sum of smaller powers. This is why ESA and, more broadly, the European Union were created. The question remains, however, if and when it will be possible to enjoy a common strategic economic policy in a sector with strong, fiercely competitive industrial interests, such as launch vehicles and strategic technologies.

The path outlined by Draghi is an aspiration in a continent where nations were at war just eighty years ago, and where nationalism is once again influencing, if not shaping, the decisions of some governments. It is a path that one might legitimately doubt can be followed, “whatever it takes.”