Europe’s share of the global economy is decreasing. The Old Continent is worried about not being able to keep up with the pace imposed by the United States and China.
“We are too small,” laments former Italian Prime Minister Enrico Letta, who has just submitted a report to the European Union (EU) on the future of the single market.
“And not very ambitious,” adds Nicolai Tangen, director of the Norwegian Sovereign Wealth Fund. “The Americans work harder.”
“European companies must regain self-confidence,” adds Eurochambres, an association of chambers of commerce.
There are many reasons for the crisis in EU competitiveness. It has too many regulations and its leaders in Brussels do not have enough powers. Its financial markets are fragmented; its public and private investments are too low; its companies are too small to compete globally.
It can no longer count on affordable Russian energy, cheap Chinese imports and U.S. military protection.
At the same time, Beijing and Washington are boosting their capacities in semiconductors, alternative energies and electric cars with billions, turning global free trade upside down.
Private investment is lagging behind. Large companies invested 60% less in 2022 than their U.S. rivals and their growth slowed by a third, according to a report from the McKinsey Global Institute. Per capita income is on average 27% lower than that of the United States. Productivity growth is slower than in other major economies and energy is much more expensive.
Mr Draghi’s report will be published by the end of June – after the European Parliament elections, which took place on Sunday – but he has already called for “radical change”: sharp increase in common spending, revision of the EU financing and regulation and consolidation of small businesses.
Getting 27 countries to act in concert is difficult, but the challenge has grown in the face of rapid technological progress, increasing international conflicts and the increased use of national policies to guide commercial activity. Imagine that each American state enjoyed national sovereignty and that Washington had few powers to finance activities like the military.
Europe has already acted to stay in the race. Last year, the EU adopted an industrial green plan towards the energy transition. In the spring, she proposed her first industrial defense policy. But these are small steps compared to the resources committed by the United States and China.
Europe “is far from its ambitious targets for transition to renewable energy, clean technology capacity and investment in its supply chain”, indicates the research firm Rystad Energy in a recent analysis.
To stay in the pack, public-private investment in the EU must increase by 500 billion euros ($743 billion Canadian) per year just for the digital and green transitions, Draghi says.
His report and Mr Letta’s – commissioned by the European Commission, the EU’s executive arm – are expected to guide policymakers when they meet in the fall to draw up the next five-year strategic plan.
There are still many people in Europe – and elsewhere – who prefer open markets and distrust government intervention. But many European officials, politicians and business leaders are now arguing for the need for greater collective action: pooling public funds and creating a single market for capital. Without this, Europe will not be able to make the investments it needs to be competitive in defence, energy, supercomputers and so on.
Mr. Letta says he experienced Europe’s competitive shortcomings firsthand during his six-month tour of 65 European cities to prepare his report: “impossible to travel “by TGV between European capitals, a deep, emblematic contradiction single market problems,” he says.
But the proposed solutions could clash with the political mood. Many leaders and voters on the continent are very concerned about jobs, living standards and purchasing power. But they are reluctant to give the EU more powers and financial means. In addition, seeing national brands merging with rivals is displeasing, as is the disappearance of familiar administrative rules. Increasing paperwork is another area of concern.
Since the 2000s, Europe has fallen behind in three areas of competitiveness: capital investment, research and development, and productivity. But it is a world leader in reducing emissions, tackling inequality, and social mobility, according to McKinsey.
Some 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 comes from the fact that Europeans want to work fewer hours, on average, over their lifetime.
A choice that could become unaffordable for Europeans if they value their standard of living, experts warn. Policies governing energy, markets and banks are too disparate, says Simone Tagliapietra, a research fellow at Bruegel, a pro-European think tank in Brussels.
“If we continue to have 27 poorly integrated markets, we won’t be able to compete with the Chinese or the Americans,” he says.
