Europe faces dire economic prospects amid monumental challenges

Europe faces dire economic prospects unless its leaders start tackling reforms and put the conditions in place for a significant increase in private investment, according to The Conference Board.

The 20-nation economy is set to grow by an average of just 0.9% a year through 2039, compared with rates of 1.6% in the US over the same period and 1.3% in the decade before the pandemic, the think-tank said in a report published Friday.

Annual expansions of 2.4% are theoretically achievable, though that would require “decisive efforts” by both the public and private sectors, it said. They include a fivefold jump in research and development spending, more integrated capital markets and more than five million new workers a year.

Europe’s challenges are monumental. The war in Ukraine has upended entire countries’ business models built on cheap Russian energy, competition from China is threatening the future of Germany’s car industry, and regulatory hurdles are widely blamed for slow progress on green investments and digitization.

Adding to that are the threat of a US-China trade war and political paralysis in Germany and France, the region’s two largest economies. That’s raised doubts over the continent’s ability to reform and amplified concerns over job security.

“If there’s one message here it’s urgency,” said Maria Demertzis, chief economist Europe at The Conference Board. “Events are catching up with us. But in talking about geopolitics and war, we tend to forget that the biggest risk is something that will happen with a probability of 100% unless we reverse course — aging.”

Today’s working age population of 291 million compares with 165 million in the US. By the end of the century, the former will have shrunk by more than a third, while the latter will be almost a fifth larger, according to the report.

Little to no progress in tackling labor shortages would be a key ingredient making the euro zone’s gloomy economic outlook even worse. If combined with sluggish investments in the green and digital transformations, low R&D budgets and failures to remove regulatory hurdles, growth risks not exceeding 0.2% on average a year, The Conference Board estimates.

Similar warnings have come from former European Central Bank President Mario Draghi, who said in September that the EU would face a “slow agony” unless it took steps to boost competitiveness. His call to invest as much as €800 billion ($840 billion) extra a year and commit to the regular issuance of common bonds, though, fell on deaf ears within some of the region’s largest economies.

The ECB under his successor Christine Lagarde published its own projections through 2027 on Thursday. They don’t foresee growth exceeding 1.4% in any of the years covered by the forecasts, and don’t include the likely negative effect of US trade tariffs.