Euro area productivity will keep falling behind
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The chronic underperformance of euro area productivity growth compared to the United States over the past three decades is glaring, and it has vast implications on markets and the economy.
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Back in 1995, productivity levels in the US and the euro area were neck on neck. But since then, the US has pulled ahead significantly, boasting an average annual growth rate of 1.7% in labour productivity, while the euro area has fallen far behind, only managing a 0.9% average annual increase.
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In this analysis, we argue that euro area productivity growth has been lower than US due to weaker adoption of Information and Communication Technology (ICT), lower public investments, a less educated workforce, and regulatory constraints.
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We expect weak euro area productivity relative to the US to continue as Europe lags in new transversal technologies and regulatory hurdles persist. Public investments under RRF and progress on regulation, including a capital market union, support productivity, but large gains are far away.
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Continued weak productivity implies a structurally lower EUR/USD and lower ECB policy rates. At the current juncture, weak productivity growth might prolong the period of restrictive monetary policy.
Productivity is low in Europe due to weak ICT adoption
In examining the recent sluggish growth in productivity within the euro area compared to the US, several underlying factors come to the fore. A significant contributor appears to be the region's inability to fully harness the productivity-enhancing potential of Information and Communication Technology (ICT). IT and digitalization have historically been potent drivers of productivity, particularly in the service sector. Yet, since 1995, while the United States has witnessed a remarkable 900% surge in IT-related capital stock, the corresponding increase has been far more modest in the euro area, with Italy seeing only a 200% increase and Germany and France experiencing a 300% increase.
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