How can Europe build a high-wage, high-productivity economy?

The world has never been wealthier

Over the past two decades, if one looks at the global economy through the lens of a corporate balance sheet, net worth has more than tripled. However, the world’s ballooning wealth has been driven largely by low interest rates and a flood of money into real assets, particularly real estate, rather than investment in productive stuff like digital infrastructure, renewable energy, and affordable housing. To put it very crudely: since the financial crisis, cheap money from central banks has driven up prices for land and buildings instead of being invested productively.

Since the 2007-2009 financial crisis, global productivity growth has stagnated. 

Lower productivity growth has led to lower wage growth; as the International Labor Organization (ILO) puts it: “Sustainable wage growth over long periods is only possible when there is significant productivity growth”. For some countries, the picture is even bleaker; the Organisation for Economic Co-operation and Development (OECD) reports that, for several of its members, even modest productivity growth has been decoupling from wage growth for decades, meaning a shrinking share of GDP has been going to labour since the 1990s.

What do our readers think? 

We had a comment from Bruno, pointing out that “productivity in the West has not increased in the last decades, despite all the technological developments”. How can Europe escape this trend and start building a high-wage, high-productivity economy?

We also had a comment from Yannick, who worries that interest rate hikes in response to rising inflation could hurt young people (and young homeowners in particular). What impact might interest rate rises have on the economy?

To get a response, we put both these comments to Jan Mischke, Partner and Research Leader on Europe at the McKinsey Global Institute (MGI) during an interview with Friends of Europe. You can see his responses in the video at the top of this post.

How can Europe build a high-wage, high-productivity economy? 

What impact will interest rate rises have on the economy? Let us know your thoughts and comments in the form below and we’ll take them to policymakers and experts for their reactions!

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