By Carlos Olaya Loayza, We Are Innovation
Europe, the continent that was once the epicenter of power and innovation, is facing a challenging reality: It needs to catch up with its transatlantic counterpart, the United States. From economic and educational aspects to technological fields, the Old Continent is experiencing a slowdown in its growth and a decline in its global influence, which could have significant repercussions on its medium and long-term economy, prosperity, and international standing.
Until over a decade ago, Europe led the world economy with one of the highest historical economic growth rates. However, the 2008 financial crisis, Brexit, the COVID-19 pandemic, and the recent war in Ukraine have led to a gradual but steady decline in Europe, causing it to lag behind more economically robust counterparts like the United States in terms of economy, education, technology, innovation, investment, among other aspects.
One only needs to look at the economic figures to grasp the magnitude of the gap between these two regions. Before the 2008 financial crisis, the economies of the European Union and the United States were relatively similar in size: the European Union had a Gross Domestic Product (GDP) of $16.2 trillion compared to $14.7 trillion for the United States. However, since then, both economies have diverged drastically. In 2022, the GDP of the European Union was approximately $19.8 trillion, while that of the United States was around $25 trillion. This difference demonstrates a significant economic growth and development advantage for the United States.
One of the factors contributing to this European economic decline is the implementation of burdensome labor regulations, fiscal policies, and bureaucratic processes across all countries in the region. These measures have only discouraged the growth of domestic companies. The rigidity in labor and fiscal regulations has hindered companies’ ability to adapt quickly to changing market conditions and has generated additional administrative burdens that affect their efficiency and competitiveness.
Moreover, Europe has constantly sought to find a “balance” between work and leisure, a phenomenon that has had a highly significant negative impact on its economic growth. The pursuit of more leisure time, especially by the young workforce, has reduced the productivity of companies, affecting their performance and competitiveness in the market.
Additionally, Europe is considered one of the regions with the highest proportion of elderly population in the world. This progressive aging of the population has impacted the efficiency of companies, as an older population implies a decrease in the availability of qualified labor, reducing businesses’ efficiency and productivity.
Due to the various regulations, the increased leisure of the young workforce, and the aging population, European companies have reduced their international presence. This situation has allowed American and Asian companies to expand and establish themselves in the global market, even becoming part of the world’s 20 largest companies due to their high sales, profits, productivity, efficiency, sustainability, and solvency levels. The main success of companies such as Apple, Microsoft, Berkshire Hathaway, Industrial and Commercial Bank of China (ICBC), Saudi Aramco, and Amazon, among others, lies in their continuous implementation of technology, innovation, and highly skilled labor.
Regarding innovation and technology, the European Union lags behind the United States. Statistical data shows that Research and Development (R&D) spending in the European Union represented only 2.3 percent of its GDP in 2020 (€311 billion), while the United States spent an equivalent of 3.08 percent of its GDP. Similarly, Europe’s patent applications and intellectual property protection also fall behind, with around 180,000 applications in 2020, compared to 625,000 in the United States. Additionally, only 49.4 percent of European companies reported having carried out innovations between 2016 and 2018, a figure surpassed by the United States at 66.6 percent.
Europe needs to catch up compared to the United States. However, this situation is not a call for resignation; on the contrary, it is a call to action. Europe has the potential, history, and capacity to reclaim its position on the world stage. Recent global events have opened up new opportunities for economic growth, such as the collapse of the American banking giant that promoted startups and entrepreneurship, Silicon Valley Bank. This development opens up new opportunities for cities like Berlin, Stockholm, and London, which have emerged as startup hubs and now have the potential to lead this entrepreneurial ecosystem through investment and development of startups.
Furthermore, Europe is considered the main territory in the tourism and “lifestyle” industry. With appropriate regulations and policies, it could encourage the acquisition of highly skilled labor, which will directly impact the efficiency and productivity of companies and, ultimately, positively impact its economy. Additionally, suppose Europe aims to close the existing gap with the United States, face global challenges, and maintain its competitiveness. In that case, it must promote investment in research and development of technology, innovation, education, and access to capital, among other areas. Europe can reclaim its leadership position and build a prosperous future for future generations.
Source: We Are Innovation
Carlos Olaya Loayza is an Economist licensed by the Universidad Peruana de Ciencias Aplicadas (UPC) and a lecturer at this university.. He is currently an intern at Fundación Internacional Bases.