Regional Economic Outlook for Europe, October 2024: A Recovery Short of Europe’s Full Potential
Regional Economic Outlook, October 2024
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- Published: October 24, 2024
Overview and key findings
- Europe’s economy is recovering, benefiting from a strong crises’ response, but the recovery is falling short of its full potential.
- Uncertainty about persistent core inflation, policy directions, and geopolitical conflicts is dampening the near-term outlook.
- In the longer term, weak productivity growth—attributed to limited scale and business dynamism—together with new headwinds from fragmentation and climate change, are holding back growth potential.
- Steady macro policies are needed to navigate an uncertain environment:
- Transition to a neutral monetary policy stance.
- Reduce fiscal deficits without jeopardizing the recovery.
- A larger and more integrated single market for goods, services, and capital will incentivize investment, innovation, and generate scale benefits.
- Deepening European integration will strengthen economic resilience by insulating businesses and labor markets from global fragmentation pressures.
Note One — Europe’s Declining Productivity Growth: Diagnoses and Remedies
- Europe’s widening productivity gap with the U.S. has deep firm-level roots:
- Compared to the U.S., Europe’s leading firms innovate and grow less.
- Young high-growth firms have a smaller footprint in the economy and tend to remain small.
- Identified bottlenecks:
- Smaller markets.
- Limited equity financing, which hinder leading firms from innovating and scaling up, particularly in tech sectors.
- Policy and structural remedies highlighted:
- Increase human capital investment.
- Greater availability of risk capital.
- Improve the design and coordination of public support to R&D and education systems.
- Remove intra-Europe barriers to factor and product markets integration to improve business dynamism and revive productivity growth.
- Domestic reforms to lower barriers to firm entry, facilitate exit, and remove tax and regulatory disincentives to grow.
Note Two — Accelerating Europe’s Income Convergence through Further Integration
- Economic convergence is required to raise Europe’s growth, meaning activity should expand fastest where opportunities are largest.
- Historical evidence from the early 2000s:
- EU accession acted as a catalyst for convergence through effective integration and structural reforms, improving connectedness for old and new member states.
- Due to EU accession, average regional GDP per capita in new member states increased by more than 30 percent, with larger gains for poorer regions.
- Productivity catch-up was driven by innovation and higher educational attainment, along with substantial capital investment, primarily through FDI.
- Recent developments and prospects:
- Productivity growth has slowed more recently.
- Based on new estimates, Europe’s income gap to the US could be reduced by around 10 percentage points through a new enlargement round.
- If enlargement is paired with deeper integration to reduce remaining barriers within the EU, the benefits could be magnified.
Policy implications and priorities
- Maintain steady macroeconomic policies to support recovery while addressing vulnerabilities:
- Transition monetary policy to a neutral stance.
- Reduce fiscal deficits in a manner that does not jeopardize the recovery.
- Structural and regional policies to boost potential growth:
- Remove intra-Europe barriers to factor and product market integration.
- Expand the scale of markets to foster firm growth and innovation.
- Enhance access to risk capital and reform public support for R&D and education.
- Pursue domestic reforms to lower barriers to firm entry, facilitate exit, and eliminate tax and regulatory disincentives to grow.
- Deepen European integration and consider enlargement to accelerate income convergence and strengthen resilience to fragmentation.
Regional Economic Outlook — Europe, October 2024
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