Nobel Prize winner Michael Spence warns that Europe is on the verge of economic stagnation due to a lack of innovation and sluggish productivity. In an opinion piece, Spence stresses that structural changes and technological progress are necessary to compete with the US and China.
Nobel Prize winner warns: Europe’s economy faces stagnation if technological innovations are not urgently implemented
According to Nobel Prize winner Michael Spence, the European economy is on the verge of stagnation due to a lack of innovation and weak productivity.
The economist explained in an opinion piece for Project Syndicate on August 21 that structural change driven by technological innovation is crucial for long-term productivity growth in advanced economies.
“Here lies Europe’s main problem: in many areas – from artificial intelligence to semiconductors to quantum computers – the US and even China are leaving Europe far behind,” he wrote.
Europe has been experiencing a decline in performance for years. The GDP of the Eurozone and that of the USA were roughly the same in 2008. According to the World Bank, the US economy is currently around 75 percent larger than that of the Eurozone.
In fact, the figures are distorted by currency fluctuations. Over the past two decades, EU productivity has lagged behind that of the US by only 4%, adjusted for purchasing power. German consumers are still optimistic, even though Germany is Europe’s weakest major economy.
Investors now recognize that an era of “American exceptionalism” has dawned in the global economy and financial markets.
This is in stark contrast to Europe’s growing recognition as a holiday destination. The influx of visitors has sparked a backlash from locals fed up with congested streets, inflated prices and squatted houses.
Nobel Prize winner calls for bold new vision: Europe’s innovation deficit threatens economic future
According to Spence (via Fortune), a senior fellow at the Hoover Institution, Europe’s innovation deficit is due to underinvestment in an already decentralized R&D landscape, incomplete integration of the single market, a lack of key infrastructure such as computing power, and limited availability of venture capital and private equity funds.
He pointed out that Europe has significant advantages, including a social safety net that provides the economic security necessary for entrepreneurial risk-taking, and the talent emerging from universities can overcome these obstacles.
He warned that traditional, less innovative industries would continue to dominate, while the best and brightest minds would migrate to other countries if there was no new economic vision.
“Europe must choose: it can stay on its current course, which is certain to lead to relative stagnation, or it can take an entirely new path,” Spence wrote. “The latter approach is riskier but also offers far more upside potential.”
However, he said that politicians and voters must prioritize this option. He called on politicians to fully explain the implications of the status quo or a new economic vision.
He stressed that Europe has already succeeded in pursuing new models of sustainable development and that it is capable of doing so.
“But first, Europeans must answer a simple but crucial question: what should the EU look like in a decade – in terms of innovation, economy, security and resilience?”
