What’s in store for the EU (hint: it might not be what you think)

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European polititians are concentrated while signing the treaty for the European Common Market and the Euratom, Rome's City Hall, Italy, March 25, 1957. [AP Photo/Stf]

Certainly, the past 10 years have been tough for Europe but, as the EU celebrates its 60th anniversary, it must also build on its positive achievements in order to tackle the numerous challenges ahead, writes Jacques Bughin.

Dr Jacques Bughin is a director of the McKinsey Global Institute and a senior partner of McKinsey & Company, based in Brussels. He is also co-author of MGI’s new discussion document on the future of the European Union Rome Redux: New Priorities for the European Union at 60.

The European Union is celebrating its 60th anniversary this month, and much of the coverage is likely to focus on the economic stagnation, political malaise, and non-stop crisis management we have experienced in the EU over the past decade—even before Brexit.

In fact, that’s a distorted picture: looked at with a long-term perspective, the record is an overall positive one: the EU has followed more or less the same growth trajectory as the United States, at least until the 2008 financial crisis, and surpassed the US in terms of its welfare growth. We set this out in a new discussion paper just published in advance of this week’s anniversary of the Treaty of Rome.

Certainly, the past 10 years have been tough: investment still hasn’t recovered, despite very high returns for companies, productivity has faltered, and unemployment remains high. Yet the employment rate gap with the US has nearly closed, bond market returns have actually outperformed those of US bonds, and product markets have undergone a huge deregulation and liberalisation, as a result of the introduction of the single market starting in the 1980s. Europe remains a world leader across a range of social indicators, from gender equality to the use of renewable energy.

Yet even as it must deal with the growing political divergence and sluggish economic growth that now dog it, the European Union faces some less-publicised but probably even more formidable long-term challenges. The key issues for the years and decades ahead are how quickly and effectively Europe addresses the disruption wrought by three global forces:

First is ageing, which will create an economic growth gap: the working-age population is starting to decline in many countries, including in Germany and Italy. To ensure long-term GDP growth will require that productivity-growth increases to compensate for this decline in employment growth.

Second, rapid advances in technology could give the European economy new tools to boost productivity in the forms of digitisation and automation—but they will prove highly disruptive to companies and the labour force. Europe is already needing to catch up: currently it is realising only 12% of its digital potential, compared with 18% in the United States. China today invests more in innovation as a share of GDP than the EU. About 46% of the activities European workers are paid to do have the potential to be automated already today with existing technology. That potential will only increase as artificial intelligence, advanced robotics, and machine learning continue to make giant strides.

Third, the EU faces increasing competition from emerging economy companies and digital multinationals, amid a broad backlash against globalisation and global institutions. In the past decade, the 50 largest firms from emerging economies have doubled their share of revenue from overseas activity, from 19% to 40%. By contrast, the share of global revenues of EU firms has markedly declined, dropping from 36% in 1980 to 23% in 2013.

How should the EU respond to these forces? Decline need not be fatal. Europe remains a leader in terms of its openness to physical and digital flows, which in turn has been at the core of its competitiveness. In McKinsey’s index of global connectedness, ten of the top 20 nations are European. But the EU will have to work hard to build on its strengths. Among possible ideas for further discussion and action:

  • The EU is the second largest economic entity in the world with GDP of €15 trillion. It should leverage that scale. The single market is unfinished business in many areas, including energy, capital markets—and especially digital. Member states should work together to complete it.
  • The EU will need to innovate as it adapts to the changing world of work. That can include spawning new types of technology-enabled employment opportunities and putting in place innovative social security systems that help deal with worker displacement from automation. The technological advances are reshaping the workplace, including by accelerating a shift to independent work. They will require a major overhaul of education systems to place greater emphasis on literacy, numeracy, and problem-solving skills. Iterative and life-long learning will need to become the new mantras of schools everywhere.
  • Finally, the EU will need to be reconfigured to better serve its citizens: In the public mind, Europe today is often associated with technocratic practices that can seem far removed from the everyday life of most citizens. In fact, the EU bureaucracy is quite small: the number of civil servants in the Commission, the Parliament, and the Council together totals some 55,000—only a little larger than the Paris municipal administration. But Europe must better serve and interact with its citizens. New governance and accountability will be needed. More citizen engagement and direct democratic interaction can be achieved by leveraging technology: for example, digital platforms can give ordinary citizens a voice and can be used to crowdsource solutions.

When the Treaty of Rome was signed in 1957, the need for Europe to live and work together in peace and harmony was self-evident. Safeguarding peace remains a core objective, but a new vision and narrative are needed today to convince businesses and an increasingly sceptical European public that working together as “Europeans” remains a worthwhile cause for their lives. Happy birthday—the future is going to be quite a ride.