Global economic shocks in recent years make Europe more vulnerable than other parts of the world. While the consequences of the disruptions caused by climate change and the pandemic affect virtually everyone, the European Union has to deal with the war that is taking place on its doorstep, and the acute dependence on the import of energy sources has as a consequence the rise in prices - and the need to make a move away from using of Russian energy sources - hits particularly hard. Its economic growth and its economic security are also under pressure.
Some of these were short-term shocks. The disruptions caused by the pandemic have for the most part ceased to be a problem by themselves, and even inflation, which began to rise after the pandemic, could be said to be largely under control, thanks to the efforts of the central banks of the EU member states, and especially the European central bank, so it seems likely that the issue will be fully resolved within the next 12 months.
However, the European Union also faces major economic challenges that it will not overcome so easily. To begin with, due to increased security risks in its environment, combined with growing doubts about the durability of the American commitment to the defense of Europe, the EU has found itself under pressure to strengthen its own defense capabilities. This implies not only greater coordination between member states, but also a significant increase in overall defense spending: at the EU level, 1,3% of its gross domestic product is allocated for this purpose, significantly less than the 2% set by NATO.
In addition, productivity growth, a bottleneck in most of the world, is particularly low in Europe, and the gap that exists between the EU and the United States on this basis is increasing year by year. With an average unemployment rate of around 6,5%, there is some scope for increasing aggregate demand to boost growth, but robust growth in the long term will be virtually impossible unless Europe is able to address the problem of under-productivity.
It won't be easy. Long-term productivity growth in developed economies depends to a considerable extent on structural changes, driven mainly by technological innovation. And therein lies Europe's key problem: in numerous sectors - from artificial intelligence (AI), to semiconductors, to quantum computing - the US and even China leave the EU far behind.
The main reasons for the innovation deficit within the EU are well known. Both basic and applied research and development (R&D) suffer from chronic underfunding. The effectiveness of basic research funding is undermined by a decentralized approach, as uncoordinated and poorly targeted national programs take precedence over those funded and administered at the Union level. In addition, the integration of the common market remains incomplete, especially in the services sector. This is of particular importance in the digital sphere, where the return on investment in innovation depends on the size of the market.
The European Union also faces other obstacles that prevent it from becoming a hotbed of innovation. One of them is the absence of the necessary infrastructure, especially the massive computing power necessary to develop AI models. For such capacities, the Union currently relies for the most part on American technology giants.
Another problem is that entrepreneurial capital and venture capital funds - which are available to investors with experience and motivation to help young entrepreneurs realize innovative ideas - are not widely available, although there are promising entrepreneurial ecosystems in a number of EU member states.
But it is possible to jump over those barriers. And if they are skipped, the EU has significant advantages that it can capitalize on, starting with the abundance of talent coming from top universities. European well-developed public services and social security systems provide such a level of economic security that it is thus possible to reduce the business risks that entrepreneurs decide to take.
If, however, the EU does not capitalize on the technological incentives of structural changes, the dominance of traditional industrial sectors, proven slow in accepting innovations that contribute to improving productivity, will continue in certain parts of its economy. In a globalized economy in which value is increasingly extracted from intangible sources, the EU will continue to depend on material goods to create value. And the deep reservoir of human capital that Europe has at its disposal will become shallower over time, because top talents will go to where greater opportunities open up for them.
Europe has to make up its mind: it can continue in the same direction, which is certain to lead to relative stagnation, or set a completely new course. The latter option is more risky, but it also opens up much greater possibilities. In the state apparatus, business and the academic community, there is no shortage of those who understand what challenges Europe is facing; these people are more than capable of devising, modifying and implementing some creative plan focused on the future.
But it does not seem that the creation of such a plan is high on the list of priorities neither at the EU level, nor at the level of the member states. Something like that is not discussed in the debates that take place during the pre-election campaigns. Perhaps what is missing is a clear idea of what the likely consequences will be if the status quo continues. And more importantly, an attractive vision that would inspire and direct both political measures and investments.
When the road is full of trials, a clear vision of the goal to strive for is vital to keep people motivated. Technocrats often fail to see this, but Europe has already gained such experience through the effort put into adopting sustainable growth patterns and economic models, which are areas where a clear vision of where to go exists. Likewise, leaders of successful developing countries usually promote a clear vision of the future they are aiming for, to encourage people and enable them to make the difficult decisions needed to build such and such a future.
There is no reason to think that the EU is unable to shape a new vision of its own future and a roadmap for the digital and structural transformation it desperately needs. Before that, however, Europeans must answer a simple but critically important question: what should the EU look like in ten years' time, in terms of innovation, economy, security and resilience?
The author is a Nobel Prize winner in economics and professor emeritus at the Graduate School of Business (GSB) at Stanford University.
(Project Syndicate, 2024; radar.rs)
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