Nobel laureate Michael Spence says Europe is suffering from a lack of innovation and low productivity, and that unless it changes direction, the region's economies are headed for stagnation.
In a Project Syndicate op-ed on Wednesday, the economist said long-term productivity growth in advanced economies depends on structural change led by technological innovation.
“Herein lies Europe's main problem: the United States, and by extension China, are leaving it behind in areas ranging from artificial intelligence to semiconductors to quantum computing,” he wrote.
Europe has been in the doldrums for years. In 2008, the U.S. and eurozone GDPs were roughly equal. Today, the U.S. economy is about 75% larger than the eurozone's, according to World Bank data.
To be sure, currency fluctuations skew the figures: Adjusted for purchasing power, EU output has fallen just 4% compared with the U.S. over the past two decades. And even in Europe's weakest big economy, German consumers remain optimistic.
Meanwhile, investors have increasingly recognized an era of “American exceptionalism” in the global economy and financial markets.
That's in contrast to Europe, where it is growing as a leisure hub, where overwhelming numbers of tourists are sparking a backlash among locals who are tired of holidaymakers clogging up roads, driving up prices and taking over their homes.
Spence, a senior fellow at the Hoover Institution, cited a lack of investment in Europe's already fragmented research and development environment, incomplete integration of the single market, a lack of key infrastructure such as computing power, and limited availability of venture capital and private equity funds as reasons for Europe's innovation deficit.
Europe can overcome these obstacles, he noted, and has important advantages, such as the talent coming out of its universities and the social safety nets that give it the economic stability needed to take entrepreneurial risks.
But without a new economic vision, less innovative and traditional sectors will continue to dominate and the best talent will leave for other countries, he warned.
“Europe must decide: either stay on course (which will surely lead to relative stagnation) or chart an entirely new course,” Spence wrote. “The latter approach is riskier, but also carries the potential for much greater upside.”
But he said the choice did not appear to be a top priority among policymakers and voters, and called on leaders to offer a clearer picture of what maintaining the status quo or a new economic vision would entail.
Europe can do this and has already been successful in targeting a new sustainable growth model, he noted.
“But first, Europeans must answer a simple but important question: what should the EU look like in 10 years' time in terms of innovation, economy, security and resilience?”
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