The Draghi Report: Political Stalemate and Europe’s Productivity Gap Curb Growth

Moreover, with general elections in Germany scheduled for October 2025, it is unlikely that the mainstream parties will reform the debt-brake rule, which requires a two-thirds majority and support from the conservative opposition. This political inertia also makes further European-level reforms difficult even though they are essential to boosting investment and growth in Germany and Europe.

Europe’s Divergent Productivity Levels Reflect Different Stages of Economic Development

Similarly, raising Europe’s growth outlook will require Southern Europe to address its productivity gap, particularly when compared with the US – on per capita and per hours worked bases – over the past 25 years (Figure 2). Full and timely implementation of NextGenerationEU reforms and investments through 2026, especially in Italy and Spain, are thus critical.

The productivity gap between North-West European employees and US employees increased to 20% in 2023 from 10% in 1999 when the euro was introduced. However, this gap is erased accounting for total hours worked (Figure 3). This suggests that in North-Western Europe the issue is less individual productivity, but rather fewer hours worked compared with the US. One or the other, if not both, need to improve to raise Europe’s growth outlook, which is possible as shown by Central and Eastern Europe, where the productivity gap to the US has narrowed over the past 25 years.