It’s The Economy, Stupid
Economic growth has slowed all over the West. The Draghi report only scratches the surface.

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On both sides of the Atlantic, political leaders and pundits are rediscovering the virtue of economic growth. Kamala Harris’ pitch to American voters is for an “opportunity economy,” a somewhat nebulous idea that nonetheless suggests prioritizing upward mobility and building wealth. In Brussels, a report by Mario Draghi warns that Europe is falling behind in the economic contest with major economies around the globe, while also leaving behind many of its citizens.
Unless their economy is turned around, Europeans may have to “give up one or more of [their] goals” because of high debt burdens and an adverse demographic outlook, Draghi warns. Those may include Europe’s ambitious plans for decarbonization, digitalization, and defense. In the United Kingdom, a group of center-right think-tankers released their own assessment of Britain’s economic stagnation. The report places the blame on restricted housing supply, runaway energy costs, and the equally overpriced cost of new infrastructure.
In comparative terms, the economic picture from the United States is probably the most cheerful. Real wages, expressed in purchasing power parity terms, grew faster in the United States than in any other G7 nation and remain more than 30 percent higher than in Germany. A 2022 study by the European Centre for International Political Economy, which looked at disaggregated real income comparisons between US states and European Economies, concluded that “French GDP per capita was lower than the 48th poorest US state, Arkansas, while German GDP per capita had fallen to become as prosperous as the 38th US state, Oklahoma.” The British economy, meanwhile, is increasingly falling behind even the seemingly overregulated, slow economies of the continent as a result of a lack of investment in capital and skills.
This is not to say that everything is alright in the United States. In comparison with the period 1946-1973, the US economy has, since then, shed more than 0.6% of its annual growth. If the US economy had instead continued on its previous trajectory, its aggregate size today would have been almost a third larger than it currently is. With Congress’ seeming inability to make decisions over the federal budget and with large entitlement programs on autopilot, America is on an unsustainable fiscal trajectory.
There are geopolitical consequences to slow growth in the United States and Europe. Under the constraints imposed by mandatory spending, it has proven hard to increase the defense budget back to a size adequate to America’s global commitments and the worsening international situation. With a hollowed-out industrial base, the United States could easily lose an international war against, say, China, the bipartisan Commission on the National Defense Strategy has warned. Earlier this year, Senator Roger Wicker urged an increase in defense spending to at least 5 percent of GDP.
In Europe, which has taken even greater advantage of its peace dividend, the gaps in military capabilities and defense production are still greater. Despite a hot war on the EU’s doorstep, major European economies such as France, Germany, or the UK, are either unwilling or unable to embark on a sustained rebuilding of their militaries. While a lot of attention is paid to Germany’s complacency and pacifistic political culture, defense spending is being held back as much, if not more, by the sorry state of the core European economies. France’s debt-to-GDP ratio is close to 100 percent, the UK’s is 85, and, while Germany’s debt is lower (58 percent of GDP), the country is suffering the consequences of years of disinvestment into its productive capabilities.
Measuring defense spending in proportion to GDP is arbitrary. What matters on the battlefield are real capabilities, resulting from absolute levels of spending. Three percent, or even five percent, of a low number remains a low number. What economic growth delivers is not only a bigger pie to slice but also the sustainability of public budgets over time. As a rule of thumb, any debt burden can be sustainable if the rate of economic growth exceeds the rate at which the government is borrowing its funds. If Western nations are faced with genuinely existential threats in the form of Russian imperialism in Eastern Europe and China’s challenge to the Indo-Pacific, alongside the gradual crumbling away of international norms such as the freedom of navigation in places like the Red Sea, it is hard to see how accelerating growth could not be a priority.
Our economic vitality matters for our soft power. The aftermath of the Great Recession has depleted the West’s aid budgets and led to a withdrawal from many developing countries. China’s control of supply chains of, say, rare earth minerals, or the reluctance of the ‘Global South’ to cooperate with the West in sanctioning Russia are all consequences of our declining economic weight and presence in the developing world.
Whether a prospective Harris administration will provide a compelling answer to the problem remains to be seen. There are many good ideas in the Draghi report, including calls to complete the single market, dismantle the barriers standing between inventors and investors, move European research and academic institutions to the forefront of global research, and complement decarbonization with an agenda to drive down the cost of energy—currently higher and more volatile in Europe than in the United States.
However, by framing the challenge in distinctly Brussels-centric terms of mobilizing additional spending at the EU level, through the use of a common debt instrument, Draghi all but ensures that his efforts will come to nought. The EU, as a fundamentally confederal structure without the power to tax much in terms of its own resources, is in an awkward position to issue new debt. Even during the pandemic, Germany had to be dragged kicking and screaming into a compromise that involved financing a small portion of the NextGenerationEU spending package through bonds backed collectively by member states.
For some, the EU is always facing a Hamiltonian moment, waiting for a radical push for federalization. But if the thirteen American colonies were essentially bankrupt and needed the federal government to act as a Deus Ex Machina, their financial woes had been the result of the War of Independence, not of open-ended redistribution schemes. Piling additional, EU-level debt on top of the already existing national debt burdens would make economic sense only if one is confident that the additional spending will be successful in bringing up European growth rates. On that front, especially given the EU’s previous record, reasonable people can disagree.
Moreover, as the Polish economist Marcin Piatkowski noted, it is striking how parochially Western European the Draghi report is. Countries of Central and Eastern Europe—the Baltic states, Poland, and Romania—have all seen fast rates of economic growth during the 2000s and even the 2010s. In real terms, per capita income almost tripled in Lithuania since 2000. In Italy, it remains roughly the same today as in 2000—a shocking indictment of the country’s political elites. Surely, there are lessons to be learned from the bold reforms that Eastern Europeans undertook as they were opening up their economies to foreign investment and seeking membership in the EU and NATO.
If painting with too broad a brush is unhelpful, there are common themes—both across Europe and within the broader transatlantic community. The EU as a whole has suffered from the continuing fragmentation of the single market and the absence of a well-functioning venture capital market. The United Kingdom and some US states—more so than, say, France—are being held back by the costs of building either housing or infrastructure, resulting from overregulation and the creation of veto points. And essentially the entire Western world is suffering from high energy prices, amplified by Russia’s invasion of Ukraine but driven fundamentally by a lack of investment into supply. In the UK alone, Foundations notes, energy prices tripled in nominal terms between 2004 and 2021—rising twice as fast as consumer prices at large.
Vogtle 3 and 4, in Georgia, are the first new nuclear reactors to be built in the United States in decades—arguably as a result of a dysfunctional regulatory framework that has driven the cost of nuclear energy far above those seen in other economies. While a bipartisan reform is underway, an unreasonable regulatory regime governing nuclear energy is only one example, among many, of the obstacles to scalable, productive investment. The National Environmental Policy Act (NEPA), a sprawling piece of federal legislation requiring extensive review of environmental impacts, has brought numerous construction projects, including in energy, to a halt. It is telling—and indeed encouraging—that the Biden administration has decided to exempt CHIPS Act-funded projects from NEPA’s strictures in order to ensure their timely completion.
Addressing the shortages in energy, housing, infrastructure, and human capital surely requires investment, both public and private. Contra the Draghi report, however, it does not require a European Grand Plan or a dramatic shift in attitudes toward the European project—nor does it require another iteration of massive federal spending bills as seen during the Biden administration.
Yet, on both sides of the Atlantic, the imperative of accelerating growth does require political leaders to act with urgency, in their local contexts, to liberate the productive capacities of their economies—especially by letting people and companies build and flood markets with cheap, clean energy. It can, and must, be done—not only for the sake of our prosperity but also for the sake of our geopolitical survival.
Dalibor Rohac is a senior fellow at the American Enterprise Institute in Washington DC. He is on X at @DaliborRohac.
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There is at the moment a very strange development. Many voters are expecting and many politicians (even among the right-wingers) are promising more control and government intervention while at the same time there is a decentralising trend as with cryptocurrencies and blockchains that could change the overall economic models, markets and global integration during the 2030s