The European Central Bank said the EU could close about one-third of its productivity gap with the United States if it had as many large companies as the US, pointing to regulatory barriers that prevent European firms from scaling up.
The assessment, released today, frames larger firms as a key part of the bloc's effort to narrow the gap with the US economy. It's a blunt diagnosis of Europe's competitiveness problem: not a shortage of startups or ideas, but a regulatory and capital-market environment that stops successful companies from growing.
The Scale-Up Problem
The ECB said the finding points to the need for reforms that make it easier for businesses to scale up. Europe has plenty of small and medium-sized enterprises. What it lacks are the continental champions that can compete globally, invest heavily in research and development, and drive productivity gains across entire sectors.
The US economy has long outpaced Europe in productivity growth, a gap that translates directly into higher wages, stronger public finances, and greater geopolitical leverage. The ECB's analysis suggests that Europe's fragmented markets, complex regulatory systems, and underdeveloped capital markets are holding back the firms that could close that gap.
What Reform Looks Like
The assessment doesn't prescribe specific policies, but the implications are clear. European companies face 27 different regulatory regimes, fragmented venture capital markets, and labour rules that make rapid expansion difficult. A German software company that wants to hire in France, Italy, and Spain must navigate three separate employment frameworks. An American competitor operates in a single market of 330 million people.
The ECB's intervention comes as Europe struggles to respond to the US Inflation Reduction Act and China's industrial subsidies. Both rivals are using state power to build national champions in green technology, semiconductors, and artificial intelligence. Europe's response has been more regulation and more committees.
Why This Matters:
The ECB assessment is a rare admission from a major EU institution that Europe's economic model isn't working. Closing one-third of the productivity gap with the US would mean higher living standards, stronger tax revenues, and more resources for defense and social spending. But it requires reforms that many member states resist: deeper capital-markets integration, less fragmented regulation, and acceptance that some national champions must be allowed to fail while others grow large. The alternative is continued relative decline, with all the fiscal and geopolitical consequences that follow. Europe can't regulate its way to prosperity. It needs to let successful companies grow.