National-Level Priorities to Lift Growth in the EU: Why, What, and How

National-Level Priorities to Lift Growth in the EU: Why, What, and How?

September 20, 2025

Thank you for the opportunity to address you today on the national-level reform priorities of EU countries.

History shows that high productivity growth in Europe is possible. Between the end of World War II and the end of the last century, the EU outpaced U.S. labor productivity growth.

But when the information and communication technologies (ICT) revolution let productivity surge in the U.S., starting in the late 1990s, the EU started to fall behind.

Today, per capita incomes in Purchasing Power Parity (PPP) terms for many EU countries are close to 30 percent lower than in the U.S., with the bulk of the shortfall driven by a significant productivity gap.

By now, it is well understood that the path to closing this gap will require reforms both at the European and the national level. A deeper single market would allow Europe's firms to realize economies of scale at a time of shrinking global trade opportunities. And national reforms would address some of the significant remaining structural policy gaps that are holding back productivity. What is more: tackling both promises would make the combined impact larger.

In today's speech, I will offer a blueprint for action. I will outline what we see as the EU's main structural policy challenges at the national level; provide you with what we see as the key national-level structural reform priorities across the EU members and with estimates of what implementing these reform priorities can potentially achieve; and outline effective strategies to make these reforms happen.

Many European countries undertook major reforms at the national level in waves between the mid-1990s and mid-2010s-triggered by economic stagnation, outright crises, or EU accession. In most cases, these reforms were followed by strong growth performance. Key examples include Denmark, Ireland and the Netherlands during the 1990s, Germany during the 2000s, and the growth momentum created by the reform efforts around the 2004 EU expansion.

Yet reform activity has faded considerably since then, and the remaining structural and institutional shortcomings became more penalizing as the ICT revolution unfolded around the turn of the century.

This is not to say that Europe does not have "champions" that offer best-in-class performance. Indeed, Europe boasts leading examples across many structural policy areas. Europe's problem is that the gap between the global frontier and the less-well performing countries is often significant. In other words, stalling reform momentum has left a lot of unfinished business.

But where to begin? Our IMF country teams have taken stock of the structural reform gaps across all main policy areas, weighed the growth implications of these gaps, and selected a set of key reforms offering the highest growth impact.

Labor market and human capital-building reforms are most urgent for most countries. Reforms are needed to build human capital, expand labor supply, address skills mismatches amid rapid technological change, and set up labor market regulations that facilitate workers going where they are most productive.

The revamping of fiscal-structural frameworks comes in second in terms of priority to lift growth. Tax and public investment management reforms can reduce distortions and administrative burdens, leading to higher productivity and in some cases also higher labor force participation.

For most old member states, which tend to be closer to the technological frontier, boosting innovation is central. Priorities include removing red tape, deepening capital markets, and enhancing innovation policies. For some new member states, strengthening governance is critical to reap the gains from other reforms and sustain convergence.

Would a bold reform push that addresses these key priorities be worth it? The answer is a resounding 'yes.'

Closing just half of the remaining structural policy gaps between where EU countries stand today and where they could be to maximize their growth potential in the top-5 priority areas could raise GDP by close to 6 percent in the EU over the medium term. Growth gains from reforms would be even higher for member states that joined since 2004, due to their larger structural policy gaps.

For the EU as a whole, these gains are equivalent to narrowing around one-fifth of the EU's income per capita gap with the US.

As mentioned earlier, Europe has several "champions" that offer best-in-class performance.

They offer valuable lessons for the entire Union, even if they themselves also have room to improve. Showcasing countries with the most growth-friendly policy settings in each structural policy area provides an opportunity to share and emulate the best practices.

For example, in innovation policy and digitalization, the Netherlands stands out-with top-tier internet access and digitalization, strong stakeholder collaboration, with deep-tech hubs like Brainport-Eindhoven, essential for its leading status in productivity and technological frontier.

So the EU offers excellent examples of the policy frontier others can aspire to, but these examples do not necessarily convey how the outcomes were achieved. How do we get there?

It is difficult to turn structural reform plans into action. When reforms mean changing the way we do things, more often than not, there are deeply entrenched interests that need convincing. This is why successful structural reforms require not only carefully designed strategies but also lots of strong political leadership.

But we can learn from what worked in the past. A few key elements can significantly smooth the path and accelerate implementation.

First, start with early and deliberate communication. Make the case for the need to pursue reforms and tackle misperceptions head-on-like Poland did during its 1990s pension reform by highlighting the severe fiscal consequences of inaction.

Second, build strong institutional setups. These foster trust through impartial analysis and consensus building. Like the tripartite labor-market dialogues in Denmark.

Third, time the reforms right, and sequence and bundle them to amplify gains and reduce political resistance. For example, Germany did just that in the early 2000s-pairing changes in unemployment benefits with a restructuring of the Federal Employment Agency and the introduction of active labor market policies.

Last but not least, use fiscal policy strategically. Use targeted and temporary measures to compensate the losers, front-load gains, or buy out rents-like Ireland's tax relief for taxi drivers during taxi services liberalization. At the EU level, make good use of the Stability and Growth Pact and performance-based EU budgeting by committing to strong reforms.

As mentioned earlier, national reforms are only one part of the EU's reform agenda. The other part consists of EU-level reforms around the single market along the lines discussed in the Draghi and Letta reports. A coordinated push of national and EU-level reforms would exploit synergies and unlock the full growth potential of both agendas.

In most areas, national and EU-level efforts go hand in hand. In some cases, failure to implement reforms at one (national or EU) level can blunt the impact of reforms pursued at the other level. In other instances, not pursuing reforms jointly would lead to missed opportunities.

For example, cutting domestic entry barriers in services sectors can amplify the gains of removing cross-border barriers to trade in goods and services. Conversely, EU-level reforms focusing on advancing the capital markets union can magnify the benefits from certain domestic efforts to deepen firms' access to venture capital.

These interactions underscore the key role the EU's MFF can play as a tool to exploit synergies.

It can be done

The stakes for Europe have never been higher. Europe's history-and countless successful reform examples-is a testament to what can be done. We have a blueprint for reform. Yet, turning a structural reform plan into action requires carefully-designed implementation strategies and decisive political leadership to drive them forward and unlock higher growth in the EU.