The Competitiveness Trap: Why Europe’s Obsession with Austerity and Deregulation is Failing
By Mariana Mazzucato
June 30, 2026
In the corridors of power from Brussels to Washington, a familiar, anxious refrain dominates the discourse. Political leaders and captains of industry, gripped by a pervasive fear of decline, repeat a mantra that has defined economic policy for decades: our economies are uncompetitive. The diagnosis, they argue, is simple—wages are too high, and the regulatory environment is too burdensome. The prescription follows with equal predictability: suppress labor costs, slash environmental and social protections, and watch as private investment floods back into the market.
However, a body of new research suggests that this obsession with "competitiveness" is not merely outdated; it is fundamentally detached from the reality of the modern global economy. For the past twenty years, capital in Europe has been both abundant and cheap, and corporate profits have remained robust. Yet, despite these favorable conditions, investment has stagnated, productivity growth has ground to a halt, and real wages have failed to keep pace with the cost of living. Even more alarming, the share of total income accruing to labor has consistently shrunk. We are not suffering from a lack of competitiveness; we are suffering from a failure of direction.
The Great Disconnect: Main Facts and Economic Paradoxes
The central paradox of the current era is the divergence between corporate health and macroeconomic vitality. Historically, standard economic theory suggested that high profitability and low interest rates would naturally incentivize firms to invest in new machinery, research, and development, thereby boosting productivity and raising wages.
The data, however, paints a different picture. In Europe, the "competitiveness" narrative ignores the structural reality that capital has been essentially free for long stretches of the last two decades. While firms have accumulated record-breaking cash reserves, they have largely funneled these resources into stock buybacks, dividend payouts, and financial engineering rather than into the real economy.
This is the "competitiveness trap." By focusing exclusively on lowering costs—labor and regulatory—policymakers have inadvertently incentivized a race to the bottom. When labor is viewed solely as a cost to be minimized rather than an asset to be cultivated, firms lose the incentive to innovate. If you can simply cut wages to maintain profit margins, why bother investing in the complex, long-term R&D required to improve productivity?
A Chronology of Stagnation: Two Decades of Misplaced Priorities
To understand how we arrived at this impasse, we must trace the evolution of the European economic consensus over the last twenty years.
- 2006–2008: The Pre-Crisis Illusion: During the mid-2000s, Europe experienced a period of growth that was largely fueled by credit expansion and a focus on financial services. The "Lisbon Strategy," which aimed to make the EU the most competitive knowledge-based economy in the world, largely failed because it lacked the mission-oriented investment necessary to bridge the gap between innovation and commercialization.
- 2009–2014: The Austerity Pivot: Following the Global Financial Crisis, the narrative shifted toward fiscal consolidation. "Competitiveness" became synonymous with "Internal Devaluation." Countries in the periphery were forced to lower wages and social spending to regain competitiveness relative to the core. This resulted in a lost half-decade of growth and deep social scarring.
- 2015–2020: The Digital/Green Transition Lag: Despite the urgency of climate change and the digital revolution, private investment remained tepid. Policymakers continued to rely on "de-risking" private capital rather than leading the transition through public-private partnerships.
- 2021–2026: The Post-Pandemic Re-evaluation: The COVID-19 pandemic and subsequent supply chain shocks exposed the fragility of the "lean" production models favored by the competitiveness hawks. Yet, as we move into the second half of this decade, the old calls for deregulation and wage suppression are resurfacing, ignoring the evidence that such policies have historically failed to stimulate meaningful growth.
Supporting Data: When Capital Doesn’t Work for the Many
The statistical evidence is damning for the proponents of the competitiveness orthodoxy.
- The Investment Gap: Business investment as a percentage of GDP in the Eurozone has remained chronically lower than its pre-2008 peaks. The decline is not due to a lack of liquidity; corporate savings are at historic highs.
- Productivity Stagnation: Productivity growth in Europe has been consistently lower than in the United States and parts of Asia. This is directly linked to the decline in capital deepening—the amount of capital per worker.
- Labor’s Shrinking Slice: According to recent longitudinal studies, labor’s share of national income has declined by nearly 5 percentage points across the OECD since the early 2000s. This is a direct consequence of the shift from a wage-led growth model to one driven by capital appreciation.
- Wage Stagnation: While productivity, however slow, has grown, real wages have remained flat. This creates a "demand-side" problem: if workers cannot afford to buy the goods and services they produce, the incentive for companies to expand capacity remains non-existent.
Official Responses: The Clash of Ideologies
The response from international institutions and government bodies remains fractured. On one side, the "Old Guard" (often found in finance ministries and central banks) continues to advocate for supply-side reforms. They argue that if Europe can only reduce the "friction" of labor markets and environmental standards, it will become an export powerhouse once again.
Conversely, a new school of thought—which this research aligns with—argues for a "mission-oriented" approach. This perspective suggests that governments should stop trying to "level the playing field" through deregulation and start "tilting" it toward specific goals, such as decarbonization and digital inclusion.
Official reports from the European Commission have recently begun to acknowledge the need for a "Green Industrial Policy." However, these initiatives are often undermined by a lack of scale and a reluctance to challenge the fiscal rules that limit state investment. The resistance to this shift is not purely economic; it is political. It requires admitting that the last twenty years of policy were based on a fundamental misreading of what drives growth.
Implications: The Path Forward
The implications of continuing down the path of competitiveness-at-all-costs are severe. If we persist in suppressing wages and neglecting public investment in infrastructure, education, and R&D, we will not achieve competitiveness. Instead, we will achieve economic sclerosis.
1. The End of "De-risking" as a Panacea: We must move beyond the idea that the state’s only role is to de-risk private investment. Instead, the state should be an active participant, setting the direction and sharing in both the risks and the rewards of innovation.
2. Redefining Productivity: We need to stop measuring productivity solely through the lens of labor-cost reduction. True productivity gains come from better technology, smarter organizational practices, and a highly skilled, well-compensated workforce.
3. Strengthening the Social Contract: A thriving economy is not one where the bottom is pushed down, but one where the floor is raised. Higher wages are not a burden on competitiveness; they are a driver of demand and a signal to firms to innovate their way out of higher costs.
4. Mission-Oriented Governance: Governments must embrace their role as investors of first resort. By setting grand challenges—whether it is the transition to renewable energy or the transformation of the healthcare sector—the state can create the market certainty that private firms currently lack, encouraging them to invest their idle capital.
Conclusion
The "competitiveness" obsession has become a crutch for policymakers who are afraid to take the risks necessary to build a modern, inclusive, and sustainable economy. We have spent two decades trying to force a square peg into a round hole, believing that if we only squeezed the economy hard enough, growth would follow.
The evidence is now undeniable: capital is not the problem, and labor is not the enemy. The problem is a lack of vision and a refusal to acknowledge that the old orthodoxy has run its course. It is time to stop obsessing over the cost of doing business and start focusing on the value we are trying to create. Only by abandoning the tired, destructive narrative of competitive austerity can we begin to build an economy that works for everyone.
