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Europe is facing an economic productivity challenge. The structural shifts resulting from Brexit, climate change, demographics, pandemic, and energy crisis are now affecting productivity levels. In the United States, GDP has grown by 34% between 2010 and 2023, while in the eurozone it has only grown by 20%. As a result of this, productivity too has increased by 20% in the US but only 5% in the eurozone.
The productivity in Europe has been falling due to insufficient investment in new technologies (computers, artificial intelligence, software, etc.) and low levels of R&D expenditure. The competitiveness of European industries has also been weakened by higher energy costs, which has harmed manufacturing prospects. This will accelerate the shift away from industrial activity and towards the services industry.
The service industries usually have slower productivity growth than manufacturing industries, which will further cause the productivity slowdown.
Additionally, the U.S. and Europe still differ greatly in their R&D expenditures for crucial technologies, with Europe falling behind in areas like software and electronics research. The EU market also remains highly fragmented and the level of trade among EU countries is less than half that between US states. Therefore, European businesses don’t benefit from economies of scale like American companies, which is crucial in tech, where scaling up quickly is necessary.
Furthermore, the upcoming wave of retirement among the baby boomers is also likely to significantly weaken the labor supply. It is likely that as labor shortages will become more severe in Europe, it will increase tax burdens on workers. This will also increase the demand for healthcare workers, which will pull workers from more productive industries. It is time for the European workforce to be revived. This can be done in a few ways; by making labor mobility more attractive, by activating underemployed workers, and by strengthening workers’ skills.
Lowering barriers to hiring skilled workers from outside the EU can also boost productivity and address skills gaps. Over the past decade, migrant workers have replenished the labor pool, but tighter immigration policies are expected to restrict immigration flows in the coming years. There is approximately eight times more cost for relocating across EU member states than between US states. The cost of developing language skills should be reduced by improving accessibility to language training. Initiatives such as these can enhance cross-border mobility and facilitate the movement of talent between low- and high-productivity firms, which are often geographically confined.
Moreover, the transition to electric vehicles will negatively affect employment in sectors that produce internal combustion engine vehicles. Several regional value chains built around supplying the auto industry, which employs 7 percent of the European workforce, are likely to be disrupted. For the past decade, investing money budgeted by local governments has often been underspent because of staff shortages, and red tape that is high in the EU further deters private sector investment. However, unlike the US which has strength in innovation, and China which is a leader in manufacturing, Europe has capabilities in both areas: it can still innovate as well as manufacture at an affordable cost. This middle place provides Europe with some advantages that should be utilized to boost industrial output.
Furthermore, Europe lacks a startup ecosystem, and too few of them grow rapidly and eventually become large companies. Compared to their European counterparts, the fastest-growing companies in the United States employ six times more people. A lack of successful young companies leads to fewer large, highly productive companies in the future. In order to achieve a single market that is open to all goods, services, capital, and labor flows, the EU must find a common ground for removing barriers. Europe needs simpler regulations and tax procedures to increase investment, change accounting and bankruptcy rules, and work towards integrating capital markets.
These pieces are being published as they have been received – they have not been edited/fact-checked by ThePrint.