Europe’s share of the global economy is shrinking, raising concerns that it will not be able to keep up with the United States and China.
“We are too small,” said Enrico Letta, a former Italian prime minister who recently presented a report to the European Union on the future of the single market.
“We’re not that ambitious,” Nikolai Tangen, head of Norway’s sovereign wealth fund, the world’s largest, told the Financial Times. “The Americans just work harder.”
“European businesses need to regain their confidence,” declared the Federation of European Chambers of Commerce.
There are many other reasons for the phenomenon called the “competitiveness crisis.” The European Union has too much regulation and too little power for the leadership in Brussels. Financial markets are too fragmented. There is too little public and private investment. Companies are too small to compete on a global scale.
“Our organisations, decision-making and fundraising are designed for ‘yesterday’s world’: before COVID-19, before Ukraine, before the Middle East catastrophes and before the renewed conflict between great powers,” said Mario Draghi, a former European Central Bank president who heads a study on Europe’s competitiveness.
Our fundamental reliance on cheap energy from Russia, cheap exports from China, and military protection from the United States can no longer be taken for granted.
At the same time, Beijing and Washington are pouring hundreds of billions of dollars into expanding their own semiconductor, alternative energy and electric vehicle industries, seeking to upend the global free trade system.
Private investment has also lagged: Large companies, for example, invested 60% less than their U.S. peers in 2022 and grew at two-thirds the rate, according to a report from the McKinsey Global Institute. Per capita income is on average 27% lower than in the U.S. Productivity growth has been slower than in other major economies, and energy prices are much higher.
Draghi’s report will not be made public until voters in the European Union’s 27 member states go to the polls this week to elect their parliamentary representatives.
But he has already declared that “radical change” is needed: in his view, that means a big increase in joint spending, an overhaul of Europe’s messy financing and regulation, and the integration of small and medium-sized enterprises.
The inherent challenges of getting more than 24 countries to function as a single unit are exacerbated in the face of rapid technological advances, intensifying international conflicts, and the increasing use of national policies to direct business. Imagine what would happen if every state in America was sovereign and the federal government had limited power to raise funds to fund things like the military.
Europe is already taking some steps to keep up — last year the European Union passed a Green Deal industrial plan to speed up the energy transition and this spring proposed its first industrial defense policy — but these efforts pale in comparison to the resources the United States and China are putting into it.
The EU “will fall far behind on its ambitious energy transition targets, including investment in renewables, clean tech capabilities and domestic supply chains,” research firm Rystad Energy said in an analysis this week.
In Draghi’s view, public and private investment in the European Union needs to increase by 500 billion euros ($542 billion) a year just on the digital and green transition.
His report and that of Mr Letta were commissioned by the European Commission, the EU’s executive arm, to guide policymakers meeting in the autumn to draw up the EU’s next five-year strategic plan.
There are still large swaths of people in Europe and elsewhere who favor free markets and are suspicious of government intervention, but many European officials, politicians and business leaders are increasingly speaking out about the need for more aggressive collective action.
Without pooling public funds and creating a single capital market, they argue, Europe will not be able to make the investments in areas such as defence, energy and supercomputing that it needs to compete effectively.
And without integrating smaller businesses, they will never be able to match the economies of scale that can be achieved by large foreign companies that are well positioned to monopolize market share and profits.
For example, Europe has at least 34 major mobile networks, while China has only four and the United States has only three, Draghi said.
Letta said he experienced Europe’s endemic lack of competitiveness first-hand during a six-month trip to 65 European cities researching the report. “It was not possible to travel by high-speed rail between European capitals,” he said. “This is a serious contradiction and emblematic of the problems of the single market.”
But the proposed solutions could go against a political current: Many leaders and voters across the continent have deep concerns about jobs, living standards and purchasing power.
But the EU is wary of giving the EU more control and financial powers, and is often loath to let domestic brands merge with rivals, erase familiar business practices and administrative rules, and worries about creating a quagmire of new bureaucracy.
Angry farmers in France and Belgium have blocked roads and dumped truck loads of fertiliser this year in protest at expanding EU environmental regulations that control pesticide and fertiliser use, cropping schedules and zoning.
Blaming Brussels is also a popular tactic for far-right parties looking to exploit economic fears. France’s anti-immigration Rally National party has called the European Union “the enemy of the people.”
At the moment, opinion polls are predicting that right-wing parties will win more seats in the European Parliament, which will further divide the legislative body.
At the national level, government leaders may seek to protect their own power. Over the past decade, the European Union has sought to create a single capital market to facilitate cross-border investment.
But many small countries, including Ireland, Romania and Sweden, are opposed to ceding powers or changing laws to the EU, fearing that their financial industries would be disadvantaged.
Civil society groups are also concerned about the concentration of power: Last month, 13 European organisations wrote an open letter warning that greater market integration would harm consumers, workers and small businesses, give big corporations too much influence and lead to higher prices, and risk neglecting other economic, social and environmental priorities.
For more than a decade, Europe has lagged in several measures of competitiveness, including capital investment, research and development and productivity growth, but it leads the world in reducing emissions, reducing income inequality and expanding social mobility, according to McKinsey.
And part of the economic gap with the United States is the result of choice: half of the difference between Europe’s and the United States’ gross domestic product per capita is the result of Europeans choosing to work fewer hours on average over their lifetimes.
Some warn that such options may no longer be a luxury Europeans can afford if they want to maintain their living standards. Simone Tagliapietra, a senior researcher at Bruegel in Brussels, says policies governing energy, markets and banking are too fragmented.
“If we continue to have 27 poorly integrated markets, we will not be able to compete with China or the United States,” he said.
