Europe’s economic share of the global market is declining, and concerns about the continent’s ability to compete with powerhouses like China and the United States are growing. Enrico Letta, a former Italian Prime Minister, recently gave the European Union a report on the single market’s future and declared, “We are too small.”
The head of Norway’s sovereign wealth fund, the biggest in the world, Nicolai Tangen, told The Financial Times, “We are not very ambitious.” The European Chamber of Commerce has declared that “European businesses need to regain self-confidence.”
There is an endless list of factors contributing to the so-called “competitiveness crisis” in the European Union (EU), including an excessive number of regulations and insufficient authority held by Brussels’ leadership. Companies are too small to compete on a global scale; public and private investments are too low; and financial markets are too fragmented.
“Our organisation, decision-making and financing are designed for ‘the world of yesterday,’ pre-COVID, pre-Ukraine, pre-conflagration in the Middle East, pre-return of great power rivalry,” Mario Draghi, a former president of the European Central Bank who is heading a study of Europe’s competitiveness said.
It is now impossible to take for granted cheap energy from Russia in the post-Ukraine scenario, inexpensive exports from China, and a firm reliance on United States military defence. Concurrently, hundreds of billions of dollars are being directed by Beijing and Washington toward the development of their own semiconductor, alternative energy, and electric vehicle industries as well as the disruption of global free trade agreements.
According to a McKinsey Global Institute report, Europe-based big businesses invested 60% less in 2022 than their American counterparts and expanded at a rate of two-thirds slower. In terms of per capita income, it is typically 27% less than that of the US. Furthermore, compared to other large economies, productivity growth is slower and energy prices are significantly higher.
Draghi’s report, in all likelihood, will be made public after the parliamentary election of the European Union is over. However, he has already declared that “radical change” is necessary. From his perspective, this entails a massive rise in collaborative spending; a reorganisation of Europe’s convoluted financing and regulatory framework, and a consolidation of smaller businesses.
The inherent difficulties in coordinating the actions of over 22 nations have gotten more acute due to the speed at which technology is developing, the escalating number of international conflicts, and the growing reliance on national policies to direct business. Imagine if the federal government’s ability to raise money to finance the military was restricted and each state in the United States retained its national sovereignty.
Europe has started moving in the right direction already. The European Union first proposed an industrial defence policy, and it passed the Green Deal Industrial Plan in 2023 to expedite the energy transition. However, compared to the resources that China and the United States are using, these efforts are insignificant.
According to an analysis released by the research firm Rystad Energy, the bloc “is set to fall far behind its ambitious energy transition targets for renewable energy, clean technology capacity and domestic supply chain investments.”
Draghi believes that for the European Union to stay up, public and private investment in the digital and green transitions alone needs to increase by half a trillion euros annually ($542 billion).
The European Commission, the EU’s executive body, ordered both his report and Letta’s to aid in directing decision-makers when they convene in the fall to draft the bloc’s next five-year strategic plan. A considerable portion of people still favour free markets and are wary of government interference in Europe and other regions.
However, there is a growing consensus among Europe’s most powerful politicians, business executives, and officials regarding the necessity of more assertive group action.
They contend that Europe cannot effectively compete if public funds are not consolidated and a single capital market is not established. This will prevent the continent from investing in crucial areas like energy, defence, and supercomputing.
Furthermore, it cannot compete with the economies of scale enjoyed by enormous foreign corporations that are better positioned to gobble up market share and profits if smaller businesses are not consolidated.
According to Draghi, Europe possesses at least 34 major mobile networks, while China and the United States have four and three, respectively.
Letta claimed that during his six-month research trip to 65 European cities for his report, he witnessed first-hand the peculiar competitive shortcomings of Europe.
“By high-speed train between European capitals” was not an option, he declared.
This stark contradiction serves as a metaphor for the issues facing the single market. However, there may be political pushback to the suggested fixes. Concerns about jobs, living standards, and purchasing power are major issues for many politicians and voters throughout the continent. Giving Brussels more power and resources, though, is something they are cautious about.
Furthermore, they frequently find it difficult to witness the demise of well-known administrative guidelines and business practices or the merger of national brands with competitors.
Another concern is that there might be an increase in red tape. In 2024, in protest of the numerous environmental regulations imposed by the European Union that govern their use of pesticides and fertilisers, planting schedules, zoning, and much more, irate farmers in France and Belgium blocked roads and dumped truckloads of manure.
For far-right political parties seeking to capitalise on economic concerns, blaming Brussels is also a handy strategy. The European Union has been dubbed the “enemy of the people” by the anti-immigrant National Rally party in France.
According to the current political undercurrent, right-wing parties are gaining big time in the European Parliament, further fracturing the legislative body. Government officials at the federal level tend to defend their rights. The European Union has been working to establish a single capital market for the last ten years to facilitate international investment.
However, a lot of smaller countries, like Sweden, Ireland, and Romania, have resisted changing their laws or giving up control to Brussels because they fear it will hurt their own financial sectors.
The consolidation of power worries civil society organisations as well. Thirteen European organisations released an open letter in May 2024 alerting readers to the dangers of increased market consolidation, which they said would hurt workers, small businesses, and consumers while giving corporate giants undue power and driving up prices.
Europe has been lagging behind the rest of the world for over ten years in many competitiveness metrics, such as capital investments, research and development, and productivity growth. However, McKinsey claims that it is a global leader in lowering emissions, reducing income inequality, and promoting social mobility.
Also, choice plays a role in some of the economic differences with the United States. Because Europeans choose to work fewer hours on average over their lifetime, the difference in per-capita GDP between Europe and the US is half. Others caution that if Europeans wish to keep their standards of living, they may no longer have the luxury of making such decisions.
According to Simone Tagliapietra, a senior fellow at the Brussels-based research group Bruegel, policies controlling energy, markets, and banking are too dissimilar.
“If we continue to have 27 markets that are not well integrated. We cannot be competing with the Chinese or the Americans,” he remarked.
Europe’s recovery remains firmly on course, driven by internal demand. All of the major economies performed marginally better than predicted till April 2024, which shows growth that is slightly above expectations, according to the most recent GDP data for the euro area. The healing process is propelled by a rise in both consumer and business optimism. Household finances are fortified by persistent job markets, resulting in a rebound of incomes.
In various countries, disinflation is ongoing and is preparing the ground for interest rate cuts. As of April 2024, the inflation rate in the euro area has stayed the same at 2.4%. Additionally, the core inflation rate has noticeably decreased.