​​Vai dal Barbieri: Europe, the sedated giant

In recent years, the Eurozone has gone through a prolonged period of economic stagnation, highlighting the structural fragilities of a growth model overly dependent on external demand and industrial investment fuelled by current account surpluses. This approach, which in the past had enabled the region to overcome the 2010 crisis, is proving less and less effective in a global context characterised by increasing competition. Germany, traditionally regarded as the economic engine of Europe, is facing a crisis that further aggravates the difficulties of the entire continent. At the same time, apparently positive indicators, such as the low level of unemployment, mask worrying dynamics that threaten to undermine the European Union's overall competitiveness. These signals make urgent strategic reflection on possible economic and industrial policy reforms necessary to face future challenges and to maintain a leading role on the global scene.
Thus, in a context of economic stagnation, increasingly complex challenges emerge not only for governments but also for businesses, which are called upon to rethink targets and strategies in scenarios of great uncertainty. A broad reflection, based on solid data and forward-looking vision, becomes essential to imagine a sustainable future.
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Historically, Europe has based its economic growth more on external demand (exports) than on domestic demand (consumption and investment). After the Euro crisis of the early 2010s, the persistent current account surplus in the balance of payments stimulated investment and kept real GDP growth around 2%, despite historically low domestic consumption. ECB policies, such as zero interest rates and Quantitative Easing, temporarily supported the economy, but did not solve the structural problem of weak domestic demand.

In 2023, the Eurozone economy faced marked stagnation, with GDP growth virtually non-existent. This picture reflects a particularly complex economic environment, characterised by persistent inflationary pressures, weak domestic demand, a marked tightening of monetary policies by the ECB and a gradual reduction in fiscal support. Although a technical recession has been avoided, the outlook for 2024 remains bleak, casting doubts on the region's ability to revive sustainable growth.

The economic model that navigated the euro crisis of 2010-2011 seems to have lost its effectiveness, assuming it was really sustainable in the long run. Even in the current year, consumption growth is practically nil, while the increase in public spending and the growing absorption of workers in the state sector are contributing to a general reduction in productivity. Paradoxically, the instruments that in the past had evitated the collapse are now proving to be the main culprits of the slowdown, turning what was a lifesaver into a potential executioner of the European economy.

Germany, historically the engine of the European economy, has now become the main drag on growth in the old continent. German industrial production has plummeted by almost 20% from its 2017 highs, with strategic sectors such as metallurgy and mechanical engineering in dire straits: the former saw a dramatic 20.5% drop in sales, while the latter contracted by 10.7%. The decline is aggravated by growing competition from China, particularly in the automotive sector, which accounts for more than 20% of German manufacturing value added and absorbs a large part of European investment in research and development. In May 2024, vehicle production fell by a further 5% compared to the previous month, highlighting a structural crisis that looks increasingly difficult to reverse. The situation was further deteriorated by the war in Ukraine, which triggered a surge in gas prices, a crucial element for many German industries already under pressure from the introduction of stringent environmental regulations. The energy crisis forced Berlin to reactivate coal-fired power plants, effectively marking a step back from the ambitious goals of the Energiewende.

Despite the unemployment rate being at an all-time low, the European labour market failed to stimulate robust economic growth. Record employment has been accompanied by stagnation in labour productivity, due to a significant increase in public sector jobs. Between 2019 and 2023, the public sector contributed 40 per cent of the overall employment increase, but many of the new positions had little impact on real economic value, often taking the form of 'stimulus' roles or 'dummy jobs'. This imbalance contributed to lower productivity growth per worker, limiting the potential for structural GDP growth.

Economic growth has thus remained primarily dependent on population growth and capital investment, both of which Europe struggles to sustain due to unfavourable demographics and insufficient levels of productive investment. In this context, the absence of labour productivity growth renders nominal GDP growth incapable of translating into meaningful real expansion.

The problem is not exclusively European: similar situations can be found in countries such as Canada, where the expansion of employment does not translate into higher growth in added value and this growth is predominantly driven by the expansion of the public sector. Also to be considered is the role of economic stimuli, which, although partly oriented towards infrastructure expansion, struggle to generate the added value needed to trigger sustainable growth. At the same time, there is a flip side of the coin represented by unpaid but essential jobs, such as domestic work, that are not captured in traditional metrics.

As suggested by some experts, a key indicator to monitor is the value produced per worker per hour, which is stagnant in Europe. With flat productivity, economic growth is fragile and highly exposed to small shocks. Without a recovery in productivity, GDP growth will continue to depend solely on the expansion of the labour force or capital investment, two pillars that Europe is struggling to strengthen. In this context, even with low unemployment, the potential for economic growth remains limited, leaving the continent at risk of recession.

Europe's future increasingly depends on its ability to strengthen its economic and political integration. As Mario Draghi and other European leaders have pointed out, greater cohesion between Member States is the only way to respond effectively to global challenges. Europe must reawaken its economic and industrial potential, overcoming its current difficulties with a common and ambitious vision for the future.