In the latest episode of Power and Consequences, we (Gary Gensler and Simon Johnson) discuss the current economic and political situation in Europe, i.e., the 27 countries in the European Union and, within that, the 21 countries in the Euro area. Twenty years ago, Europe’s GDP weighed in as large as the US. Not so any longer. What happened? Why has Europe’s growth lagged behind the US?
Europe did well in previous waves of industrialization and tech development, but lost its edge during the digital 1990s and has fallen further behind the IT frontier in the past two decades. The entire region is seized with concerns about its future in the age of AI, particularly as most new information technology is being developed in the United States and in China. Add to these challenges, real risks from Chinese manufacturing, Europe’s energy dependencies, the ongoing Ukraine and Iran conflicts, and continuing trade disputes with the US.
Europe is also witnessing a rise of of nationalist, euro-sceptic, anti-immigration political parties. The Alternative for Germany, AfD, has made significant gains with German Chancellor Friedrich Merz’s popularity at an all-time low. What will the next elections in Germany and France, Europe’s two largest economies, mean for Europe? What will they mean for the US?
So how much trouble is Europe in really? Much has been written on the question, including the widely discussed 2024 Draghi report on EU competitiveness and more recently the IMF’s report Reforming Europe Under Pressure.
There are big questions about entrepreneurship, continuing cross border trade restraints (particularly in services), and the level of regulation in Europe. If it is harder to start a business in Europe than in the US, why not just move? Many excellent European computer scientists, for example, seem happy working in the United States (including on AI).
As the Draghi report and others have highlighted, might the problems be due to Europe’s fragmented capital markets and heavier reliance on bank funding? Or might it be that the move to the Euro — without concurrently moving to fiscal integration, uniform banking policies, and true free trade — has shackled Europe with slower growth?
There also are some fascinating debates underway, including between Paul Krugman and Luis Garicano (writing with others). Both sides raise good points: Krugman that Western Europe is still well-off and close to the United States in terms of average standard of living; Garicano that the latest wave of world-sweeping technology is not led by Europe.
