GENERAL NEWS
Scaling up the single market
The IMF ( International Monetary Fund ) launched its Regional Economic Outlook for Europe ( focusing on productivity ) on 14 November 2024 in Brussels , Belgium .
“ Europe ’ s long-anticipated recovery ( following a sequence of unprecedented shocks ) has begun , with an orderly disinflation process well underway in many countries . Yet , both in the short- and the medium-term , we see Europe ’ s economic trajectory falling short of its true potential . Uncertainty has been causing households to refrain from spending and firms to scale back investment plans . Together , the increased caution makes for a comparatively tepid short-term recovery . Looking beyond the next few quarters , prospects are weighed down by persistently low productivity growth . Europe ’ s innovation efforts are falling short , and the productivity gap vis-à-vis the global frontier is only widening ,” commented Alfred Kammer , Director , European Department , IMF .
Outlining the bottlenecks hampering European firms ’ growth and innovation , Kammer highlighted the necessary steps he believed that Europe must take to remove these obstacles and lift living standards . Two key factors mattered for subdued productivity growth among Europe ’ s large leading firms , he said ; market size and the financing structure .
“ A productivity revival is in Europe ’ s own hands . What it will take is a deeper single market – and , given the shock-prone world we are living in , integrating more fully within the single market is key to strengthening economic resilience . With a new Commission focused on strengthening Europe ’ s economic footing , there is a window of opportunity that Europe cannot afford to miss ,” he outlined .
Growth outlook shows recovery
The IMF ’ s latest growth outlook shows that a recovery is underway , he said . The preliminary data for growth in the third quarter of this year show that the euro area expanded by 0.4 and the EU by 0.3 per cent , on a quarter-on-quarter basis .
“ Our baseline outlook is for a continued modest increase in growth into 2025 for both advanced European economies and the Central , Eastern and Southeastern Europe region . A rebound in private consumption and investment will be the key drivers , thanks to steadily growing
Alfred Kammer , Director , European Department , IMF .
disposable incomes and easing of financial tightness . However , the pace of recovery lags significantly behind Europe ’ s previous post-crisis recoveries and the strong rebound seen in the U . S .,” Kammer explained .
A critical factor explaining this tepid recovery in the near term is high uncertainty . Since the beginning of this year , geoeconomic tensions have escalated and uncertainty about the direction of both domestic and trade policies has risen .
Closing the productivity gap
Image : Shutterstock . com .
“ Currently , Europe ’ s per capita income is about 30 per cent lower than that of the U . S ., largely because of a sizable productivity gap that opened in the last two-and-a-half decades . With the inevitable headwinds from ageing , higher productivity is truly the only game in town to sustainably higher growth ,” added Kammer .
He pointed out that the R & D expenditures of European tech firms have hovered around three to four per cent of sales in recent years , while they have tripled in the U . S . ( reaching around 12 per cent of sales in 2023 ).
“ Europe has an overabundance of small mature firms . European micro-firms account for 20 per cent of total employment — twice as much as in the U . S .,” Kammer highlighted , pointing to key reform priorities to strengthen growth and close Europe ’ s productivity and income gap with the U . S .
“ In the short term , European policymakers need to do their part in reducing elevated uncertainty . In advanced Europe , this means a smooth loosening path for monetary policy and implementation of the new fiscal rules to ensure that buffers are in place when future shocks hit . A deeper single market will be key to unleash growth for Europe ’ s most productive firms . There is scope for expanding firms ’ market access within Europe by addressing underinvestment in border infrastructure , opening protected sectors , pursuing further services trade liberalisation and harmonising regulations ,” he outlined .
“ Efforts to lower trade barriers should be accompanied by advancements towards the EU capital markets ’ union . Many of the required reforms would better harness Europe ’ s considerable savings and increase the availability of equity financing for firms of all sizes . Easing barriers to labour mobility , for example through greater pension portability , could promote innovation clusters that require talent agglomeration . Indeed — research shows that workers ’ costs of migrating between EU countries is about eight times higher than for migration between U . S . states ,” he added .
“ Easing remaining administrative barriers to entry would help more people start businesses , especially in services sectors . Tax and regulatory incentives for small firms should be made temporary to incentivise firm growth . Finally , supporting tertiary education and addressing skills ’ mismatches are critical to foster ideas creation through new firms and technology adoption by existing businesses ,” he concluded .
In short , the EU must find common ground for removing barriers to goods , services , capital and labour flows within the single market .
“ It is not only about increasing per capita GDP through enhancing productivity , but this is also key in strengthening economic resilience which is so essential in this shockprone world ,” concluded Kammer . n
www . imf . org
6 | ismr . net | ISMR November 2024