The European model will be unsustainable without reforms

06.04.2024 2 min

The mid to long term results of Europe’s economic performance require critical reflection. And anticipating future difficulties require us to think about the reforms to be rapidly implemented to protect the European standard of living and social protection, an invaluable shared asset but unsustainable without in-depth change.

Some data. Over the last 20 years (2002-2023), the cumulative economic growth rate of the United States has reached 60%. The euro zone is at 30%. American household consumption increased by 60%, that of Europeans by 20%. The rate of American private and public research and development over GDP has exceeded the European one by about one point by year for the last 20 years, etc. Thus, over the same period productivity gains have increased by more than 45% in the United States compared to 10% in the euro zone. From 2019 to 2023, they increased by 1.7% per year in the United States and by 0.3% in the euro zone (-0.8% in France). However, the working age population is growing by around 0.2% per year in the United States while it is falling by around 0.5% per year in the euro zone. It will fall by 0.8% around 2030, with the percentage of the population over 65 continuing to increase (22% today, 26% in 2030).

To deal with this negative demographic effect and protect European standards of living, growth will be essential, and therefore more productivity gains. Innovation, research and development and robotisation should be widely encouraged. Especially since Europe is not prominent in the strategic industries of the future: wind turbines, voltaic panels, electric batteries, electric cars, industries of the fourth technological revolution…

We must therefore change the paradigm by facilitating Schumpeterian growth much more, through creative destruction. By rethinking the weight of regulations which, in Europe, are always higher than those in the rest of the world. By increasing the mobility of labour and capital. By combating the decline in the quality and effectiveness of teaching. By controlling and better allocating public spending… Indeed, European potential growth of around 0.5 to 1%, resulting from productivity gains close to zero, declining demographics and a slowing rise in the employment rate will in no way ensure the persistence of European economic prosperity.

Qualified immigration would also make it possible to resolve this difficult equation; in the United States, immigrants having, in total and on average, a level of education higher than that of the resident population. Finally, an increase in the quantity of work (number of hours worked in life as well as the number of people working as a percentage of the population), with less cultural disaffection for work, will be essential.

The Europeans preference, like their institutions, for precaution instead of risk, as well as the permanent extension of rights without their accompanying duties, is unsustainable, otherwise they risk an inexorable decline. A certain strategic naivety must give way to ethical pragmatism. Ethics without efficiency cannot survive for long. Europe cannot continue much longer without the danger of PĆ©guy’s criticism of Kantianism: having pure hands, but having no hands at all. To preserve the very essence of what made post-war Europe, we urgently need to change our software. It remains for us to think carefully about institutional reforms, those through which Europe regulates itself, to facilitate this jumpstart and allow it to maintain its place in the world.

Olivier Klein
Managing Director of Lazard Freres Bank
Professor of economics at HEC