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EU needs tech, economic vision to rival US, China
With its current course leading only to economic stagnation, the EU must establish a vision for a more dynamic, productive future. Above all, Europeans must answer a simple but critical question: What should the EU look like – in terms of innovation, the economy, security and resilience – in a decade?
Michael Spence 23 Aug 2024

The global economic shocks of the past few years have left Europe particularly vulnerable. While virtually everyone has suffered from climate- and pandemic-related disruptions, the European Union has also had the Ukraine war unfolding on its doorstep, and its acute dependence on energy imports has meant that rising prices – and the need to shift away from Russian fossil fuels – have bitten especially hard. Both growth and economic security are under pressure.

To be sure, some of these were short-term shocks. The pandemic-related disruptions have largely resolved themselves, and even inflation, which surged in the pandemic’s aftermath, seems to be largely under control, thanks to the efforts of EU central banks, not least the European Central Bank, and the issue appears likely to be fully resolved within the next 12 months.

But the EU faces a number of formidable economic challenges that will not simply go away. For starters, rising security risks in its neighbourhood, combined with growing doubts about the durability of America’s commitment to European defence, have put pressure on the EU to strengthen its own capabilities. This implies not only more coordination across countries, but also a significant increase in overall defence expenditure: the bloc’s total spending currently amounts to 1.3% of GDP, well below NATO’s 2%-of-GDP target.

Moreover, productivity growth, which has been flagging in much of the world, is especially low in Europe, and the gap between the EU and the United States is widening each year. With the unemployment rate averaging some 6.5%, there is a bit of room for increased aggregate demand to fuel growth, but robust long-term growth will be virtually impossible if Europe cannot address lagging productivity.

This will be no easy feat. Long-term productivity growth in the developed economies depends significantly on structural change, driven mainly by technological innovation. This is where Europe’s principal problem lies: in a range of areas, from artificial intelligence (AI) to semiconductors to quantum computing, the US and even China are leaving Europe in the dust.

The main reasons for the EU’s innovation deficit are well known. Both basic and applied research and development have suffered from chronic underinvestment. The effectiveness of funding for basic research is undermined by a decentralized approach, with uncoordinated and poorly targeted national programmes taking precedence over EU-level finance and administration. In addition, the integration of the single market remains incomplete, particularly in services. This is especially important in digital fields, where returns on investment in innovation depend on market size.

The EU faces other barriers to becoming an innovation hub. One is a lack of the necessary infrastructure, especially the massive amounts of computing power required to train AI models. (At present, the EU relies largely on American tech giants for such capabilities.) Another is that the venture capital and private equity needed to support innovation – investors with the experience and motivation to help young entrepreneurs build innovative enterprises – is not widely available, though there are promising entrepreneurial ecosystems in a number of countries.

But these barriers can be surmounted. And if they are, the EU has important strengths on which it can capitalize, beginning with abundant talent coming from first-class universities. In addition, Europe’s well-developed social services and social-security systems deliver a level of economic security that can facilitate entrepreneurial risk-taking.

Unless the EU can capitalize on the technological drivers of structural change, however, parts of its economy will remain dominated by traditional industrial sectors that have proven slow to adopt productivity-enhancing innovations. In a global economy where value is increasingly derived from intangible sources, the EU will continue to depend on tangible assets to create value. And Europe’s deep pool of human capital will grow shallower, as its top talent migrates to where opportunities are more abundant.

Europe must decide: it can remain on its current course, which is sure to lead to relative stagnation, or it can chart an entirely new path. The latter approach is riskier, but it also holds far more upside potential. There is no shortage of people in government, business, policy and academia who understand the challenges Europe faces and are more than capable of devising, debating, modifying and implementing a creative forward-looking plan.

Unfortunately, such a plan does not appear to be a high priority within European countries or at the EU level. It does not feature in the political debates that surround national elections. Perhaps what is missing is a clear picture of the likely consequences of maintaining the status quo, and, more important, a compelling vision that can inspire and guide policy and investment.

When a journey is challenging, a clear view of the destination is vital to keep people motivated. Technocrats often fail to recognize this, but Europe itself has experienced it firsthand in its quest to adopt sustainable growth patterns and economic models, where there is a clear vision of the destination. Likewise, leaders in successful developing countries typically promote a clear picture of their desired future, in order to encourage and enable the difficult choices that are needed to build it.

There is no reason to think that the EU is incapable of devising a new vision for its future and a roadmap for the digital and structural transformation it so badly needs. But first, Europeans must answer a simple but critical question: What should the EU look like – in terms of innovation, the economy, security, and resilience – in a decade?

Michael Spence is a Nobel laureate in economics, a professor of economics emeritus, a senior fellow at the Hoover Institution, a senior adviser to General Atlantic and chairman of the firm’s Global Growth Institute, the chair of the advisory board of the Asia Global Institute and serves on the Academic Committee at Luohan Academy.

Copyright: Project Syndicate