Europe’s share of the global economy is shrinking and fears are growing that the continent can no longer keep pace with the United States and China.
“We are too small,” said Enrico Letta, a former Italian prime minister who recently delivered a report on the future of the single market to the European Union.
“We are not very ambitious,” Nicolai Tangen, director of Norway’s sovereign wealth fund, the largest in the world, told the Financial Times. “Americans work harder.”
“European businesses must regain self-confidence,” declared the European Association of Chambers of Commerce.
The list of reasons for the so-called “competitiveness crisis” is long: the European Union has too many regulations and its leaders in Brussels have too little power. Financial markets are too fragmented; public and private investments are too low; companies are too small to compete on a global scale.
“Our organization, our decision-making and our financing are designed for ‘yesterday’s world’ – before Covid, before Ukraine, before the Middle East conflagration, before the return of great power rivalry,” said Mario Draghi, a former president of the European Central Bank who is leading a study on Europe’s competitiveness.
Russia’s cheap energy, China’s cheap exports, and the fundamental reliance on U.S. military protection can no longer be taken for granted.
At the same time, Beijing and Washington are investing hundreds of billions of dollars in developing their own semiconductor, alternative energy and electric car industries, and shaking up the global free trade regime.
Private investment is also lagging behind. Large companies, for example, invested 60% less in 2022 than their U.S. counterparts and grew two-thirds faster, according to a report from the McKinsey Global Institute. As for per capita income, it is on average 27 percent lower than that of the United States. And productivity growth is slower than other major economies, while energy prices are much higher.
Mr Draghi’s report will only be published after voters in the 27 European Union states go to the polls this week to elect their parliamentary representatives.
But he has previously said “radical change” is needed. According to him, this means a huge increase in common spending, an overhaul of the financing system and European regulations and a consolidation of small businesses.
The challenges inherent in more than two dozen countries acting as a single unit have become more acute in the face of rapid technological advances, increasing international conflict, and the growing reliance on domestic policies to direct affairs. Imagine if every U.S. state had national sovereignty and federal power was only limited to raise money to fund things like the military.
Europe has already taken some steps to keep pace. Last year, the European Union adopted an industrial Green Deal plan to accelerate the energy transition, and this spring it proposed an industrial defense policy for the first time. But these efforts have been overshadowed by the resources employed by the United States and China.
The bloc “is poised to fall far behind its ambitious energy transition goals on renewables, clean technology capacity and domestic supply chain investments,” the research firm said Rystad Energy in an analysis this week.
According to Draghi, public and private investment in the European Union must increase by an additional half a trillion euros per year ($542 billion) just for the digital and green transitions, in order to keep pace.
His report and that of Mr. Letta were commissioned by the European Commission, the executive arm of the European Union, to help guide policymakers when they meet in the fall to develop the country’s next five-year strategic plan. block.
There is still a significant contingent in Europe – and elsewhere – who prefer open markets and are wary of government intervention. But many top European officials, political mandarins and business leaders are increasingly talking about the need for more aggressive collective action.
Without pooling public funding and creating a single capital market, they argue, Europe will not be able to make the kind of investments in defense, energy, supercomputers and much more. still others that are necessary to compete effectively.
And without consolidating smaller companies, it cannot match the economies of scale available to gigantic foreign companies that are better positioned to gobble up market share and profits.
Europe, for example, has at least 34 major mobile networks, Mr. Draghi said, while China has four and the United States three.
Mr Letta said he was personally confronted with Europe’s unique competitive deficiencies when he spent six months visiting 65 European cities to research his report. It was impossible to travel “by high-speed train between European capitals,” he explained. “This is a profound contradiction, emblematic of the problems of the single market. »
The proposed solutions, however, may clash with the political grain. Many leaders and voters across the continent are deeply concerned about jobs, living standards and purchasing power.
But they are reluctant to give Brussels more control and financial power. And they are often reluctant to see national brands merge with competitors or see familiar business practices and administrative rules disappear. Creating a new quagmire of bureaucracy is another concern.
This year, angry farmers in France and Belgium blocked roads and dumped truckloads of manure to protest the proliferation of EU environmental regulations that govern their use of pesticides and fertilizers, planting schedules, zoning and much more.
Blaming Brussels is also a convenient tactic for far-right political parties seeking to exploit economic concerns. The anti-immigrant National Rally party in France has called the European Union the “enemy of the people.”
Currently, polls show that right-wing parties are expected to win more seats in the European Parliament, leaving the legislature even more fractured.
At the national level, government leaders can protect their prerogatives. Over the past decade, the European Union has attempted to create a single capital market to facilitate cross-border investment.
But many smaller countries, including Ireland, Romania and Sweden, have resisted ceding power to Brussels or changing their laws, fearing they would disadvantage their domestic financial sectors.
Civil society organizations are also concerned about the concentration of power. Last month, 13 European groups wrote an open letter warning that greater market consolidation would harm consumers, workers and small businesses and give too much influence to corporate giants, driving up prices. And they fear that other economic, social and environmental priorities are being pushed aside.
For more than a decade, Europe has lagged behind on several measures of competitiveness, including capital investment, research and development, and productivity growth. But it is a global leader in reducing emissions, limiting income inequality and expanding social mobility, according to McKinsey.
And some of the economic disparities with the United States are the result of choice. Half of the gap in gross domestic product per capita between Europe and the United States is the result of Europeans choosing to work fewer hours on average over their lifetime.
Such choices could be a luxury Europeans no longer have if they want to maintain their standard of living, others warn. Policies governing energy, markets and banking are too disparate, said Simone Tagliapietra, a senior researcher at Bruegel, a research organization in Brussels.
“If we continue to have 27 markets that are not well integrated,” he said, “we will not be able to compete with the Chinese or the Americans.”