The latest growth data has increased pessimistic comments regarding the future prospects of a Europe that remains stagnant while the US grows at more than 2%. The reality, however, is that the narrative that Europe is falling far behind the US is, at the moment, somewhat exaggerated: in 2000, the eurozone-27 and the US had the same GDP (adjusted by purchasing power parity). Today, the US is only 4% higher.
That said, a more detailed look at the data suggests that, if Europe does not react, this gap could widen significantly in the future. The growth of an economy depends on two major variables: the evolution of its working-age population and its productivity. During the aforementioned period, Europe greatly increased the employment rate of its population, from 62% to 70%, and it does not seem possible to continue significantly increasing this percentage. Furthermore, demographics are not helping: the total working-age population of the US will remain almost stable until 2100 (US Census), while Europe will lose 47 million people of working age (Eurostat), and Spain, 12.2 percentage points.
Productivity emerges as the pillar for Europe’s economic revitalization. Here, the data is not optimistic. The European Commission has just released the annual report R
Three changes are key: The first is the essential increase in investment in R&D. It is impossible to improve productivity if Europe continues with chronic underinvestment. In 2022, the US invested 3.46% of GDP in R&D. The EU-27, only 2.23%, and Spain, 1.44% of GDP.
The second is the flexibility of the labor market. All sectors, and the technology sector in particular, require an agile environment that allows errors to be quickly corrected and investments and talent to be changed when necessary.
Finally, the long-awaited union of the European capital market. This is essential to encourage good resource allocation across the continent. Some brilliant European entrepreneurs are giving up on potentially revolutionary ideas due to lack of funding or rigidities.
The path to follow so that Europe can maintain its position is clear, but we are at a crucial moment where we must act as soon as possible in these three directions. If not, Europe may be relegated to the global innovation bench.
