IMF: The gap in wealth between Europe and the US is widening due to cross-border issues.

On November 14, 2024, the International Monetary Fund (IMF) published a study demonstrating a growing gap in labor productivity between the European Union and the U.S., a trend that has been observed since the 1990s. The main cause of this gap is the cross-border fragmentation of the European market, which hampers productivity growth in EU countries.

GDP per Capita: A Comparison of Europe and the U.S.

According to IMF data, GDP per capita in EU countries, calculated based on purchasing power parity, is about 72% of the corresponding figure for the U.S.. Notably, 70% of the difference between these figures is attributed to lower productivity growth rates in the EU.

The head of the IMF's European Department, Alfred Kammer, stated that while the economies of the EU and the U.S. are comparable in size, the European market suffers from significant fragmentation.

“Companies in Europe focus on national markets rather than the larger single market of the EU. As a result, they do not leverage the full scale potential that is crucial for growth,” emphasized Kammer.

If trade barriers between EU countries were reduced to the level that exists between U.S. states, it could boost productivity in Europe by 7%, he noted.

Financing Challenges: The Lack of a Unified Capital Market in the EU

Another factor hindering productivity growth is the absence of a unified capital market in the EU. Companies in Europe face challenges in raising funds through equity issuance, putting them at a disadvantage compared to American firms. Unlike in the U.S., where venture capital funds are active, European companies often rely on bank loans.

European tech companies, whose primary assets are intellectual property and ideas, cannot provide the traditional collateral required by banks. At the same time, venture financing in the EU remains underdeveloped and is often limited to national markets due to complexities in cross-border regulation.

The EU is working on establishing a Capital Markets Union to eliminate these barriers. However, despite the progress made in 2024, diplomats and officials are skeptical about the speed of implementing the necessary reforms.

Labor Mobility: Barriers and Costs in the EU and the U.S.

The third reason for the EU's lag behind the U.S. is low labor mobility. European workers face much greater obstacles when relocating within the bloc compared to their American counterparts moving from one state to another.

“In Europe, the costs of labor mobility are eight times higher than in the U.S.,” noted Kammer.

One reason for this is the lack of affordable housing for rent or purchase. Consequently, workers prefer to stay in their regions, limiting the redistribution of labor resources between EU countries.

Potential Solutions: A Look at EU Policy

Kammer emphasized that improving the single market for goods, services, and capital is a key step towards increasing productivity in the EU.

“The good news is that the solutions to most of these problems lie in the hands of the politicians themselves,” he stated.

Last week, EU leaders tasked the European Commission with developing proposals to enhance the single market by mid-2025. These measures are expected to help eliminate barriers that hinder the economic development of the region.