Europe at a Crossroads: The Time for Bolder Policy Action Is at Hand

Rick Rieder argues that anemic growth in Europe is a longstanding problem that today requires a bold solution. Institutionally, the ECB can offer potentially effective, if unconventional, help.

A shorter version of this commentary appeared in the Financial Times on July 22, 2019.

A specter is haunting Europe – the specter of anemic growth. Ten years have passed since the global financial crisis and while unemployment in the U.S. has recovered to the best levels in nearly 50 years (3.6%), those gains have not been replicated in Europe. 10.4% of the Italian labor force remains unemployed; that number rises to 14.7% in Spain, and the unemployment rate in Greece is a whopping 18%, with an unhealthy skew in most countries toward youth unemployment. Wage growth patterns between the U.S. and Europe display similar disparities.

Why Europe suffers stagnant growth?

Much of the problem boils down to lackluster expectations about forward growth (the European Central Bank itself recently lowered its 2019 growth expectations in the EU by almost 40%, from 1.7% to 1.1%). But there’s also something to be said about regulatory burdens in some locales that reward the status quo and inhibit change. Think about the size and scale of the “Diesel-gate” scandal, without which German automakers may never have embarked on electric vehicle programs, and even so only long after U.S. and Chinese peers had started down that road.

The fact is that European companies are losing ground to their American and Chinese counterparts as persistently torpid domestic growth stifles both innovation and investment -two desperately needed competitive stimuli. Remarkably, in a 2019 ranking of the world’s largest “unicorns” (private startups valued over $1 billion), only 15 of the top 250 were domiciled in the Eurozone (versus more than 175 in the U.S. and China combined). The ECB has not been sitting idle, and in fact it has rightfully been one of the most dovish central banks in the world over the last decade, accumulating trillions of euros in public and private debt in order to keep key borrowing rates at, or below, 0%. Yet, despite some cyclical bounces, the structural trajectory of the region’s economy remains woefully unimproved.