Europe is facing a formidable number of challenges.  Russian aggression on its doorstep, persistent attacks by Trump's America, disruptions in trade, and serious energy-security vulnerabilities are some of the more serious ones.  Faced by the unravelling of its 80-year-old transatlantic alliance with the USA, Europe is having to increase defence spending, while doubts are multiplying whether it can preserve the public services and welfare systems that are its hallmarks. 

These challenges would be daunting even if economic growth and public finances were strong.  They aren't.  Europe's economy has been lackadaisical.  After a post-covid recovery of 6.3%, it has puttered at a 1.6% rate for the last four years.  Over the last nine years, the EU's growth rate has averaged 1.7%, compared to Malta's 6.8% and the USA's 2.5%.  The EU's stagnant productivity is dragging down medium-term growth prospects, while quite a few member states face significant public finance pressures     

Take the EU's total factor productivity   ̶   it is about 20% below the US level.  EU productivity has grown at an annual rate of 0.4% over the last nine years, compared to 1.3% in Malta and 2.1% in the USA.  This is especially true for tech, where the productivity of US-listed tech firms has increased by about 40% over the past two decades, while European tech firms have seen minimal progress. Low productivity translates into lower incomes, so much so that per capita income, even in the EU's largest advanced economies, is about 30% lower than the US average. And it is falling further behind over time.

The picture is similarly dim in Europe's fragmented capital and labour markets, constraining companies' incentives to scale up their production.  Financial markets are dominated by banks which favour physical collateral for their loans. But most start-ups and SMEs, especially in the tech sector, have fewer physical and more intangible assets.  Ask a bank to accept a patent as collateral, and you would be laughed out of the building.  As a result, capital markets are not channelling savings into long-term investments in risky but potentially revolutionary ideas.

Compounding the problems is the scarcity of high-skilled workers.  Barriers to cross-border labour mobility remain high, while there is a shortfall of human capital needed for innovative sectors. The ageing populations of many countries mean that new ideas that produce young and high-growth firms are harder to come by, not to mention that the working-age population is set to decrease by 54 million by the end of this century. 

Europe's exporters have had to cope with new tariffs on exports to their most important foreign market, the United States.  But what about obstacles to trade within the EU itself?   An IMF research team has shown that high trade barriers within the bloc are equivalent to an ad valorem cost of 44% for manufactured goods and 110% for services. These costs are borne by EU consumers and companies in the form of less competition, higher prices, and lower productivity.

Europe is also lagging far behind the USA and China in AI innovation and adoption.   Europe has a poor adoption record of productivity-enhancing technologies. One reason is that US firms have tripled their research and development spending to 12% of sales revenue   ̶  triple that of European companies.

What is even more troubling is that innovative European firms have been taking their talents to more dynamic markets elsewhere.  According to research by Ricardo Reis of the London School of Economics, so-called "unicorn" companies valued at more than $1bn have been leaving the EU for the US at a rate that is 120 times faster than the other way around.

Back in 2008 Malta's MEP Louis Grech had authored a report on the Single Market to complement that produced by the Italian economist Mario Monti.  The single market was incomplete, both of them said, its promised potential limited by barriers and national priorities.   Several other reports and years later, the situation hasn't changed much.  

The single market remains a work in progress.  It cannot deliver its full potential unless such strategically important sectors like energy, finance, and communications are fully integrated.  Former Italian Prime Ministers Mario Draghi and Enrico Letta have made a compelling case for completing and deepening the single market.  This would motor the growth and economic resilience that Europe needs.

Full integration of the single market would yield tremendous benefits.  The IMF estimates that a 10% reduction in barriers to intra-EU goods trade and multinational production would lift GDP by around 7%.  How?  By, for example, introducing high-quality insolvency rules for firms to simplify the regulatory landscape, bolstering the capital markets union to boost venture capital and equity investment, increasing labour mobility across the EU, and integrating the European electricity market more deeply.  These last four measures by themselves could raise EU GDP by approximately 3% over the next 10 years.

EU and domestic reforms together would amplify growth.  In another paper, the IMF highlights the significant potential gains from addressing policy gaps in labour markets, business regulation, and credit and capital markets.  Here again, output could be boosted by around 5% in advanced European economies and up to 7% in east European member states over the medium term.

It is not the case that Europe doesn't have enough savings to finance higher investment.  While the EU's household saving rate is about three times that of the US (Malta's is even higher), Europeans have only invested one dollar for every $4.60 invested by Americans in equity, investment funds, and pension or insurance funds.  Blame the bloc's fragmented internal market.

The Union also needs to revamp the EU's Multiannual Financial Framework (MFF).   NextGenerationEU has strengthened economic convergence and resilience, but challenges remain.  More resources should be allocated to R&D, the clean energy transition, energy security, and defence.  Expenditure on European public goods needs to increase from 0.4% of GNI to 0.9%.  Consolidation of the current 50 programmes in the EU Budget is key to shifting toward a performance-based budgeting model.  Own resources and borrowing capacity also need to be reinforced as a regular financing tool for long-term investment, making sure that the financial burden is borne more evenly across time by member states.

Europeans are demanding tangible results.  After the enormous legislative efforts of the last five years, the Commission should make sure all these new rules are well implemented and enforced. Enforcement remains an EU weak point, with the Single Market Scoreboard showing an ever-increasing number of infringements.

I recall Louis Grech and others stating that delivering on the single market is the best way forward to achieve growth.  The EU's single market of 450 million people has turned the bloc into a global economic powerhouse, accounting for about 15% of world GDP   ̶   comparable to the US and China. This prosperity has ensured that many of the member states rank high in life satisfaction, safety at work, social protection, and life expectancy.

Between the mid-1990s and mid-2010s, many European countries undertook major reforms at the national level that were triggered by economic stagnation, outright crises, or EU accession. In most cases, these reforms were followed by strong growth performance. Key examples include Denmark, Ireland, and the Netherlands during the 1990s, Germany during the 2000s, and the growth momentum created by the reform efforts around the 2004 EU expansion.

Yet reform activity has faded considerably since then, and the remaining structural and institutional shortcomings became more penalizing as the ICT revolution unfolded around the turn of the century.  The single market remains the guiding star:  extending it would ensure the repetition of previous success stories and contribute to Europe's geopolitical stability and enhancement of its role on the world stage.

There is no doubt that the EU's macroeconomic stability strategy as a whole has proved largely ineffective since 2008.  The proof is in the bloc's relative stagnation in the face of a US economy that managed to maintain its position and twenty years of historic growth for China. The macroeconomic mistakes made in the aftermath of the great financial crisis were the cause of Europe's downward trajectory.

The growth gap between the United States and the eurozone widened during the crises in 2008 and in 2011, and more recently with the Covid crisis. The paradox is painful: while the 2008 financial crisis started in the United States and the 2020 pandemic crisis started in China, each time it has been Europe that has suffered the most. In 2020, US GDP fell by 3.5%, while euro area GDP fell twice as much, by 6.6%.

Everybody is familiar with the dictum that "if the U.S. economy sneezes, the world economy catches a cold."  Well, on this side of the Atlantic, "if the German economy sneezes, the EU catches a pneumonia."  Unfortunately, Germany has underdelivered on investments in recent years.  Last year, many German economic institutes downgraded their 2026 growth forecasts, citing limited momentum from spending and slow progress on structural reforms.

Since then, Germany, which accounts for roughly a quarter of the 28-nation bloc's gross domestic product, overhauled its fiscal rules to boost infrastructure and defence spending, a potential game-changer for Europe's economy.  However, rather than splurging on day-to-day spending, the emphasis should be on the kinds of additional infrastructure that would boost the economy and stock performance more durably. Infrastructure spending will pick up this year, but Barclays Bank economists point out that, looking across this year and next, social spending is rising faster.

Thank God that, in spite of pressure from the Commission, Labour governments in Malta since 2013 have largely turned their back on the EU's macro-economic strategy and chosen another road that has assured growth and prosperity.  In spite of the fact that there are certain problems that need better management, this choice remains sound. Likewise, the EU needs to return to a trajectory that will enable the continent's participation in the global economic race and, in this way, achieve its ambition of strategic autonomy.

But that does not mean that we ourselves don't need to make reforms.  The recent IMF report makes that absolutely clear.  In its response to the IMF's recommendations, the government has mostly concurred.  Some of the reforms had already been mentioned in previous reports and in EU Commission Country Reports. It would seem that, mesmerised by our high GDP growth rate, policymakers are sometimes rather relaxed.  That is a mistake.