Making European Reforms a Success on the Ground: Leveraging the EU’s production hubs while leaving no one behind
IMF News, November 13, 2025
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- Published: November 13, 2025
Key projections and macro outlook
- Euro area growth: 1.2 percent in 2025, 1.1 percent in 2026, and a modest peak at 1.4 percent in 2027, supported partly by higher public spending in Germany—before slipping back to 1.1 percent over the medium term.
- Europe’s GDP per person gap to the U.S.: nearly 30 percent in purchasing power terms.
- Around three-quarters of the gap with the US stems from lower productivity.
- Recent trade-policy developments: effective tariffs on EU goods under the new US–EU trade agreement are more than 10 percentage points above pre-announcement levels; announcement of higher future US tariffs last April briefly boosted exports but momentum reversed when the agreement took effect.
Productivity gaps and potential gains
- Full closure of domestic structural policy gaps to the global frontier and reduction of cross-border barriers to levels seen between US states could raise productivity—and income per capita income—by roughly 20 percent.
- The estimate above excludes second-round effects from attracting more talent and capital; long-term gains would be even larger.
- An “intermediate” reform package—closing only half of these gaps—would raise income by nearly 9 percent.
Production hubs, regional dynamics, and agglomeration
- About 60 percent of EU GDP is generated in Europe’s productivity hubs.
- European hubs are, on average, around one-third less effective than American ones in turning density into productivity.
- Hubs mentioned as examples: Silicon Valley, the Benelux corridor, Bavaria’s high-tech area, Ile-de-France; high-potential European regions that could expand include Antwerp, Eindhoven, Munich, and Warsaw.
- Aggregate reform gains manifest at the regional level: existing production hubs become significantly more effective; growth also spreads to high-potential regions with low initial employment relative to underlying productivity.
Key barriers constraining productivity
- Fragmented market access: trade costs between member states are equivalent to an average 40 percent tariff on goods—far higher than those faced by US firms trading across state lines.
- Private-sector dynamism: many regions have too small a share of private employment, stifling innovation and competition.
- If regions improved market access and private-sector participation from the EU median to the 75th percentile, productivity would rise by nearly 5 percent—3 points from better market access and 2 from stronger private sector activity.
- Mobility frictions:
- Lowering mobility costs to reduce the difference in how workers relocate to regions offering higher real wages in Europe and the US by half could raise EU productivity by about 1.8 percent.
- Mobility obstacles cited include non-transferable pensions, non-recognized qualifications, and unaffordable housing in growth centers.
- Capital fragmentation and venture capital shortfalls:
- EU firms are two-thirds less likely to receive venture capital funding than their US counterparts, and when they do, the amounts are roughly half as large.
- Home bias in VC: over 60 percent of venture capital investors are from the same country as the startup, compared to just 30 percent for US states.
- Policy levers: harmonizing corporate legal regimes could raise cross-border venture capital flows in the EU by around 13 percent; simplifying withholding tax procedures by around 20 percent.
Distributional effects and support for lagging regions
- In the combined reform package that closes half of national and EU-level policy gaps:
- All countries gain and most regions benefit.
- Some regions may see productivity decline; the impact on these regions can be significant relative to their size but is generally only a small share of the total gains.
- Restoring per-capita incomes in regions with declining productivity to pre-reform levels would require less than 2 percent of aggregate gains.
- Policy implication: national mechanisms can share benefits widely; the EU’s next Multiannual Financial Framework could incentivize productivity-enhancing structural reforms.
Policy recommendations — a reform package for all Europeans
- Early, ambitious domestic structural reforms:
- Modernize labor-market regulations to enable reallocation.
- Invest in human capital.
- Improve tax systems.
- Address governance weaknesses.
- Deepen the single market:
- Harmonize regulations—stop gold plating.
- Open protected sectors.
- Advance the savings and investment union.
- Remove barriers to labor mobility.
- Prepare local ecosystems:
- Ensure expanding regions have affordable housing and public services that scale with growth.
- Share gains without distorting incentives:
- Use support for lagging regions to ease adjustment costs but avoid preventing resources from moving where they are most productive.
- Pair place-based temporary support with structural reforms to durably mitigate losses.
Final takeaways
- Europe has the people, the technology, and the savings to grow faster, but needs decisive policy action to turn reform priorities into progress “on the ground.”
- Well-designed national and EU-level policies can unlock the full benefits of production hubs and ensure that prosperity is shared across regions.
- Reform pays—and it pays for everyone; by acting boldly through national reforms, deeper integration, and smarter local policies, Europe can reignite growth, revitalize its hubs, and help sustain its social welfare state.
Remarks by Alfred Kammer, Director, IMF European Department, at the launch of the Fall 2025 Regional Economic Outlook for Europe; Banque de France, Paris — November 13, 2025