## How to Awaken Europe's Private Sector and Boost Economic Growth

_IMF Blog, September 11, 2024_

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**Canonical URL:** [How to Awaken Europe's Private Sector and Boost Economic Growth](https://www.imf.org/en/blogs/articles/2024/09/11/how-to-awaken-europes-private-sector-and-boost-economic-growth)

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## Bibliographic details
- Authors: Diego Cerdeiro, Gee Hee Hong, Alfred Kammer
- Published: September 11, 2024

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### Key findings on productivity and firm performance
- Income per person in the European Union is on average one-third less than in the United States, mostly because of lower productivity.
- The aggregate productivity problem can be traced back to performance differences at the firm level.
- Market valuations of US-listed firms have more than tripled since 2005, while Europe’s have grown by only 60 percent.
- Productivity for US technology firms has surged by nearly 40 percent since 2005, yet it’s little changed for European companies.
- Research and development spending as a share of sales in the United States is more than double that of Europe.

### Business dynamism and the startup-to-scale pipeline
- Europe has a lower number of startups, and too few grow fast to become large firms.
- In the United States, the fastest growing young companies employ six times more people (as share of total employment) than their European counterparts.
- With fewer successful young firms, Europe generates fewer large and highly productive companies later on and has an overabundance of small and low-growth firms.

### Constraints to scaling up: market size and access to finance
- Market size
  - While the EU and US markets are comparable in terms of purchasing-power parity gross domestic product, the EU’s market is highly fragmented.
  - Trade intensity between EU countries is less than half the level between US states, limiting economies of scale and network effects—especially harmful in tech sectors where rapid scaling matters.
- Access to finance
  - In the last two decades, US-listed firms have issued about twice as much equity relative to their size as their European counterparts.
  - Venture capital as a share of the economy in the EU is only around a quarter what it is in the US.
  - Equity is crucial to finance intangible investments (patents, trademarks) that can’t be pledged as collateral and to protect investments against short-term fluctuations.
  - Debt financing bears higher interest rates, especially for younger businesses.

### Policy recommendations at the EU level
- Deepen the European single market to lift constraints to growth for Europe’s most productive firms.
- Remove remaining barriers to trade within the EU and advance the capital markets union to incentivize R&D and investments that require a large customer base.
- Invest more in physical infrastructure to connect EU countries and pursue deeper services trade liberalization to expand firms’ market access within Europe.
- Ease constraints that inhibit venture capital to increase equity financing availability for startups and young firms, including:
  - Harmonizing regulations that hinder investments in larger venture funds.
  - Having the European Investment Fund play a catalytic role by providing a quality seal and due diligence as a public good.

### Policy recommendations at the domestic (national) level
- Ease remaining administrative barriers to entry to help more people start businesses, especially in services sectors.
- Design labor market regulations that protect workers, not jobs, by:
  - Combining more flexible layoff procedures with adequate unemployment benefits.
  - Strengthening active labor market policies that support job search and skill development.
- Make tax and regulatory incentives for small firms temporary to incentivize firm growth.
- Support tertiary education and address skill mismatches to foster idea creation through new firms and technology adoption by existing businesses.

### Overall conclusion
- The EU must find common ground for removing barriers to goods, services, capital, and labor flows within the single market.
- Efforts should span opening protected sectors, lowering regulatory costs of operating across borders, expanding capital markets for innovative ventures, and investing in education.
- A thriving business sector is key to reducing Europe’s large productivity and income per capita gap.

*Source: IMF blog post by Diego Cerdeiro, Gee Hee Hong, Alfred Kammer, September 11, 2024.*

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## References

- [around a quarter](https://www.imf.org/en/Publications/WP/Issues/2024/07/10/Stepping-Up-Venture-Capital-to-Finance-Innovation-in-Europe-551411)

_Source: https://www.imf.org/en/blogs/articles/2024/09/11/how-to-awaken-europes-private-sector-and-boost-economic-growth_