Europe’s biggest economic wounds are self-inflicted

When European Central Bank president Christine Lagarde warns that Europe’s “old growth model” has aged and its reliance on exports is now a “vulnerability”, it is worth listening. Central bank heads rarely use such choice language.

In an eye-opening speech in Frankfurt last month, Ms Lagarde said the bloc’s export engine had stalled and its industrial base – above all in Germany, though she did not mention it by name – is losing steam.

She urged policymakers to boost the domestic economy, arguing that its “latent strengths” have helped to cushion recent shocks – a fair observation, given the worst fears about Russia cutting off energy exports to Europe in 2022 did not materialise.

European Central Bank president Christine Lagarde delivers her keynote speech at Euro Finance Week, a week-long conference in Frankfurt, Germany. Reuters

Europe’s economy has grown a little faster than expected this year but that modest rebound masks deeper structural problems. The single market remains fragmented, holding back the bloc’s productivity, growth and living standards.

The bloc's economic divisions are not just a localised problem; they are pushing capital, companies and innovation abroad, with knock-on effects for the global economy.

It is tempting to blame these struggles on the conflict in Ukraine, or trade tensions with the US and China. In reality, Europe’s enduring weakness is largely self-inflicted – the result of policy choices that have allowed the single market to fragment from within.

Five trends show how this is happening. First, non-tariff barriers to trade between member states have increased. The ECB, Mrs Lagarde’s own institution, estimates that internal obstacles are now equivalent to tariffs of 100 per cent in services and 65 per cent on goods.

While those estimates can be debated on technical grounds, the underlying point stands: too many rules still protect domestic providers in Europe’s vast service sector from internal competition, often justified on safety grounds.

Second, EU governments still buy almost everything at home. Research shows member states source little across borders. In theory, the single market guarantees that companies can bid for public contracts across borders . In reality, there’s strong home bias: less than 5 per cent of contracts go to firms based in another EU country.

Europe still has deep pools of savings, skilled labour and strong institutions ...