Mario Draghi’s new report on EU competitiveness didn’t mince words.
“Across different metrics, a wide gap in GDP has opened up between the EU and the US, driven mainly by a more pronounced slowdown in productivity growth in Europe. Europe’s households have paid the price in foregone living standards. On a per capita basis, real disposable income has grown almost twice as much in the US as in the EU since 2000.”
I agree with most of it and am actually encouraged to see the frankness in the report. However, I do think he missed out on a few key things. His report focused on two major reasons for the slowdown in productivity growth in the EU compared to the US and China.
1) “There are not enough academic institutions achieving top levels of excellence and the pipeline from innovation into commercialisation is weak.”
2) “Regulatory barriers to scaling up are particularly onerous in the tech sector, especially for young companies.”
I’m not sure I agree with the academic institutions comment but he’s spot on with the regulatory barriers. However, I think he missed out on the root cause of the issue. Commercialization is not the issue. Overly generalizing here, the EU optimizes and champions different outcomes and ultimately ingrained risk aversion in the cultures is a factor. I’m not saying these are bad things, but over a long enough period of time they lead to gaps in productivity compared to cultures and societies that are hyper-optimized for achieving peak output.
What different outcomes do I mean?
Take a look at EU labor laws. They are not optimized to ensure peak profitability of employers and maximum productivity of employees, but rather optimized to protect individual employees, ensure they have a safety-net significantly funded by their employers, and that their employees have a guaranteed work-life balance proscribed by the State.
Go to many EU countries on Sunday and try to visit a retail store to shop. You’ll find many of them by law are not allowed to be open. There are many good effects that come from these laws. But there are also counter effects that occur as well that ultimately reduce peak productivity.
Compare this to the US, where labor laws are generally very friendly to employers. Where there is competition among 50 different states vying to attract these businesses through tax incentives, labor laws, and access to talent, etc. The norm is more for businesses to be open most hours of the day, with the idea that a retail store not being open a day of the week being seen as a missed opportunity.
Ingrained Risk Aversion
Personal credit cards are practically not a thing in many continental EU countries. EU Banks often require personal guarantees for any sort of business loan, especially at the small business level. Debt in general is seen as a bad thing in the EU. Even when interest rates were negative, there wasn’t some massive increase in debt per individual taken on. This culturally ingrained risk aversion means that people are less incentivized to take larger risks, especially when you are operating out of the EU market.
Compare this to the US market, where personal credit cards and personal debt are rampant. The average American has mortgage debt, home equity lines, vehicle debt, personal credit card debt, and likely student debt. The US financial infrastructure is not only in place to make and encourage riskier loans but the cultural acceptance of taking on such debt is so much higher in comparison to the EU. You add in that the culture in the US is not a savings culture with the median savings amount of $8,000 per household, and you see that consumer spending is not only the norm but highly encouraged. The access to excess capital along with a culture of spending leads to both good and bad outcomes but arguably leads to increased market opportunity, which leads to higher reward for capturing such a market, which leads to increased risk appetite to try and capture such a market.
You can make an argument that because of the two things above, the EU as a society is poorly optimized on a risk/reward basis in comparison to the US & China when the sole metric is productivity output and maximizing real disposable income. If we were looking at citizen happiness, then I think you’d find most of the EU, especially the Northern European countries to be at the top.
See Mario Draghi’s full report on EU competitiveness here — https://commission.europa.eu/document/download/97e481fd-2dc3-412d-be4c-f152a8232961_en?filename=The%20future%20of%20European%20competitiveness%20_%20A%20competitiveness%20strategy%20for%20Europe.pdf
