MILAN – The global economic shocks of the past few years have left Europe particularly vulnerable. While virtually everyone has suffered from climate- and pandemic-related disruptions, the European Union has also had the Ukraine war unfolding on its doorstep, and its acute dependence on energy imports has meant that rising prices – and the need to shift away from Russian fossil fuels – have bitten especially hard. Both growth and economic security are under pressure.
To be sure, some of these were short-term shocks. The pandemic-related disruptions have largely resolved themselves, and even inflation, which surged in the pandemic’s aftermath, seems to be largely under control, thanks to the efforts of EU central banks, not least the European Central Bank, and the issue appears likely to be fully resolved within the next 12 months.
But the EU faces a number of formidable economic challenges that will not simply go away. For starters, rising security risks in its neighborhood, combined with growing doubts about the durability of America’s commitment to European defense, have put pressure on the EU to strengthen its own capabilities. This implies not only more coordination across countries, but also a significant increase in overall defense expenditure: the bloc’s total spending currently amounts to 1.3% of GDP, well below NATO’s 2%-of-GDP target.
Moreover, productivity growth, which has been flagging in much of the world, is especially low in Europe, and the gap between the EU and the United States is widening each year. With the unemployment rate averaging some 6.5%, there is a bit of room for increased aggregate demand to fuel growth, but robust long-term growth will be virtually impossible if Europe cannot address lagging productivity.
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