60 years after Rome: how is the EU really doing?


Picture of Jacques Bughin
Jacques Bughin

Senior Partner at McKinsey & Company and Director at the McKinsey Global Institute (MGI)

This is no time for Europe to rest on its laurels

Jacques Bughin is a McKinsey senior partner based in Brussels and a director of the McKinsey Global Institute (MGI), which has just published ‘Rome redux: New priorities for the European Union at 60’.

This month marks the 60th anniversary of the signing of the Treaty of Rome, and much of the coverage is likely to focus on the travails of the past decade, including economic stagnation, political malaise and non-stop crisis management culminating in Brexit.

But viewed over all six decades, how has the European Union as a whole and its member states fared? To mark the anniversary, McKinsey Global Institute took stock of economic achievements and challenges in a paper entitled Rome redux: New priorities for the European Union at 60.

Looking back at European Union’s history, we note five key highlights:

1. Economic growth: on a par with the US, especially for early members
Overall, the EU’s GDP per capita followed more or less the same growth trajectory as that of the United States, until recently. Growth was especially buoyant from the signing of the Treaty of Rome until the early 1980s, then underperformed in the late 1980s and 1990s, but picked up again relative to the US until the 2007‒08 financial crisis.

However, the sovereign debt crisis in 2012‒13 threw Europe into a double-dip recession that the US managed to avoid. In 2007‒2016, the EU’s GDP per capita grew at half the rate of the US, at 0.3% compared with 0.6%.

It is interesting to look at how the growth of GDP per capita correlates with the accession date of an EU member state. The original six signatories of the Treaty of Rome ‒ have done the best by far, with a sense that the later a country enters, the lower its momentum.

2. Social progress: the EU’s DNA
The EU’s economic activity, as measured by GDP per capita, remains lower than that of the US. At the current growth level, it would take more than ten years to catch up to the current US level.

One often-heard argument is that economic activity is a very crude measure of our welfare – the area in which the EU may indeed be scoring better than the US.

If one corrects economic activity by various indicators of welfare, as per the methodology of two renowned Stanford economists, Charles I. Jones and Peter J. Klenow, we find that the gap with the US is cut in half. Also, as the welfare growth rate is one point higher than the GDP growth rate, the welfare-adjusted gap to the US is more manageable: barely five years.

The EU has certainly been a powerful engine for social progress over the decades: gender equality is among the highest in the world and the EU scores highly across a range of social indicators, from the quality of healthcare to environmental protection.

Within this overall picture there is considerable variation among countries, as Nordic and continental European countries tend to perform better than their southern and eastern European counterparts.

3. Financial markets: EU wins gold
This may come as a surprise, especially given that the US has the largest and most liquid capital markets in the world. Western European bonds have posted higher total inflation-adjusted returns in the past half-century than US bonds (4.4% versus 2.5%), while the return on western European and US stocks has been similar, at around 5.7%.

4. Labour productivity: a fading victory
Europe’s labour productivity grew strongly from the 1950s to the 1970s, catching up and overtaking labour productivity in the United States.

The initial Treaty of Rome countries overtook the US in the late 1970s. By the early 1990s, the entire EU, then comprising 15 countries, was ahead. The trend subsequently turned when US productivity (particularly in services) accelerated from the late 1990s, leaving Europe behind. Since the 2007‒08 financial crisis, productivity growth has been similarly weak on both sides of the Atlantic.

5. Employment: more inclusive than thought
While political and popular attention has been focused on unemployment, which remains much higher overall in the EU than in the US, the employment rate ‒ the proportion of the working-age population that is employed ‒ tells a different story.

EU employment increased steadily from the early 1990s until the financial crisis, as female and senior participation rose. During the crisis, the US employment rate fell more sharply than in the EU, narrowing the gap even further to just three percentage points. However, there are big differences among the EU member states.

But where do we go from here?

While the EU’s 60-year record is impressive in parts, the last ten years have nevertheless been marked by weak performance. The EU will have to deal with disruptive global forces that will impact growth in the years ahead.

These forces include ageing, digitalisation and automation, as well as tough new competition from emerging economies. Our research has shown that Europe could boost GDP by two or three percent annually through a combination of national structural reform and pan-European investment.

However proud of its past achievements, this is no time for Europe to rest on its laurels

For the future, the EU’s scale will be an asset, but the single market remains unfinished business in many areas, including energy, capital markets ‒ and especially digital.

On the latter, many markers point towards Europe trailing and being more and more challenged.

For example, most countries in the EU have a negative balance in digital goods and services with the US; the UK, the most digitised economy, has voted to leave the EU; the most vibrant city in continental Europe for artificial intelligence might be Zürich, in non-EU member Switzerland. Europe is also slowly losing ground in the global networks of data flows, with the centre of gravity shifting rather fast to the East and Asia.

The European Union will need to innovate as it adapts to the changing world of work: the technological advances reshaping the workplace will require a major overhaul of education systems to place greater emphasis on literacy, numeracy, and problem-solving skills.

The EU must also look for ways to better serve its citizens. New governance and accountability are needed. More citizen engagement and direct democratic interaction can be achieved by leveraging technology. For example, digital platforms can give ordinary citizens a voice and can be used to crowdsource solutions.

“Past performance is not necessarily indicative of future results,” reads the standard disclaimer that money managers and mutual funds routinely put in their communications. For the EU on its 60th birthday, that caution also holds true.

However proud of its past achievements, this is no time for Europe to rest on its laurels.

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