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Good afternoon,
Thank you, President Letta, for the kind invitation to speak at IE University—a university that embodies exactly what Europe needs more of: entrepreneurship, openness, and the ambition to scale ideas globally.
It is a pleasure to discuss Europe’s economic future with you—and especially alongside Enrico, whose work on the Single Market, including “Much More than a Market” and the “One Europe, One Market” initiative endorsed by European leaders recently, has helped re-center this debate at a critical moment.
A Simple Question
Let me begin with a simple question. If Europe were a company, how would investors assess it? They would see low unemployment. They would see inflation back at target. They would see strong institutions and social stability. But they might also ask: where is the growth engine? And this question goes to the heart of Europe’s economic challenge.
Europe Is Not “Sick” — But It Is Losing Momentum
Let me be clear: Europe is not sick.
Growth, while modest, has proven resilient despite repeated global shocks.
Take Spain. Spain has been one of Europe’s growth leaders in recent years, with strong job creation and a steady decline in unemployment. This progress demonstrates that meaningful dynamism is possible—even in a difficult global environment.
Europe’s economic and social model remains the envy of the world. European citizens benefit from strong safety nets, universal access to quality healthcare, vibrant cities, and a deep commitment to sustainability.
These achievements are not accidental. They are the product of decades of thoughtful policymaking and institutional strength.
But stability is not the same as dynamism. And here lies the uncomfortable truth: Europe’s relative economic weight in the global economy has been shrinking.
In 2010, the European Union’s economy was broadly comparable in size to that of the United States and significantly larger than China’s (Figure 1). Since then, the gap—especially in productivity—has widened [1].
European firms have been less innovative than global competitors. And this is not only about technology giants. Across sectors, productivity growth has lagged (Figure 2).
In short, Europe’s potential is gradually diminishing—just as pressures are intensifying.
The Pressures Are Mounting
There are three major pressures.
First, fiscal pressures.
Public spending demands are rising—on pensions, healthcare, and defense. By 2040, these pressures could amount to almost 5 percent of GDP. Sustaining Europe’s social model will require a stronger economic base.
Second, geopolitical fragmentation.
The global trading system is becoming less predictable. Nearly 20 percent of European imports are strategically important inputs (Figure 3 and 4). This leaves key sectors vulnerable to supply disruptions and subject Europe to the weaponization of trade.
Third, energy and strategic dependencies.
Since Russia’s invasion of Ukraine, energy costs have risen and price differences in electricity across Europe have widened. At the same time, global export restrictions on critical raw materials have increased sharply.
Europe’s economic model was designed for integration and openness. It is now operating in a world of fragmentation and uncertainty.
The question, therefore, is not whether Europe has strengths. The question is whether those strengths are sufficient for the world we are entering.
The Core Challenge: A Scale Deficit
So what is holding Europe back?
Europe does not have a talent deficit. It does not have a savings deficit. It does not lack ideas.
It has a scale deficit.
While Europe produces exceptional entrepreneurs and world-class research, too few firms grow large enough to compete globally from within Europe.
In the United States, firms scale up across a single market of 340 million people under one regulatory framework. In Europe, firms operate across 27 national regimes.
A European startup can succeed in Madrid. But scaling to Milan, Munich, or Warsaw often means navigating different licensing systems, insolvency rules, and administrative requirements.
In some cases, it is easier to expand to the United States than across Europe.
The data confirms this pattern. U.S. public-traded firms are larger and younger than their European counterparts (Figure 5). Mature U.S. firms employ eight times as many workers as young firms; in Europe, the ratio is closer to two. And this is scale at work.
Scale matters because scale supports investment in research and development.
Scale supports resilience.
And scale supports higher wages.
Without scale, innovation remains local. With scale, it becomes global.
The Answer: Completing the Single Market
So, what should Europe do?
This brings me to my central message:
The most powerful tool Europe has to raise productivity and strengthen economic resilience is already in its hands—the Single Market.
But it is unfinished.
Because Europe does not yet operate as one fully integrated market, firms remain smaller and less productive than they could be. Financial markets remain fragmented. Energy systems remain partially disconnected. Labor mobility remains constrained.
Completing the Single Market is not a technical adjustment. It is a growth strategy.
A fully integrated market would allow firms to operate at continental scale.
It would deepen banking and capital markets, enabling better risk sharing.
It would create more stable electricity prices through interconnected grids.
And it would allow workers to move more easily to where their skills are most productive.
In short: integration is Europe’s comparative advantage.
The challenge is to finish what was started.
How Much Is Left to Do?
So, how much is left to do?
Even today, the remaining direct and indirect costs of cross-border trade within the EU are equivalent to a tariff of around 44 percentage points for goods and 110 percentage points for services—two to three times higher than those among U.S. states [3].
Europe’s internal market is still far from frictionless.
What drives these costs?
First, high administrative burdens: multiple licensing requirements, duplicative approvals, complex labeling rules.
Second, fragmented capital markets: costly cross-border investment and limited venture capital for scaling firms.
Third, low labor mobility. Imagine you receive two job offers after graduation—one in Madrid, one in Munich. In theory, the Single Market guarantees free movement. In practice, you may face delays in recognition of qualifications, uncertainty about pension portability, housing shortages, and administrative complexity. These frictions feel personal. But they are also macroeconomic inefficiencies. By some estimates, moving across borders in Europe is around eight times more costly than comparable moves within the United States.
Finally, energy fragmentation. Insufficient interconnectors and regulatory differences prevent Europe from operating as a true energy union. Energy price dispersion has become a structural competitiveness issue.
All of this reduces scale. All of this reduces productivity.
READ MORE: https://www.imf.org/en/news/articles/2026/03/11/sp031026-ak-ie-university-madrid
