How to revitalise Europe’s economy

Italy has not been renowned for its dynamism since the 1960s, when its economy roared ahead like a new Ferrari.

Yet it is to eminent Italian economists and politicians that the EU has repeatedly turned for advice on how to boost European growth, which has long been as sputtering as an old Fiat.

First came Mario Monti’s 2010 report on making the most of Europe’s single market, followed by Enrico Letta’s similarly themed 2024 opus. Soon after came Mario Draghi’s blockbuster on boosting European “competitiveness”.

Fast forward to 2026 and few of the three wise men’s recommendations have been implemented. Indeed, on 12 February EU leaders gathered at Alden Biesen castle, an hour’s drive east of Brussels, for yet another discussion on how to get Europe’s economy out of first gear, with a view to stepping on the accelerator at their European Council meeting in March.

The stakes are huge. Prolonged economic malaise is not just miserable. It is also fomenting political populism and exacerbating Europe’s geopolitical weakness. Anger and frustration at the cost-of-living crisis is bolstering far-right nationalist parties. And a lack of growth hampers funding the huge increases in defence spending that the continent urgently needs.

So, while it is welcome that EU leaders are focusing on the need for economic reform, less talk is needed and more action. What to do, though?

Dynamism, not competitiveness

Start with a critical conceptual point. Economic reform should aim to boost productivity, not competitiveness. Europe’s exports can compete in global markets – the EU had a hefty trade surplus last year. It’s problem is that its economy is not dynamic enough.

Higher productivity growth – in effect, making more output with fewer inputs – is essential to sustainably raise Europeans’ living standards. Yet since 2000 real productivity per hour worked across the EU has grown by less than 1% a year. Worse, since 2020 it has stagnated.

Why has productivity growth lagged, not just compared to Europe’s past, but also to the present US?

Part of the story is that Europe has been hit by huge external shocks in recent years: soaring energy prices since Russia’s full-scale invasion of Ukraine, higher US tariffs and increased Chinese competition. Industrial energy prices are still two-thirds higher than five years ago. Exports to the US were 15% lower in the final quarter of 2025 than a year earlier.

The euro is up 15% against the US currency since last year and up 8% against China’s. Add China’s massive industrial overcapacity and technological superiority in electric cars, solar panels and other clean technologies, and no wonder European manufacturing is struggling.

Related News

But Europe’s productivity morass is largely due to longstanding structural problems that those shocks have compounded. Already in 2000, the Lisbon Agenda aimed to make the EU “the most competitive and dynamic knowledge-based economy in the world” – by 2010.

Europe’s core problem is that it has a corporatist economic model that favours big established companies which congregate in slower-growing sectors such as cars and chemicals – and ossifies the structure of the economy.

But especially at a time of rapid technological change like now, what Europe desperately needs is a dynamic economy that frees faster-growing, innovative, challenger companies to grow, notably in tech.

Three growth levers

A whole host of reforms are needed. But at EU level three big levers could help: deeper integration, better regulation and increased investment.

Consider integration first. The EU single market is an amazing achievement – not least in public relations. In principle, it stitches 27 national markets into a seamless union of 450 million people.

But in practice, it is “single” in name only. To a large extent, national economies remain subscale local fiefdoms. Most taxes, many regulations and most finance remain resolutely local. While product standards for goods have largely been harmonised, many professional qualifications are still not mutually recognised across countries.

Even services that are essential for trading goods, such as trucking, operate under different rules in France and Belgium, as European Commission President Ursula von der Leyen recently observed. Meanwhile, Europe’s “single” electricity market lacks interconnectors between national grids, to the delight of domestic utility companies and to everyone else’s dismay.

Worse, the single market is becoming more fragmented, as the share of services in the economy swells, and because the Commission enforces existing rules less vigorously.

None of this is new: read the Monti report. But the latest wheeze is to propose a 28^th corporate regime that would purportedly allow a business incorporated at EU level to trade freely throughout the Union.

On paper it looks great – so much so that it is portrayed as a panacea. But in itself it would not harmonise disparate national tax, regulatory and funding systems.

Inescapably, meaningful progress in completing the single market and enforcing existing rules requires confronting vested interests.

Regulation and investment

EU regulation often entrenches established companies too. As Draghi observes, the EU enacted some 13,000 pieces of legislation during von der Leyen’s first five-year term. For large companies with armies of lawyers, complying with all this red tape is a hassle; for smaller start-ups it is a huge handicap.

The EU also has a tendency to over-regulate emerging technologies – such as artificial intelligence (AI) – before they have developed. This stifles innovation, to the benefit of existing firms – in this case, perversely, mostly American ones.

A lighter regulatory touch, especially for smaller companies and innovative sectors, is needed.

The third issue is investment. While Europeans start lots of businesses, they often fail to scale them up. The problem is not just an incomplete single market and regulations that favour incumbents. It is a lack of investment. Venture-capital (VC) funding for startups in the US is nearly three times higher than in the EU.

Europe does not lack funds: it saves more than the US does. But Europeans invest their savings more conservatively, in bank accounts and bonds – or in US shares. EU pension funds allocate just 0.01% of their assets to European VC.

Creating a single market for savings and investment would help. But more immediately, domestic savings need to be channelled more productively.