Europe’s economy: Three pathways to rebuilding trust and sustaining momentum

Europe has an opportunity to ensure that growth and well-being continue in the long term, and to strengthen trust in its institutions.

Europe is bouncing back after a “lost” decade. Business and citizen optimism has returned and eurozone GDP in 2017 expanded at its fastest pace since the 2008 financial crisis. This changing mood creates an opportunity for European political and business leaders to take the action needed to ensure that growth and well-being are sustained in the long term, and that trust in Europe’s institutions is strengthened.

Rebuilding trust is critical: even in a time of economic recovery, divergent forces linger, anti-globalization sentiment is gaining ground in a number of countries, and distrust of politicians and political institutions is rife. Business leaders, meanwhile, tell us that they favor “more Europe” but still worry about the fragility of the eurozone. Drawing on research by the McKinsey Global Institute, this briefing explores three pathways where Europe could take concrete action to begin restoring trust while sustaining economic momentum:

Restoring economic dynamism and investment for inclusive growth
Capturing the benefits of globalization while addressing the backlash against trade and migration
Embracing automation and AI to drive long-term competitiveness, while addressing challenges from the future of work
Rebuilding trust through tangible improvements on areas of citizen concern—and more

1. Restoring economic dynamism and investment for inclusive growth

A decade after the global financial crisis, the European economy is gathering momentum, but uncertainty is holding back investment and confidence in economic advancement remains elusive for many.

For much of the past 60 years, the EU followed a similar growth trajectory to the United States, and the gap between the United States and the EU is narrower for various indicators of welfare than it is for GDP. Gender equality in society in the EU is the highest in the world, although it can further improve in the workplace, and the EU as a whole scores strongly across a range of social indicators, from the quality of healthcare and education, to environmental protection, public safety, social protection, and work-life balance. Its trajectory diverged from that of the United States when GDP growth in the EU fell back in a double-dip recession in 2012-13, but the euro crisis that accompanied it has since stabilized and per-capita GDP is back to pre-2008 levels. Unemployment in the EU-28 has fallen below 8 percent, its lowest level since 2008–09.

Recapturing economic momentum will require a renewal of business confidence and investment. Business investment is still below pre-crisis levels, at 12.4 percent of GDP in 2016. Business leaders we surveyed told us that lingering uncertainty and weak demand, which is hampering growth and productivity, is holding back investment. This has real consequences: our analysis shows that if investment of all forms in Europe were to return to pre-crisis levels (as a portion of GDP) by 2020, overall European GDP could receive a boost of €1 trillion in 2030. Underinvestment in critical areas such as transportation, new digital ecosystems, and power grids can erode future growth potential and productivity, which has slowed sharply in Europe post-crisis compared with a decade earlier. In France, Germany, and Sweden, for instance, annual labor-productivity growth has slowed from a 1985–2005 average of some 2 percent to less than 1 percent in 2010–16, while it is close to zero in the United Kingdom. Weak capital deepening is one of the primary drivers.

Large cash holdings are one manifestation of the lingering business uncertainty: EU gross corporate savings exceeded €2 trillion in 2016, almost €500 billion more than in 2009. Of the more than 2,000 C-suite business executives we surveyed across France, Germany, Italy, Poland, Spain, and the United Kingdom, 37 percent told us that their cash position had increased by more than 3 percent. Fueling the reluctance are concerns other than a lack of investment opportunities: just over half of the respondents to a separate McKinsey Quarterly survey said they saw more investment opportunities than they could fund. All this comes at a time when the return on cash is poor because of historic low interest rates. Companies hoarding cash say they are evenly split between “saving for future investments” and “building reserves for potential future crises (Exhibit 1).” Read more….