Europe’s competitiveness is in meltdown, IMF reports

According to a new report by the International Monetary Fund, Europe’s economy has been languishing and losing more ground each year in a productivity race with the US and China.

The meltdown in EU companies’ competitiveness was directly related to their need for more innovation. Large European companies, the IMF found, invested significantly less in research and development than their US counterparts.

The technology sector exemplified this trend: over the last 20 years, investment by US firms grew by 40 per cent, while investment by European firms remained stagnant.

This IMF proposed a solution similar to Enrico Letta’s and Mario Draghi’s prescriptions: deepening the single market to increase its size and strengthening the European private sector.

The IMF report also provided data further documenting just how much European companies have lagged due to lack of dynamism. The ten largest US companies were, on average, founded in 1985. In Europe, it was 1911.

This affected not only European firms’ lack of innovation, but also their very structure. In Europe, the IMF economists pointed out, there is a shortage of young high-growth firms and a shortfall of successful firms, as evidenced by the overabundance of small, mature, low-growth firms instead.

An example of this was how 20 per cent of the EU’s employment was in micro-enterprises with fewer than ten workers, while in the United States this category was half the size.

Numerous reports have attempted to analyse why the European economy has lost so much ground to the US economy since the end of the 20th century. The problem was chiefly the result of an incomplete single market, limiting the size and efficiency of the private sector.

According to the IMF, ‘limited market size impedes innovation and growth among the most productive European firms’.

European companies needed help to take advantage of economies of scale and network effects, things which came more easily to US companies.

Another factor was the lack of a true capital union, which complicated company financing for EU companies.

This particularly affected investment in research and development, an increasingly critical pillar in the digital revolution. Technologies such as artificial intelligence and quantum computing have needed large amounts of capital to avoid being left behind.

The IMF proposed removing ‘bottlenecks’ in the single market to allow it to expand.

To this end, it suggested ‘expanding market access for firms within Europe, addressing the lack of investment in border infrastructure, opening up protected sectors, liberalising trade in services and harmonising regulations.’

If these problems were not addressed in time, the implications for the union as a whole could be dramatic.

If the trend continued, Europe could be marginalised in strategic sectors such as artificial intelligence, biotechnology, and quantum computing, where massive US and Chinese investment was building the next generation of technology leaders elsewhere.

This would also directly impact European citizens, with fewer job opportunities in the EU in high-tech sectors, and lower overall wage growth.

The lack of dynamism and support for innovation also threatened to lead to a ‘brain drain,’ where European talent migrates to more competitive and attractive economies.

The European Socialists have warned they will halt votes on all other commissioners if their Spanish candidate for Commission Executive VP for the Clean, Just and Competitive Transition, @TeresaRibera, is not part of the new Von der Leyen’s executive. https://t.co/x41CTBt3s9

— Brussels Signal (@brusselssignal) November 14, 2024