ECB’s Nagel Says Europe’s Productivity Gap With U.S. Has Widened Sharply Since 2019

21 November 2025

By David Barwick – FRANKFURT (Econostream) – Europe’s productivity gap with the United States has widened markedly in recent years, driven by both structural factors and recent shocks, European Central Bank Governing Council member Joachim Nagel said on Friday.

Nagel, who heads the Deutsche Bundesbank, observed in a speech at the European Banking Congress that labor productivity in the United States has risen by almost 61% since 1995, compared to a little more than 39% in the European Union. “Almost half of the productivity gap that has opened up over the past thirty years stems from just the last five years,” he said.

He attributed the recent divergence to a higher structural U.S. productivity path, pandemic-related dynamics that boosted U.S. output per hour, Europe’s energy terms-of-trade shock following Russia’s invasion of Ukraine, and much looser U.S. fiscal policy. Between 2020 and 2024, the average U.S. fiscal deficit was more than triple that of Europe, he noted.

Despite weaker productivity growth, Europe’s standard of living has held up better than expected, Nagel argued. Real GDP per capita increased by 50% in Europe from 1995 to 2024, versus 58% in the United States. Europe “successfully managed to activate previously untapped labor reserves,” which helped offset slower productivity, he said.

Still, Nagel warned that raising productivity is essential if Europe wants to maintain living standards as investment needs rise and labour supply tightens. He cited pressures from defence spending, a more difficult global trade environment, demographic aging and the transition to a carbon-neutral economy.

He called for simplifying and harmonizing EU regulation to reduce compliance costs for firms. He highlighted the proposed “28th regime” as an option that would let companies operate under a single EU-wide legal framework rather than navigating 27 national systems. Such an approach could “help businesses scale up faster” and accelerate cross-border expansion, he said.

Nagel also urged deeper and more integrated European capital markets to improve access to equity financing. Completing the Savings and Investments Union is essential both for start-ups that depend on venture capital and for established firms seeking to grow, he said. Europe’s fragmented markets “mak[e] it harder for companies to raise the funds they need,” he said

Important initiatives are already in motion, he said, but their success depends on implementation with “speed and ambition,” combined with targeted national reforms.

Nagel concluded that Europe faces major challenges but has the ability to close the productivity gap if it acts decisively. “Europe could and should do better,” he said. “Let’s turn [these challenges] into something productive.”