By the end of this century, the gap between the Gross Domestic Product (GDP) of Europe and the United States will further widen. This is the latest alarm bell rung by the International Monetary Fund (IMF) regarding the "lack of business vitality" on the European continent. The IMF also emphasized that the weak performance of the European economy after the pandemic is due to low productivity and an aging workforce. The gap in productivity levels between the United States and Europe involves all industries, but it is particularly evident in the technology sector.

Specifically, the IMF stated in its latest outlook report that an aging workforce and low productivity growth will reduce the annual GDP growth rate of the European continent to 1.45% over the next decade before 2029, while the estimated average growth rate for the United States during the same period is 2.29%.

Recently, the eurozone economy continues to weaken, with economic activity contracting for two consecutive months. The preliminary value of the eurozone's composite Purchasing Managers' Index (PMI) in October rose slightly from 49.6 in September to 49.7, remaining below the 50 boom-or-bust line for the second consecutive month.

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Paolo Grignani, a senior economist at Oxford Economics, stated that the specific data indicates that due to the deterioration of employment and inflation sub-indicators, one should not be overly optimistic about the overall data. The PMI data is still in a contraction range, with the manufacturing industry gaining some traction, while the service industry has slightly declined. Inflation remains low, but there is still some price pressure in the service industry.

"Germany and France remain the weak links in the eurozone. The brief PMI of these two countries is mixed, with the former recording a certain degree of contraction, while the latter's service and manufacturing sub-indicators further fall into recession," he added.

The U.S. economic growth rate continues to exceed that of Europe. Since the global financial crisis, especially since the pandemic, the U.S. economic growth rate has exceeded that of Europe.

Alfred Kammer, Director of the IMF's European Department, stated that the "fundamental" problems of the European continent can be traced back decades ago. He emphasized that, adjusted for purchasing power, the per capita GDP of workers in the United States, Germany, France, Italy, and Spain was the same at the beginning of 2000.

"In the next 25 years, our gap has continued to widen," he said. Today, the per capita income of workers in the above four European countries is about 20% lower than that in the United States. "This is a huge gap: it did not exist before, but it exists now."Kammer added that the pandemic has temporarily exacerbated the issue, with the IMF estimating that Europe's average growth rate has decreased by 0.6 percentage points compared to the 20 years ending in 2019. "In contrast, the United States' projected growth rate for the decade ending in 2029 has slightly increased compared to the previous decades," he stated.

Previously, the recovery of consumer spending was expected to become a driving force for economic growth in the Eurozone by 2024. However, a recent report released by Oxford Economics also indicated that this hope has not been realized. The report's author, Oxford Economics Senior Economist Tomas Dvorak, told Yicai Global that the Eurozone's private consumption growth remains unsatisfactory, reflecting the broader economy's lukewarm momentum. "We expect this situation to continue in the second half of this year, with only a slight rebound in 2025."

He stated that the still-tight monetary policy is the main obstacle to consumer spending. Dvorak added that households continue to convert liquid savings into fixed deposits to take advantage of high deposit interest rates. "Tight credit conditions also suppress demand for durable goods, which are the main culprits behind insufficient consumer spending, although there are signs that demand for durable goods is beginning to improve," he told the reporter. "Lower interest rates will gradually help, but we are seeing warning signs in the labor market. Corporate employment expectations have deteriorated, which may indicate an increase in layoffs. We now expect the unemployment rate to rise slightly in 2025, which will exacerbate the slowdown in real income growth and induce some precautionary savings."

Nevertheless, "we do not yet believe that spending will decrease completely. The rise in unemployment should be controlled and relatively short-lived. Real income will continue to grow, consumers' balance sheets are quite healthy, and the relaxation of interest rates will encourage households to reduce their savings rate. However, consumer growth will remain at 0.8% this year and 1.5% in 2025, which is not outstanding," he explained.

Reasons for the poor EU outlook

This time, the IMF also stated that Europe's poor outlook is related to factors such as low levels of business investment, too few cross-border activities, and productivity far below that of the United States. Taking the most significant gap in the technology sector as an example, "Europe's technology productivity has almost stagnated since 2005. Meanwhile, the United States' productivity has increased by nearly 40%." The IMF stated that the scale of Europe's venture capital industry is only one-fourth that of the United States, which is another reason for the "widespread lack of business vitality" in Europe.The IMF also stated that in Europe, the proportion of new companies established for no more than five years is "only about half of that in the United States." The organization supports the report published by the former President of the European Central Bank, Mario Draghi, in September, which argues that the European Union must increase investment, enhance competitiveness, and calls for more measures to integrate the region's economy.

The IMF stated: "For Europe to fully realize its growth potential, it needs a larger and more integrated single market, especially for goods, services, and capital markets."

Kammer acknowledged the difficulty of achieving greater integration, "We know... the solutions," but he added, "national interests and vested interests hinder progress."

Recently, in an effort to revitalize the EU's capital markets, there is a hopeful idea within the EU to transform the European Securities and Markets Authority (ESMA) into a model similar to the U.S. Securities and Exchange Commission (SEC). Draghi's report suggests that "ESMA should evolve from an institution coordinating national regulatory bodies into a single common supervisory authority for all EU securities markets," granting it the power to regulate large multinational issuers and cross-border financial markets.

However, some smaller EU countries, such as Luxembourg and Ireland, oppose this idea, fearing it could undermine their thriving domestic financial industries.

Recently, the EU has once again proposed a plan to establish a "European Capital Markets Union" within the next five years. The EU hopes to connect its 27 different markets, which would greatly assist European companies in financing.

Zhao Yongsheng, a researcher at the National Institute of International Trade and Economics at the University of International Business and Economics and a doctoral supervisor at the Sorbonne University in Paris, told Yicai Global that this move is "inevitable." The United States practices a "market-based" (i.e., stock market and venture capital-focused) financial model, while Europe practices a "bank-based" (i.e., large bank-led financial consortium) model. Overall, the vitality of American companies is indeed greater than that of European companies, but currently facing multiple competitions, the EU must strive for reform to not fall behind.

The current issue with the EU is that compared to the United States, its capital market is too small, and many startups cannot raise funds in the European market. The EU faces new demands and challenges in terms of capital and financial integration. "For example, when facing the demand for large capital in the digital economy and artificial intelligence industries, the EU market cannot meet these needs. This forces EU regulation to adjust according to industry demands," he told the reporter.