Europe’s Productivity Weakness: Firm-Level Roots and Remedies

IMF Working Papers, February 14, 2025

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Canonical URL: Europe’s Productivity Weakness: Firm-Level Roots and Remedies

Authors: Oyun Erdene Adilbish, Diego A. Cerdeiro, Romain A Duval, Gee Hee Hong, Luca Mazzone, Lorenzo Rotunno, Hasan H Toprak, Maryam Vaziri
Published: February 14, 2025
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798229001441.001

Europe faces a well-known productivity malaise, with a large and widening aggregate productivity gap relative to the U.S.
The paper provides a novel diagnosis of the firm-level roots of Europe’s productivity growth slowdown through an analysis of data covering the universe of firms in Europe and the U.S over their life cycles.
Compared to their U.S. counterparts, critical performance gaps are identified among both Europe’s frontier firms and young high-growth firms.
Smaller markets and limited market-based financing are key bottlenecks for frontier European firms.
Skill shortages and insufficient risk capital, such as venture capital, hinder the formation and subsequent growth of young firms in Europe.
Removing remaining intra-Europe barriers to accelerate factor and product markets integration, alongside national reforms to facilitate swifter resource reallocation and enhance human capital, could help revive Europe’s productivity growth.

Data scope: analysis covers the universe of firms in Europe and the U.S over their life cycles.
Frontier firms:
- Exhibit performance gaps versus U.S. frontier firms.
- Main constraints identified: smaller markets and limited market-based financing.
Young high-growth firms:
- Exhibit weaker formation and growth relative to U.S. counterparts.
- Main constraints identified: skill shortages and insufficient risk capital, including venture capital.

Regional-level actions:
- Remove remaining intra-Europe barriers to accelerate factor and product markets integration.
National-level actions:
- Implement reforms to facilitate swifter resource reallocation.
- Enhance human capital to address skill shortages.
Financial-sector actions:
- Develop market-based financing and risk-capital provision (including venture capital) to support frontier firms and young high-growth firms.