March 11, 2026Unleashing Europe’s Economic Potential

Opening Remarks by Alfred Kammer, Director, IMF European Department, at HEC, Paris

March 11, 2026

Good evening.

Thank you very much to the two student associations, HEC European Horizons and HEC Economic Advisory, and to Charlotte Mahnke for the invitation. It is a pleasure to be here at HEC tonight.

The last time I was in Paris, in autumn 2025, we launched our latest Regional Economic Outlook for Europe-our biannual assessment of the region's economic prospects. And I was very happy that some of you participated in that event.

My message then was simple: despite having the people, the technology, and the savings to grow faster, Europe appears to be settling into a path of slow and mediocre medium-term growth.

Tonight, I would like to do two things. First, explain why this is happening. And second, outline what policies could structurally improve Europe's outlook.

In short, Europe needs to raise productivity and strengthen resilience. Achieving both requires completing the EU Single Market. And this is a project that would require EU-level as well as national reforms.

This means advancing the savings and investment union, reducing frictions to cross-border trade in goods and services, and enhancing labor mobility. It also means integrating Europe's energy market.

The Russian gas shut-off and the resulting energy crisis in 2022-when energy prices surged and shortages were feared in parts of the EU-is still fresh in our minds. Europe adjusted impressively, and the worst was avoided.

But the underlying vulnerabilities have not disappeared. Europe remains highly dependent on imported fossil fuels. And recent events remind us how quickly energy markets can shift. Following the onset of the conflict in the Middle East, European natural gas prices nearly doubled in just one week, against the background of yet again low gas storage levels.

Stable and affordable energy is essential for Europe in a rapidly changing world. It matters not only for traditional industries but also for the industries of the future-including artificial intelligence.

For that reason, I will spend the second half of my remarks discussing how Europe can build a more integrated and resilient energy system.

The Urgent Need for Single Market Reforms

Let me begin by emphasizing the remarkable success of the European Union as an engine of economic convergence.

EU enlargement has delivered significant gains in living standards. Consider the 2004 accession round. Our estimates suggest that, after 15 years, GDP per capita in the new member states was about 30 percent higher than it would have been otherwise. Existing member states also benefited, with gains of around 10 percent of additional GDP per capita.

However, this convergence engine is now losing momentum.

European growth is falling behind other major economies. One key reason is insufficient scale across several dimensions.

Three trends illustrate the challenge.

First, Europe's economic weight is declining relative to its peers. In 2010, EU GDP was roughly on par with that of the United States and significantly larger than China's. Today, a substantial gap has opened up with the United States (Figure 1).

Europe remains prosperous, but its relative position is gradually eroding. This makes sustaining Europe's social model increasingly difficult.

Second, Europe once led in productivity growth but now lags behind. Productivity is the central challenge for Europe's economy. Both in technology sectors and across the broader economy, the productivity gap with the United States continues to widen (Figure 2).

Third, Europe is producing fewer globally dominant firms. Among companies founded in the last 50 years, U.S. firms overwhelmingly dominate global market capitalization. Europe has far fewer companies that reach comparable scale (Figure 3).

These trends are not new. Europe's productivity challenges have been building for more than a decade. But the urgency of addressing them has increased sharply.

The global environment has changed. The post-second world war economic architecture is evolving, and Europe faces rising geopolitical and economic uncertainties. In this context, a larger and more productive economy would be a key source of economic resilience.

Closing the gap requires action both at the European level and at the national level.

First, Europe must complete the Single Market-particularly in the areas defined by the EU's four freedoms: the free movement of goods, services, labor, and capital. As I mentioned earlier, energy integration is also a critical component.

Second, national structural reforms, including to complement EU-level reforms to complete the Singel Market, remain essential. These include modernizing labor-market regulations to facilitate worker reallocation, investing in human capital, improving tax systems, and strengthening governance frameworks.

Our research suggests that the potential gains are substantial. If reforms reduced internal EU frictions to levels comparable with those between U.S. states, European productivity could rise by around 20 percent (Figure 4).

Moreover, higher productivity would crowd in up to €800 billion in additional private investment over ten years-roughly 18½ percentage points above baseline. Over time, GDP per capita could increase by around 35 percent.

Deepening the Single Market is not only about growth. It is also about resilience. Unlike some alternative policy approaches-such as large-scale industrial policies-Single Market reforms are beneficial for all member states.

But what does "completing the Single Market" actually mean?

From a personal perspective, the Single Market may already feel largely complete. You can travel freely across the EU, work in other member states, and easily purchase goods from other countries.

Yet economically significant barriers remain.

In intra-EU trades, regulatory barriers are equivalent to a tariff of around 44 percentage points for goods and 110 percentage points for services-two to three times higher than those among U.S. states.

Labor mobility is also much lower. Regulatory and institutional barriers make moving between EU countries roughly eight times more costly than moving between U.S. states.

Financial markets are another area of fragmentation. Europe's financial system-worth roughly €85 trillion-is divided across 27 national banking systems and relatively small capital markets (Figure 5). This fragmentation limits the supply of risk capital needed to support innovation and growth.

What concrete steps could help?

One priority is greater harmonization of legislation. In particular, policymakers should avoid "gold-plating"-where member states add requirements that go well beyond EU directives.

Another important proposal is the introduction of a "28th regime." Under this regime, firms could choose to operate under a single pan-European legal system covering areas such as company law and insolvency.

Labor mobility also requires further progress. Key reforms include mutual recognition of professional qualifications, portability of social security rights, and more flexible housing markets.

Europe must continue advancing its savings and investments union. Fragmented capital markets limit the efficient allocation of Europe's substantial savings and constrain the growth of innovative firms.

At the same time, an integrated energy market lowers costs, reduces volatility, and enhances resilience.

The Case for Energy Market Integration

Let me now turn to energy policy-an issue that recent developments have once again brought to the forefront.

Europe's objective is clear: a system that provides affordable, low-carbon energy while ensuring resilience and security of supply.

The encouraging news is that these objectives reinforce one another. And a fully integrated European energy market is central to achieving them.

Let me highlight three key facts.

First, industrial energy prices in Europe have risen significantly. Since 2000, real energy prices for EU industry have roughly doubled. In 2023 they were about two to three times higher than those in the United States and China (Figure 6).

One key reason is Europe's high natural gas prices. Because gas often sets the marginal price for electricity, this translates into higher electricity costs as well.

Contrary to some public debates, the EU Emissions Trading System contributes only modestly to the transatlantic price gap. Excluding carbon pricing would still leave the transatlantic electricity price gap at over 90 percent of what it is today.

Energy prices also vary substantially across Europe. In some EU countries, electricity prices are roughly three times higher than in others.

Second, high energy prices affect parts of the economy significantly.

For many sectors the impact is manageable. But energy-intensive industries-such as aluminum, cement, paper, and basic chemicals-are much more exposed. Following Russia's gas shut-off and the resulting energy shock in 2022, these sectors experienced notable declines in output (Figure 7).

Our estimates suggest that this energy shock reduced the euro area's potential output by roughly 0.8 percentage points, even after accounting for improvements in energy efficiency.

Energy costs also influence investment decisions. According to a recent European Investment Bank survey, 41 percent of EU firms still view energy costs as a major obstacle to investment.

This is not only about traditional industries. Affordable and reliable electricity will also be critical for future technologies, including artificial intelligence, which requires enormous computing power and electricity.

Third, Europe's energy market remains insufficiently integrated.

The wide differences in electricity prices already point to this problem.

To use a finance analogy: when large price gaps exist in markets, arbitrage usually closes them quickly. But in electricity markets, arbitrage is limited by physical constraints-most importantly, the capacity of the electricity grid.

Looking at electricity grid congestion allows us to visualize the point more explicitly - broadly think of congestion as how frequently interconnection lines are being used close to maximum capacity.

As electrification progresses and renewable generation expands, congestion in Europe's grid has increased significantly. In particular, bottlenecks between peripheral regions and the center have roughly doubled over the past five years (Figure 8).

When the grid is congested, electricity cannot flow freely-and prices diverge.

The Way Forward

What should Europe do?

First, the expansion of renewable energy must continue. The costs of solar power, wind energy, and battery storage have fallen sharply in recent years (Figure 9).

Concerns about the macroeconomic costs of Europe's energy transition are often overstated.

In a just released paper, we find that if ETS1 and ETS2 are strengthened as needed to meet emissions targets, and part of the revenue is recycled into well designed green subsidies, the impact on investment, growth, energy prices, and public finances remain limited.

In our calculations, achieving the EU's 2035 climate goals implies an increase in aggregate annual investment (public and private) of just around 1 percent of GDP. This is less than many earlier estimates that also took a careful sectoral modelling approach, largely because we capture the broader adjustment of the economy.

Moreover, revenues from carbon pricing could more than cover the required public investment of 0.5 percent of GDP annually.

Second, a successful energy transition requires a stronger and more integrated electricity grid.

Renewable potential is unevenly distributed across Europe. Southern Europe has abundant solar resources, while northern and Atlantic regions have strong wind potential (Figure 10).

But renewable energy is inherently variable. The sun does not always shine, and the wind does not always blow.

Integration provides the solution to not building capacity everywhere. Stronger cross-border interconnections allow electricity to flow to where it is needed, reducing both prices and volatility.

Greater interconnection also improves the efficiency of existing generation capacity, lowering prices already today. This is particularly important because natural gas is likely to remain the marginal electricity price setter for much of the next decade.

However, progress toward a fully integrated energy market faces political challenges.

Countries with relatively low electricity prices sometimes worry that integration will raise domestic prices. But new evidence suggests that this concern is often misplaced.

In our forthcoming research, we find that new interconnections typically reduce wholesale electricity prices by around 5 percent on average (Figure 11).

Interestingly, prices can fall on both sides of the connection. Even countries with relatively low prices experience occasional spikes. Interconnections help smooth these fluctuations-effectively providing insurance. This is a win-win for all countries.

Finally, Europe needs greater ambition in energy policy coordination.

The European Commission's proposed Grids Package and plans to expand grid investment in the EU's next budget are important steps. These measures could accelerate permitting, strengthen interconnections, and help lower electricity costs.

But further progress is needed.

Europe would benefit from a comprehensive EU-level strategy covering the entire energy system-coordinating planning, investment, and market design across member states.

Today, many decisions remain largely national. For example, countries often plan capacity mechanisms independently to ensure sufficient electricity supply in emergencies. Coordinating these mechanisms at the European level could generate significant efficiency gains.

At the same time, policymakers must provide stable and credible policy signals to the private sector. Long-term investment in energy infrastructure requires predictable rules and consistent climate policies, including maintaining the EU Emissions Trading System.

To sum up, the EU can simultaneously reduce energy prices, improve its energy security, and meet its emission reduction goals.

Conclusion

Let me conclude by returning to the broader picture.

Many of the policy recommendations I have discussed today have already been proposed in influential reports-including those led by Mario Draghi and Enrico Letta. The European Council is setting end of 2027 as a target for completing key elements of the Single Market agenda.

The analytical work has largely been done.

The challenge now is implementation.

Completing the Single Market, strengthening financial integration, and building a truly integrated energy system would significantly boost Europe's productivity and resilience.

Achieving these goals will require political determination-and a willingness to confront vested interests and institutional inertia.

HEC's motto captures this challenge well: "The more you know, the more you dare."

Europe already knows what needs to be done.

The question now is whether it will dare to do it.

Thank you very much. I look forward to the discussion.

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