EU aspirations require 2.2 trillion investment & reforms

The strong growth years in Europe have been disrupted by the recent economic crisis, yet it still remains one of the most progressive regions for many social benefits including health, work life balance and education. Yet going forward, healthy economic growth is no longer a security, and if the continent wants to realise a sustained GDP growth of 3%, a number of large reforms and investments are needed, says McKinsey & Company in a new report.

Even seven years after the economic crisis in Europe, the region is still blighted by lacklustre growth, poor youth employment figures and slow wage growth. Yet while recent years have not seen considerable improvement in economic indicators, the region as a whole remains one of the most prosperous places in the world to find oneself, with its high quality of life indicators, low poverty levels and generally good healthcare systems.

In a recent survey of 16,000 Europeans, McKinsey Global Institute, the research unit of McKinsey & Company, explores the direction that the average European would like to see for the continent, as well as ways in which those aspirations can be realised through economic policy and wider economic reforms.

Growth in Europe
According to McKinsey, the European region – with the current ecosystem benefits of a low oil price and QE – has the potential to achieve sustained economic growth of between 2% - 3% annually from its current baseline growth of 0% - 1% to 2025 with considerable structural reforms on both the national as well as the EU level. “Europe would then have an opportunity to unleash investment of €250 billion to €550 billion a year in innovation, education, infrastructure, and energy and, by closing its output gap and mobilising its workforce, create more than 20 million new jobs,” say the authors of the report.

As it stands, growth in Europe’s productivity and employment growth rates are relatively low compared to the CAGR of the past fifty years, with a projection from McKinsey highlighting that the future fifty years will see considerably slower growth rates. Of the four largest economies, productivity, employment growth and per capita GDP growth are all expected to be considerably lower, with especially Germany to see falls. The UK will see its level of GDP growth drop from an average 2.2% to an average 2.0%, while German is expect to see its average GDP drop from 2.2% to 1.0% over the coming 50 years. The large drop in Germany is down to the considerable drop in the working age demographic, a labour market ‘mismatch’ that last year was taken under scrutiny by a report from The Boston Consulting Group.

Current environment
Even while the future 50 years show decreasing levels of employment growth and lower GDP growth, Europeans continue to seek those environmental factors each and most people strive for with each other that makes the region such an attractive place to live. As a whole, the region is one of the most progressive in terms of social and economic values. Compared to the US, healthcare quality of Western European countries finds itself in the upper percentile, with the average across the whole region in line with the US. Education in the region lies considerably above that of the US, even at the average. The region is also considerably safer than the US and enjoys a massively improved work-life balance, with even the poorest regions of the continent enjoying better or the same balance as the US. On economic factors the US does better than the average for European countries, however, the cost of economic flexibility and other factors may well be those social factors that make Europe a good place to be for all its citizens – rather than those economically advantaged.

Aspirational benefits
While Europe continues to enjoy the shared benefits of its regional wealth, many of its citizens seek to see available benefits improve further. As part of the study, McKinsey & Company asked how they would like their future social and economic life to be. The respondents said they want additional investment in education, health care, public safety, and the living environment in the period to 2025, and, at the same time, want to increase their disposable income. To achieve this, the consultancy estimates that an additional €2.2 trillion in spending will be required, with 91% of surveyed respondents preferring this scenario.

To make the scenario practical, respondents said that they were willing to increase their working hours by an 1.8 per week per worker on average (0.5 hours to 2.7 hours depending on the country) – and more productively, as well as a willingness to accept some reallocation of resources away from social-protection programmes. Although the numbers varied considerably per country, with especially Spanish workers seeking to increase social protection, while Polish workers – already with some of the longest working hours in Europe – not as keen to work even longer for additional benefits.

Investment and productivity
To make the aspirations reality, the consultancy states that European countries will need to bring in various structural reforms – both on the national as well as European wide level. As it stands the current economic benefit from low oil prices, QE and the Euro are generating between 0.8% - 1.5% additional GDP over the base line 0% - 1% growth in the region. For the aspirations of surveyed Europeans to be met, an additional 1.5% GDP growth is required.

According to the analysis, a total growth profile of between 2% - 3% to 2025 can be achieved through a mix of further reforms, including productive infrastructure investment, nurturing ecosystems for innovation, reduced energy burden, competitive and integrated markets in services and digital, grey and female labour force participation and pro-growth immigration.

“If Europe undertakes reform on the supply side and boosts investment and job creation—moving beyond crisis management and establishing the vision, trust, and governance to act at speed and scale – 2% - 3% sustained GDP growth is possible”, conclude the authors.