'The Future of European Competitiveness' Highlights - Part 1

The starting point: a new landascape for Europe

Chapter 1 of "The Future of European Competitiveness" outlines Europe’s strengths and the challenges it faces to maintain its competitiveness in a changing global landscape. The chapter discusses Europe’s current economic status, structural challenges, and the significant transformations it must undertake to address these issues and sustain growth.

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1. Current Landscape of the European Economy

Europe has established a robust economic model characterized by an open economy, market competition, and strong social policies to fight poverty and inequality.

• The Single Market comprises 440 million consumers and 23 million companies, making up about 17% of the global GDP (based on 2023 IMF data).
• Europe has achieved low levels of income inequality compared to the US and China, with income disparity rates roughly 10% lower than those seen in these countries.
• Eight of the top 10 countries globally in rule of law are EU members, and Europe leads in life expectancy and low infant mortality.

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2. Economic Challenges and Productivity Gap

Despite its strong base, Europe's economic growth has been slowing due to a persistent productivity gap with the US. Over the past two decades, the EU's GDP growth rate has lagged behind the US, and China has rapidly narrowed the gap.

• GDP Growth Gap: The EU-US gap in GDP level (at 2015 prices) widened from about 15% in 2002 to 30% in 2023, and on a purchasing power parity basis, the per capita gap grew from 31% to 34%.
• Productivity: The productivity gap accounts for around 70% of the difference in per capita GDP with the US, contributing to slower income growth and weaker domestic demand within Europe.

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3. External Shifts Affecting Growth

Three external conditions that historically supported Europe’s growth – trade openness, affordable energy, and geopolitical stability – have deteriorated.

• Trade: While international trade rose from 30% to 43% of EU GDP between 2000 and 2019, the multilateral trading system is now under strain, and the IMF projects a slower trade growth rate of 3.2% over the medium term.
• Energy: Europe’s dependence on Russian pipeline gas ended abruptly due to geopolitical tensions, leading to a significant economic loss equivalent to more than a year’s GDP growth.
• Geopolitical Stability: Rising global instability, with increased tension between the US and China, and conflict in regions supplying essential commodities, has led to increased economic and security risks.

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4. Three Strategic Transformations Needed

a. Accelerating Innovation and New Growth Engines

To maintain competitiveness, Europe must close its innovation gap, especially in advanced technologies and digitalization.

Currently, only four of the top 50 global tech companies are European. In the past decade, Europe’s share of global tech revenues dropped from 22% to 18%, while the US share rose from 30% to 38%.

• Innovation and Productivity: Faster innovation is essential for raising EU productivity, household incomes, and domestic demand. The ECB has noted an increase in direct competition between Chinese and EU exporters, now covering around 40% of sectors compared to 25% in 2002.
• AI and Digital Transformation: The emerging wave of AI technology offers Europe a chance to regain competitiveness by focusing on autonomous robotics and other AI-driven advancements.

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b. Decarbonizing while Ensuring Industrial Competitiveness

Europe’s energy landscape changed drastically due to geopolitical events, particularly with Russia. As a result, EU industries face significantly higher energy costs compared to the US and China, with electricity costs 2-3 times higher and gas prices 4-5 times higher.

• Decarbonization as an Opportunity: Europe aims to lead in clean technologies and circular economy practices, but it must synchronize policies across sectors to achieve these goals. EU industries will incur higher investment costs to meet decarbonization targets, especially in high-energy sectors like clean tech and automotive.

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c. Increasing Security and Reducing External Dependencies

Europe's reliance on other regions for critical resources and manufactured goods poses economic vulnerabilities. The EU's strategic openness to trade is now shifting towards securing independent access to essential materials and technologies, especially with increasing global trade tensions.

• Trade Dependency: The US is currently re-routing critical supply chains through allies, while China is pushing for self-reliance in strategic industries. As a highly open economy, Europe must secure key raw materials and protect essential supply chains to reduce its vulnerabilities.
• Defense and Security: With EU defense spending only a third of US levels, Europe faces a stark challenge in building a robust and independent defense industry.

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5. A Coordinated European Response

The report advocates for a new industrial strategy focusing on:

• Productivity Growth: Boosting productivity through focused innovation, improved commercial pipelines, and addressing skill gaps.
• Energy and Environmental Policy: Implementing a decarbonization strategy aligned with industrial competitiveness.
• Foreign Economic Policy: Developing a “foreign economic policy” to ensure resource security, establish trade partnerships, and build robust defense capabilities.

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6. Governance and Structural Reforms

For Europe to achieve these goals, coordinated policy-making and reduced regulatory burdens are essential. The EU’s complex governance model, with decision-making split among member states, complicates swift and effective policy responses. The report emphasizes the need to reform governance for faster and more coherent policy action.

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7. Social Inclusion in Economic Transformation

While Europe seeks to match the US in productivity, it aims to do so with a socially inclusive model. This includes protecting workers in traditional industries and ensuring equitable access to training and new job opportunities as the economy adapts to technological advancements.

In conclusion, Europe’s strategy focuses on innovation, energy sustainability, security, and a cohesive policy framework to adapt to external pressures and maintain its economic and social strengths in an evolving global context.

... Stay tuned for Part 2