Europe's economic lag: Lack of young giants stunts growth

None of the 25 largest European listed companies has been established in the last 50 years. In the USA, half of the large firms, including all the largest, are relatively young. This is one reason why, in terms of economic development, Europe has fallen behind the United States.

Former President of the European Central Bank, Mario Draghi, highlighted in a prominent report on Europe's competitiveness that Europeans have lost the knack for building large enterprises capable of conquering the global market.

"In the European Union, there is not a single company with a market capitalisation exceeding £87 billion, which was founded from scratch in the last 50 years. Meanwhile, all six US companies with a market capitalisation above £870 billion were established during this period," noted the report, endorsed by Draghi.

Economists from Deutsche Bank, adhering to the adage that a picture is worth a thousand words, decided to illustrate the former ECB president's thesis. They considered the 25 largest public (i.e., listed) companies from the European Union and the USA, showcasing their founding dates and market values.

It transpires that the youngest of the large European companies is Germany's SAP, a software producer supporting business management. The company was founded in 1972, which is 52 years ago. In 1984, under half a century ago, ASML was established, which ranks third among the largest EU enterprises. However, it emerged from the merger of two companies with much longer histories: ASM and Philips.

In comparison, 12 out of the 25 largest US companies were founded after 1974. Among them are six companies with a capitalisation exceeding £870 billion. These include Apple, Microsoft, Nvidia, Amazon, Alphabet, and Meta.

"So, European companies indeed lack scale and innovation, which leads to weak productivity growth," concluded Jim Reid, an economist at Deutsche Bank.

Why is the lack of young, large companies a problem? Draghi's team explains that long-established companies usually operate in industries where technological progress is slow. This, in turn, means they spend less on research and development than younger companies operating in new industries. And even if they spend a lot, they achieve worse results. For instance, in 2003, both in Europe and the USA, the largest expenditures in this area were incurred by automotive companies. In Europe, this remains unchanged to this day. Meanwhile, in the USA in 2012, the most significant spending on innovation was by software and computer hardware companies, and in 2022, companies from the broader digital sector (Alphabet, Meta, Microsoft).

Expenditures on R&D are clearly correlated with the pace of labour productivity growth. According to Draghi's report authors, EU countries allocate an average of about 2.3 percent of GDP to this purpose, while the USA allocates 3.5 percent of GDP. This is the main reason why, while labour productivity was 5 percent lower than in the USA in 1995, today it is 20 percent lower (as shown in the chart below).

The economists from Draghi's team identified several reasons why Europe cannot expect large companies in modern sectors. The most important is that new, innovative enterprises are unable to scale up their operations. This is mainly due to the persistent fragmentation of European markets: both goods and services, as well as capital.

In Europe, therefore, many start-ups appear, but their development is often blocked by non-uniform regulations in EU countries and problems with access to financing. At a certain stage, many of them move to the USA, where it is much easier to find investors. The effect is that in 2023 only 8 percent of "unicorns", i.e., new enterprises worth over £870 million, came from the EU. By comparison, the USA has produced 66 percent of "unicorns" and China 26 percent.