Regional Economic Outlook for Europe, October 2024: A Recovery Short of Europe’s Full Potential

A Recovery Short of Europe’s Full Potential

Europe’s economy is recovering, benefiting from a strong crises’ response. Yet, the recovery is falling short of its full potential. Uncertainty about persistent core inflation, policy directions, and geopolitical conflicts, is dampening the near-term outlook. In the longer term, perennially weak productivity growth—a result of limited scale and business dynamism–-amid new headwinds from fragmentation and climate change are holding back growth potential. Steady macro policies are needed to navigate an uncertain environment. This requires transitioning to a neutral monetary policy stance and reducing fiscal deficits without jeopardizing the recovery. Policymakers also need to tackle barriers to higher potential growth. A larger and more integrated single market for goods, services, and capital will incentivize investment, innovation, and generate scale benefits. Deepening European integration will also strengthen economic resilience by insulating businesses and labor markets from global fragmentation pressures. These are formidable policy challenges, but now is the time to bring Europe to its full potential.

Projections Table

REO NOTES

Note One

Europe’s widening productivity gap with the U.S. has deep firm-level roots. Compared to the U.S., Europe’s leading firms innovate and grow less, while young high-growth firms have a smaller footprint in the economy and tend to remain small. Bottlenecks like smaller markets and limited equity financing hinder leading firms to innovate and scape up, particularly in tech sectors. To unlock the potential of young high-growth firms, human capital investment and greater risk capital availability are needed. Beyond long-documented policy priorities—improving the design and coordination of public support to R&D, education systems—the chapter’s findings highlight the importance of removing intra-Europe barriers to factor and product markets integration for improving business dynamism and reviving Europe’s productivity growth. This regional agenda must be complemented by domestic reforms to lower barriers to firm entry, facilitate exit, and remove tax and regulatory disincentives to grow.