The European Commission is right to examine why Europe's economy is losing ground to global competitors. But by focusing primarily on energy costs, its latest competitiveness report overlooks a more important question: why some European economies are becoming steadily more productive while others are falling behind.
A worker attends to a robotic arm at engineering company in Germany. Photo: Getty Images
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On 16 July, the European Commission published a report examining the global competitiveness of the European economy. It appeared almost exactly one year after the announcement of a new trade agreement between the EU and the United States – a deal that the World Economic Forum warned could undermine Europe's competitiveness.
With EU-US trade accounting for roughly one quarter of the bloc's external trade, according to UNCTAD and WTO data, any deterioration in Europe's competitiveness could have significant macroeconomic consequences. The Commission is therefore right to examine the bloc's ability to compete in the global economy.
Energy Matters – But It Is Not the Whole Story
The report identifies one overriding problem: Europe's dependence on imported fossil fuels. "Europe's reliance on imported fossil fuels has repeatedly exposed it to geopolitical shocks. These have driven up energy prices for both households and companies, and dragged down our competitiveness."
To address the issue, the Commission proposes doubling electricity's share of total energy demand from 23% today to 46% by 2040 while also reforming the Emissions Trading System to reduce the cost burden of the transition.
Yet those recommendations sit uneasily together. One calls for a much faster shift towards electrification, while the other implicitly acknowledges that the transition itself has become increasingly expensive.
Overall, however, the report remains focused on expanding electricity use. Its overarching objective is to narrow "the price gap between electricity and fossil energy costs" and thereby reduce production costs for European businesses.
That strategy could indeed lower energy prices. But cheaper electricity alone is unlikely to transform Europe's competitiveness. In German manufacturing, for example, energy accounts for only around 7% of total business costs.
The exact share naturally varies between industries. Nevertheless, the German figure illustrates that competitiveness depends primarily on factors other than energy prices.
That raises an important question the Commission leaves largely unanswered: had it examined the broader drivers of competitiveness, what different policy recommendations might it have reached?
Extensive research has already explored that question. A 2024 study by the Elcano Royal Institute, for example, identifies nine major drivers of economic competitiveness. Two factors often highlighted in public debate, however, receive comparatively little attention: labor costs and labor productivity.
Comparing labor costs is not straightforward. While wages are generally higher in the United States than in Europe, comparisons of unit labor costs in export industries consistently favor the US.
Source: RaboResearch, based on data from Eurostat, BEA, BLS and GGDC
Because unit labor costs incorporate productivity, they offer a more meaningful comparison than wages alone. That makes labor productivity an essential variable in any serious assessment of Europe's competitiveness.
More importantly, productivity data reveals a striking pattern within the European Union itself.
Inflation-adjusted labor productivity data from Eurostat shows a broad geographical divide between eastern and western member states. Although not absolute, the pattern largely follows the route of the former Iron Curtain.
Between 2015 and 2025, labor productivity across the EU increased by 7%. Eleven of the sixteen countries that exceeded that average were in Central and Eastern Europe, stretching from Estonia to Romania, with Croatia and Slovenia also outperforming the bloc.
The remaining five above-average performers were Ireland, Cyprus, Denmark, Malta and Sweden. Of the sixteen countries, only Sweden recorded productivity growth below 10%.
By contrast, every one of the eleven countries that fell below the EU average was located in Northern, Western or Southern Europe: Finland, Austria, Belgium, France, Germany, Luxembourg, the Netherlands, Greece, Italy, Portugal and Spain.
The gap is striking. Ireland recorded the strongest productivity growth over the decade, at 38.9%, followed by Poland (34.3%) and Romania (33.8%). At the other end of the scale, productivity barely increased in Greece (0.2%) and actually declined in Italy (-1.2%) and Luxembourg (-4.5%).
Looking Beyond Energy
Such wide differences in labor productivity suggest that Europe has much to learn from comparing its highest- and lowest-performing economies. The question becomes even more pressing given the outright decline in productivity in Italy, the EU's fourth-largest economy.
Energy prices undoubtedly matter. So do taxes, regulation and other forms of government intervention in the economy. But given the central role that workers play in every business, a deeper understanding of why productivity is rising rapidly in some parts of Europe while stagnating in others would do far more to strengthen the continent's long-term competitiveness than focusing on energy costs alone.
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