Cross-border challenges are increasing the disparity in economic output between Europe and America. Since the 1990s, Americans have continued to advance, as shown in a study by the International Monetary Fund.
According to the study, the European Union’s GDP per capita, when adjusted for purchasing power parity, is now approximately 72% of that of the United States.
Alfred Kammer, the head of the IMF’s European department, stated, “Seventy percent of that gap is explained by lower productivity growth.”
He noted that productivity in Europe grew more slowly than in the U.S. despite the two markets being comparable in size. The European market is highly fragmented, with trade barriers between the EU’s 27 countries that do not exist in the U.S.
As a result, firms are focusing on national markets instead of the larger European market. They are not fully exploring the benefits of having that extensive market available, and Kammer emphasized that scale matters.
Lowering trade barriers among EU countries to match those between U.S. states could increase European productivity by seven percentage points, according to him.
Another challenge is the absence of a unified market for capital flows. This situation places EU companies at a disadvantage compared to U.S. firms when it comes to obtaining financing through equity issues. Consequently, EU companies often rely on bank loans.
Many European tech companies lack the traditional physical collateral that banks typically require for loans. Their primary assets consist of intellectual property and innovative ideas.
Companies typically look for funding from venture capital firms willing to take risks. However, such firms are less developed in Europe. When they do exist, they tend to concentrate on national markets to avoid the complications of cross-border regulations.
For the past decade, the EU has been actively working on establishing a Capital Markets Union. This initiative aims to eliminate obstacles to capital flows, and efforts have intensified this year. Still, officials and diplomats express skepticism about the speed of progress.
The third factor hindering productivity growth in the EU is that workers face significantly greater barriers when moving across the 27-nation bloc compared to US workers moving between states. Additionally, there is a shortage of housing available for purchase or rent.
Kammer stated, “The costs in Europe are eight times as high.” He emphasized the need to enhance the EU’s single market for goods and services. He noted, “The good news is that … the solution for much of this is in policymakers’ own hands.”
Last week, EU leaders asked the European Commission to prepare proposals by mid-2025 aimed at improving the single EU market.
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