Beyond austerity: A path to economic growth and renewal in Europe

By Charles Roxburgh, Jan Mischke, Baudouin Regout, Davide Archetti, Alexandre Chau, Paolo D'Aprile, Akshat Harbola, Harald Proff, Dirk Schmautzer, Manuela Thomys, Andreas Weber

With multiple pressures on growth and constrained public finances, Europe needs structural reform even to match past GDP growth rates. Parts of Europe have begun to reform with demonstrable success.

Europe faces multiple, simultaneous pressures on GDP growth at a time when scope to stimulate growth from public funds is limited by high debt and deficit levels. The threat to growth is unlikely to dissipate in the short or even medium term and significant imbalances in unit labour costs and current account positions between European economies intensify the strain.

playplay
00:00
Podcast
A way forward for Europe
Charles Roxburgh describes Europe's progress on reform, the economic pressures facing the region, and what it will take to restore long-term growth.

In this challenging context, Europe has little choice but to pursue structural reform to bolster growth. MGI finds that Europe needs to accelerate productivity growth by around 30 per cent over historic levels, or opt to work more, just to maintain past GDP growth levels. Productivity growth would have to grow by an even greater margin if Europe is to close the 24 per cent per capita GDP gap with the United States that prevails today—equivalent to $11,250 per capita, or $4.5 trillion in overall GDP.

Europe has made progress on reform, the report notes. In the ten years prior to the global economic crisis, Europe's per capita GDP growth matched that of the United States. This was due largely to major European reforms to labour markets that helped cut unemployment and boost participation by six percentage points in 20 years. Contrary to popular perceptions of Europe's poor record on job creation, 24 million new jobs were created between 1995 and 2008, more than in the United States over the same period despite slower population growth.

MGI suggests that Europe should aspire to match instances of best practice within the region in order to meet its full growth potential. If Europe as a whole could reach European best practice on labour market participation, its overall participation rate would rise 9 per cent—and without reducing vacation or absence times or changing the number of hours worked per week. Boosting service sector productivity to European best practice could add around 20 per cent to the region's overall productivity.

The report sets out a comprehensive agenda for European structural reform on the basis of analysis of existing best practice within the region, proposing action in three areas in parallel. If all of Europe were to match best practice in all three, Europe could even close today's 24 per cent per capita income gap with the United States:

  • Further reforming labour markets in four areas: boosting participation among older workers as in Nordic countries and the Netherlands; reducing structural unemployment using similar reforms to those we have seen in Denmark and the United Kingdom; reducing youth unemployment as in the Netherlands; and balancing the mix of part- and full-time work for women.
  • Unlocking the full growth potential of service sectors in four ways: further opening up competition in service sectors still constrained by a high level of regulation (e.g., professional services) and monopolistic structures (e.g. network industries); boosting productivity through deregulation of product, land, and labour markets and supporting greater operational efficiency and professionalism in sectors such as retail, land transport, and construction; unlocking growth by setting the sector's direction and providing enablers such as standards, education, and infrastructure (e.g., in business services, tourism, and telecoms; ensuring scale across national borders.
  • Aligning policies to growth and renewal, capturing growth and innovation opportunities in high-growth emerging markets, cleantech, and new technology sectors by re-prioritizing funds for R&D toward competitive and innovation sectors; developing clusters; improving the link between academia and business; and developing a more entrepreneurial mindset.
More from the McKinsey Global Institute
Article

The four pillars of distinctive customer journeys

Executive Briefing - McKinsey Quarterly

The CEO guide to customer experience

Report - McKinsey Global Institute

Realizing the potential of Africa’s economies