In This Article
- Exhibit 1: Between 1995 and 2005, service sectors grew less in Europe than in the United States.
- Exhibit 2: Europe’s labor productivity was catching up with that of the United States for several decades, but the trend reversed itself in the mid-1990s.
Audio is available for this article.
Europe has made considerable economic progress in the past 15 years, but its per capita GDP is still $11,250 lower than that of the United States—$4.5 trillion in all. A preference for leisure time is one reason, but a widening productivity gap between Europe and the United States is the major culprit. What accounts for it? The answer is underperforming service sectors. Local services (such as retailing) alone account for two-thirds of the productivity shortfall. But Europe, boasting examples of best practice across service sectors, could reduce the gap. The trick would be for companies to emulate these examples in their own industries and for governments to help them do so by removing regulatory hurdles.1
The opportunity to improve Europe’s lagging service sectors is one of the major themes addressed in Beyond austerity: A path to economic growth and renewal in Europe, a new report from the McKinsey Global Institute (MGI).2 The report analyzes Europe’s strides in reforming labor markets, cutting unemployment, and fueling growth in per capita GDP; the many pressures bearing down on growth; and how to build an effective pro-growth agenda using recent reforms as a platform. Given high debt and deficit levels, little scope remains to spur growth through short-term stimulus spending. Europe must therefore embrace structural reform—and boosting the performance of service industries is a critical part of this effort.