Europe is facing a critical moment as it grapples with rising energy costs, increased regulation and intensifying global competition, warned Beata Javorcik, chief economist at the European Bank for Reconstruction and Development (EBRD). 

In a recent interview with bne IntelliNews, Javorcik outlined the challenges that are eroding the continent’s competitiveness, particularly in the face of competition from the United States and China, and stressed the need for action along the lines of the recommendations in the September 2024 report by Mario Draghi on the future of EU competitiveness. 

“In European cities, there is a view that Europe is in crisis and losing competitiveness,” Javorcik said. Recent events, such as Volkswagen's announcement of a factory closure in Germany, reflect the severity of the situation. Javorcik linked this trend not only to energy costs but also to increasing competition from China, which has become a significant player in global markets.

Regulatory burden straining businesses

A key issue highlighted by Javorcik is regulation of European companies. While many of these regulatory measures are well-intentioned, the sheer volume of directives is creating a burden that European businesses struggle to bear.

“There is a sense that a tsunami of regulation is sweeping through Europe,” she said. “Even if each directive is well-meaning and makes sense, the sheer number imposes a big burden on European firms, and that erodes competitiveness.”

This erosion is contributing to a broader sentiment that now is the time to act. “This feels like a now or never moment,” Javorcik said, expressing concerns that unless decisive steps are taken, Europe’s economic standing could continue to decline.

The Draghi report’s wake-up call

Javorcik’s comments were made shortly after the publication of the Draghi Report, a hard-hitting assessment of Europe’s economic future, authored by former Italian prime minister Mario Draghi. The report, which calls for an €800bn annual investment to rejuvenate Europe’s productivity, has sparked debate across the continent. Draghi warned that Europe is facing a “slow and agonising decline” unless it can overcome long-term stagnation and boost competitiveness through massive investment.

Javorcik believes the Draghi Report has shaken up the European elite and achieved its purpose of creating a sense of urgency. “The Draghi report has shaken Europe up,” she said. "The report is a statement of the problem. It shocked. I think that was its purpose: to shake up the European elite and create a sense of urgency, and it succeeded.”

While the report has been seen by some as primarily focused on Western Europe, Javorcik argued that it is equally relevant for the newer EU members of Central and Southeast Europe. 

“Some in Eastern Europe perceive it as pertaining mostly to the West, but I don’t think that’s the right perspective,” she said. 

“The focus is on the lack of competitiveness and need for greater innovation, dynamism and productivity growth. Eastern Europe registered spectacular growth over the last 30 years, but those old sources of growth are depleted. The East now needs to grow based on its own innovation.”

No magic bullet

The Draghi Report highlights several areas of concern, including excessive regulation and the difficulty of scaling up startups in Europe. Despite Europe generating innovative ideas, Javorcik pointed out that many startups seek financing in the US due to the lack of supportive financial infrastructure in Europe. “There is no magic bullet. What the report is advocating is massive spending and the question is how to achieve that,” she said.

One of the report’s main recommendations is a call for massive spending on future growth, but the challenge lies in how to finance it. Javorcik said that Europe must make strategic investments in innovation and productivity while being mindful of fiscal constraints. “The money has to come from somewhere, which is a sensitive topic,” she added. 

The report suggests that this investment could come at the EU level, giving all member states access to funds and preventing governments from misallocating resources. However, the downside is the need to raise significant amounts of capital. Another alternative would be to encourage countries to spend more on their own, potentially by loosening state aid rules. However, this could create inequalities between countries with more fiscal space and those facing tighter budgets.

For Eastern Europe, the fiscal space is generally more limited than in Western Europe, but Javorcik remains optimistic, explaining that Eastern Europe still stands to benefit from increased investment in countries like Germany, which would fuel exports. However, countries in the region have been hit hard by external demand shocks, particularly from Western Europe, and by high energy costs, which soared after Russia’s invasion of Ukraine in 2022.

Several countries in the region saw faster wage growth and more expansionary fiscal policies, which helped soften the blow. However, some are now facing scrutiny from Brussels over budget deficits, particularly Poland, Slovakia and Hungary, making it harder to commit to supporting the innovation and investment that is urgently needed.