Mario Draghi transformed the verb into an element of economic alchemy. If more than a decade ago he formulated a sentence that began with 14 words to ward off ghosts from Europe (At any cost…), last week hammered home in Madrid with these words: “The Union finds itself in a more complicated situation than a year ago and must invest 1.3 billion and carry out essential reforms in order not to fall behind. We must go faster. There is less time available.”
More than a year has passed since the Italian magician, former president of the ECB, former Italian prime minister and figure in whom many have placed their hopes to revitalize the old Europe, presented his report with the analyzes and recipes to save the EU from its paralysis. But on this occasion his words seem to have fallen on deaf ears. Now it is the International Monetary Fund (IMF) that insists on transforming the Italian alchemist’s verses into prose. “As growth momentum fades, Europe is settling into a slow and mediocre path in the medium term,” warned Alfred Krammer, the IMF’s chief economist for Europe, at the report’s launch in Paris. Making European reforms successful on the ground. An eloquent title that leaves no doubt about his intentions.
The report urges European authorities to remove internal barriers to regain lost ground against the United States.
The Fund’s economists calculate that per capita income in the United States is 30% higher than that of the Old Continent. “And it is destined to expand even further,” they underline. The fundamental issue is productivity, they argue. Europe has no shortage of capital or work. It simply doesn’t produce enough resources. About three-quarters of the gap with the United States is due to lower productivity, they point out.
“Fully eliminating structural gaps in terms of internal policies and reducing intra-EU cross-border barriers to trade and labor mobility to levels similar to those in the United States would increase EU productivity by 20.2%,” says the document, which concludes: “Taking into account indirect effects from increased investment, such a package would virtually close the transatlantic income gap.”
Even an “intermediate” reform package, which may be more realistic given Europe’s political crossroads, would raise revenues by almost 9% if just half of these internal gaps were closed. “This is the magnitude of Europe’s untapped potential,” the analytical paper highlights.
The IMF urges the adoption of the necessary reforms to harmonize legislation, enable capital mobility and allow companies to compete in a broader European market, without different bureaucratic requirements in each member country.
It lists a good package of tasks: modernizing labor market regulations to reallocate resources, investing in human capital, improving tax systems and addressing governance deficiencies. They also propose the harmonization of regulations, the opening of protected sectors, the promotion of the union of savings and investments and the elimination of barriers to labor mobility; Growing regions need affordable housing and public services that support growth; Support for lagging regions should alleviate adjustment costs, but not prevent resources from moving to places where they are most productive. Territorial policies can help temporarily alleviate adjustment costs resulting from reforms and must be complemented by structural reforms to mitigate losses on a lasting basis.
The technicians of the organization led by Bulgarian Kristalina Georgieva predict weak growth of 1.2% for the euro zone this year, and a tenth less for the next. And although they expect a slight recovery in 2027 due to higher government spending in Germany, they calculate that the performance of the European economy will return to that languid pace, 1.1%, in 2028. “This path leaves Europe growing well below its pre-covid trend, warns Krammer.
The IMF’s proposal to multiply productivity and income per capita is feasible because around 60% of the EU’s GDP is generated in Europe’s productivity centres, where companies, workers and ideas meet. “These centers offer a natural productivity advantage: companies can share more resources, access larger markets and learn from each other. Think Silicon Valley, the Benelux corridor, the high-tech zone of Bavaria or the Île-de-France region,” the report notes.
The Fund highlights some of the obstacles to growth: fragmented market access, limited dynamism of the private sector, barriers to mobility, etc. “Trading costs between member states equate to an average 40% tariff on goods, much higher than that faced by U.S. companies trading between states.” In many regions, private employment represents too small a percentage of total employment, hindering innovation and competition.
“If regions improved market access and private sector participation from the EU median to the 75th percentile, productivity would increase by almost 5%, three points for better market access and two for greater private sector activity,” advise IMF experts.
“Europe must unleash its talent”
The Fund provides an example of labor mobility in the United States, where workers move easily to take advantage of opportunities. In Europe, mobility – both within and between countries – is much lower. “A young engineer from Naples or a software developer software in Thessaloniki may have difficulty finding work in Munich or Lyon, not because of a lack of skills, but because of obstacles such as non-transferable pensions, unrecognized qualifications or unaffordable housing in growth centres,” he argues.
And it proposes that reducing mobility costs could increase EU productivity by around 1.8%. He gives the example of Ireland, where international mobility has helped create a skilled workforce which is among the factors that attract multinationals to invest in the country. And Spain, with a great attraction for young highly skilled workers in the tech sector after covid, which has brought benefits to the economy. “This isn’t brain drain, it’s brain circulation.”
Finally, the Fund recalls that the European financial system remains fragmented. And he exemplifies this with venture capital. “European companies are two-thirds less likely to receive venture capital funding than their US counterparts, and when they do, the amounts are about half.”
Harmonization of corporate legal regimes could increase cross-border risk capital flows in the EU by around 13% and simplification of withholding tax procedures by around 20%.
Regarding distributional effects: when we simulate the reform package that closes (only) half of the political gaps at national and EU level, all countries win and most regions benefit.
