Solving Europe’s economic conundrum

By Pascal Lamy and Eric Labaye

How should policy makers undertake the reforms necessary to revitalize the continent’s economy and restore the confidence of voters? The McKinsey Global Institute wants your ideas.

European leaders have a long list of crisis measures and short-term worries to deal with, from the ongoing refugee crisis to the risk of Britain voting to leave the European Union. While the focus on daily issues is understandable, it’s important that leaders don’t lose sight of the longer-term priorities for the European economy. The restoration of stronger growth is sorely needed to meet the aspirations of European citizens, and thereby to restore confidence in the common future of European nations.

At a time when growth in China and some emerging markets is slowing, Europe should be in a position to pick up some of the slack in the global economy. After years of sluggishness following the 2008 financial crisis, the sharp fall in oil prices since 2014 combined with a favorable euro exchange rate and the European Central Bank’s quantitative-easing program provide Europe with a rare window of opportunity to tackle the big challenges ahead. Corporate investment, subdued since the 2008 financial crisis, is finally picking up.

Still lacking, however, is a concerted push by policy makers to use this window to create the conditions for sustainable, faster growth. The European public is eager to break out of the current frustrating economic cycle: a survey and conjoint analysis the McKinsey Global Institute (MGI) undertook of 16,000 Europeans in eight countries in 2014 showed a clear willingness to make tough trade-offs, including working longer hours or accepting some changes in social protection in return for improvements in incomes and better public services like healthcare or education.

There’s no secret about what needs to be done. If Europe is to revitalize the economy, it will require a combination of pan-European steps to stimulate investment and job creation and, at a national level, the implementation of key structural reform measures. They include measures outlined in the June 2015 MGI report A window of opportunity for Europe1 : mobilizing the workforce, including making labor markets more flexible; boosting productivity, including stimulating competition in the single market; investing for growth, including in education and innovation; and improving EU competitiveness. This combination could create sustainable annual GDP growth of as much as 3 percent, more than double the eurozone’s current performance (exhibit).

Europe's growth rate

Europe needs to act now, and not just to play its rightful role in today’s global economy but also because its aging population will act as a significant brake on economic growth. By 2050, the EU labor force could shrink by 42 million, or 12 percent, dragging down growth and prosperity unless there is a sharp rise in productivity to compensate for it or a continued increase in immigration.

For years now, the policies that could lead to a revitalization have been discussed and advocated repeatedly by various European institutions, including the European Central Bank and the European Commission, and at meetings of government ministers and heads of state of all 28 EU members. Yet moving from theoretical discussion to practical application in individual countries continues to be difficult. Some countries have made significant reform moves, including Spain. But political obstacles to deep reform continue to hamper the continent; many leaders fear that implementing economic change that will make a difference in the longer term would hurt their short-term electoral prospects.

While the headlines are often gloomy, Europe is in fact far from being a spent force. It generates 25 percent of global GDP, and its countries include world leaders on key social and economic measures—such as German trade competitiveness, UK strength in services, world-class French transport infrastructure, and Danish energy efficiency. From a corporate perspective, too, it is alive and kicking: there are more European companies in the Fortune Global 500 (142) than American ones (128).

The need for new ideas and fresh input into how to overcome this fundamental issue of the European political economy is the spark behind the MGI Essay Prize. We hope it will generate some original approaches to the conundrum about reforms that not only are acceptable to voters but also will restore their confidence in European integration. That is especially important as Europe struggles to maintain its cohesion and counter growing public disgruntlement and political fragmentation. The essay for Europe Prize will focus on that very real—and often understated—strength, and on the opportunities that the continent has to maintain and strengthen its global role. Seizing those opportunities will be fundamental if the continent is to renew the faith of its citizens in the greater European ideal.

For more on the McKinsey Global Institute Essay Prize - An Opportunity for Europe, visit

About the author(s)

Pascal Lamy, who is chairing the panel of judges for the Europe Prize, is president emeritus of the Jacques Delors Institute and the former director general of the World Trade Organization. Eric Labaye is a director in McKinsey’s Paris office and chairman of the McKinsey Global Institute.
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