In North American tech circles, there's a lot of talk about how Europe struggles to stay competitive. I've thrown in my fair share of critiques, but it's worth noting that some European policy choices—whether unintended or part of a trade-off—have made it tougher for growth companies to thrive there. This has played a role in Europe's slower economic growth compared to the U.S. Back in 2011, the 27 EU countries made up about 21.4% of the world's output, almost neck and neck with the U.S. at 21.1%. Fast forward to last year, and the U.S. has jumped to 25.8%, while the EU has slipped to 17.6%.
Just recently, the European Commission put out a report by Mario Draghi that digs into the EU's competitive position and offers some ideas on how to boost it. What's interesting is how practical the report is—it starts the energy discussion with natural gas and leaves the long-term renewable plans for later. It really sheds light on where Europe stands in terms of competitiveness and how it might step up its game.
To understand how we got here, let's take a quick look at some long-term policy decisions made by the EU and other countries:
First off, wealthier countries outside the U.S. often choose more leisure time as their GDP grows. That means shorter work hours, longer vacations, and earlier retirements. The U.S. is kind of an outlier here. For instance, the difference in GDP per capita growth between Japan and the U.S. can be entirely chalked up to work hours and labor participation. Both countries saw their output per hour grow at about 1.7% annually, but the U.S. has a younger workforce and works longer hours. So, moving toward shorter workdays and earlier retirement might dent GDP per capita, even if people end up enjoying life more.
But when things settle, these two factors play out differently. Working fewer hours cuts down output and probably slows growth, partly because getting better at something often comes from putting in the hours. If you work 10% more, you're practicing 10% more, which helps you get better faster and gives you more time to mentor others. On the flip side, retiring earlier has mixed effects. If people retire at 60 instead of 65, they'll consume less each year—they save more while working and spend less during retirement because their spending habits are already set. The extra output doesn't just vanish; it's saved instead. Over their careers, they'll save more, and their retirement savings will be bigger and last longer. If there are good investment opportunities, earlier retirement could actually boost growth since more output gets invested rather than spent. Over time, you'd see an economy that's more focused on capital than labor, which is something we see in some of the world's most productive economies.
Another issue, especially in Europe, is trying to make the labor market stable at the individual level rather than overall. It makes sense to protect workers from being easily fired—a company losing one person out of 500 isn't a big deal for them, but for that worker, it can be tough. Same goes for landlords raising rents; they can handle an empty unit better than a tenant can handle losing their home. But when laws make it hard to fire people or raise rents, it effectively becomes a tax on offering jobs or housing, and there's not always a subsidy to balance that out. In the U.S., we've more or less accepted these kinds of market frictions.
This ties into another problem: while U.S. immigration policies can be messy, our growth industries are great at hiring highly educated immigrants. Companies like Stripe and Tesla are now worth more than half of the total market value of their founders' home countries. This means a lot of talent that could've built up local companies is instead boosting U.S.-based multinationals, which might not have much to do with their countries of origin.
At the same time, European tech protectionism often looks like punishing successful foreign companies after the fact rather than helping local ones grow from the start. Even rules that seem neutral, like GDPR, end up hitting global companies harder—fines based on global revenue are like an extra tax on companies doing business worldwide compared to those operating locally. Draghi's report gently critiques this, saying things like "while the ambitions of the EU’s GDPR and AI Act are commendable..." The report subtly contrasts this with China's strategy of supporting local companies while making it tough for foreign ones, especially in key areas. China might not lead in extracting certain minerals, but they control over 50% of the processing for cobalt, lithium, and rare earth metals, and they handle all the graphite processing.
One of the report's sharpest insights is how the U.S. has pulled ahead partly due to handling volatility in energy and crucial technologies. Back in the early 2000s, the U.S. was vulnerable to swings in energy prices and global politics. When things got shaky—like with China's rapid growth pushing up commodity prices—U.S. consumers felt the squeeze. This was somewhat balanced by rising asset values, especially in real estate, and financial tools that turned housing gains into spending power. It wasn't sustainable, but fracking turned things around by boosting domestic energy production.
Not many countries benefit from global instability, but as a net oil producer and the world's top military power, the U.S. is better positioned to handle it. Investors looking for good returns with less risk find the U.S. more attractive now than it was 15 years ago, even if the fundamentals haven't changed drastically.
Volatility matters, but so do actual levels. It's costlier to transport natural gas as LNG than through pipelines. Europe was okay with this when Russian gas was plentiful, but that's changed. Now, European gas prices are three to five times higher than in the U.S. Europe has energy-heavy industries like steel, cement, and chemicals, and it also imposes higher carbon taxes. While that's great for the environment, it means they're paying more to essentially shift emissions elsewhere.
The report offers some solutions. Like many in the U.S., they want to speed up the permitting process for renewables and electricity transmission projects. They also suggest easing up on environmental rules that slow down renewable energy projects. One bold idea is to use Ukraine's natural gas storage to build bigger reserves, which could help buffer price swings. They mention providing "counter-guarantees to de-risk gas storage in Ukraine," though it's not entirely clear what that entails. Another suggestion is to form an Organization of Natural Gas Importing Countries so the EU can collectively negotiate long-term gas prices. While this might prevent countries from outbidding each other, it doesn't eliminate price volatility, and long-term contracts usually follow market rates. The EU could buy LNG at variable prices and offer fixed-price contracts to domestic firms, funding the difference with EU-wide bonds—a method they used during the pandemic. This wouldn't make energy cheaper overall, and could even raise costs by shielding users from volatility. But it would spread the impact across the EU economy instead of hitting specific sectors hard, which might help keep important industries afloat.
Surprisingly, the report puts a spotlight on telecommunications. It's unexpected because telecoms don't seem like a huge driver of long-term growth. Sure, we use more bandwidth as we get richer, and smart devices need more data, but the way the report analyzes the telecom sector is intriguing. It feels like a global investor pointing out that Europe could get a great return by reshaping its telecom industry. There's even a chart showing that the industry's return on capital has been below its cost of capital for the past decade, meaning it's been losing investor money, and it's getting worse.
The issue comes down to policy choices. The EU promotes competition in telecoms, leading to many small companies, especially in smaller countries. This keeps prices low for consumers but also means less investment, so Europe ends up offering decent service at good prices but falls behind in innovation. If there's a limit to how much economic benefit you get from more bandwidth, then this policy makes sense. But it also means betting against future advancements. Interestingly, this report didn't really move the stock prices of small European telecom companies, even though there are too many of them. Collectively, European telecoms valued under $5 billion trade at about 6.2 times EBITDA, lower than any big U.S. carriers, with many at even lower multiples. I'll dive deeper into potential opportunities here later this week.
It's a bit of a Kalecki-style argument: business returns can be limited by access to resources and comparative advantages, but profits are also shaped by policy choices. If Europe wants a denser telecom network, it needs to make sure the telecom sector isn't where money goes to waste, which might mean shifting some costs from households to companies.
Out of all the proposals, easing up on M&A restrictions in the telecom sector seems the easiest to tackle. Draghi's suggestions are practical: if the EU is one market, then competition among mobile carriers should be considered across the EU, so it's okay for smaller countries to have fewer providers. If mergers end up hurting competition, regulators can step in after the fact rather than blocking them upfront. Even if a merger means fewer choices for consumers, it could lead to better infrastructure and more R&D, giving people fewer but better options.
The report also highlights some success stories, like the space industry, where European companies are doing well, and defense, where the issue has been more about demand—Europe makes weapons but exports almost 40% of them. Pharma is another area where European companies compete globally, though there's room to grow.
In the end, it's hard to say if these recommendations will be put into action. Defense is gaining traction now, and space has long-term drivers, but both need time. Energy costs are a big concern, but practical solutions that involve a gradual shift from fossil fuels aren't as exciting as going all-in on renewables, even if a fully renewable grid is a long and pricey road. The telecom M&A idea seems the most likely to see quick movement since regulators just need to signal they're okay with major telecom companies consolidating the market. While this wouldn't revolutionize the EU economy, it would show that Draghi's report is being taken seriously.
Mario Draghi has a lot of political clout—he's often called "the man who saved the Euro." At 77, he probably won't be in government much longer, so lending his name to this report is a way to use his influence while he can, similar to how the Volcker Rule outlived its namesake's tenure.
Every country aiming for economic growth has to figure out how to handle the bumps along the way. Reading this report, it seems like the EU has been acting as if those bumps don't exist: relying on Russia for gas, assuming Chinese electric cars won't compete with European ones, and thinking that occasional fines can address the dominance of American tech giants. In the U.S., the federal government and the wealth of the super-rich often absorb these shocks—they have deep pockets and usually take bigger hits during recessions or industry shake-ups. This report is a call for the EU to acknowledge that volatility and uncertainty are real but shouldn't be reasons to stand still.
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