The International Monetary Fund (IMF) has issued its latest warning, stating that Europe faces "fundamental" issues that could see its economic growth persistently lag behind that of the United States over the next decade.
The IMF warned on Thursday that the gap between Europe and the United States in terms of Gross Domestic Product (GDP) would further widen by the end of this decade, and sounded the alarm over Europe's "lack of business dynamism."
In its latest European economic outlook report, the IMF stated that an aging workforce and low productivity growth would reduce the annual GDP growth rate of the European continent to just 1.45% over the next decade (until 2029). In the United States, the average growth rate for the same period is estimated to be 2.29%.
Since the global financial crisis, and particularly since the COVID-19 pandemic, the United States has consistently outpaced Europe in terms of economic growth.
Alfred Kammer, Director of the IMF's European Department, indicated that the European continent has "fundamental" issues dating back decades, emphasizing that at the beginning of the 21st century, GDP per worker adjusted for purchasing power parity was the same in the United States, Germany, France, Italy, and Spain. He pointed out that "over the next twenty-five years, we have seen the gap widen, and now the income per worker in these four European countries is about 20% lower than in the United States, a significant gap that did not exist in the past but exists now."
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Kammer added that the pandemic temporarily exacerbated this issue, with the IMF estimating that Europe's average growth rate has decreased by 0.6 percentage points compared to the 20 years prior to 2019.
In contrast, in the United States, the 10-year forecasted growth rate until 2029 has slightly increased compared to the previous decades.
The IMF stated that Europe's bleak outlook is associated with factors such as low levels of business investment, insufficient cross-border activities, and significantly lower productivity compared to the United States. The organization added that the difference in productivity levels between the United States and Europe spans all industries but is particularly evident in the technology sector. "Europe's technological productivity has essentially stagnated since 2005. In the United States, it has grown by nearly 40%."
The organization also noted that Europe's venture capital industry is only a quarter the size of that in the United States, which is another reason for "Europe's lack of broader business dynamism."
The IMF pointed out that the proportion of new companies in Europe that are five years old or younger is "only about half that of the United States." The IMF also supports the report released by former European Central Bank President Draghi in September, which argues that the European Union must increase investment, enhance competitiveness, and calls for Brussels to take more measures to integrate the region's economy.The IMF believes that "in order for Europe to fully realize its growth potential, a larger, more integrated single market is needed, especially for goods, services, and capital markets," yet Kammer admits that achieving more integration is "very difficult."
"We know...the solutions," Kammer says, but adds that "national and vested interests are hindering progress."