Economic Growth

Europe at Davos 2025: how the region can spur growth without higher taxes and heavier debt

Former European Central Bank chief Mario Draghi presents his report on the future of European competitiveness to the European Parliament in Strasbourg, France September 17, 2024. REUTERS/Johanna Geron

Draghi delivers some sobering news to the European Parliament about the region's future competitiveness. Image: REUTERS/Johanna Geron

Marushia Gislén
Community Lead, Europe and Eurasia, World Economic Forum
Andrew Caruana Galizia
Head of Europe and Eurasia, World Economic Forum
This article is part of: World Economic Forum Annual Meeting
  • Europe is beset by economic malaise at a time when it must invest heavily in its future.
  • The region doesn’t have to rely on onerous taxes or ballooning debt to fund the growth it needs.
  • There are four clear ways to spark domestic innovation, tackle the climate challenge, and deliver greater prosperity.

Two years on from the one-two punch of the energy-price crisis and the enactment of the US’s inwardly focused Inflation Reduction Act, the European economy is still reeling.

Growth in EU economic output stood below 1% in 2024, while public debt remains high – and increasingly expensive to service. The timing of this malaise could scarcely be worse; Mario Draghi, the former president of the European Central Bank, recently calculated that the continent needs 800 billion euros a year in additional investment, which excludes new demands from across the Atlantic to ramp up defence spending from 2% of GDP, already out of reach for several European economies, to 5%.

Government debt in Europe has become more expensive to service.
Government debt in Europe has become more expensive to service. Image: ECB

The good news is that Europe’s policymakers are not faced with a Hobson's choice between relative economic decline, or higher public spending through politically unsustainable tax hikes and debt loads. There is another path, which is to pursue several long-overdue measures that require no additional public money – merely political courage. There are four broad areas where action can be taken.

1. Marrying climate action and growth through cheap, green energy

The International Energy Agency finds energy prices for European industry are nearly double those in the US and China, even after falling from their peak in 2022. Without low-cost and reliable clean energy infrastructure, European industry will remain at a structural disadvantage. Europe has a single market for trade in goods, but the energy market remains firmly entrenched in national priorities and legislation. Completing this unfinished pillar of the European single market could see Europe begin to close its energy cost-gap with other regions. Tackling regulatory fragmentation, including on taxation, with the ultimate goal of delivering cheaper electricity for consumers and producers, would further incentivize the development and uptake of new technologies – helping the region become a market leader in the industries of tomorrow. But cheap, green energy is only one of the ways policymakers can help European industry without diluting climate ambition.

Delivering on the European Green Deal, a new World Economic Forum report produced in collaboration with Accenture, found that the biggest obstacle to the European private sector’s decarbonization is not the cost involved, nor over-regulation, but the fragmented nature of Europe’s regulatory environment – in other words, complexity. Reducing that complexity through further harmonization of rules across EU economies, as opposed to taking a scythe to the European Green Deal, could help European companies reduce emissions with less effort. This is important; the adoption of net-zero commitments is twice as high in Europe as it is in other regions, but only about a fifth of European companies are on track to achieve net zero by 2050.

2. Uniting Europe’s capital markets

One of the most striking data points in the Draghi report is that between 2009 and 2023, despite saving significantly less than eurozone households, net household wealth in the US grew roughly three times more than in the eurozone. The report attributes this to the EU's fragmented capital markets. The US benefits from more integrated and efficient capital markets, which help yield dramatically better returns on invested household savings. This disparity shows the true cost to individual European households of Europe’s inability to create a Capital Markets Union (recently rechristened by former Italian Prime Minister Enrico Letta as the Savings and Investments Union).

Fragmented capital markets and banking systems impact the ability of the public and private sectors to raise the funds needed to meet the moment. While the economic case for capital market integration is clear, much of the power to correct course resides in national capitals, which tend to fear that the benefits of integration will not be equally distributed, or that a European-level capital markets supervisor will not be as nimble or accessible as a national supervisor. Finding ways to overcome these political obstacles will deliver generational financial returns without the need for new public money.

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3. Closing the tech gap

A recently published World Economic Forum report based on McKinsey research, Europe in the Intelligent Age: From Ideas to Action, priced the benefit of closing Europe’s technology gap with the US at between 2 trillion and 4 trillion euros annually – more than Europe's combined spending on healthcare, defence, and net-zero initiatives.

This research provides a detailed assessment of where Europe stands, and how it can advance in 14 technology domains – prioritizing 10 large public sector “grand projets” to transform the EU investment environment. The proposed initiatives range from establishing a greenfield, EU-wide regulatory framework for tech startups, to developing a time-bound EU digital permitting system, and positioning the public sector as an anchor customer for advanced technology.

Rapid technological advancements offer Europe an unprecedented opportunity. Developing and deploying emerging technologies at speed and scale, without additional demands on the public purse, promises to reignite Europe's potential to deliver prosperity for its citizens in the decades to come.

4. Making external action work for the European economy

With trade in goods and services equivalent to 22.4% of its GDP in 2023, Europe has long been seen as a major beneficiary and champion of free trade – and of the rules-based global economic order that underpins it. At the same time, Europe’s reliance on imported inputs for key industrial sectors, from critical raw materials to batteries and active ingredients in pharmaceuticals, poses new challenges in a context of fierce geopolitical competition.

In partnership with the European Council on Foreign Relations, the World Economic Forum convened a high-level group of European policymakers, thinkers and business leaders over the course of last year that resulted in the new report Europe's Path to Strategic Interdependence. It makes the case for Europe to strike the right balance between open interdependence – a strategy perfectly adapted to a world that no longer exists – and the siren call of strategic autonomy. It makes proposals for Europe to develop an effective foreign economic policy that supports both its own technological and energy transformation needs, as well as those of its key partners.

What’s Next?

Over 100 European political leaders are set to participate in the World Economic Forum’s Annual Meeting in Davos this week, together with hundreds of European CEOs and thought leaders. The several Europe-focused sessions they will engage in will be anchored in an ambition to unlock the productivity needed to strengthen European competitiveness with green growth, capital market integration, tech competitiveness, and strategic interdependence.

In spring 2025, the World Economic Forum will launch launch a leaders community that is focused on European growth and competitiveness, building on the roundtables taking place this week in Davos. The community will steer the action of four leadership groups supporting the implementation of competitiveness-enhancing reforms in the priority areas set out above. This initiative aims to empower policymakers from both the public and private sectors to confront challenges head-on, and seize the opportunities at hand for Europe to lead in a rapidly evolving global landscape.

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