IS THERE any hope for Europe? No.
Earlier this year we saw a burst of irrational exuberance about Europe. As the US announced exorbitant arbitrary import tariffs and a crackdown on immigration, Europe was going to be the new shining city on a hill, attracting the world’s talent and leading global free trade, leaving the US isolated and impoverished. It’s time for a reality check.
Europe has become poorer. At the start of the 1990s, real per capita incomes in the main European Union (EU) countries were on a par with the US. Today, US real incomes are 20 per cent higher than Germany’s, 35 per cent higher than France’s and 40 per cent higher than Italy’s.
Europe’s economies are less dynamic, less entrepreneurial and less innovative. This translates into much lower productivity growth. Over the last 10 years, productivity stagnated in Italy and France; in Germany it rose at an average annual rate of 0.7 per cent; US productivity grew twice as fast at 1.3 per cent.
Money can’t buy happiness, but a sense of opportunity helps: the 2025 World Happiness Report shows that three-quarters of the EU’s population are less happy than Americans. Though four northern European countries top the list, all major EU members – including Germany, France, Italy, Spain and Poland – rank below the US.
These underwhelming results are inversely proportional to Europe’s stated ambitions. The 2000 Lisbon Strategy aimed to make the EU “the most competitive and dynamic knowledge-based economy in the world” by 2010, by investing in human capital, fostering innovation and completing the internal market.
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Twenty-five years later, Europe’s innovation lags both the US and China. As for completing the internal market, former European Central Bank president Mario Draghi noted that regulatory and administrative barriers across EU member countries are equivalent to 45 per cent tariffs on goods and 110 per cent on services – making those imposed by the US pale by comparison.
Over-regulation at the root of Europe’s problems
The roots of Europe’s economic underperformance can be summarised in three words: regulation, regulation, regulation. The old continent’s instinct is to regulate every facet of economic activity in excruciating detail. This paralyses labour mobility, hinders business creation and discourages entrepreneurship and innovation.
Behind this lies a broad consensus for state intervention in the economy. The Draghi report was perhaps the most depressing confirmation. As a central banker, Draghi identified the obstacles to growth with uncompromising clarity.
His report hits all the right notes: less regulation, more innovation, more competition. But it places even more emphasis on greater government investment, to the tune of 800 billion euros (S$1.19 trillion) per year, a European industrial strategy to create EU champions, and doubling-down on green policies that have made Europe’s energy cripplingly expensive.
More government, and more government debt – these are the elements of the Draghi agenda most likely to materialise.
This love for state intervention is reflected in the body politics. Europe does not have a political left and right in the US tradition. European voters have a choice between pro-immigration socialism and anti-immigration socialism. No major European party truly supports economic liberalisation – because virtually none of the voters do.
Economic groupthink negates what should be an advantage of the EU’s setup: federalism. The US benefits from the fact that different states have a fair amount of leeway in setting local taxes and regulations. This shows up in clear differences of economic performance, and voters and businesses can and do vote with their feet.
This should be even more true in Europe, where the balance of power is more heavily tilted in favour of the states. Instead the opposite happens: a race to the bottom, while Brussels strives to gradually limit the scope for economic experimentation at the local level.
Irrational approach to immigration
Europe’s stubborn unwillingness to tackle its economic challenges should be enough to justify pessimism. But the region’s approach to immigration is even less rational. Europe is taking in large numbers of immigrants without having the capacity to foster any degree of economic, social or cultural integration.
The traditional argument is that Europe needs to import young workers to compensate for its ageing population. But Europe’s over-regulated and dysfunctional labour markets cannot employ even the native young: youth unemployment rates stand at around 20 per cent in France and Italy, and over 25 per cent in Spain. Very few of the young unskilled people flooding into Europe can be gainfully employed.
And for all the talk about European values, almost no individual EU country has a set of principles that an immigrant can embrace and feel truly part of the country. To make matters worse, the bulk of immigration comes with cultural and religious backgrounds so distant from Europe as to make the integration challenge extremely hard to begin with.
Far from giving Europe an economic boost, immigration threatens to undermine the political and social cohesion of individual EU member countries, not to mention the union as a whole.
Europe does have a clear path to success. It requires deregulation, more competition, more breathing space for the private sector and a more pragmatic immigration policy. I don’t think Europe is ready to walk that path – but I would love nothing more than to be proven wrong. OMFIF
The writer is co-founder of Annunziata + Desai Advisors and former chief economist at General Electric and UniCredit
