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t is useful to read the report published by a group of economists from sciences po coordinated by lionel nesta whose main conclusions were published this week first the report depicts a gap that began to widen in the early 2000s and was then exacerbated by the subsequent sovereign debt crisis eurozone gdp per capita fell from about 85 of the us level in 2000 to 78 4 in 2022 for italy europe s true sick man the drop was even more dramatic from 94 to 74 contrary to what one might think this gap is not due to fewer hours worked or a lower employment rate once again it is important to distinguish levels from changes certainly europeans have always worked less overall nonetheless over the past twenty years the gap has actually decreased so it can t explain the increasing difference in output per capita europe s achilles heel so what s the problem the core issue is a persistent slump in labor productivity growth that is how much output is created per hour worked it is important to note for non experts that we are not talking about levels some european countries still have higher labour productivity than the united states today but for almost thirty years it has been growing less this slowdown does not only concern manufacturing often at the center of the debate on deindustrialization but also extends to services for france for example the sectors where the gap with the us has widened the most are information and communication technologies manufacturing and trade the work of nesta and his co authors identifies two root causes of the widening gap with the us and china the first is weaker growth in total factor productivity an indicator that captures the efficiency with which factors of production are combined and that reflects technical progress and innovation the second critical issue which causes the first is chronic under investment european companies invest far less than their american rivals not just in traditional equipment tools and physical capital but critically in digital technology and intangible assets like software r d and databases us investment in ict is nearly four times greater europe is losing the global technological race its spending on research and development is lower not only than america s on that too italy is at the bottom of the pack in europe but also than china s which is rising rapidly especially in cutting edge technologies this lack of investment and research automatically translates into less innovation especially in strategic sectors like digital and green technologies r d in billion euros and of gdp source bock et al an analysis of patents in future strategic technologies such as artificial intelligence quantum computing and cybersecurity shows this innovation gap europe appears confined to a comfort zone of specialization in more mature technologies while the us and a rapidly ascending china share leadership in cutting edge domains furthermore as with everything the eu is moving in a disorderly fashion there is a lack of a common and coordinated strategic vision with each major country following its own national priorities a vicious circle unable to compete on innovation european firms have defaulted to price competitiveness a strategy that has proven to be a double edged sword while american companies thanks to greater market power have been able to maintain or increase their profitability in europe companies have contained prices by compressing margins a choice that has diverted resources from future investments triggering a vicious cycle that limits the ability to innovate and grow a vicious cycle we might add fueled by the short sighted policy of wage moderation pursued by many companies and governments which in the illusory attempt to restore profit margins has clipped the wings of consumption and thus contributed to the poor dynamism of profits in this regard we recall that among all oecd countries italy is the country where workers purchasing power has decreased between 1999 and today the way out how do we get out of this impasse the key is the revival of private investment which certainly involves greater access to financial markets the main angle of the draghi report which insists on a capital markets union but also and i would say above all through an increase in wages and purchasing power to boost domestic demand and a revival of public investment in tangible and intangible infrastructure which acts as a lever for private investment it is worth remembering that among the recommendations of the draghi report was an increase in investment of eight hundred billion euros per year to be achieved among other things through the establishment of a common borrowing capacity a proposal that has completely vanished just as when it comes to spending more on defense european countries demonstrate admirable activism and flexibility in interpreting the rules categories global economy growth tags draghi report eu growth ict innovation investment deficit labor productivity public investment r d sustainability technology total factor productivity wages without a true industrial policy rearm europe is just a massive redistribution scheme march 13 2025 leave a comment this is a deepseek translation with minor edits of my latest diario europeo published in the italian daily domani last thursday gathered in an extraordinary council meeting in brussels the 27 member states gave the green light to the european commission s rearmeurope package it is not my intention to discuss the appropriateness of large scale rearmament except to note that while it seems difficult to imagine a significant political entity without autonomous defense capabilities rearmeurope appears to have many blind spots firstly it is a plan focused on increasing national spending which does not address the main problem highlighted among others by the letta report in no uncertain terms how it spends for defense is for the eu more a problem than how much it spends with member states acting in an uncoordinated manner and weapon systems that do not communicate with each other secondly with a communication strategy that is to say the least reckless european leaders seem intent on conveying the message of an imminent military aggression by russia they are much quieter about how to counter the real risk the destabilization of the european project through interference cyberattacks and so on aimed at weakening the democratic process of european countries which is already not in great health and at empowering euro skeptic parties a destabilization project moreover that marks a convergence of interests between russia and the current american administration as demonstrated by vance s speech in munich in short one might say that to deal with putin we need fewer cannons and more hackers let s first see what rearmeurope contains and what its likely medium and long term consequences will be the commission aims to channel around 800 billion into defense spending this would come mostly from the activation of the stability pact s safeguard clause for four years government spending on defense would not count towards the pact s limits and would not trigger excessive deficit procedures then the commission will propose a scaled down version of next generation eu with 150 billion in common debt to be distributed as loans to member states for military spending the bill for rearm europe will be paid by the usual suspects at first glance this seems like great news for those like me who have always fought for common debt instruments and for the exclusion of investment spending from the stability pact s constraints but appearances can be deceiving this operation instead of being the first step towards a fiscal and industrial policy worthy of today s challenges risks becoming yet another noose that will tighten around the necks of eurozone governments in the coming years just look at what happened with the pandemic in that case too the stability pact s constraints were suspended and common debt was raised to be distributed to european countries in the form of loans and grants those funds were necessary and were used mostly well to keep european economies afloat but they were not for free they were mostly loans which piled up in debt for eu countries once the emergency was over and the stability pact came back into force that in the meantime had been reformed but in fact not really we embarked on a new season of fiscal consolidation which will presumably first claim as victim social spending but also the very objectives of next generation eu the ecological and digital transitions just look at the competitiveness compass announced with great fanfare to implement the draghi report which in fact does not mobilize fresh money but in the best tradition of the commission shifts resources allocated for past priorities to current ones waiting to shift them again tomorrow to future priorities this is why many european observers had a sense of déjà vu at the announcement of the possible use of cohesion funds for defense and this is why we can be sure that once the emergency is over brussels and finance ministries will return to the mantra of debt reduction which at that point will certainly not target defense spending in short however hard they try to sell it this is not a turning point with the temporary relaxation of constraints and the european loan program rearmeurope reallocates spending towards defense not today maybe but certainly tomorrow when the champions of fiscal discipline will demand sacrifices on social spending healthcare education and maybe even the transitions a true strategic autonomy what should have been done then as mentioned above the increase and rationalization it bears repeating of defense spending is an indispensable element of the attempt to equip the european continent with strategic autonomy but so is energy autonomy on which instead we continue to do things on a shoestring so is the opportunity provided by the trump administration s masochistic attack on the world of research which a forward looking european leadership should exploit to roll out the red carpet in terms of investments in the scientific research ecosystem for overseas researchers looking to escape an environment that has become toxic and last but not least so is investment in digital and environmental sustainability to try to turn the unavoidable ecological transition into a driver of growth and productivity in short defense should be one of many pieces of an industrial policy worthy of the name aimed at reviving europe s growth and making it less dependent on ancient allies turned hostile or on emerging powers it is bizarre one might say suspicious that all those who point to the example of the united states regarding military spending suddenly fall silent on the hundreds of billions of public investments that overseas administrations pour into the development of sectors like electric vehicles and artificial intelligence in other words we should have seized this crisis as an opportunity to redesign the entire european industrial policy system to serve strategic autonomy and growth with common spending tools with real solidarity among european countries rearmeurope does not involve grants but only loans effectively repudiating the main innovation that characterized next generation eu and with a rewrite of the stability pact that introduced permanent protection for investment not just in defense in the absence of a truly new and comprehensive industrial policy rearmeurope will certainly enrich some european corporations and many american ones without any impact on growth eventually further tearing apart the european social contract in a few years for euro skeptic parties and the foreign autocrats who sponsor them it will be payday categories emu governance global crisis tags common debt competitiveness compass diarioeuropeo eu european commission european defense industrial policy nato next generation eu putin rearm europe rearmeurope russia security social spending stability pact trump ukraine usa vdl von der leyen trump s war on friends and foes should we imagine a multilateral order without the us february 11 2025 leave a comment this is a deepseek translation with minor edits of my latest diario europeo published in the italian daily domani the first days of the trump administration were a roller coaster from proposals to invade allied countries to the idea of turning gaza into a resort passing through tariffs and the dismantling of the u s public administration amid all this the u s withdrawal from the beps base erosion and profit shifting agreements went largely unnoticed however this decision has significant consequences marking a further step backward in the global fight against inequality and tax avoidance by multinational corporations beps is an international agreement facilitated by the oecd to combat tax avoidance that is centered on two pillars the first establishes a minimum tax rate of 15 on corporate profits reducing incentives to shift profits to tax havens the second introduces algorithms to allocate profits and thus the tax base among countries based on the economic activity of multinationals revenue employees capital rather than their fiscal residence the goal is to stop the race to the bottom in corporate tax rates to attract multinationals the so called tax competition and prevent tax avoidance by these corporations the beps agreement despite its many flaws is an important attempt to coordinate international tax policies and combat tax avoidance by large multinationals it also introduces the crucial principle that tax competition should be fought because it limits the fiscal space of states depriving them of essential resources for public services and redistributive policies the u s withdrawal from this global agreement not only weakens its effectiveness but also clarifies if it were needed the interests that the trump administration will protect in the coming years guess what helping the rich only benefits the rich this is no surprise trump s first term was already characterized by regressive policies his 2017 tax reform for example drastically reduced the corporate tax rate from 35 to 21 and today the tycoon intends to lower it further to 15 what is more surprising is that some still try to defend policies benefiting the wealthier classes and capital by arguing that reducing taxes for the rich and corporations stimulates investment economic growth and consequently the well being of all the economic benefits granted to the wealthy in short would trickle down to the less privileged improving their living conditions this theory has been invoked to justify many tax reforms in recent decades from reagan s tax cuts in the 1980s to those of trump and macron an odd couple but united by their faith in trickle down in 2017 however the empirical evidence overwhelmingly shows that tax cuts for the rich do not produce the promised economic benefits for example a ...
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