IMF: Closing Structural Gaps Could Boost EU Productivity 20% and Nearly Close US Income Gap
SDG 8: Decent Work and Economic Growth | SDG 17: Partnerships for the Goals
Institutions: Ministry of Finance | NITI Aayog
The IMF Note, “Making European Reforms a Success on the Ground,” addresses Europe’s subdued growth, which leaves its per-capita GDP nearly 30 percent lower than the US. The Note argues that decisive action has been lacking due to uncertainty over the size and distribution of reform gains.
The IMF estimates the potential of fully closing structural policy gaps (domestic reforms, trade costs, and labor mobility barriers) would raise aggregate EU productivity by 20.2 percent. Factoring in second-round effects (from higher investment), this combined effort would nearly close the per capita income gap with the US. Even an intermediate package, halving these gaps, yields substantial productivity gains of 8.7 percent.
The analysis shows this productivity gap is foremost driven by inefficiencies in production hubs (which account for 60 percent of EU GDP). While most regions gain from reforms, some low-density regions could see productivity fall due to out-migration when labor mobility is eased. The IMF stresses that carefully designed national policies, such as ensuring affordable housing in hubs and frontloading domestic reforms in lagging regions, are essential to maximize gains and ensure they are widely shared.
The IMF’s novel regional analysis—quantitatively linking national structural reforms (a core focus of India’s long-term growth agenda) with estimated regional/sub-national impacts—is highly relevant for India’s pursuit of inclusive growth. Estimating and publicizing the regional benefits of major reforms (e.g., affordable housing in Mumbai/Bangalore hubs, labor market streamlining) is essential for building political consensus and proactively mitigating the local uncertainty that slows down decisive policy action.
What is the role of labor mobility and trade costs in the calculated 20.2 percent productivity gain?→ The total 20.2 percent gain is split into roughly three parts: national structural reforms (closing domestic policy gaps) contribute about 9.9 percent; and deepening the Single Market (reducing intra-EU trade costs and labor mobility barriers) contributes the remaining half (trade costs add 5.7 percent, and mobility friction adds 4.5 percent). This confirms that both national commitment and continental integration are equally vital for high growth.
Follow the full report here: Making European Reforms a Success on the Ground