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Europe must find its own way to raise living standards

Protesting farmers all over Europe, strikes of train drivers and airline personnel in many countries, a slow economic recovery from the energy shock in the wake of Russia’s war on Ukraine: the economic backdrop to the European Parliament elections is bleak.

For a diagnosis, economists revive an old trope, notably that Europe has a technology gap. In the 1980s, it was the pretext for leading OECD officials to ask for bringing down labour costs and to reregulate markets so as to create a more favourable business environment for investment and entrepreneurship. Labour costs were lowered and led to a marked fall in the labour income share in many OECD countries. The (slower) rise in labour productivity has become decoupled from productivity growth. In other words, the fact that an hour of work produces more output has not benefitted workers but those who own capital, directly as business owners or, more likely, indirectly as stock market investors and employees of financial institutions. A ‘disproportionate wage growth at the very top of the wage distribution’ has contributed to rising inequality of income and, even more extreme, of wealth.

A McKinsey report from 2022 on ‘Securing Europe’s Competitiveness’ speaks for many policy advisors when it upholds the United States as the shining example to follow. Its authors conclude that as ‘technology permeates all sectors and corporate scale advantages, and winner-take-most dynamics increase, Europe’s current approach is no longer tenable’. The same report shows that, on other and arguably more relevant metrics, Europe does much better than the United States. Europe does better on sustainable growth (for instance CO2 emission per capita or per unit of GDP), social inclusion (for instance, poverty rates and social mobility) and well-being (in its simplest form: life expectancy).

This suggests that European public policies should rather try to harness, and indeed upgrade, traditional strengths than try to become more like the United States, with its growth model of radical technological change that enriches above all rich investors. Amazon is frightfully productive as a digitalised service, brings goods fast, reliably and cheaply to consumers; but it treats workers like machines who don’t need a break regularly and a bathroom occasionally, its environmental footprint is vast and it promotes market concentration along supply chains.

The problem is that traditional ways of harnessing traditional strengths of European economies are not readily available anymore:

  • political parties can no longer rely on core constituencies and act as a transmission belt between them and the government;

  • trade unions have been weakened by the decline of main industries and the bargains they struck can therefore also no longer serve as a benchmark for other sectors;

  • the public sector in many countries is no longer setting a decent standard of pay and employment conditions but has outsourced the provision of public goods, where pressure on wages and intensity of work is relentless.

It may sound puzzling , but new ways of raising living standards equitably can start from the fact that Europe is the continent of welfare states. There is also a consensus across the political spectrum that robust safety nets are worth preserving. Welfare systems are different and can act as laboratories for old and new policy ideas. As unlikely as it seems, European Parliament elections can be a way of opening up voice channels and make missing voices heard, at least temporarily. The anti-austerity movements in Southern Europe were a case in point. The rise of far-right movements now ring alarm bells, not only in national capitals but also in Brussels. For the long term, non-governmental organisations, like the European Anti-Poverty Network, are needed to represent interests. They have always used - and been used by - the EU level as a voice channel for those who are drowned out by established organised interests in national arenas.

Research can tell us what the challenges and options to address them are. Welfare states have always provided social security in fast changing economies. In mature systems, there is a safety net for almost any contingency that can affect families adversely. But social risks evolve. Living in degraded, polluted environments is more a plight of poverty these days than hunger. Economic and social precariousness can affect entire territories. When better-off, mobile citizens leave, these territories become left-behind places in which residents have to accept any work for lack of decent work. Amazon warehouses are the symptoms of this malaise.

EU interventions tend to address regions, not individuals, notably through infrastructure projects and agricultural policy. This may be more appropriate for the challenge of reconciling the need for robust social policies with the need for a green transition. The rollout of a digital infrastructure can facilitate around-the-clock care services and technological innovation for a circular economy to serve farmers exposed to the uncertainties of climate change. It does not require radical technological change but incremental innovation and scaling up of already available technologies to make European economies and welfare states more robust.


Waltraud Schelkle is Joint Chair for European Public Policy at the Department for Political and Social Sciences and the Robert Schuman Centre for Advanced Studies. Schelkle’s research interests are, first of all, in the area of political economy of monetary integration, understood as a form of inter-state risk sharing.