Economic competitiveness becoming top European concern

GOING by media airtime and column inches, many might conclude that the biggest challenge facing Europe at the moment is the Ukraine war. Yet, a growing number of senior political leaders across the region perceive an even more significant, medium to longer-term problem of an economic nature.

That is, Europe’s apparent significantly declining competitiveness vis-a-vis other key world powers, especially the United States. In 2008, the EU economy was larger than that of the United States: US$16.2 trillion versus the latter’s US$14.7 trillion.

Yet by 2023, the US economy had grown to over US$25 trillion, whereas the EU and the UK economies together had only reached about US$20 trillion. As Christian Ulbrich, chief executive officer of JLL, a global real estate services firm, has commented, Europe’s “wealth is melting away at rapid speed”.

Economists do not fully agree on the scale of the challenge facing Europe, which some such as European Central Bank (ECB) executive board member Isabel Schnabel, argue is a “crisis” and structural in nature. Others, however, think the problems are less serious, even though there is no denying that lists of the top global technology companies, the world’s top universities, or semiconductor manufacturing capacity, tend to show Europe falling behind.

Moreover, one other key problem is that there are significant disagreements on the diagnosis of the drivers of the bloc’s competitiveness challenge. In other words, different people attach different prioritisation around what is a long list of problems. These include flatlining labour productivity; failure to match US levels of private or public sector investment; failure to reap more efficiency gains from digital technologies; the fragmentation of European financial markets; and regulation, which tends to leave the region more exposed to external pressures.

On the latter point, the external landscape may only become less favourable in the years to come for Europe. Geopolitically, for instance, China and Russia are increasingly flexing their muscles in the region, while a second Trump presidency could see the post-1945 Western security alliance fray.

Moreover, further economic shocks cannot be ruled out either, potentially akin to the multiyear eurozone crisis of 2009. Then, several nations (Greece, Portugal, Ireland, Spain and Cyprus) were variously unable to repay or refinance their government debt or to bail out over-indebted banks under their national supervision without the assistance of external bodies such as other Eurozone countries, the ECB, or the International Monetary Fund. The problem, as Dr 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 highly unclear whether Europe will be able to recover its economic competitive advantage in coming years. But there is unanimity on the importance of the region trying to urgently address this question.

This is why European Commission President Ursula von der Leyen has commissioned a report on this super-priority from former ECB chief Mario Draghi who, more recently, was Italian prime minister. Draghi is the leading central banker of his generation who made 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 single currency in what was perhaps the decisive moment of the then-crisis.

His call for governments to come together and take “urgent action” to implement a substantial bailout fund was initially met with resistance from Germany. Yet, it eventually paid off and economies began to grow, and subsequently, no country left the Eurozone. With this episode, Draghi earned the nickname “Super Mario” after the hero in the Nintendo video game.

While Draghi’s report may not be concluded till the second half of the year, he has indicated his line of thinking. He argues that Europe is undergoing massive change 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 different reasons.

In this context, Draghi believes that the EU needs to take bold, decisive action, from lowering energy prices to reducing regulatory burdens. However, he also argues that massive investments are needed in the green and digital transitions, calculating that the funding gap between Europe and the United States in terms of investment is equivalent to around half a trillion euros (around S$729 billion) a year.

Draghi highlights these twin transitions as being key for Europe with good reason. On the digital transition, the region risks potentially not capitalising upon the next technology revolution of AI and quantum, in the same way as it did not do with the early 2000s Internet technology boom.

To be sure, the EU has passed the world’s first comprehensive AI-related legislation giving regulatory first-mover advantage. However, that is not the same as commercialising the technology, as in the early 2000s, and today it is US firms founded in that era such as Alphabet and Amazon that dominate the landscape, with their competitors more likely to come from world powers such as China (Alibaba, for instance) than Europe.

On the green transition, meanwhile, the EU is placing much emphasis on this policy area through its Green New Deal. However, this is not always matched by commensurate resources, while the US$369 billion Inflation Reduction Act is widely seen as a “game changer”, with China continuing to offer significant state support to its firms.

The Draghi report this year will be complemented by one from another former Italian prime minister, Enrico Letta. His study will look at another part of Europe’s competitiveness puzzle: the state of the internal market.

Letta is now the president of the Jacques Delors Institute, a think tank named after the former French European Commission president. His report will look for solutions to try to resolve the dilemma of how best to preserve the strength of the huge EU single market, and the associated freedoms of movement, capital, goods and services, while competing with global giants such as the United States, China and India.

Taken together, Europe is therefore facing a critical moment, and it remains unclear if it will be able to act decisively with other crises ongoing such as Ukraine. The key next step will be marshalling a broad political consensus around bold reforms, and the funding to deliver this, with a potential window of opportunity in the next European Commission from late 2024.

The writer is an associate at LSE IDEAS at the London School of Economics