Europe’s Economic Crossroads: A Call for Bold Reform

Amidst global instability, Europe faces a critical juncture. Goldman Sachs’ leadership sees nascent optimism, but warns that unlocking the continent’s economic potential demands decisive action and a unified vision for the future.

Optimism Amidst Challenges

Conversations with CEOs at the start of the year revealed deep pessimism regarding Europe. However, that negative sentiment has notably shifted, according to the observations of David Solomon. As the Board of Directors convenes in Paris, the emerging optimism provides a crucial opportunity.

European nations are making considerable strides towards a more cohesive defense policy. Moreover, the continent would profit from stronger economic and financial integration, especially through streamlined cross-border operations and leveraging an integrated capital market and banking union.

Solomon highlights encouraging signs that Europe can advance, emphasizing the EU’s leaders’ recognition of greater autonomy in defense and security as a strategic and economic necessity.

Areas for Improvement

Europe possesses significant strengths. Individual countries’ reforms have improved tax regimes to attract talent, even though international investors would prefer quicker action. Furthermore, Europe remains one of the world’s wealthiest and most extensive economies.

Goldman Sachs’s experience illustrates this. The firm has significantly expanded its European operations over the last few years, from Warsaw to Frankfurt, and Milan to The Hague. In Paris, they opened a new office to accommodate their growing footprint, with nearly 500 positions. This expansion was possible due to a positive reform agenda in France.

Europe benefits from a deep talent pool. Its educational institutions, particularly for business and engineering, are globally competitive. The EU produces nearly as many STEM graduates per capita as the U.S., according to Christine Lagarde, President of the ECB, and Ursula von der Leyen, President of the European Commission.

Key Reforms Proposed

Solomon suggests five key reforms for Europe’s economic advancement.

First, Europe must address the regulatory burdens on businesses. Solomon notes that Europe’s obligations on firms are often excessive, duplicative, and costly. Mario Draghi stated that the internal barriers and regulatory hurdles in Europe are equivalent to a tariff of 110% for services and 45% for manufacturing.

Policymakers in the EU are encouraged to examine the regulatory infrastructure that has expanded in Brussels. Reducing inefficient structures and processes will signal the EU’s focus on efficiency, results, and economic growth.

Second, member states should build the long-term capital needed to channel financing into public and private markets. Essential steps include plugging gaps in auto-enrollment, consolidating pension schemes, and offering incentives for retail participation in capital markets.

A strong capital market, supported by both institutional and retail investors, is a prerequisite for a Europe-wide ‘Savings & Investments Union.’ Europe is building on strong foundations in this respect, with an internationally regarded equity market structure that has weathered recent volatility effectively.

Third, Europe’s venture and growth capital ecosystem needs special attention. This means allowing pension funds and insurers to engage more with early-stage investments, alongside public funding to “de-risk” potential projects. The U.S. has a significant advantage in early-stage risk capital.

Europe must provide greater support for small businesses engaging with investors and simplify the cross-border regulatory regime they face.

Fourth, the EU must commit to its decade-old pledge of creating a unified capital market. Integration moves will allow companies to diversify funding, facilitate cross-border investment, and encourage the risk-taking necessary for innovation.

Finally, how does Europe work collectively when a few countries veto reform to protect their interests? The focus on national interests over EU-wide interests hinders the economic, financial, diplomatic, and military power of the region.

Looking Ahead

Solomon concludes that the time for tangible change is now. Europe’s independence, nurturing innovative firms, and offering citizens the chance to benefit through a true investment union are major prizes. The European Commission aims to reduce reporting burdens on businesses by 25%, an ambitious goal that needs a new and detailed approach.

The EU has the potential to boost its economic growth. The latest figures show that the European Union’s GDP growth is expected to be 0.8% in 2024, a slight increase from 0.6% in 2023 (European Commission, May 2024).

The hope is that Europe will succeed. A self-reliant and dynamic Europe will benefit everyone in a fragmented and volatile world.