What ails Europe? The European Union’s gross domestic product per person last year added up to only about 73 percent of America’s, accounting for differences in purchasing power. This is down in real terms from 77 percent in 2008, on the eve of the global financial crisis.
Brussels is worried. Earlier this month, Mario Draghi, former prime minister of Italy and president of the European Central Bank presented a diagnosis of Europe’s lackluster performance. Without a boost in productivity, he warned, Europe will fail to maintain its generous social welfare model, combat climate change and maintain its independence on the world stage: “This is an existential challenge.” But the biggest challenge is that, however much it tries, the E.U. is still not really one big thing, but a collection of smaller ones. This makes it difficult for companies to scale.
For the United States, too, it is critical that Europe succeeds. The E.U. remains America’s unparalleled ally, indispensable in facing an onslaught of new challenges, such as global warming and the rising geopolitical rivalry between China and the United States, which could once again fragment the world into rival blocs.
And, yet, the E.U.’s institutional architecture — the convoluted governance, shared with member states wielding veto power, the patchwork of often uncoordinated decisions and rules — is likely to get in the way of the massive effort the Draghi report calls for.
The continent’s central shortcoming is a pronounced slowdown in productivity growth. Labor productivity in the E.U. has declined to under 80 percent of that in the United States, from about 95 percent in the mid 1990s, as the continent has fallen further behind the technological frontier.
According to the Draghi report, were it not for the tech sector, Europe’s productivity growth over the past two decades would be quite near that of the United States. But back in the 1990s, Europe largely missed out on deploying the internet at that crucial time. And its digital deficits have grown since then.
There are precious few European companies at the cutting edge of artificial intelligence. At this stage, according to the Draghi report, there is no point for Europe to even try to compete in cloud computing. The region has created virtually no technologically disrupting firms; not one E.U. company with a market capitalization over 100 billion euros was created from scratch over the past 50 years. In the United States, there are six valued at over $1 trillion. The three biggest spenders on research and development in the United States are digital firms — Microsoft, Alphabet and Meta. In the E.U., the top three are automotive manufacturers, which are nonetheless failing to keep up with the electric-vehicle revolution.
More investment is badly needed. In 2021, E.U. companies spent about half as much on research and innovation as U.S. firms. Mr. Draghi’s report suggests the continent needs almost 5 percent of E.U. GDP in additional investment. To get over the shortfall, though, Europe must reconsider key elements of its architecture.
There are regulatory hurdles. Europe’s embrace of the “precautionary principle” — which can justify halting technologies to prevent plausible yet indeterminate harms in the future — has enabled a flood of regulation, inhibiting investment and innovation. For instance, limiting access to health data will hamstring the development of AI in the pharma industry. The hurdles rise as national governments add their own rules on top of E.U. law, creating a complex regulatory patchwork.
But the biggest challenge is that, however much it tries, the E.U. is still not really one big thing, but a collection of smaller ones. This makes it difficult for companies to scale. Consider the E.U.’s public support for research and development — $108 billion in 2021, not far behind the $131 billion the United States spent. Over 90 percent of the European money was handed out by nation states to their pet projects, making it hard to build a Europe-wide investment strategy.
Similar constraints play out in the telecommunications market, served by a bunch of relatively small national operators rather than larger continentwide firms. Defense budgets are national, which leads to a bewildering array of duplicative weapons systems rather than a Europe-wide interoperable defense infrastructure.
Critically, the E.U.’s several small capital markets lack the scale needed to raise the kind of money for firms to stay in the global race. Without broad financing instruments, which would likely include Europe-wide government securities, Mr. Draghi’s moonshot will not get off the ground.
Mr. Draghi’s report has many good ideas — to unify budgets, markets and strategies; to streamline rules to encourage innovation. At its core, the message is one that Europeans have heard before: For Europe to thrive, it must act as Europe. To the extent that it can, Washington should help it succeed.
