EU’s Complex Competitiveness Challenge Is Growing In Urgency – OpEd

By Andrew Hammond

Judged by the amount of air time devoted to it by the media, it would be easy to conclude that the biggest challenge facing Europe at the moment is the war in Ukraine.

Yet, many senior political leaders across the region perceive an even more significant, longterm problem: Europe’s economic competitiveness in relation to other key world powers, especially the US, which appears to be significantly in decline.

In 2008, the EU economy was valued at $16.2 trillion, greater than that of the US at $14.7 trillion. Yet by 2023, the US economy had grown to more than $25 trillion, whereas the combined value of the EU and UK economies had only reached about $20 trillion.

This prompted Christian Ulbrich, the CEO of JLL, a global real estate services firm, to comment that Europe’s “wealth is melting away at rapid speed.”

There are differing opinions among economists on the scale of the challenge this presents to Europe. Some, such as Isabel Schnabel, a member of the European Central Bank’s executive board, argue it is a “crisis” that is structural in nature. Others think the problems are less serious, even though there is no denying that a glance at lists of the top global technology companies, the world’s leading universities or semiconductor manufacturing capacity reveals Europe is falling behind.

One key problem is that there are significant disagreements about what is driving the bloc’s competitiveness challenges. That is to say, different people attach different priorities to what is a long list of problems, including flat-lining labor productivity; failure to match US levels of investment by the private and public sectors; failure to reap greater gains in efficiency from the use of digital technologies; and the fragmentation of European financial markets, and their regulation, which leaves the region more exposed to external pressures.

On the latter point, the external landscape might become even less favorable for Europe in the years to come. Geopolitically, for instance, China and Russia are increasingly flexing their muscles in the region, while a second Trump presidency might cause fragmentation of the post-1945 Western security alliance.

Further economic shocks cannot be ruled out either. The problem, as Francois Geerolf of the French Economic Observatory asserts, is that “with each new crisis, Europe seems to permanently lose a few points of economic growth to the United States.”

In this context, it is unclear whether Europe will be able to recover its economic competitive advantage. However, there is unanimity on the important need for the region to urgently address the issue.

This is why European Commission President Ursula von der Leyen commissioned a report on this high-priority matter from former European Central Bank chief Mario Draghi who, more recently, served as prime minister of Italy.

He is considered the leading central banker of his generation, who earned his reputation in 2012 at a time when it appeared as though the future of the single European currency was in peril. In seven simple words — “whatever it takes to save the euro” — he changed market sentiment by pledging massive intervention to defend the currency in what was perhaps the most decisive moment of the economic crisis. 

His call for European governments to come together and take “urgent action” to implement a substantial bailout fund to tackle the debt crisis and instability was initially met with resistance from Germany. Yet, it eventually paid off, economies began to grow, and no country left the eurozone. For his efforts, Draghi earned the nickname “Super Mario,” after the hero of the Nintendo video games.

Though Draghi might not complete his report until the second half of this year, he has indicated his thinking so far. He argues that Europe is undergoing massive changes, with three of the key pillars it has long relied on — Russian energy, Chinese exports, and the US security umbrella — all potentially transforming, albeit for differing reasons.

Against this backdrop, Draghi believes the EU needs to take bold, decisive actions, from cutting energy prices to reducing regulatory burdens. He also argues that massive investments are needed in the green and digital transitions, as he calculates the funding gap between Europe and the US in terms of investment in these areas is equivalent to about half a trillion euros a year, approximately a third of which is public money.

Draghi highlights these twin transitions as being key for Europe with good reason. On the digital front, there is a risk the region might potentially fail to capitalize on the revolutionary development of artificial intelligence and quantum technologies, mirroring its failures during the internet technology boom of the early 2000s.

Certainly, the EU has passed the world’s first comprehensive AI-related legislation, providing it with a regulatory first-mover advantage. However, this is not the same as commercializing the technology, as we saw in the early 2000s when US firms such as Alphabet and Amazon seized the advantage and now dominate the landscape, while their main competitors are more likely to have emerged from world powers such as China, in the form of Alibaba for example, than Europe.

In terms of the green transition, the EU is placing much of the emphasis on its European Green Deal. However, such ambitions are not always matched by the provision of commensurate resources. Meanwhile, Washington’s $369 billion Inflation Reduction Act is widely seen as a “game changer,” while China continues to offer significant state support to the nation’s businesses.

Europe is therefore at a critical juncture and it is unclear whether it will be able to act decisively on this agenda while it is dealing with other ongoing crises, including the war in Ukraine. A key next step will be to marshal a broad political consensus around a bold package of reforms, complete with the funding needed to deliver it.

The Draghi report could create a window of opportunity for this to happen within the next European Commission when its term begins following the EU parliamentary elections in June.

• Andrew Hammond is an associate at LSE IDEAS at the London School of Economics.