https://constitutionofinnovation.eu/#endnote-mutual-recognition-book
Optical illusion on the floor of the Duomo, Florence
In 1945, Europe was ruined. Average incomes were 22 percent lower than the United States at the start of the war; by the end that gap had grown to 75 percent. These economies were different in kind, too. In 1950, for every farmer in America there were 2.7 manufacturing workers, compared to just 1.3 in Germany and 0.92 in France.11. From the GGDC 10-Sector Database.
But rather than stay poorer, as one might have expected, Europe rapidly rebuilt itself. Not just did it reach its previous levels of development within nine years, it then blew past them. Even though the decades after the war saw some of the fastest growth in American history, Europe grew much faster. In thirty years after 1950, the core European economies grew so fast that consumption per capita tripled while their citizens worked 400 fewer hours per year.22. Bergeaud, Antonin, Gilbert Cette, and Rémy Lecat. Productivity trends in advanced countries between 1890 and 2012, Review of Income and Wealth 62, no. 3 (2016): 420-444.
Part of this growth was catch-up: converging on the frontier America had set for us. But part of it was pushing the technology frontier forward. By the end of the 1970s, Europe was mass-producing jet engines and nuclear power plants. This success was not an accident; it was ‘constituted’ through a set of common beliefs, proved principles, and appropriate practices that stimulated innovation.33. As in Friedrich Hayek’s 1960 book, The Constitution of Liberty, we use ‘constitution’ to mean the basic principles and practices needed for innovation and prosperity to return to Europe, not a legal document.
However around 1980, this unprecedented growth period ended. While the United States maintained a remarkably constant 2 percent growth rate in average income, the European core economies decelerated, slowly and then sharply. Since 1995, Europe’s average annual growth has been just 1.1 percent; since 2004, it has been a mere 0.7 percent – all while the United States has continued on its steady track. By 2022 the relative gap in output per head has returned to where it was in 1970. Decades of convergence were surprisingly wiped out.44. All figures from “The Past, Present and Future of European Productivity”, written by Antonin Bergeaud for the ECB Forum on Central Banking, July 2024.
A long list of reports by European luminaries have diagnosed this decline. The 1988 Cecchini Report calculated the enormous ‘cost of non-Europe’; the 2004 Sapir Report identified Europe’s ‘disappointing’ growth; and the contemporaneous Kok Report argued the EU was failing through lack of political will. In 2010, Mario Monti warned that the internal market was suffering from ‘integration fatigue.’ Last year, Enrico Letta found the European market critically fragmented, while Mario Draghi concluded that Europe’s competitiveness had fallen so far it now required ‘radical change’ just to survive.
Despite these warnings, the European Union’s response to its decline has been weak where it needs to be strong, and active in the areas where it should be passive. The problem is not a lack of reports, but a system that refuses to prioritise.
The continent faces two options. By the middle of this century, it could follow the path of Argentina: its enormous prosperity a distant memory; its welfare states bankrupt and its pensions unpayable; its politics stuck between extremes that mortgage the future to save themselves in the present; and its brightest gone for opportunities elsewhere. In fact, it would have an even worse hand than Argentina, as it has enemies keen to carve it up by force and a population that would be older than Argentina’s is today.
Or it could return to the dynamics of the trente glorieuses. Rather than aspire to be a museum-cum-retirement home, happy to leave the technological frontier to other countries, Europe could be the engine of a new industrial revolution. Europe was at the cutting edge of innovation in the lifetime of most Europeans alive today. It could again be a continent of builders, traders and inventors who seek opportunity in the world’s second largest market.
The European Union does not need a new treaty or powers. It just needs a single-minded focus on one goal: economic prosperity. This prosperity is necessary for its own sake and for all the other things we want Europe to be: a bulwark against Russian tyranny, a generous supporter in lifting the world out of poverty, and a champion against climate change.55. As Jean-Jacques Servan Schreiber observed in the 1960s, “The degree of autonomy, prosperity, and social justice that a country aspires to depends upon its growth rate. A society enjoying rapid growth is free to define its own form of civilization because it can establish its order of priorities. A stagnant society cannot really exercise the right of self-determination”. See Jean-Jacques Servan-Schreiber, The American Challenge (Penguin, 1969), p182.
To achieve this prosperity, we need to return the Union back to its original intent, as a federal body dedicated to economic development through a common and free market.
The neglect of that purpose has been overwhelming. The European Union currently pursues a long list of goals, including (as given by the Commissioner titles): promoting the ‘European way of life,’ ‘health and animal welfare’, ‘environment, water resilience and a competitive circular economy’, ‘intergenerational fairness, youth, culture and sport’ or ‘social rights and skills, quality jobs and preparedness’. Meanwhile, the internal market has become so fragmented that, according to recent IMF analysis, internal trade barriers are equivalent to a 44 percent tariff on goods and 110 percent on services. And, as Mario Draghi famously pointed out, no European company worth over €100 billion was set up from scratch in the last 50 years; the continent that birthed the industrial revolution has wrecked its own ability to catch the digital one.
These are not accidents of history; they are consequences of our choices. In recent decades, the Union and its Member States have confused regulation with progress and bureaucracy with integration.
If the European Union keeps stagnating, our countries will not be able to maintain the things its citizens take for granted: unemployment benefits, free healthcare, lifelong pensions, and affordable education. Growth is necessary to pay for existing commitments, and fulfill the recent deluge of new ones. Stagnation is going to make the European welfare state a utopia of the past.
This paper proposes a different path, one guided by pragmatism, not ideology. This requires a clear set of principles to focus the actions of the European Union on a few critical objectives and act decisively to achieve them. To understand how to correct its course, we must first examine how the EU lost its way.
The European project began with a clear purpose. The 1950 Schuman Declaration proposed integrating the coal and steel industries – the raw inputs of war – to make conflict between France and Germany ‘not merely unthinkable, but materially impossible.’ This approach, known as functional integration, was based on the proposition that when economies become interdependent through trade, war becomes prohibitively expensive.6