Has Europe Fallen Behind?
Over the last decade, Europe has faced several crises that have threatened the continent’s economic prosperity – from the War in Ukraine, to Brexit, to the Eurozone crisis. While the United States and China have grappled with economic challenges as they re-emerge from the pandemic, Europe has faced much a starker reality.
The Current State of the European Economy
Since the end of 2019, private consumption in the Eurozone has declined by about 1%, according to the Organization for Economic Cooperation and Development. For comparison, U.S. consumption has risen about 9% over the same timeframe. Fifteen years ago, the European Union and the U.S. each represented about a quarter of total global consumption. Today, the U.S. represents 28%, whereas the European share has fallen to just 18% (Fairless 2023).
Wages in Europe have also seen sluggish growth or decline since 2019. In Germany, wages have shrunk by roughly 3%. In Italy, wages have fallen 3.5%. Both Spain and Greece have experienced a 6% decrease in wages once adjusted for inflation and purchasing power. In contrast, U.S. real wages have climbed 6% since 2019 according to the Organization for Economic Cooperation and Development. In Europe, growth has been about 6% over the past fifteen years, compared with 82% growth seen in the U.S. (Fairless 2023). In April 2023, the International Monetary Fund projected the British economy to shrink by 0.3% in 2023. Among other large, developed countries, Germany is the only other nation projected to contract this year (Giles 2023). These bleak economic numbers have been reinforced by the fact that Europe entered a mild recession at the beginning of the year , whereas the U.S. and Asia began to move past the post-pandemic economic slump (Fairless 2023). The slowdown has been so pronounced in Europe that International Monetary Fund Chief Economic Pierre-Olivier Gourinchas noted the Eurozone as the area of the world where, “the slowdown is concentrated” (Giles 2023).
The Causes of Europe’s Woes
Economists have pointed to several reasons that explain Europe’s gradual decline relative to the U.S. and Asia. While crises, such as COVID-19 and the War in Ukraine, have certainly played a role in exacerbating economic turmoil, structural issues embedded within the continent have created much deeper problems. European demographics paint a bleak economic portrait. Like many other developed economies, the European population is aging, putting a strain on young workers and the continent's pension systems. There are more Europeans over 65 years old than under 15 years old. Coupling this fact with the rise of populism that has made it harder to boost immigration, Europe is faced with a burgeoning demographic crisis (The Economist 2021). In addition to aging woes, European workers hold a much stronger preference for free time and job security as opposed to raw earnings. This preference has led to slower growth and lower productivity than their American counterparts (Fairless 2023). Unions in Europe are much stronger and more influential than in the U.S. and Asia. Workers in Europe work shorter hours and enjoy greater job security, but at the expense of higher labor costs (The Economist 2021).
Europe has also been slow to adopt and develop emerging technologies. The U.S. and Asia have been pioneering new technologies on the global market, whereas Europe has struggled to adapt to the changing landscape. The seven largest technology firms in the world, as measured by market capitalization, are all American, and only two companies in the top twenty are European. A primary reason for this discrepancy can be traced back to higher education within the region. In Times Higher Education top thirty ranking of the world’s top universities, only two EU institutions placed in the top thirty. UK institutions did slightly better, with five placing in the top thirty. However, the remaining twenty-three are all located in the United States or Asia (Times Higher Education 2023). In Shanghai’s world’s top university rankings, two E.U. schools and four UK universities place in the top thirty, with the remaining twenty-four in North America and Asia (Shanghai 2023). Without a reliable number of top universities to feed the innovation pipeline, the EU has struggled to keep pace with the U.S. and Asia.
This problem can also be attributed to the lack of capital available in Europe. Due to low consumption, an aging population, and burdensome regulations, the EU has dwindled as an attractive investment destination. As such, the pool of available capital for tech startups is much lower than that of the U.S. and Asia. Chief of the Global Advisory Board at Deutsche Bank Paul Achleitner notes that Europe is now “almost totally dependent on U.S. capital markets” (Rachman 2023). AstraZeneca Chief Executive Pascal Soriot adds, “We have some of the lowest prices in Europe and the UK…When you add the 26.5% rebate, it becomes rapidly unattractive for companies to operate in this environment and certainly very unattractive to invest.” Soriot also argues that if Europe is aiming to catch up to its rivals in the biotechnology sector, it will not do so, “with the kind of economic policies the European Commission is thinking about” (Kollewe 2023).
In a bright spot for Europe’s technological sector, Europe does better than its Asian counterparts in dispersing technological advancements throughout the region. Technological innovation is a critical component of success and domination in the industry. However, another critical driver of growth comes from the adoption of such technologies by firms outside of the technology industry. The diffusion and adoption of technology by firms was a key driver of productivity growth in the 20th century. Furthermore, workers in new technology firms have higher wages than firms with older technologies. While Asian countries such as Japan dominate in terms of innovation, European countries, like France, have succeeded in diffusing technology across their country. Japan is second only to South Korea in the number of annual per-person patents produced. However, as of the late 2010s, only 47% of large Japanese firms use computers to manage their supply chains, and Tokyo is far more productive than the rest of the country (The Economist 2023). By comparison, France, which only has an average record on innovation, has excelled in spreading technology and knowledge throughout the country (The Economist 2023).
Despite its success in diffusing new technology, a primary reason for this lack of investments and business opportunities is the fragmented nature of the European market. Despite the European Union attempting to stitch together national economies on the continent, it is still nearly impossible for European entrepreneurs to target a larger market with early-stage startups. Given the current landscape, entrepreneurs must launch, grow and expand within their home country, before raising funds to expand to other European countries. The differing languages, culture, and regulations between European states further hinders easy expansion (Colin 2018). Volvo Chairman Carl-Henric Svanberg argues, “When [European] companies think of their home market, they usually think of their home country, not of Europe.” Europe lacks the economies of scale and growth opportunities that are commonplace in the U.S. and China (The Economist 2021).
Europe has been slow to create new companies as well as grow its existing companies. In 2000, forty-one of the top 100 most valuable companies in the world were European-based. As of 2021, that number stood at only fifteen (The Economist 2021). Europe has become a “place for companies such as Amazon and TikTok to find customers, not a base for local firms to conquer the world” (The Economist 2021). The traditional European corporations that dominated the global market in 2000 were mostly concentrated in sectors that have experienced slow growth, such as insurance or telecommunications. However, since then, the burgeoning technology sector that has blossomed in the U.S. and Asia has pushed these European veterans out of the top 100, and Europe has been unable to keep up (The Economist 2021).
The lack of opportunities to reach consumers domestically due to depressed consumption has forced European firms to expand overseas where most of their consumer base resides. According to Morgan Stanley, firms in richer European countries generate over half of their income abroad. This figure is up from just a quarter in 1997. Contrasting this number with the U.S., American firms generate over 70% of their income domestically (The Economist 2021). Due to the lack of domestic firms and depressed consumption at home, Europe is heavily reliant on global imports and exports. Exports account for 50% of the Eurozone’s Gross Domestic Product, compared to only 10% for the U.S (Fairless 2023). High energy costs and inflation are depressing manufacturer’s price advantage in international markets and threatening labor relations, weakening Europe’s economic standing. Furthermore, China is a crucial market for European products, and the recent economic downturn in that country has undermined the European economy (Fairless 2023).
Recent economic crises and developments have ripped off the mask that previously covered these economic woes. In 2009 and 2010, the Eurozone crisis revealed the flaws of the single integrated currency, the Euro. However, since that crisis the Eurozone has done little to prevent a similar crisis from reemerging. The Eurozone has no permanent budget to dampen economic shocks. The Eurozone also does not feature a functioning banking union to prevent the weak financial system from plaguing public finances. In order to accommodate the differing risk associated with lending to different members, the European Central Bank has been forced to move away from low-interest rates in the face of rising inflation. Finland projects borrowing costs to triple in 2023 as compared to 2022, which further complicates Europe’s difficulty in fostering entrepreneurship (The Economist 2023).
The United Kingdom’s exit from the European Union in the last several years has also created problems for both the British and European economies. After Brexit, most products from the UK now face non-tariff barriers. These new barriers have devastated British exports, as many are intermediate goods. This fact translates to higher trade costs that will increase final prices experienced by consumers already grappling with high inflation. Brexit has also left lasting effects on the European Union. In an attempt to prevent members from leaving the bloc in the future, the Union is now more inclined toward protectionism and against reform , which could hinder the already heavily trade-dependent bloc’s economic growth (Reed 2022).
The COVID-19 pandemic and the outbreak of War between Russia and Ukraine has also revealed some of Europe’s deep structural issues. These dual crises complicated global supply chains and catapulted food and energy prices. In response, European governments targeted their subsidies at employers to protect jobs. However, this approach left consumers cashless once the price shock emerged, which has suffused depressed consumption and demand throughout the continent. In contrast, the U.S. targeted aid toward citizens to preserve spending. The U.S. has also pursued policies emphasizing low energy prices, reducing the energy price shock more than in Europe (Fairless 2023).
Europe’s Next Steps
Despite the many problems faced by Europe, the continent still has several advantages over the U.S. and Asia that make it an attractive place to live. In addition to more worker protections, Europe continues to dominate the lifestyle industries. Almost two-thirds of the world’s tourist arrivals are into Europe (Rachman 2023). The luxury goods market features mostly European players. Football continues to be dominated by European teams (Rachman 2023). Further, despite frustration with government regulations, Soriot notes that the UK continues to be great for research at universities and commercial labs (Kollewe 2023). Europe also provides citizens with a larger safety net, which reduces risk aversion among the populace (Colin 2018). This fact may help Europe juice the entrepreneurship that it desperately needs. Europeans also prefer competition among many mid-sized companies, as opposed to giant corporate behemoths, which may help breed innovation (The Economist 2021).
Europe is also a global leader in advancing environmental protections and its implementation of climate change mitigation policies. In 2019, The European Union committed to carbon neutrality by 2050. The bloc has also committed 30% of its long-term budget from 2021-2027 to achieving this goal (European Council). The EU is the largest provider of climate financing in the world (European Council).
Many of Europe’s problems are structural, but several have been intensified by ongoing or recent crises. For example, the high rates of inflation experienced by Europe may begin to subside as the initial shocks from COVID-19 and the War in Ukraine begin to subside. Energy inflation has been the primary driver of the elevated inflation rates experienced in Europe relative to the U.S. The War in Ukraine caused a terms-of-trade shock to energy prices due to Europe’s heavy reliance on Russian gas imports, especially relative to the U.S. Similarly, the pandemic represented a much more lasting demand shock in Europe than the U.S., due to the nature of the stimulus measures that each government pursued. Europe’s targeted stimulus approach was less effective than the U.S.’s widespread household income support in juicing demand following the initial lockdown phase of the pandemic. As a result, Europe is experiencing lower Gross Domestic Product figures and higher rates of inflation than the U.S (Koester et al. 2021). As the continent moves past these crises, Europe does have a path forward to reinforce itself as an economic powerhouse. However, there are still many structural reforms that the continent needs to undertake.
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