“Political deadlock in Germany and France limits the prospect of implementing reforms proposed by the Draghi report, which, together with Southern Europe’s productivity gap, challenges Europe’s growth outlook.”, — write: www.fxempire.com
Europe faces a range of challenges including widening gaps in technology and digital infrastructure, a fragmented single and capital market, a declining working-age population, and the need to balance decarbonisation with competitiveness goals while ensuring Europe’s security given volatile geopolitics.
Figure 1: Annual investment flows
% of GDP
In France, three months after the snap elections in July, it is still unclear whether the new prime minister can form a stable government capable of materially reducing the budget deficit and enacting major supply-side reforms to boost economic growth.
It is also unlikely that France’s next government, which will be primarily reliant on the far right, will be an advocate for policies deepening European integration ahead of the presidential elections scheduled for 2027.
Similarly, in Germany, the recent success of populist far-right and far-left parties in Thuringia and Saxony highlights Germany’s fragmented political landscape. As mainstream parties lose ground, the current traffic-light coalition government at the national level is weakened, reducing the likelihood of further economic stimulus and reforms.
Europe’s Divergent Productivity Levels Reflect Different Stages of Economic Development Similarly, raising Europe’s growth outlook will require Southern Europe to address its productivity gap, particularly when compared with the US – on per capita and per hours worked bases – over the past 25 years (Figure 2). Full and timely implementation of NextGenerationEU reforms and investments through 2026, especially in Italy and Spain, are thus critical.
The productivity gap between North-West European employees and US employees increased to 20% in 2023 from 10% in 1999 when the euro was introduced. However, this gap is erased accounting for total hours worked (Figure 3). This suggests that in North-Western Europe the issue is less individual productivity, but rather fewer hours worked compared with the US. One or the other, if not both, need to improve to raise Europe’s growth outlook, which is possible as shown by Central and Eastern Europe, where the productivity gap to the US has narrowed over the past 25 years.
This demographic shift underscores the growing importance of productivity gains as a driver of economic growth compared with previous decades. Unless Europe significantly enhances its capacity to attract and integrate foreign workers, productivity improvements will be critical for sustaining growth.
Figure 4: Working-age population changes over 2025-50
% change of current working-age population
Alvise Lennkh-Yunus is the Managing Director of Sovereign and Public Sector ratings at Scope Ratings GmbH. Brian Marly, senior analyst at Scope, contributed to co-drafting this comment.
About the Author
Alvise Lennkh-Yunus is Head of Scope’s Sovereign and Public Sector ratings team.
Advertisement