Europe needs to wake up

Europe's leaders need to implement some big changes in order to avoid the continent becoming a second-division world economic region.

by McKinsey Quarterly Online
Last Updated: 23 Jul 2013

Whilst many people blame the welfare state for sluggish performance in Europe, the real reason is the woeful level of labour productivity which compares very poorly with the more dynamic American economy.

There is a 32 per-cent per capita output gap between the US and Europe. When you look at particular sectors in the private economy you get a better picture of the poor European performance.

For example, French and German productivity lagged 15 and 22 per cent respectively behind that of the US. Europe is particularly poor in this regard in auto, road freight, banking, electric-power generation, clothing and fixed-network telecommunications.

A large proportion of the productivity gap is accounted for by the fact that European workers work fewer hours: 1,564 annually as opposed to 1,819 for the average worker in the US.

Europe will get poorer as it ages unless it takes some drastic steps. It should liberalise the EU through the single market structure already in place and end the protection of favoured industries in particular states.

Companies need to be able to enter and exit markets freely. Further, the EU should integrate its capital markets which would expand the amount of funding available to all-sized businesses.

Regulations should not be done away with but rather they should be implemented intelligently and within a framework of good governance, a factor that has helped some European sectors such as telecommunications catch up with the US.

Europe should also focus on developing the sectors in which it has a comparative advantage such as luxury goods, green technology, health care and high-quality capital goods. Finally, it should use the welfare state to put money into key growth inputs such as education and research.

Europe's productivity challenge
By Heino Fassbender
The McKinsey Quarterly Online, June 2007
Review by Morice Mendoza

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Mike Ashley: Does it matter if the public hates you right now?

The Sports Direct founder’s response to the COVID-19 pandemic has drawn criticism, but in the...

4 films to keep you sane during the coronavirus lockdown

Cirrus CEO Simon Hayward shares some choices to put things in perspective.

Pandemic ends public love affair with Richard Branson et al

Opinion: The larger-than-life corporate mavericks who rose to prominence in the 80s and 90s suddenly...

The Squiggly Career: How to be a chief strengths spotter

When leading remotely, it's more important than ever to make sure your people spend their...

"Blind CVs don't improve your access to talent"

Opinion: If you want to hire socially mobile go-getters, you need to know the context...

The highs and lows of being a super-achiever

Pay it Forward podcast: techUK boss Jacqueline de Rojas and Google UK's marketing strategy and...