The European economic model of balance technological progress, economic growth and social well-being is at risk

Speech by Christine Lagarde, President of the ECB describing the economic European model which combines technological progress economic growth and social protection and how this unique model is under pressure due to a changing geopolitical environment, and to a lost in leadership in terms of economic productivity and technology. She provides some remedies aligned with Draghi’s recommendations based on more European single market integration. Failure to adapt to the new environment and to regain competitiveness and technological innovation of the region would place this model at risk.

European economic model is under pressure: The level of public social spending in many European economies exceeds the average of other advanced economies. Today almost nine out of ten citizens consider a social Europe to be important. But there are two megatrends challenging this model:

1. Geopolitical fragmentation into rival blocs, where attitudes towards free trade and global regulatory standards are being called into question. In this context economic dependencies are turning into geopolitical vulnerabilities. Europe is a more open economy than others therefore more exposed than others to a decrease in international trade.  Additionally, European exporters are facing much stronger and direct competition from China in their traditional areas of strength than the United States, and at the same time the EU’s share in world trade is declining, with a notable fall since the onset of the COVID-19 pandemic.
2. Europe is falling behind in emerging technologies that will drive future growth: A key reason for this is that innovation and financing ecosystems are not suited to developing new advanced technologies. Not because Europe lacks talented people and ideas, the savings to invest in those ideas, but because of a lack of scale in the European digital single market and from a lack of capital markets to channel savings to entrepreneurs. In fact, more than one-third of EU savings sit in cash and low-yielding bank deposits, compared with around one-tenth in the United States. According to her, if we were to give EU households better opportunities to invest their savings, up to €8 trillion could be redirected into long-term investments. 

Further single market integration, shared interest and common efforts to meet growing future expenditures: To raise productivity Europe needs to reinforce the single market union, sharing common interest (defense and green transition) and joining resources to be efficient in the management of public spending. According to the ECB, the trade barriers that still exist within the EU represent a shortfall of around 10% of our economic potential. If Europe cannot raise productivity, there will be fewer resources for social spending, defense capabilities and the green and digital transition of the economy.

If Europe fails, some difficult choices will arise between adjusting the social model, delivering on climate ambitions and playing a leading role in global affairs, a conclusion in line with Draghi´s report about the future of European competitiveness.