Productivity declining in most of Europe – IMF

The economy is set to recover but growth will be moderate, according to Alfred Kammer, head of the fund’s European Department

The EU economy is not growing as fast as it could be and productivity is a problem in every member country, according to Alfred Kammer, director of the IMF European Department.

The IMF shared its regional economic outlook for Europe earlier this week. It looks like the EU economy is bouncing back, although the expected GDP growth rate is only 1.7% this year and in 2025, up from 1.5% a year earlier.

Commenting on the report, Kammer pointed to three factors holding the EU back.

“First, Europe’s markets are too fragmented to provide the needed scale for firms to grow. Second, Europe has no shortage of savings, but its capital markets fail to provide, to boost young and productive firms. In addition, Europe is missing skilled labor where it is needed,” he said.

Kammer said removing the remaining barriers to the free movement of goods, services, capital, and labor across Europe would solve most of these issues.

The IMF official also pointed to the 30% gap in income per capita between the EU and the US, which he described as “stunning.” It “remains unchanged for two decades now,” he lamented. This is partly due to low productivity in Central, Eastern, and South-Eastern Europe (CESEE). These countries joined the bloc in the 2000s and are partly to blame for it lagging behind.

Kramer also said that the main reason why Europe is doing poorly is “really the large Russian induced energy price shock Europe is going through,” with Germany most affected because of its energy intensive manufacturing.

After the Ukraine conflict heated up in February 2022, the EU made it a top priority to stop relying on Russian energy. The sanctions on Moscow and the sabotage of the Nord Stream pipelines in 2022 have led to a big drop in Russia’s gas supplies to the bloc.

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Brussels’ refusal to buy Russian energy has been holding back the EU’s economic growth, Hungarian Prime Minister Viktor Orban said in October. Some other EU countries, like Hungary, Austria, Slovakia, the Czech Republic, and Italy, are still importing Russian pipeline gas.

The IMF recently raised its 2024 growth forecast for Russia from 3.2% to 3.6%. It has also ranked Russia as the world’s fourth-largest economy based on purchasing power parity (PPP).

However, the fund says the Russian economy is pushing against capacity constraints and its overheating. According to Kramer, in the long-term, Russia will have to deal with fewer technology transfers and a weaker ability to attract financing as a result of the sanctions.

President Vladimir Putin said earlier this year that the Russian economy is in good shape and rapidly expanding despite pressure from Western sanctions.