Claus Romanowsky reckons those that claim Europe’s economy is falling technologically behind are out of touch.
The chatbot developed by his team at German engineering company Siemens will soon let factory staff anywhere check with robots and machines with no need to know any code — potentially reaping massive gains in productivity.
“If you might be a employee coming in to start out your shift and a machine will not be working, you normally need to wait hours, possibly days, for a programmer,” the Siemens executive says.
“But now with this chatbot you’ll be able to just ask it what’s unsuitable and fix it yourself much quicker . . . It is very easy to see the large potential for this technology.”
If more European corporations harnessed artificial intelligence in this fashion, it would help to handle among the deep-seated problems within the region’s economy, which is lagging behind the rip-roaring growth of the US. Europe stays badly behind in AI innovation and adoption. Siemens, for instance, needed to team up with American tech giant Microsoft to develop its chatbot.
Europe’s economic underperformance has long nervous policymakers. But it has surged to the highest of their agenda now that the expansion gap with the US has turn into even wider following the dual shocks of the coronavirus pandemic and Russia’s war in Ukraine.
French President Emmanuel Macron warned last month that Europe faces a “mortal” threat from economic decline, rising illiberalism and the war on its eastern border.
US gross domestic product has proved more resilient to those shocks and rebounded faster from them, rising 8.7 per cent above pre-pandemic levels by the primary quarter of this yr. That is greater than double the three.4 per cent rise in Eurozone GDP and even further ahead of the 1.7 per cent equivalent increase within the UK economy in the identical period.
This transatlantic divergence has turn into so acute that it’s making a rift between the US and Europe on monetary policy. With growth and inflation expected to stay stronger within the US than in Europe, investors expect the Federal Reserve to chop rates of interest fewer times this yr than the European Central Bank or the Bank of England.
The combination of high European energy costs, now well above those within the US, and the attractive subsidies offered by Washington for green energy and semiconductor projects in-built the country is tempting large numbers of European corporations to shift activities there.
The EU has asked Mario Draghi, Italy’s former prime minister and ex-head of the ECB, to give you ways of boosting the bloc’s competitiveness. He is predicted to recommend deeper integration of EU capital markets and greater centralised funding for defence and other areas from Brussels, warning recently that “without strategically designed and co-ordinated policy actions, it’s logical that a few of our industries will shut down capability or relocate outside the EU”.
Even the top of Norway’s oil fund, one among the world’s biggest investors, says it’s “worrisome” how far more hard-working, ambitious and evenly regulated US corporations and staff are than those in Europe.
Faced with an ageing population and a dearth of leading corporations within the fastest growing areas of technology, European policymakers are looking for ways to inject dynamism into their economies.
Paolo Gentiloni, the EU’s economy commissioner, says the query now’s methods to address the necessity for critical investments in areas comparable to the green transition and defence given the sluggish backdrop.
“The scandal for Europe will not be low growth, because unfortunately we’re accustomed to this,” he says. “The problem is methods to keep a sufficient level of investment, attracting private capital, and supporting with public investment the needs of those recent challenges.”
Europe’s economy was riding high within the early Nineteen Nineties, having fun with a lift from deepening the EU’s single market before expanding it eastward following the top of the cold war.
But since then, the combined economies of the 27 countries that make up the EU today have steadily lost ground to the US, hit by a series of setbacks, particularly the Eurozone debt crisis a decade ago. More recently, the Covid-19 pandemic and Russia’s war in Ukraine have each inflicted more economic damage to Europe than to the US.
Average per capita income levels in purchasing-power-parity terms in Europe have fallen to around one-third below those within the US, in line with the IMF. What’s more, per capita income within the US has overtaken all the main advanced economies of the EU and the fund forecasts this gap will only widen further over the remaining of this decade.
Part of the issue for Europe has been a paucity of demand growth, weak investment and labour hoarding — where corporations retain more staff than needed resulting from concerns they’ll struggle to rent them back once demand recovers.
Some of this stems from a scarcity of consumer confidence in Europe. House prices have fallen in lots of countries and governments are reining in spending. Faster US wage growth has helped its staff regain the purchasing power they lost resulting from high inflation before their counterparts in Europe. US households have also benefited from investing more in equity markets, which have risen sharply lately.
“There are negative wealth effects in Europe,” says Ana Boata, an economist at German insurer Allianz Trade. “If you don’t expect to get more from public welfare or pension systems, you might be likely to avoid wasting more and spend less. Then you add within the uncertainty from wars and you’ve got doom and gloom.”
Wealthier and older households within the US have been insulated from higher borrowing costs by the country’s predilection for 30-year mortgages, locking in rates of interest at ultra-low pre-pandemic levels. European households have shorter term or variable-rate mortgages, which have eaten up more of their monthly income since rates shot up two years ago.
In the Eurozone, persons are still saving greater than 14 per cent of what they earn — well above the historical average. But US consumers have spent just about all the extra cash they put away through the pandemic, reducing their savings to lower than 5 per cent of their income.
People in Europe are also selecting to work less — a trend that has intensified for the reason that pandemic — underlined by German train staff successfully pushing to cut back their working week from 38 to 35 hours by 2029 and steel staff demanding to be paid more for working only 32 hours per week.
The ECB estimated that at the top of last yr the typical Eurozone worker worked five hours lower than they did just before the pandemic hit in 2020 — equating this to the lack of 2mn full-time staff a yr — while the typical hours of US staff have remained stable.
“There is a difference between the work-life balance within the US and in Europe,” says Markus Brunnermeier, a German-born professor of economics at Princeton University. “People’s preferences are very different. Europe’s labour shortages are made worse by this and by demographics. It will be compensated by immigration from eastern Europe, but younger people from this region are going back home or not moving in any respect.”
An extra burden for Europe’s economy stems from its ageing population and falling birth rates, that are already creating widespread labour shortages as the child boomer generation retire.
Currently within the EU there are three working-age individuals for all and sundry aged 65 years or older. But by 2050, the ratio is projected to be lower than two working-age individuals for each older person. The US population will age more gently, from just below 4 working-age individuals for every one aged over 64 today to just below three by 2050, in line with the census bureau.
Many EU countries are in search of to maintain older staff within the labour force for longer, or to spice up female labour force participation. But ageing societies mean that demographic trends are more likely to make little contribution to medium-term growth, leaving Europe much more reliant on improvements in productivity.
Here too, the story is worrying. The US is seen as a more business-friendly and dynamic entrepreneurial environment, which has consistently proved more proficient at channelling investment into high-growth sectors including IT.
Isabel Schnabel, an ECB executive, says the Eurozone has lost about 20 per cent of productivity relative to the US for the reason that mid-Nineteen Nineties, attributing this to the continent’s “failure to reap the advantages of digital technology developments” comparable to cloud computing and software applications. “It will not be that this technological knowledge will not be distributed across countries, however it is barely a really small share of firms inside countries that make efficient use of it,” she says.
Schnabel adds that many European corporations are too small and constrained by regulation to totally exploit recent technology. Companies with greater than 250 employees account for nearly 60 per cent of personal sector jobs within the US, but within the EU this falls to between 12 per cent in Greece and 37 per cent in Germany. “Larger firms invest more and are more productive,” she says.
Europe’s productivity lag is long-standing and enormously costly by way of living standards. If the largest five European economies — Germany, the UK, France, Italy and Spain — had matched America’s productivity growth rate between 1997 and 2022, their GDP per capita would on average be nearly $13,000 higher in purchasing-power-parity terms, estimates from the McKinsey Global Institute show.
“In terms of the productivity gap between the US and Europe, what you’ve seen happening should you measure over the past 4 years is that (the US) has been mildly disappointing and (Europe’s) been terribly disappointing,” says Jason Furman, an economist at Harvard. “We’re type of the least ugly horse within the glue factory.”
Part of the issue has been Europe’s laggardly investment growth. Erik Nielsen, economics adviser at Italian bank UniCredit, says investment within the US had increased greater than 8 per cent for the reason that end of 2019 and was still growing strongly initially of this yr, while it remained “terribly weak” within the Eurozone at 4 per cent below pre-Covid levels.
The differences are stark when the biggest corporations are examined. The biggest publicly traded European corporations with greater than a billion dollars of annual revenue, including those within the UK, Norway, and Switzerland, invested $400bn lower than their US counterparts in 2022, McKinsey has found.
Volkswagen was the one EU company that appeared in the highest 10 in a recent European Commission report examining the world’s top 2,500 R&D investors in 2023. Six of the highest 10 were headquartered within the US and none were within the UK.
Jan Mischke, a partner on the McKinsey Global Institute, says the investment gap is especially glaring in IT. The R&D spending of the so-called Magnificent Seven corporations — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — amounted to greater than $200bn last yr, around half of Europe’s total equivalent spending across all private and public sectors.
Europe, Mischke says, has been constructing and perfecting a model of “industrial excellence”, however the world is now changing. “There is a large technological disruption happening where an incremental approach doesn’t cut it.”
The mismatch in enterprise capital funding is stark. Last yr VC investment in US corporations was almost treble what those in Europe managed, in line with KPMG research. VC funds within the US also raised almost five times as much as those in Europe over the past three years.
“With all of the doom and gloom around Europe, that is the large lingering query: is adoption of latest AI technology more likely to be slower and fewer useful than within the US and China?” says Adam Posen, president of the Peterson Institute for International Economics. “Europe has an understandably cautious approach to regulating recent technology but that can be a drawback here.”
While ministers within the EU agree that growth must be bolstered, some query how sustainable the US’s current trajectory can be.
“(It) will not be a brand new issue for Europe and never a brand new issue for the Netherlands: growth has not been spectacular,” says Steven van Weyenberg, the Dutch finance minister. But the recent performance, he adds: “Part of this story could be very loose fiscal policy within the US which might not be sustainable for a long time.”
Most EU economies have began to shrink their budget deficits ahead of the reintroduction of binding fiscal rules this yr. But US spending has continued to surge. That trend is predicted to proceed, whoever wins November’s US presidential election. The Congressional Budget Office projects deficits to stay around 6 per cent for every fiscal yr over the approaching decade.
“The query is how for much longer can the US power ahead, when last yr it was mainly driven by a big fiscal stimulus and an enormous increase in immigration,” says Kaspar Hense, portfolio manager at investor RBC Bluebay Asset Management. “But a Trump presidency could bring more fiscal largesse and we don’t think Biden could be much different.”
US productivity was boosted by the temporary surge in unemployment after the pandemic hit in 2020, which reshuffled people into recent and more productive roles once activity picked back up. Europe as a substitute selected to guard jobs with massive furlough schemes. “We froze our labour market,” says Boata at Allianz, adding that this resulted in “zombified jobs”.
Yet this pattern could reverse because the US boost wears off and if European corporations stop hoarding labour. ECB economists wrote in a blog last week that there have been already signs of “weaker tailwinds” in Eurozone job markets, “which in turn will support the rise in productivity” as emptiness levels fall, wages keep rising and hours worked increase.
The potential gains from AI — comparable to what Siemens is doing with its chatbot — represent “a considerable key driver and opportunity for Europe . . . to have the economic power to tackle a few of its hardest problems,” says Ralph Haupter, Microsoft’s head of Europe, the Middle East and Africa. He estimates AI could increase productivity of programmers by 40-45 per cent and of office staff by 20-25 per cent.
The Eurozone economy showed tentative signs of rebounding from its recent stagnation with quarterly growth of 0.3 per cent initially of this yr. The UK economy grew at an excellent faster quarterly rate of 0.6 per cent, overtaking US growth of 0.4 per cent within the period. Some policymakers consider lots of the region’s problems could possibly be fixed if there was less negativity concerning the future.
“There is a risk that the doom and gloom becomes self-fulfilling,” says Schnabel. “Given the large shocks now we have had in Europe, the economic performance has not been as bad as many had feared, so we should always stop talking ourselves down.”
