Ex-ECB chief says European economy risks becoming irrelevant
The European Union (EU) must step up its game in foreign policy and strategic investment to avoid losing economic relevance to China and the United States.
That's the main takeaway of a recent report authored by Mario Draghi, who served as president of the European Central Bank (ECB) between 2011 and 2019.
In his view, Europe needs “radical” economic reforms to lower its dependence on resource-rich nations and ensure that its goals of social equality and clean energy transition are realized.
Without these reforms, the region will continue to lose relevance to more productive parts of the world, such as China and the United States.
“The EU will need to develop a genuine “foreign economic policy” that coordinates preferential trade agreements and direct investment with resource-rich nations, the building up of stockpiles in selected critical areas, and the creation of industrial partnerships to secure the supply chain of key technologies,” the report said.
By Draghi's estimates, that could cost the EU an extra 800 billion euros ($884 billion) per year.
While Draghi’s report could influence the debate around EU competitiveness, which is a key priority of the European Commission, it’s unlikely to have an immediate impact.
Economists are also skeptical that EU member states will reach a consensus on the proposals.
In the meantime, Europe is mired in a “slowcession” that the ECB hopes won’t spiral into a full-blown economic downturn.
Small growth, big productivity gap
Following a brief post-pandemic boom, the EU economy has barely grown. While technically not in a recession, the region’s economic gains have been barely noticeable.
Since the first quarter of 2023, quarterly growth in the 27-member region has fluctuated between 0% and 0.3%. The results have been equally dismal for the 20 countries that share the euro.
For the ECB, a downward revision to eurozone growth in the second quarter was the final straw. On Sept. 12, the central bank moved to lower interest rates for the second time since June.
According to ECB Governing Council member Piero Cipollone, “Europe desperately needs growth,” which means any further delays in cutting rates “puts us at a serious disadvantage.”
According to Independent Strategy founder David Roche, the European economy could benefit from Draghi’s proposed reforms, “but it won’t happen.”
Roche said the region is “paralyzed by populism and incompetence at the national level,” which makes regional coordination difficult.
Although estimates vary, the Central Bank of Ireland recently reported that the EU lags the U.S. in productivity growth by a wide margin.
In 1995, American labor was 13% more productive than the EU region, but this figure surged to around 20% in 2019.
Perhaps the most shocking productivity stat came from a recent report by the International Monetary Fund, which said Europeans produce nearly 30% less per hour worked than Americans.
Economists say strong productivity is a precursor to faster growth, more plentiful jobs, and eventually higher wages.
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