EU Productivity Gap: More Big Firms Could Close Gap

The European Union faces a significant productivity deficit compared to the United States, with EU workers producing 20% less output per hour. Academic studies indicate this gap has widened since 1995.

The European Central Bank (ECB) suggests that a key factor is the EU's smaller proportion of large companies. If the EU mirrored the US in its business size distribution, the productivity gap could be reduced by approximately one-third, even without altering existing productivity levels of individual firms.

Large companies, defined as those with at least 250 employees, are substantially more productive, generating over double the annual value added per worker compared to firms with fewer than 10 employees. This disparity highlights the importance of enabling businesses to scale up.

Beyond firm size, the ECB identifies other contributing factors to Europe's weaker productivity, including lower innovation rates, fragmented regulations, and less developed capital markets. These issues collectively hinder companies' ability to grow and compete internationally.

In response, the ECB supports the proposed "EU Inc." framework. This initiative aims to establish an EU-wide corporate law regime, modeled loosely on Delaware's corporate framework in the US, to reduce barriers to cross-border business activities and strengthen the Single Market.