Europe’s share of the global economy is shrinking and fears are deepening 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, head of Norway’s sovereign wealth fund, the world’s largest, told The Financial Times. “Americans just work harder.”
“European companies need to regain confidence in themselves,” declared the European association of chambers of commerce.
The list of reasons for what has been called the “competitiveness crisis” goes on: the European Union has too many regulations and its leadership in Brussels has 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, decision-making and financing are designed for ‘yesterday’s world’: before Covid, before Ukraine, before the conflagration in the Middle East, before the return of great power rivalry,” said Mario Draghi , former president of the European Central Bank who leads a study on Europe’s competitiveness.
Cheap energy from Russia, cheap exports from China, and a fundamental dependence on US military protection can no longer be taken for granted.
At the same time, Beijing and Washington are funneling hundreds of billions of dollars to expand their own semiconductor, alternative energy and electric car industries, and disrupt the global free trade regime.
Private investment is also lagging. Large corporations, for example, invested 60 percent less in 2022 than their American counterparts and grew at two-thirds the pace, according to a report by the McKinsey Global Institute. In terms of per capita income, it is on average 27 percent lower than in the United States. And productivity growth is slower than other major economies, while energy prices are much higher.
Draghi’s report will not be published until voters in the European Union’s 27 states go to the polls this week to elect their parliamentary representatives.
But he has already declared that a “radical change” is necessary. In his view, that means a huge increase in joint spending, an overhaul of Europe’s confusing financing and regulations, and a consolidation of smaller companies.
The challenges inherent in getting more than two dozen countries to act as a single unit have become more acute in the face of rapid technological advancement, growing international conflicts and the greater use of national policies to conduct business. Imagine if every state in the United States had national sovereignty and there was only limited federal power to raise money to fund things like the military.
Europe has already taken some measures to keep up. Last year, the European Union approved a Green Deal Industrial Plan to accelerate the energy transition, and this spring proposed an industrial defense policy for the first time. But these efforts have been dwarfed by the resources the United States and China are employing.
The bloc “will fall far behind its ambitious energy transition goals on renewable energy, cleantech capacity and domestic supply chain investments,” 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 an additional half a trillion euros a year ($542 billion) in the digital and green transitions alone to keep pace.
Both his and Letta’s reports were ordered by the European Commission, the European Union’s executive body, to help guide policymakers when they meet in the fall to draw up the bloc’s next five-year strategic plan.
There is still a sizable contingent in Europe – and elsewhere – that prefers open markets and distrusts government interventions. But many of Europe’s top officials, political mandarins and business leaders are increasingly speaking out about the need for more aggressive collective action.
They argue that without pooling public finance and creating a single capital market, Europe will not be able to make the kind of investments in defence, energy, supercomputing and more that are needed to compete effectively.
And without consolidating smaller companies, it cannot match the economies of scale available to giant foreign companies that are better positioned to absorb market share and profits.
Europe, for example, has at least 34 major mobile networks, Draghi said, while China has four and the United States three.
Letta said he experienced Europe’s peculiar competitive shortcomings firsthand 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,” she said. “This is a profound contradiction, emblematic of the problems of the single market.”
The proposed solutions, however, may go against the political grain. Many leaders and voters across the continent are deeply concerned about jobs, living standards and purchasing power.
But they are wary of giving Brussels more control and financial muscle. And they are often reluctant to see national brands merge with rivals or familiar business practices and administrative rules disappear. Creating a new swamp of bureaucracy is another concern.
Angry farmers in France and Belgium blocked roads and dumped trucks full of manure this year to protest the proliferation of EU environmental regulations governing pesticide and fertilizer use, planting schedules, zoning and much more.
Blaming Brussels is also a convenient tactic for far-right political parties seeking to exploit economic anxieties. The anti-immigrant National Rally party in France has called the European Union the “enemy of the people.”
At the moment, polls show that right-wing parties are expected to win more seats in the European Parliament, leaving the legislative body 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 nations, including Ireland, Romania and Sweden, have opposed ceding power to Brussels or changing their laws, concerned about putting their domestic financial industries at a disadvantage.
Civil society organizations are also concerned about the concentration of power. Last month, 13 groups in Europe wrote an open letter warning that further market consolidation would hurt consumers, workers and small businesses and give too much influence to corporate giants, causing prices to rise. And they are concerned that other economic, social and environmental priorities will be left aside.
For more than a decade, Europe has lagged behind on several measures of competitiveness, including capital investments, research and development, and productivity growth. But it is a world 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 an election. Half of the gap in per capita gross domestic product between Europe and the United States is the result of Europeans choosing to work fewer hours, on average, over their lifetime.
Others warn that such options may be a luxury that Europeans no longer have if they want to maintain their living standards. 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 cannot compete with the Chinese or the Americans.”