- Europeans produce significantly less per hour worked compared to Americans, leading to a growing economic divide.
- Europe faces major challenges in the areas of innovation, expensive energy and fragile supply chains that affect its global competitiveness.
Is Europe doomed to economic decline? This is a pressing question as the continent increasingly loses ground to the United States in terms of productivity. A major report by former Italian Prime Minister Mario Draghi paints a clear picture of Europe’s economic development and raises concerns about its competitive position on the world stage.
Europe’s dwindling competitiveness
The gap between Europe and the United States is widening. Europeans are on average 25% less prosperous than Americans. While longer working hours in the US play some part in this discrepancy, the more worrying fact is that Europeans are simply producing less per hour worked. This trend is not new; productivity in Europe has been gradually declining since the mid-1990s. Once comparable to the United States, Europe is now lagging well behind. This problem affects many of the leading European economies, including Germany, France and Italy.
The Draghi report, commissioned by the European Commission, highlights three main problems that are hampering Europe’s competitiveness:
- A glaring lack of innovation
- High energy costs
- Fragile supply chains and a weak defense industry
Europe’s innovation difficulties are obvious, with a lack of leading technology companies comparable to the American Silicon Valley giants. The question,
“Where is the European Google?”
remains unanswered. In addition, European companies are slow to adopt new technologies, which dampens productivity growth, especially in sectors that work intensively with information technology.
In terms of energy, Europeans face much higher costs for electricity and natural gas compared to their American or Chinese counterparts. This significant disadvantage affects the production costs of European companies, which further impairs their ability to compete globally.
Interestingly, the Draghi report does not mention the ageing of the European population as a factor contributing to the decline in productivity. However, the ageing of the population is undeniable and has a profound impact on the size, composition and dynamics of the workforce. Older workers may be less inclined to take on new technologies or entrepreneurial risks.
The report calls for greater coordination between EU countries in the areas of regulation, trade policy, industrial strategy, research funding, education and land use, with the aim of creating a more unified European entity along the lines of the United States or China. Even if this is advantageous in some areas, the need for such centralization in all areas is questionable given the linguistic and cultural diversity in Europe.
By implicitly portraying the United States as a competitor, the report overlooks potential transatlantic cooperation that could benefit both regions. Europe faces more pressing threats, particularly from Russia and China, with the latter posing a major challenge in areas such as electric vehicles and green technologies.
Rather than seeing the American Inflation Reduction Act as a threat, Europe could take inspiration from it and deepen economic ties with the United States. This includes leveraging American investment in venture capital and joint research projects that could foster a stronger transatlantic alliance in the face of China’s rise.
A call for pragmatic reforms
Current European policies, such as Germany’s phase-out of nuclear energy and strict data protection regulations, have unintentionally favored established American tech giants over new European start-ups.
Europe needs to rethink its relationship with technology. Instead of merely regulating the American digital giants, it needs to create an environment that nurtures its own technology champions. This requires greater support for research and innovation and a reflection on cultural and regulatory barriers that hinder entrepreneurship across the continent.