Cross-border challenges are widening the productivity gap between Europe and the United States, with Americans pulling ahead since the 1990s, according to an International Monetary Fund (IMF) study. The report shows that the European Union’s GDP per capita, measured in purchasing power parity, is about 72% of that of the United States.
Alfred Kammer, head of the IMF’s European department, attributed 70% of this gap to slower productivity growth in Europe. He explained that despite the EU and U.S. being similar in market size, Europe’s market is fragmented. Trade barriers among the EU’s 27 countries prevent firms from targeting the broader European market, unlike U.S. companies that benefit from a unified domestic market. “Scale matters,” Kammer emphasized, adding that reducing intra-EU trade barriers to U.S. levels could boost European productivity by seven percentage points.
A second issue is Europe’s lack of a unified capital market, which disadvantages EU firms in raising funds compared to U.S. companies. EU businesses often rely on bank loans rather than equity financing, a challenge for tech firms whose assets are intellectual property rather than physical collateral. Venture capital firms, which fund high-risk ventures, are underdeveloped in Europe and tend to focus on national markets due to cross-border regulatory complexities.
Although the EU has been working on a Capital Markets Union for the past decade to address these barriers, progress has been slow, with officials expressing doubts about how quickly improvements can be made.
The third factor hindering EU productivity is labor mobility. Workers in the 27-nation bloc face more barriers than U.S. workers moving between states, compounded by housing shortages across Europe. “The costs in Europe are eight times as high,” Kammer noted.
He urged policymakers to address these challenges, highlighting the need for a stronger single market for goods and services. “The good news is that … the solution for much of this is in policymakers’ own hands,” Kammer concluded.
