Here’s how Europe’s policymakers should seize on their window of opportunity


Picture of Eric Labaye
Eric Labaye

Europe has been grappling with some formidable challenges, and there is still more to do to strengthen the eurozone, overcome debt burdens and cope with an ageing society. Shocking though it was when Pope Francis likened Europe to a “grandmother, no longer fertile and vibrant”, we see grounds for optimism.

Citizens may be more willing to accept economic reform than is commonly thought. Our colleagues at the McKinsey Global Institute (MGI) have surveyed 16,000 Europeans in eight countries and found high aspirations for healthcare, education, disposable income and infrastructure, with people willing to make tough trade-offs, including longer hours and reduced social protection. 91% of respondents said they would support changes to the status quo even if that meant making sacrifices.

European countries are already world leaders on the societal progress that citizens value. And at least one of the EU countries is a global leader on one or more dimensions of economic activity. Think of Germany’s export competitiveness, the United Kingdom’s world-beating position in e-commerce, France’s transport infrastructure, Portugal’s excellent record on bringing women into the workforce and Denmark’s energy efficiency.

MGI has identified 11 growth drivers that we believe can deliver sustained 2-3% growth over the next ten years while unleashing investment of between €250bn and €550bn every year and creating more than 20m new jobs

But the challenge is to turn Europe as a whole into a true “leading practice club” that is successful across the board. A strengthened European Semester could form the institutional nucleus for this, and MGI has identified 11 growth drivers that we believe can deliver sustained 2-3% growth over the next ten years while unleashing investment of between €250bn and €550bn every year and creating more than 20m new jobs. Three-quarters of these growth drivers can be achieved by EU national governments if they are able to replicate successes achieved elsewhere.

The reforms needed for these leading practices to be a reality require investment support and job creation in these times of weak demand. Some pundits have criticised the eurozone’s fiscal compact of 2012 that enforced budget discipline on member governments, and have instead called on Europe’s national governments to step up fiscal stimulus and move faster on quantitative easing. That’s in line with textbook economics, but those pundits have not always acknowledged that some version of the fiscal compact was an inevitable pre-condition for mutual fiscal support within the eurozone, and that quantitative easing (QE) has fewer, and different, transmission channels in Europe than in the United States.

There are some investment and job creation support options that might be more compatible with Europe’s institutional set-up than QE or extending deficits limits. Governments and European institutions could count public investments as assets that initially enter a balance sheet, and only count toward fiscal deficits as they depreciate over their lifecycle – just like private corporations do. If the government builds a bridge for €1bn, for instance, it should appear in government finances as a cost of €40mn p.a. over the 25-year lifetime of the bridge rather than as €1bn additional deficit at time of construction. This style of policy could avoid the bias against public investment during times of fiscal consolidation and thus unlock €140bn a year in extra investment. And the European Central Bank could issue vouchers directly to households (a form of helicopter money). Although risky and contentious in legal as well as political terms, this could have a much more direct impact on consumer spending as well as fewer of the undesirable consequences of QE. 

Thanks to today’s lower oil prices, the euro’s favourable exchange rate and the effects of QE, 2015 looks set to be a relatively strong growth year for Europe. It is therefore a window of opportunity in which ambitious reforms can be undertaken to get the continent onto a more competitive footing, and to stimulate investment and job creation. It’s time to seize the moment.

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