European productivity from a regional perspective

The Draghi report is flooded, even in its preamble, with references to the persistent productivity gap with the US, the low productivity growth in the EU, and the need to boost it in a context of a rapidly ageing population.1 Thus, a sustained and higher increase in productivity has become a top priority for the European economy, as it would simultaneously allow for an improvement in citizens' purchasing power, help mitigate the effects of the demographic transition – including the sustainability of public finances –2 as well as help maintain a minimum level of economic relevance in the new global geopolitical scenario. In this Dossier, we explore recent dynamics in the EU’s productivity, focusing on its territorial dispersion and the differentiating factors between the best and worst performing regions. We begin with some context by outlining the main trends.

The debate around what productivity is and how to measure it would probably fill an entire Dossier, so it is worth specifying from the outset which metrics we will use as a reference here and in the following articles. We opt to use GDP per hour worked, as it is considered a relatively uniform measure of production capacity (value added generation) per unit of working time. It is also less sensitive to the cycle than productivity per employee – as seen during COVID-19 – and is easily observable compared to the complications involved in estimating total factor productivity (TFP).3 Moreover, GDP per hour worked is the metric which, according to the Draghi report, goes further in explaining the differences in per capita income between the European economy and the US. As for its measurement, we use statistics in real terms to analyse its evolution over time and abstract from the impact of prices, and when making a cross-sectional snapshot between EU Member States or regions, we adjust the nominal values for differences in purchasing power parity in each territory. In this way, our goal is to achieve the best possible approximation to a tangible idea – such as physical goods or services provided – rather than one based on monetary concepts or productivity.

The debate around metrics quickly takes a back seat when we find that they all lead us to a similar diagnosis and, more importantly, one that is not favourable for the aggregate productivity of the European economy. Thus, real GDP growth per hour worked in the EU has shown a notable slowdown over the past 30 years, decreasing from an annual average of 1.7% in the period 1996-2007 to 0.8% in 2008-2023, and falling below 0.5% since COVID-19 (see first graph). Productivity growth since the Great Recession is also less than half of that observed in the previous decade if we look at the figures in terms of GDP per employee or TFP. The comparison with other developed economies does not reflect well on European productivity either (see second chart). According to OECD estimates, GDP per hour worked in the EU would today be equivalent to 85% of the value for this group of economies, compared to 95% in 1995. Moreover, it would have followed a similar trend relative to the country considered to be the technological frontier, the US, decreasing from 65% to 55% in the same period.4

The data for the EU as a whole, or even within the Member States, conceal highly disparate realities between territories.5 As a starting point for the more in-depth analyses presented in other articles of this Dossier, we introduce here a general overview of the regional differences in productivity levels and the recent dynamics. We take as a reference the most detailed territorial division defined by Eurostat, known as NUTS3, which covers approximately 1,165 territorial units across the 27 countries that make up the EU. In the case of Spain, this corresponds to the provinces and autonomous cities.

With data for 2023, the geographical distribution shows a concentration of territories with higher productivity in the central and northern areas of the EU, while the lowest values are recorded in countries in the east and south (see map). Specifically, among the NUTS3 divisions where GDP per hour worked is at least 25% higher than the EU average, a significant number of regions are found in Ireland, Denmark, Germany, Belgium, France, and Austria. Conversely, among those with productivity at least 25% below the average, we find a majority of territories in Bulgaria, Greece, Poland, Portugal, Croatia, Hungary and the Baltic republics.