Like Alice’s Red Queen, in today’s world you have to run a lot to stay in the same place. Europe is not doing it. There is the perception, based on data, that it is lagging behind in relation to the USA and China, the great competitors for global technological and economic hegemony. From 1993 to 2022, US GDP per capita has grown by more than 55%, while Europe’s has grown by 30%. If the European Union were a US state, in 2023 it would have been the fourth poorest (in purchasing power parity), ahead of only Arkansas, West Virginia and Mississippi. The big difference between Europe and the US is the level of productivity, while in 1990 it was similar, in 2022, in the US it is 20% higher.
Productivity depends on many factors, but innovation and its diffusion, especially in terms of intangible capital, are crucial for growth. Europe has lagged behind in R&D investment and in producing patents in key technologies for the digital economy. Business dynamism in the US makes it easier to allocate resources from declining sectors to emerging ones. The development of the big technological platforms that have transformed the economy has passed over Europe, which seems to have stuck with the traditional economy when the world has gone digital. The stock market capitalization of the EU-27 is similar to that of the seven US tech giants.
According to Emmanuel Macron, Europe is in mortal danger of economic collapse. Two former prime ministers of Italy, Enrico Letta and Mario Draghi, have been tasked with analyzing the situation and proposing action measures. The Draghi report is not yet available, but it has already indicated that Europe needs to act more as an integrated body than as a confederation. Macron advocates industrial policy with heavy subsidies to take on the US and China.
The Letta report, already published, will be presented and discussed tomorrow at the Cercle d’Economia Conference. The study also proposes an increase in spending on industrial policy and suggests deepening the single market as a central part of the European strategy. The single market of 1992 was designed for a less integrated world, where Europe had more weight and many of the key players were not present. The report postulates that European companies need size to compete globally but in three crucial sectors, such as finance, energy and electronic communications, the market is segmented nationally. National concentrations and State aid to industry can distort competition.
The central idea of the report is that we need an integrated market to exploit economies of scale and to be able to make the necessary large investments, which will require public-private collaboration, to make green and digital transitions. And investment in defense is necessary given the geopolitical context due to Russia’s aggression in Ukraine, which can be existential for Europe. In addition, less bureaucracy is also needed to facilitate the productive economy and the development of SMEs. The report proposes that to the four freedoms of movement of goods, services, people and capital, the freedom to innovate and research must be added to consolidate the knowledge economy.
The Letta report contains many proposals so that Europe can compete globally and ensure the prosperity of its citizens. The big question is whether the EU states will agree on the cessions of sovereignty necessary to implement them.