Unleashing Europe’s Economic Potential

IMF News, March 11, 2026

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Speech by Alfred Kammer, Director, IMF European Department, at HEC, Paris — March 11, 2026.
Central message: Europe must raise productivity and strengthen resilience by completing the EU Single Market and integrating its energy system.
Twofold aim of the speech: explain why Europe’s growth is slowing and outline policies to structurally improve Europe’s outlook.

Europe’s economic weight is declining relative to peers; a substantial gap has opened up with the United States since 2010.
Europe once led in productivity growth but now lags; the productivity gap with the United States continues to widen.
Europe is producing fewer globally dominant firms; among companies founded in the last 50 years, U.S. firms overwhelmingly dominate global market capitalization.

If reforms reduced internal EU frictions to levels comparable with those between U.S. states:
- European productivity could rise by around 20 percent.
- Higher productivity could crowd in up to €800 billion in additional private investment over ten years—roughly 18½ percentage points above baseline.
- Over time, GDP per capita could increase by around 35 percent.

Intra-EU regulatory barriers equivalent to a tariff of around 44 percentage points for goods and 110 percentage points for services.
Labor mobility: moving between EU countries is roughly eight times more costly than moving between U.S. states.
Financial markets: Europe’s financial system is worth roughly €85 trillion but is divided across 27 national banking systems and relatively small capital markets.
Energy-related business concerns: 41 percent of EU firms still view energy costs as a major obstacle to investment.
Estimated effect of the 2022 energy shock: reduced the euro area’s potential output by roughly 0.8 percentage points.

EU-level and national reforms are both required to complete the Single Market, focusing on the EU’s four freedoms: goods, services, labor, and capital; and energy integration.
Priority reforms and actions:
- Greater harmonization of legislation; avoid “gold-plating” of EU directives by member states.
- Introduce a “28th regime” allowing firms to choose a single pan‑European legal system covering areas such as company law and insolvency.
- Improve labor mobility via mutual recognition of professional qualifications, portability of social security rights, and more flexible housing markets.
- Advance the savings and investment union to reduce fragmented capital markets and better allocate Europe’s savings to innovative firms.
- Strengthen governance frameworks, modernize labor-market regulations, invest in human capital, and improve tax systems.

Industrial energy prices in Europe:
- Since 2000, real energy prices for EU industry have roughly doubled.
- In 2023 they were about two to three times higher than those in the United States and China.
EU Emissions Trading System: contributes only modestly to the transatlantic price gap; excluding carbon pricing would still leave the transatlantic electricity price gap at over 90 percent of what it is today.
Energy price dispersion: in some EU countries, electricity prices are roughly three times higher than in others.
Grid congestion and interconnections:
- As electrification and renewable generation expand, congestion has increased significantly; bottlenecks between peripheral regions and the center have roughly doubled over the past five years.
- Congestion prevents electricity from flowing freely and causes price divergence.

Investment implications of meeting EU climate goals:
- Achieving the EU’s 2035 climate goals implies an increase in aggregate annual investment (public and private) of just around 1 percent of GDP.
- Revenues from carbon pricing could more than cover the required public investment of 0.5 percent of GDP annually.
Distributional and industrial effects:
- Energy-intensive sectors (aluminum, cement, paper, basic chemicals) were notably affected by the 2022 energy shock.
- Affordable and reliable electricity is critical for future technologies, including artificial intelligence, which requires enormous computing power and electricity.

Continue rapid expansion of renewable energy capacity (solar, wind, battery storage) given sharply falling costs.
Build a stronger and more integrated electricity grid to:
- Allow electricity to flow from regions with renewable surpluses to regions with shortages.
- Reduce both prices and volatility by smoothing regional price spikes.
- Improve the efficiency of existing generation capacity; natural gas is likely to remain the marginal electricity price setter for much of the next decade.
Accelerate cross-border interconnections:
- New evidence indicates that new interconnections typically reduce wholesale electricity prices by around 5 percent on average.
- Interconnections can lower prices on both sides of the connection by smoothing occasional spikes.
Strengthen EU-level coordination and ambition:
- Implement the European Commission’s proposed Grids Package and expand grid investment in the EU budget to accelerate permitting, strengthen interconnections, and lower electricity costs.
- Develop a comprehensive EU-level strategy covering planning, investment, and market design across member states.
- Coordinate capacity mechanisms at the European level to generate efficiency gains.
- Provide stable and credible policy signals to the private sector; maintain the EU Emissions Trading System and predictable rules for long-term investment.

Many recommendations echo influential reports; the European Council is setting end of 2027 as a target for completing key elements of the Single Market agenda.
The analytical groundwork exists; the primary barrier is implementation requiring political determination and willingness to confront vested interests and institutional inertia.

Source: Opening Remarks by Alfred Kammer, Director, IMF European Department, "Unleashing Europe’s Economic Potential", March 11, 2026.