Jan. 22, 2025 |
Europe talks the talk. One day after Donald Trump took office in Washington for a second time, European Commission President Ursula von der Leyen appeared in Davos to give a speech at the World Economic Forum. She made a point of repeatedly describing Europe as an independent and powerful actor in global politics and economics, regardless of what happens in the U.S. Which seems about normal for a high-ranking official in Brussels.
She also called for a new era of EU integration and presented three major economic reforms that her office plans to roll out shortly: 1) to unify the bloc’s fragmented capital markets, to channel the billions of euros in EU savings accounts into investments; 2) to build world-beating companies by cutting bureaucratic burdens in favor of a single set of rules across the union; and 3) to create a new “energy union” that will permanently end Europe’s reliance on natural gas from Russia.
But if all is as well in the EU as she says, why does she think it needs these economic reforms?
Despite Von der Leyen’s assuring delivery, the EU is facing entrenched economic problems: The bloc’s economy is stagnant, and it’s falling farther behind the U.S. every year. In 1995, worker productivity in the U.S. and the EU was roughly the same. But today, European productivity is 20 percent below that of the U.S. America’s GDP is now 30 percent higher than the EU’s, and the gap has doubled over the past 20 years.
Earlier this month, Martin Wolf looked at the reasons why Europe has fallen so far behind the U.S.—and the weaknesses he sees track with the targets of Von der Leyen’s plans. For example, European companies have failed to innovate in the way that U.S. companies have, which is why so few of the world’s biggest tech firms are headquartered in the EU. Innovation in America, Wolf says, is largely fueled by massively higher investment, which is mostly mediated through dynamic capital markets and venture capital—whereas in Europe, most business funding comes from banks, which are much more cautious about where they invest depositors’ money. Europe can take some important steps to increase its firms’ competitiveness, Wolf says—but even so, it’s not likely to catch up to America anytime soon.
—Michael Bluhm
