Europe’s productivity challenge: Why the gap with the U.S. keeps growing — and what can be done about it
Friday, 14 November 2025
Europe’s economic fortunes depend on its ability to boost productivity — the essential engine of prosperity. As new technologies transform the global economy, Europe is falling behind its transatlantic counterpart. In a recent episode of the Future is Blue podcast, we spoke with Romain Duval, Assistant Director in the IMF’s European Department and Mission Chief for Spain. His message was clear: the productivity gap between Europe and the United States has widened dramatically over the past three decades — and Spain faces an even steeper divergence.
[You can listen to the episode here.]A widening transatlantic divide
“After World War II, Europe went through a long phase of convergence with the U.S.,” Duval explained. “But that basically stopped around the mid-1990s — the beginning of the ICT revolution and the rise of the internet.” Since then, the U.S. has surged ahead, while productivity growth in Europe has stagnated.
Today, the labor productivity gap between the U.S. and the four largest EU economies — France, Germany, Italy and Spain — has widened by about 20 percentage points. “That’s enormous,” Duval said. “If Europe had just managed to keep up with the U.S., the purchasing power of the average European worker today would be roughly 20 percent higher.”
While Nordic countries such as Sweden have performed somewhat better, even they have not fully kept pace with the U.S. The concern now, Duval warned, is that the emergence of artificial intelligence could make the gap even larger. “Everyone will benefit from using AI,” he noted, “but there are additional gains from producing AI — and that’s where the U.S. clearly dominates. This could lead to further divergence.”
Behind the macro numbers lie deep structural issues at the firm level. U.S. companies invest three times more in R&D than their EU-listed counterparts. And when it comes to younger, high-growth firms — the so-called “gazelles”— the differences are even starker. “The employment share of these young, high-growth firms in the U.S. is six times higher than in the EU,” Duval pointed out. “It’s no coincidence that the average age of the top ten listed firms in Europe is about 115 years, compared to just around 40 years in the U.S.”
Spain’s uphill battle
If Europe as a whole lags behind the U.S., Spain has fallen behind even within Europe. “The productivity gap between Spain and the most productive EU countries is now higher than it was 30 years ago,” Duval said. Spanish listed firms invest six times less in R&D than the European average, and the share of employment in young, high-growth firms is barely one-third that of the EU.
The result is an economy where too few firms innovate and scale up. “There’s a large gap between Europe and the U.S., but also between Europe’s frontier economies and Spain,” Duval summarized.
Financing: the missing fuel for innovation
A key explanation for Europe’s productivity problem lies in how funds are allocated. “If financing wasn’t a problem,” Duval argued, “you would expect the return on investing one extra euro in any firm to be roughly the same. But that’s not what we see.”
In the IMF’s research, the “gazelles” tend to have higher returns on capital than their older peers, and yet they struggle to secure funding. “That suggests strong financing constraints,” Duval said. Venture capital tells the same story: as a share of GDP, venture capital investment is five times smaller in Europe than in the U.S., and “even smaller in Spain.”
High-tech firms, which need large upfront financing to scale up quickly, suffer the most. Big U.S. players “were able to raise massive funds early on, dominate their markets, and expand globally. That’s much harder to do in Europe.”
The human capital paradox
Another obstacle is the mismatch between education and labor-market needs. Spain, interestingly, has made progress in tertiary education attainment — over half of Spaniards aged 15–24 have completed higher education, compared to 43 percent in the EU. “But the problem is that this human capital is not well matched with the needs of the economy,” Duval said.
The share of graduates in STEM disciplines — science, technology, engineering and mathematics — has steadily declined over the past decade, even as demand for such skills has risen. “Spain has been improving education quantitatively,” Duval observed, “but without necessarily providing young people with the right skills to succeed in the labor market — and, especially, to innovate.”
Market fragmentation: the invisible barrier
Beyond finance and education, Duval emphasized another critical constraint: market size. “In Europe, despite having a Single market for 40 years, there are still many cross-country barriers to trade in goods and services,” he said. According to IMF research, those barriers are at least twice as high as those between U.S. states.
Professional services, telecoms, and energy remain heavily fragmented across EU countries, while in Spain the problem is compounded by regional disparities. “There isn’t really a single Spanish market,” Duval noted. “Autonomous communities have their own product-market regulations, which add bureaucratic costs and make it harder for firms to scale up quickly.”
Three priorities for action
Asked what policies could make the biggest difference, Duval identified three main priorities: finance, skills, and market integration.
On finance, he called for the completion of the Capital Markets Union — now rebranded in Brussels as the Savings and Investment Union — to channel Europe’s vast savings into riskier, growth-oriented investments. “Europe’s pension funds allocate ten times less to venture capital than their U.S. counterparts,” he said. “We need regulatory reform to change that.”
In education, Duval argued that countries like Spain should grant universities greater autonomy in recruitment, promotion, pay, and ensure that curriculum design be more responsive to labor market demand.
Finally, to expand market size, both Europe and Spain must reduce internal barriers. At the EU level, Duval pointed to an initiative known as the ‘28th Regime’, aimed at creating a single corporate and insolvency framework. At home, Spain should move forward with its own ‘Regime 20’ to harmonize regional regulations. “These are tedious initiatives,” he admitted, “but they are essential if firms are to grow and compete.”
“Be bold”
When asked what single piece of advice he would give the next President of the European Commission, Duval didn’t hesitate. “The number one priority is the mindset,” he said. “Be bold — because half-baked measures are not going to cut it.”
He warned against watering down EU-wide initiatives to accommodate national interests and urged a shift from directives to regulations to avoid excessive “gold-plating” — the addition of country-specific provisions that fragment the single market. “In some areas,” he added, “Europe may even need to move to qualified-majority voting to overcome deadlocks and make real progress.”
Europe’s productivity challenge is not a mystery — its causes are well known. The real question is whether policymakers will summon the ambition to tackle them.
[You can listen to the episode here.]Carlos Carnicero Urabayen