Europe’s share of the global economy is shrinking and fears are deepening that the continent can no longer keep up with the United States and China.
“We are very small,” said Enrico Letta, a former Italian prime minister who recently delivered a report on the future of the European Union’s common market.
“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 businesses must regain self-confidence,” declared the European Association of Chambers of Commerce.
The list of reasons for what has been called the “competition crisis” goes on: The European Union has too many regulations and its leadership in Brussels has too little power. Financial markets are highly fragmented; public and private investments are very low; companies are too small to compete on a global scale.
“Our organization, decision-making and financing are designed for ‘yesterday’s world’ – pre-Covid, pre-Ukraine, pre-Middle East conflagration, pre-return of great power rivalry,” said Mario Draghi, a former . president of the European Central Bank, who heads a study on Europe’s competitiveness.
Cheap energy from Russia, cheap exports from China, and basic military defense support 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 semiconductor, alternative energy and electric car industries and changing the world’s free trade regime.
Private investment also stagnates. 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, they are 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.
God. Draghi’s report will not be published until voters in the 27 European Union states go to the polls this week to elect their parliamentary representatives.
But he has already stated that “radical change” is needed. According to him, this means an enormous increase in joint spending, a review of Europe’s first funding and regulations, and a consolidation of smaller companies.
The integrated challenges of making more than two dozen countries act as a single unit have sharpened in the face of rapid technological progress, growing international conflicts, and the increased use of national policies to drive business. Imagine if every state in America had national sovereignty and only limited federal power to raise money to fund things like the military.
Europe has already taken some steps to follow up. Last year, the European Union adopted a Green Deal Industrial Plan to accelerate the energy transition and this spring proposed an industrial protection policy for the first time. But these efforts are dwarfed by the resources the United States and China are using.
The bloc “is set to fall far short of its ambitious energy transition targets for renewable energy, clean technology capacity and domestic supply chain investment,” research firm Rystad Energy said in an analysis this week.
In Mr. In Draghi’s view, public and private investment in the European Union must increase by an additional half a trillion euros per year ($542 billion) in the digital and green transition alone to maintain peace.
Both his report and Mr. Letta’s was commissioned 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 sizeable contingent in Europe – and elsewhere – that prefers open markets and is suspicious of government intervention. But many of Europe’s top officials, political mandarins and business leaders are increasingly talking about the need for more aggressive collective action.
Without the pooling of public funding and the creation of a single capital market, they argue, Europe will not be able to make the kinds of investments in defense, energy, supercomputing and more that are required to compete effectively.
And without consolidating smaller companies, it cannot match the economies of scale available to large foreign firms that are better positioned to gobble up market share and profits.
Europe, for example, has at least 34 major mobile networks, Mr. said Draghi, while China has four and the United States three.
God. Letta said he experienced first-hand Europe’s particular competitive disadvantages 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 said. “This is a profound contradiction, emblematic of the problems of the Single Market.”
The proposed solutions, however, may rub political heads. 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 financial control and power. And they are often reluctant to watch national brands merge with rivals or popular business practices and administrative rules disappear. Creating a new red tape mess is another concern.
Angry farmers in France and Belgium blocked roads and dumped truckloads of manure this year to protest the spread of EU environmental regulations governing their use of pesticides and fertilizers, planting times, zoning and more.
Blaming Brussels is also a convenient tactic for far-right political parties seeking to exploit economic anxieties. The anti-immigrant Rally National 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 be protective of their prerogatives. For the past decade, the European Union has been trying to create a single capital market to make it easier to invest across borders.
But many smaller nations, including Ireland, Romania and Sweden, have opposed handing over power to Brussels or changing their laws, worried about putting their national 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 greater market consolidation would hurt consumers, workers and small businesses and give corporate giants too much leverage, driving up prices. And they worry that other economic, social and environmental priorities will be sidelined.
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 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 choice. Half 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 lifetimes.
Such choices may be a luxury Europeans no longer have if they want to maintain their living standards, others warn. Policies governing energy, markets and banks are very different, said Simone Tagliapietra, a senior fellow at Bruegel, a think tank 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.”
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