IMF Working Papers

Europe faces a well-known productivity malaise, with a large and widening aggregate productivity gap relative to the U.S. In this paper, we provide 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, we identify critical performance gaps among both Europe’s frontier firms and young high-growth firms. Our firm-level analyses reveal that smaller markets and limited market-based financing are key bottlenecks for frontier European firms, while skill shortages and insufficient risk capital, such as venture capital, hinder the formation and subsequent growth of young firms in Europe. These findings suggest that 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.