Economic growth will help solve almost all of the many difficult issues we face. Therefore, European countries certainly need to double down on efforts to stimulate economic growth.

It would be a giant of an understatement to say that our world is one in deep turmoil with uncertainty and fear reigning among large parts of the population. Our present-day turmoil checklist is indeed nothing but impressive. The following ten areas of major concern are by no means an exhaustive list:

• The war in Ukraine, already soaked in blood and death, has nothing but destroyed the post World War II rules-based order and risks turning into a war between Russia and NATO.

• Autocratic China no longer hides its ambition to be a dominant world power firmly rejecting democracy and personal freedom. The current Beijing regime continuously nudges up the pressure around Taiwan and other areas in the South Chinese Sea bringing a major confrontation with the United States and its Asian allies every day a bit closer in the Pacific.

• The Gaza conflict risks escalating into a broader war that would set large parts of the Middle East on fire, not only producing immense human suffering but also fueling energy and economic uncertainty worldwide.

• Mastering the climate and related energy urgency has recently been clearly losing momentum. This is partly because initial policy responses, most certainly so within the European Union, have been insufficiently thought out, even reckless.

• Adequate responses to the aging population - which  is not solely an issue in high income countries - are emerging far too slowly.

• Rising inequality risks drenching Western societies in envy and resentment, further fueling populism and political extremism.

• Mounting debt levels restrict governments’ policy options and contribute to increasingly unstable financial markets and economic uncertainty.

• The major central banks of the world are struggling to find the right monetary policy stance to keep inflation under control without restraining the economy and endangering financial stability.

• Warnings of a new Covid 19-type of pandemic are sounding loud and clear, but policy preparations look woefully inadequate.

• The European Union and the United States desperately try to get control of a migrants flow that drives their population increasingly to extremist political parties.

• Situations of substantial market power of the Big Tech companies, even outright monopolies, increasingly hinder normal competition and diversified research efforts. Especially developments in the sphere of artificial intelligence risk getting out of societal control.

Growth to the rescue

Closer examination of these trouble spots reveals that what is needed for the Western world to deal adequately with almost all the challenges each of them entail for Western policy makers is economic growth.

For starters, standing up to Russia and China (and Iran and North Korea) and the alternative, non-democratic world (dis)order they want to install, will require intense diplomatic and political efforts. However, these can only succeed if the West unequivocally shows the ability and the readiness to stand firm. That inevitably means having credible striking power. The best way to ensure that there’s no need to use military power is to convince all parties concerned that the capacity to do is real. It will take substantial financial and economic resources to re-enable the West’s military capacity. Without economic growth that exercise is doomed to fall far short of what is needed.

The reconstruction efforts needed in Ukraine and Gaza will also demand huge financial and economic resources that can only be made available in an environment of sufficient economic growth. Otherwise these resources will have to be diverted from other uses, risking major societal upheaval as a consequence.

The same argument goes for the climate and energy urgency. Sufficient economic growth is essential to meet the massive investment needs of these transitions without causing significant disruptions across Western societies.

The mounting problems related to the aging of societies will simply be unmanageable in a no or all too low growth environment and without significant economic growth a softening of the inequality problem is not possible in a structural way.

Also, a growing economy offers central bankers more leeway in following the right monetary policies and shields them also better from inappropriate political pressures.

More economic growth contributes significantly to the manageability of the over-indebtedness that has escalated since the Covid 19 pandemic. And, of course, as we all experienced first hand in 2020-21 fighting pandemics adequately requires inevitably tons of money.

In short, in a world faced with huge investment and financing needs to overcome the structural problems we’re facing and with major challenges to the twin institutions of political democracy and economic liberalism, strong economic growth is imperative. Economic growth will not solve all our problems, but without sufficient economic growth many of our problems risk becoming unmanageable, further undermining the legitimacy of political democracy and economic liberalism.

Please mind the gap

Against this background it is extremely worrying that with respect to economic growth, European countries are undeniably falling behind, not only when compared to China but also against the United States. During the first quarter of the 21st century the eurozone economy grew cumulatively by 30%, exactly half the economic growth produced by the United States over the same period. During the first quarter of 2024 the US economy was already 8.7% above its pre-pandemic level, the eurozone economy only 3.4%. French president Emmanuel Macron frequently peppers his speeches and interviews with somewhat overcharged hyperbole but when he argues that Europe faces a “mortal” threat from economic decline, he certainly has a point.

The explanation of the persistent growth differential between Europe and the United States needs to come in two phases. First, we have to look at what comes out of the growth accounting exercise and secondly those accounting differentials have to be explained.

The two factors producing economic growth are population or work force growth on the one hand and productivity growth on the other.

The growth of the work force is already for many years substantially higher in the US than in Europe and this difference in work force growth is expected to be continued. For the period 2023-2030 the American work force is set to grow by 3.2% whereas most European countries will see their work force shrink. Germany and Italy are among the worst here with the German work force shrinking by 3.4% and the Italian by 2.1%. France performs a bit better with a decline of “only” 0.4%.

Europe also sorely lags the United States in productivity growth. Over the last quarter of a century the eurozone has lost at least 20% of productivity relative to the United States and, if anything, this productivity differential shows a tendency to further worsening for Europe. Most analysts link the productivity lag to what can be summarized as an “innovation gap”. According to data from the European Commission almost half of worldwide private R & D spending is done by American companies. In the top 50 of R & D spenders one finds 23 American companies, 10 European, 5 Chinese and 5 Japanese. The top four of this ranking is entirely American: Alphabet, Meta, Microsoft and Apple.  Of the number of world-class patents in advanced digital technologies 50 000 are held by Americans, 30 000 by Chines and 10 000 by Europeans.

The remarkable and apparently persistent growth differential between the United States and Europe has become the object of many analyses. One of the most recent ones was produced by researchers at the Federal Reserve Board in Washington. In a note entitled “Why is the U.S. GDP recovering faster than other advanced economies?”. They conclude that differences in monetary and budgetary policies can only explain a small part of the growth differential. The two major factors at work are differences in labor market organization and flexibility and even more what the Fed-researchers define as “business dynamics”.

The check list of what European countries can do to cure its two handicaps may be somewhat different depending on the specific country you’re looking at but some general issues are clearly around. With respect to the labor market most European countries are in need of enhanced incentives to work. Labor taxation has to be reduced which would increase both supply of and demand for labor. Early exit from the labor force into retirement has to be restricted. Companies have to be incentivized to strengthen training and learning efforts. Minimum wage legislation needs to be revised in order to improve employment perspectives for lesser skilled and educated citizens. Migration policies have to be redesigned in function of shortages on the labor market.

As to the productivity and innovation gap it is imperative to create a business environment that not only stimulates R&D efforts but also the translation of R&D results into profitable business ventures. The lack of a capital markets union within the European Union remains a major obstacle to the funding potential that entrepreneurs can tap in Europe.

Regulation is all too often complicated, inefficient and cumbersome. Environmental permits, for example, are most of the time not only difficult to obtain but also involve a nightmarishly long back-and-forth process that often discourages entrepreneurs and investors.

The above list of what to do to improve in Europe the functioning of the labor market and to stimulate business dynamics is non-exhaustive and could easily be made much longer and much more detailed. One thing is however very striking for the changes needed: apart from the labor taxation issue none of these policy changes require much money to be spent. It is a question of political readiness to do what is needed and even more a question of having the courage to act.

What we in Europe most certainly do not need in order to improve our economic growth performance is a new round of monetary and/or budgetary stimulus.

As I will argue more extensively in my forthcoming new book The Icarus Curse. How Western Democracies Derailed and How to Get Back on Track (to be published by Agate Publishing, Chicago, in October) it is exactly the relentless monetary and budgetary push of the last decades that has brought us to our present state of policy exhaustion for which we, and even more so future generations, will pay dearly. 

In the second part of the growth imperative blog I will reply to the presently quite popular slogan that it is de-growth that we need. That may sound like an attractive slogan to some but I will argue to the contrary.