Closing the big gap with US growth in Europe

At a time when an economic recovery seems at long last to have arrived in Europe, we hear a lot of economists arguing that it will surpass a growth rate of 1.5% going forward. The truth is that all of us should refuse to accept the fatality of a European secular stagnation, initiated by the 2007 downturn and followed by the 2011 double dip. While everyone is forecasting an American growth rate that doubles that of Europe over the course of the next decade, Europeans themselves are willing to achieve something greater. If we take into consideration European assets, standards, social needs and our aspiration for a global leadership, we should certainly target a 2.5% growth rate.

How can we close this growth gap and how much of it will be the result of better, more efficient integration in Europe?

Closing the gap means that we will have to offset the imminent loss of 14 million workers to retirement by 2025. It means more hours worked, higher hourly productivity, more people at work (i.e. a greater workforce participation), a better allocation of capital, greater mobility across borders, and greater extra-European immigration. This means more women at work in some countries, older people working in others, more young people at work everywhere, more Spaniards and Greeks working in Germany or French citizens working in Denmark or Poland. A McKinsey study shows that closing in the 28 European countries 50% of the gap to the upper quartile on the productivity growth and workforce participation would push the GDP growth of Europe above 2%. Alone achieving a greater female participation rate in Sweden (88%) and senior citizen participation in Hungary (58%) would in and of themselves generate 0.4% growth in European GDP.

Then comes the question of immigration. Before the refugee crisis began in Syria, the net flow of immigration was 60% below American standards. It is estimated that the wave of immigration from Syria to Germany will generate 40bps of GDP. How? Simply due to the age of immigrants crossing into Europe’s borders, they’re arriving in the prime of their working years. Of course, nobody here underestimates the social acceptance of these systemic moves. However, citizens across Europe would be more at ease if the member states had decided to create a robust single border control force with a 10 billion euro budget, like the US, rather than the meager 100 million euros currently allocated to Frontex.

To achieve this increase of production factors, we need more than job creation: we need also better jobs, ones that can leverage our populations’ exponentiary increase in qualifications and skills. Unfortunately, today, rather than improving, the skill to job ratio is worsening. A bigger and bigger proportion of Europeans are accepting jobs below their skills. And if we study the youth unemployment rate, it equally affects those with middle school or high school education as those who have a university diploma. Improving this situation means optimizing capital allocation. Historically, Europe has, relative to the US, massively underinvested in intangibles, software, new business models, consulting services and design. European banks are financing what generates returns on collateral, whether that be machines of buildings, but not the intangibles, not the confidence of their citizens and their labor force. Europe will have to find a solution to better finance its goodwill.

Where productivity is concerned, we shouldn’t be seeking ways to work harder, but rather how to work smarter. This means encouraging digitalisation, lean management, de-bureaucratisation of organisations and companies, design thinking and so forth.

Now, because a lot relates to labor market laws and education systems, 75% of what needs to be done has probably to be decided a country by country basis. The hard fact is that the collective preference remains national. Therefore we will keep in essence 28 ecosystems which will remain different. We know what this costs and that that separation remains critical.

Yet we should seriously consider common actions that we can take to fuel collective growth. Amongst many:

• the completion of the single market in services, currently only implemented by 50% of member states
• a decisive move to reinvest in public infrastructures in countries that have lagged behind in the past 10 years, like Germany, the UK, Sweden, Norway
• a heftier investment in the Erasmus program to progressively double the intra-European mobility of our younger workforce
• a better allocation of public capital, notably in defence, which is probably the utmost example of a collective investment waste: Europe has a collective army of 1.6 million people yet we can barely mobilise 50,000 of them to a battlefield, all this due to lack of integration.
• incentivise our European corporations to integrate more comprehensively into digital and build new companies naturally adept in the field. These will create an organic production cycle for European start ups and will act as channels of diffusion of innovation to subcontractors and smaller companies across the continent.
• a determination from Brussels to fight the dominance of the GAFAs and in the future of their Chinese competitors on the European digital market. Part of the European output gap is in essence siphoned out of the continent by companies which now have a market cap equivalent to the GDP of states. For this, we need to create a single common playing field for start ups in Europe and their venture capital ecosystems so that our investors can really render service to the comprehensive European demand, and entice existing European corporations to become active consolidators as much as their American counterparts are for American start ups.
• and lastly the TTIP question on which the jury still seems to be out, between those who anticipate a positive half-a-point of GDP and those who see a negative hit of exactly the same magnitude.

Again, there is never a fatality to low secular growth. Output gaps are still high in Europe, and inefficient application of capital, both human and financial cannot be last forever.