Europe must address its competitiveness deficit to adapt to the new geoeconomic era, according to McKinsey

Proposes more investment in innovation, own energy sources, diversified supply chains and larger companies.

Europe must address its competitiveness deficit to adapt to the new geoeconomic era, according to McKinsey

Proposes more investment in innovation, own energy sources, diversified supply chains and larger companies


Europe's competitiveness deficit could worsen in the new geoeconomic era that has begun, according to the consulting firm McKinsey

According to a new analysis from the McKinsey Global Institute (MGI), titled 'Accelerating Europe: competitiveness for a new era', the European economy and its companies are positioned for the new geoeconomic era, but need to take action to accelerate competitiveness and growth.

Massimo Giordano, Senior Partner at McKinsey and Managing Partner of McKinsey Europe, believes that "Europe has a lot to be proud of," as it "is a global leader in sustainability and inclusion and is home to iconic high-growth and profitable companies in almost every sector." ".

However, he warned that "all of this could be put in jeopardy" if the region does not address its competitiveness problems "in a rapidly changing world."

The consulting firm, which points out that European per capita income is 27% lower than that of the United States, affirms that this gap can be closed if the old continent accelerates its growth by becoming more competitive on a global scale. This "will determine its ability to unlock future growth while preserving its unparalleled model of sustainability and inclusion," the report says.

McKinsey Senior Partner and MGI President Sven Smit explained that "Europe's competitiveness has largely been based on its industrial excellence, but now a new geoeconomic era is creating forces that highlight new fragilities."

"If not addressed, between now and 2030, between €500,000 and €1 trillion of European added value could be at stake annually, potentially undermining the continent's strong record on sustainability and inclusion," he said. These figures are equivalent to between three and six times the incremental annual investment required to achieve zero carbon footprint.

After examining the results of 1,000 European companies and assessing the impact that disruptions can have on different sectors, the report's authors have identified competitiveness challenges in seven key dimensions: innovation, energy, supply chains, capital, talent, size and competition and markets.

With respect to innovation, the study indicates that the acceleration of technological disruption represents a challenge for the traditional European industrial model, which needs to catch up in some technologies.

Likewise, the new international context, marked by the Russian invasion of Ukraine, has highlighted the risks that entails for Europe not having energy autonomy and depending on a few exporting countries. Also a problem is the rising cost of capital, which has exposed the low levels of returns in Europe and the differences with the United States in investment figures.

The report points out that, in relation to supply chains, increasing geopolitical tensions are affecting Europe's trade relations, and that adaptation to changes taking place in the labor market is complicated by current European rules.

Finally, there are competitiveness challenges in terms of the size of companies, which have difficulty growing at a time when this is key, and competition and markets, since governments such as those of the United States and China are reintroducing or increasing tariffs and making a more active industrial policy.

Against this background, Solveigh Hieronimus, Senior Partner at McKinsey and Board Member of the McKinsey Global Institute, believes that "the time has come for European policymakers and business leaders to collaborate and develop a bold and integrated agenda to accelerate competitiveness and growth" of the continent.

To this end, the report proposes doubling public and private spending related to innovation in Europe - in areas such as artificial intelligence - by, for example, increasing joint pre-commercial contracting; and take measures so that the region diversifies and develops its own energy sources that guarantee sufficient supply at half the current price.

In addition, it sees the need to increase business investment by $400 billion annually and double the influx of foreign direct investment, particularly from global technology leaders, for example, through business-friendly rules and a targeted industrial policy.

Regarding supply chains, the MGI is committed to enhancing their diversification and resilience and to seeking new sources of supplies in European territory to ensure the availability of a series of strategic materials. And, in the workplace, he argues that Europe can become a world leader in technology adoption if it accelerates retraining, job rotation and talent attraction, including the application of flexicurity principles.

Finally, the consulting firm points out that the average size of leading companies could be doubled by introducing a "28th regime" of more simplified common business rules of the European Union, to which companies could join voluntarily, and that Europe must redefine its rules on markets and competition to be able to compete effectively in the future.