Agathe Demarais
The United States is the world’s dominant financial and technological power. China is the global manufacturing hegemon. What is Europe’s economic leverage? That question lies at the core of a recent report by former European Central Bank President Mario Draghi. In a nutshell, Draghi argues that the European Union is facing huge economic challenges that could soon make the bloc irrelevant on the global economic scene. This may sound like an alarmist take. Yet a deep dive into U.S., Chinese, and European economic data shows that Draghi’s analysis is spot on. The EU needs to overhaul its economic model—starting with the way it approaches the financing of innovation—if it wants to avoid being squeezed between the United States and China.
The causes of Europe’s economic woes are structural. Demographics and productivity growth determine long-term economic prospects, and the EU is not doing well on either metric. Take demographics: Primarily because of low fertility rates, the EU’s workforce could shrink by around 2 million workers each year by 2040. Europe’s poor demographic prospects will have important ripple effects, not least because financing growing public health care and pension costs will prove increasingly tricky as Europeans age. Things do not look better for productivity, which has grown at a modest 0.7 percent per year on average since 2015—less than half the U.S. rate and a mere one-ninth of China’s reported figure over the same period. One data point says it all: In 1995, U.S. and EU productivity was broadly similar. Today, Europe’s productivity is about 20 percent below America’s.
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