The European Union has a growth problem. Its share of the global economy has been on a steady decline for decades, dropping from over 20 per cent in 2000 to around 15 per cent currently. In part, this is due to catch-up growth in developing countries but the EU has also lagged behind its peer across the Atlantic, the United States. Europe’s productivity growth, rate of innovation and ability to foster new, innovative companies all compare unfavourably with the US.
At the same time, the EU is operating in an increasingly difficult external environment. Russian aggression has led to increased energy prices as well the need for increased defence spending, putting strain on public purses that were already under pressure from high debt levels, mediocre productivity growth and higher health and pension spending as populations age. Meanwhile, the US has turned increasingly protectionist and has broken with WTO rules, forcing the EU to accept higher tariffs. China, on the other hand, has been an aggressive competitor, putting increasing price pressure on European products, both in the European domestic market and export markets.
The first step towards solving a problem is acknowledging its existence. In that respect, Europe has done well, with not one, but two major reports coming out last year by former Italian prime ministers Enrico Letta and Mario Draghi. These reports do a good job laying out the productivity challenge and the various ways the EU can address them. However, many of their proposals are politically very ambitious, and face resistance from member-states that are loath to give up additional powers to the EU. For instance, the banking and capital market unions are long-standing projects that would provide obvious benefits for the EU but have made little headway against national opposition. Similarly, the issuance of EU bonds has been limited to exceptional circumstances such as the pandemic, and although European financial markets would clearly benefit from an EU-level safe asset, there is little chance of this happening in the near future.
This paper provides a reform agenda that would boost economic growth while also being politically feasible within current political constraints. By focusing on a few key issues – better regulation, energy, a savings and investment union, and the single market for services – we hope to provide a trigger for practical action that would leave Europe better able to foster the growth it needs.
