Productivity declining in most of EU – IMF

The bloc’s economy is set to recover but growth will be moderate, according to a top official

The EU economy is not growing as fast as it could be and productivity is a problem in every member country, according to the International Monetary Fund (IMF).

The director of the IMF's European Department, Alfred Kammer, shared its regional economic outlook for the bloc earlier this week.

Expected GDP growth rate in the EU is predicted to be only 1.1% this year and 1.6% in 2025, up from 0.6% a year earlier.

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

“First, Europe’s [sic] 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 would solve most of these issues.

The IMF official also pointed to the 30% per capita income gap 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 the bloc's newest members in Central, Eastern, and South-Eastern Europe (CESEE). 

Kramer also stressed the impact of “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 escalated in February 2022, the EU made it a top priority to stop relying on Russian energy. 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.

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 Kammer, 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.