Will Europe fall behind economically?

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Americans and Chinese work harder and invest more. Will Europe fall behind economically?

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Germans are very lazy, Mediterranean countries are heavily indebted, and everyone is very old. Complaints about Europe’s economic woes are now cheap by the dozen. Even critics fear that the old continent is increasingly turning into a giant theme park for tourists from America and Asia.

The French president is again under fire from critics. Europe faces a “mortal threat,” Emmanuel Macron recently declared. It represents not only Russian aggression and growing populism, but also the economic decline of Europe.

Warns again: Emmanuel Macron.Build: Keystone

Indeed, the economic data looks encouraging. The US economy has recovered very well from the Covid crisis and is already 8.7 percentage points above pre-pandemic levels after the first quarter of this year. Europeans can only dream of it. The Chinese economy also appears to be gradually regaining its footing. Meanwhile, a new economic miracle is emerging in India.

As president of the European Central Bank (ECB) in the 1900s, Mario Draghi saved the European economy from collapse, his legend said. Now he has to reprise his role as a rescuer in an emergency. The European Union has commissioned him to prepare a report on how the economy can become internationally competitive again. Some want Draghi to replace Ursula van der Leyen as EU Commission president.

In the eyes of economists – at least among proponents of the classical school of liberalism – the cause of Europe’s economic woes lies with the usual suspects. The head of a Norwegian sovereign wealth fund explains that it’s “concerning” that Americans are working significantly more and companies are being regulated too little.

In fact, Americans and Europeans have a different perception of work-life balance. On average, Europeans work significantly less, which has been exacerbated by the pandemic. The fact that aging on the Old Continent is significantly more advanced than on the other side of the Atlantic doesn’t really make matters any better.

Europe invests very little

After all, Americans invest significantly more than their European counterparts. EU Economic Commissioner Paolo Gentiloni explains to the “Financial Times”: “Europe’s corruption is not weak growth, unfortunately we are used to it. The problem is that we have not been able to maintain a calculated level of investment.

Europe is at risk of being left behind when it comes to digitization, especially in the future technology of artificial intelligence. Mail goes to Silicon Valley and Taiwan. Isabel Schnabel, a member of the ECB’s executive committee, attributes this to Europe losing 20 percent to the United States in terms of productivity growth. “The knowledge is there,” he explains to the Financial Times. “But only a handful of companies are using it.”

In this context, Schnabel also debunks the myth of medium-sized companies. In the age of digitization, SMEs are too small to keep up with technological advances, he says. “Big companies invest more and produce more.”

If you look at the much-quoted “Magnificent Seven,” you’ll see what Schnabel means. Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla invested about $200 billion in research last year, more than half the total of all European companies, private and public.

The liberal world economic order is at risk

Geopolitically, Europe also faces headwinds. The Biden administration on Tuesday decided to impose 100 percent import tariffs on Chinese electric cars. This is yet another highlight in the years-long global trade war. The Economist fears a 1930s-style collapse of the liberal world economy and warns of a “New World Economic Order”.

The Economist sees the liberal economic order built after World War II as at risk and cites three reasons for this: the spread of various forms of punitive measures, a new trend toward industrial policy, and the collapse of global institutions. Indeed, tariff barriers that had been phased out since the 1980s are being re-instated in many places. China’s desire to increase exports of goods, especially high-tech goods, will further strengthen this trend. If Donald Trump re-enters the White House, an outright trade war is hard to avoid. The former president is a big fan of tariffs and wants to impose a 10 percent penalty on all imports.

Joe Biden has not only adopted the tariffs of his predecessors, but also increased the trend towards increased industrial policy. His green new deal turned out to be less powerful than expected. Nevertheless, it is the start signal for an economic policy in which the state increasingly intervenes by supporting certain industries, especially when it comes to chips, batteries and renewable energy.

A common example of the collapse of global institutions is the World Trade Organization (WTO). It has been practically paralyzed for about five years because the participants can no longer accept their abilities. The International Monetary Fund has also seen better days. In the age of multilateralism, the once powerful global economic watchdog has suffered from competition from Asia and the bad image of the “Washington consensus era”.

No doubt, Macron is right. Europe faces huge challenges. But Isabelle Schnabel was also right when she warned against a self-fulfilling prophecy. “Based on the major shocks we’ve experienced in Europe, economic performance is not as bad as many feared. We need to stop talking ourselves into misery.