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MILAN – The global economic shocks of recent years have left Europe in a particularly vulnerable state. While the disruptive effects of climate change and the pandemic have spared virtually no one, the European Union has also found itself with war in Ukraine on its doorstep, and its heavy dependence on energy imports has meant that rising prices, as well as the need to move away from Russian fossil fuels, have had a particularly negative impact. As a result, both its growth and its economic security are under pressure.
Of course, some of these shocks have been short-lived. The disruptions related to the pandemic have largely resolved themselves, and even inflation, which shot up in its aftermath, seems to have largely returned to control thanks to the efforts of EU central banks, not least the European Central Bank, leading to the prospect of a complete resolution of the problem within the next twelve months.
But the EU faces a series of daunting economic challenges that will not go away on their own. First, rising security risks in its neighbourhood, combined with growing doubts about the durability of America’s commitment to European defence, have pushed the EU to strengthen its capabilities. This requires not only greater coordination between countries, but also a significant increase in overall defence spending: the bloc’s total spending currently stands at 1.3% of GDP, well below NATO’s 2% of GDP target.
On the other hand, productivity growth, which has been declining in much of the world, is particularly low in Europe, and the gap between the EU and the US continues to widen year after year. With average unemployment around 6.5%, there is some scope to increase aggregate demand and fuel growth, but the goal of sustained long-term growth will be virtually impossible to achieve if Europe fails to address its productivity gap.
This won’t be a walk in the park. Long-term productivity growth in developed economies depends heavily on structural changes, which are driven primarily by technological innovation. This is where Europe’s main problem lies: in a range of areas, from artificial intelligence to semiconductors to quantum computing, the United States and even China are leaving the old continent in the dust.