Europe is suffering from an innovation deficit and weak productivity, putting the region’s economy on a path to stagnation unless it changes course, according to Nobel laureate Michael Spence.
In a Project Syndicate op-ed on Wednesday, the economist said long-term productivity growth in advanced economies depends on structural change, led by technological innovation.
“This is where Europe’s principal problem lies: In a range of areas, from artificial intelligence to semiconductors to quantum computing, the U.S. and even China are leaving Europe in the dust,” he wrote.
Europe’s lagging performance has been going on for years. In 2008, U.S. GDP and the eurozone’s GDP were roughly equal. Now, the U.S. economy is about 75% bigger than the eurozone’s, according to World Bank data.
To be sure, currency fluctuations have skewed the numbers. Adjusted for purchasing power, the EU output fell only 4% behind that of the U.S. over the past 20 years. And even in Europe’s weakest big economy, German consumers are still feeling upbeat.
Meanwhile, investors have increasingly recognized an era of “American exceptionalism” in the global economy and financial markets.
That’s contrasted with Europe’s growing status as a center of leisure, so much so that overwhelming hordes of tourists have sparked a backlash among locals fed up with vacationers clogging streets, running up prices, and occupying homes.
Spence, who is a senior fellow at the Hoover Institution, blamed Europe’s innovation deficit on underinvestment in an already decentralized R&D landscape; incomplete integration of the single market; lack of key infrastructure like computing power; and limited availability of VC and private equity funds.
Europe can overcome these obstacles and has important advantages, such as the talent coming from its universities and a social safety net that provides the economic security needed for entrepreneurial risk-taking, he noted.
Without a new economic vision, however, traditional industrial sectors that are less innovative will continue dominating, while the best and the brightest will migrate to other countries, he warned.
“Europe must decide: It can remain on its current course, which is sure to lead to relative stagnation, or it can chart an entirely new path,” Spence wrote. “The latter approach is riskier, but it also holds far more upside potential.”
But this choice doesn’t appear to be top of mind among policymakers or voters, he said, urging leaders to offer a clear picture of what the status quo or a new economic vision would bring.
Europe can do this and already found success in targeting new sustainable growth models, he pointed out.
“But first, Europeans must answer a simple but critical question: What should the EU look like—in terms of innovation, the economy, security, and resilience—in a decade?”