Competitiveness the long standing challenge for EU economy

Launched at the 2024 EU Summer Summit the EU Strategic Agendafor the period 2024 - 2029 is based on three pillars:

1. a free and democratic Europe;
2. a strong and secure Europe;
3. a prosperous and competitive Europe.

Competitiveness has been the fundamental economic challenge for EU economies over the past decades.

In fact, the strategic objective of the Lisbon Agenda was to transform the EU into the most competitive and dynamic economy in the world by 2010.

However, the competitiveness of the European Union has deteriorated in the past decades, in the context of the exogenous and endogenous global shocks.

For instance, the weight of the EU exports in the world declined from 18.9% in 2002 to 14.8% in 2023, according to Statista. At the same time, the weight of the EU imports diminished from 17.2% in 2002 to 14.2% in 2023.

These evolutions were determined by structural challenges in the EU economy after the outbreak of the Great Financial Crisis and coronavirus pandemic.

In fact, the most severe decline for the weight of the exports and imports of the EU was during the severe macroeconomic adjustment following the outbreak of the Great Recession in 2008. This generated a W crisis for Euroland (which contributes by around 85% to the GDP of the EU), in the context of the impossible adjustment with which the countries in the Southern part were confronted.

Furthermore, the coronavirus pandemic determined a stronger adjustment of the EU economies (compared to the developments in US), given the measures implemented to support employees.

The structural challenges in terms of EU competitiveness were mainly determined by developments across Euroland and reflected by the decline of the weight of the region in the global GDP, from around 27% in 1992 (the year the Treaty of Maastricht was signed) to less than 15% in 2023, according to the International Monetary Fund (IMF).

The deterioration of the economic competitiveness of Euroland in recent decades was determined by several factors:

1. the stagnation of the labour productivity;
2. the high level of the market risk premium, raising financing costs in the region;
3. the dependence of the region on imports of relatively expensive energy.

On the one hand, labor productivity in Euroland grew by an average annual pace of only 0.2% during 1995-2023, according to the European Central Bank. However, the dynamics of the labour productivity in the region deteriorated since the launch of the EUR on January 1, 1999. This indicator increased by an average annual pace of only 0.1% during 1998-2023, significantly below the US (around 2.0%).

On the other hand, the market risk premium (an abstract indicator included in the financing costs) presented a higher level in Germany, the engine economy of the region, compared to the US over the past decades. This was despite the unprecedented expansionary monetary policy implemented by the European Central Bank after the outbreak of the Great Recession.

For instance, between September 2002 and May 2024 the market risk premium in Germany was higher by 2.3pps on average compared to the US.

Figure 1. The market risk premium - USA vs. Germany

Source: based on Market Risk Premium (2024)

Last, but not least, the energy prices in EU are higher compared to the US, the largest economy in the world.

According to the figures released by Eurostatand the US Labor Department, between 2011 and 2022 the prices for household electricity in EU were higher compared to those in US by an average of over 80%. This was determined by, among several other factors, high dependency of EU on the imports of energy.

The structural challenges in terms of competitiveness for the EU economies have been known for many decades, while solutions have been proposed by experts. These include prioritization of resources allocated for R&D, implementation of the Capital Markets Union, the development of the business potential with Asia (we are living in the Asian Century) and Africa, the implementation of the Digital Revolution and Artificial Intelligence Revolution, diminishing the dependence on imports of energy, and implementing the Political Union.

All views expressed by members are their own and not reflective of the views of the Bretton Woods Committee.

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