Can slow growth Europe become a turnaround story? And by “turnaround story” I mean grow at GDP rates that Americans would see as signs of national decline. Say, two to three percent a year. McKinsey thinks so if the region gets much-better supply-side policy:
If Europe pushes forward on reform, it could sustain GDP growth that is well above current forecasts. The European Commission forecast 1.5 percent annual GDP growth to 2025 at the time of writing. By way of contrast, in a scenario in which all countries were to close the gap with the region’s top-quartile performers on productivity and mobilising the labour force, the growth rate could be 2.1 percent a year—or more if Europe adopts the kind of growth-enhancing reforms we discuss in this report.
The below chart show 11 keys areas which are ripe for reform:
Many of the McKinsey ideas require “more Europe” not less, meaning greater economic integration. Here are the suggestions for creating more entrepreneurship:
Europe is home to some of the most innovative countries and companies in the world but spends only 2 percent of GDP on research and development (R&D), just ahead of China, at 1.9 percent. In particular, Europe’s private-sector R&D spending—at just 1.3 percent of GDP—lags behind that of South Korea (2.7 percent), Japan (2.6 percent), the United States (1.8 percent), and other countries. Analysing company-level R&D spending, we find that Europe’s gap is concentrated solely in electronics, software, and Internet services.
One of the more tangible ways Europe can encourage innovation is by using government procurement. This approach has a successful track record. One example is the way procurement by the US Department of Defense spurred the development of semiconductors. European governments spend more than 5 percent of GDP on procurement, compared with only 0.7 percent on public R&D and 0.1 percent on subsidies for private-sector R&D.
Governments could also deepen the Single Market, set Europe-wide standards and regulations for transformational technologies such as autonomous vehicles and open data, unblock barriers to entrepreneurship, and accept “creative disruption”. Additionally, governments could support large-scale step-up of public co-financing of risk capital for new ventures, as France is attempting to do. This could help close the innovation gap with the United States, whose tech companies have dominated many of the coming disruptive technologies and explain the entire R&D spending gap between Europe and the United States.
Will those ideas really create a more dynamic startup culture? How do you get both society and government to “accept creative destruction”? Sounds like a tall order, especially if you are depending on top-down initiatives to counter deep cultural attitudes and norms. Tough to reproduce America’s deep magic. Just consider where Europe is starting from in terms of creating unicorns, or billion-dollar technology startups (via the FT):
According to the data compiled by GP Bullhound, the British investment bank, the region has produced about a three tech companies every year since 2000 that have either been sold, floated on the stock exchange or been valued by investors at $1bn or more. … The study shows the cumulative value of all European unicorns created since 2000 is around $120bn. By comparison, Facebook currently has a market capitalisation of $275bn, while Uber has achieved a valuation of $40bn from investors while remaining a private company.
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