"A casual reader of recent US magazine articles would be in no doubt: Europe is on the road to becoming 'the lost continent'. Self-doubt is also growing on this side of the Atlantic. Even my friend Herman Van Rompuy was quoted last week as talking about a 'survival crisis'.
There is no doubt there are grounds for concern. The world has changed dramatically in the last 30 years. China and India's combined share of global gross domestic product adjusted for purchasing power parity will exceed 30% in 2015 compared with just 6% in 1980; Europe's will fall below 20% from 30%. While a reduction in Europe's share is normal as poorer countries catch up, we have to note worryingly that the pace of this reduction is faster than for other industrialised regions.
Europe has had its own catching up periods, notably after World War Two, when the difference in GDP per capita with the United States narrowed dramatically. Sadly, the gap never closed and, since the early 1990s, has been widening again.
This is partly due to choices our societies have made since the 1960s. In general, Europeans work fewer hours than their US counterparts and retire earlier: only 46% of 55- to 64-year-olds in Europe are still active compared with more than 60% in the US and Japan. But this is not the only reason. Since 2000, total factor productivity – the contribution to productivity growth that cannot be explained by factors such as capital or work – has increased much more slowly in Europe.
Most of these factors are intangible – the most important being research, development and innovation. Despite the efforts of the European Union, public and private sector spending on R&D still lags that in the US and Japan. There are fewer and fewer young people, and fewer are likely to get a tertiary education compared with their peers in other regions. Skills shortages are growing: Germany already lacks some 400,000 engineers, according to its Chamber of Commerce and Industry.
Another important factor is access to finance for small, innovative firms. The lack of a true European patent does not help: patent protection in the US costs around $5,000, while a patent protecting your idea here will cost $30,000 and that won't even cover all 27 member states.
So is all lost? Should we resign ourselves to decline? To those questions I reply resolutely 'no' and 'no': or rather, not if we pursue the right policies.
Europe still has the third largest population in the world after China and India, with good transport and communication links serving a huge market. It has leading technologies and knowledge in a number of sectors, with industry leaders such as Nokia and Airbus, and small businesses that have shown it is possible to conquer the world. These assets still attract enormous foreign direct investment.
But to make the most of what we have got, Europe has to get the strategy right, both domestically and internationally. First of all, we need to resist a return to protectionism of all forms – be it political in terms of rising nationalism in Europe, or in our trade relations abroad. We should also support reform of the international monetary system, gradually replacing the US dollar with a new reserve currency that could be based on the IMF's existing Special Drawing Rights (SDR).
We also need to form truly European policies in the security and supply of energy, water and the other raw materials that are necessary for our populations and businesses to flourish. More efficient use of scarce resources by us all is essential if we are to meet the threats posed by climate change.
But we can only be successful if we speak with one voice, as illustrated by the outcome at the Copenhagen summit last year, or when we see the pressure Russia is able to bring to bear on the energy policies of individual member states.
Europe must also look again critically at what it has achieved to date. The single market, the big idea that drove Europe's integration in the 1980s and 1990s, is far from complete.
Making the single market truly work will require more than just accepting each others' product standards. We need to liberate private investment and innovation, and provide real macro-economic policy coordination, including – at least within the euro zone – a minimum of tax harmonisation. This is where we should focus our energies: making the benefit of Europe tangible for small businesses and consumers."
