When the former president of the European Central Bank presented his report on EU competitiveness in 2024, he urged the bloc to pursue much needed reforms to improve productivity.

The European Commission on Sept. 16 held a high-level conference to review its progress. And while the Commission did its best to claim credit for 33 flagship initiatives, and 14 legislative initiatives, it was widely panned for moving too slowly, not least by Draghi himself.

He has a point. The EU is continuing to fall behind.

Whether you look at the 15 years since the end of the financial crisis, or the last five years since the COVID-19 pandemic began, productivity growth in Europe has lagged that of the United States. Eurozone labor productivity growth since 2020 has been a paltry 0.7 percent per year, less than half the US's 1.5 percent annual rate.

Productivity growth is not everything, of course, but in a world of demographic headwinds, something the EU certainly faces, investment and productivity are pretty much the only levers governments can pull to increase GDP growth and generate the tax revenues needed to keep deficits under control.

In the OECD’s latest long-term growth projections, it forecasts that GDP growth in Europe will accelerate from the poor levels of the last five years, but only to 1.3 percent per year in real terms, well behind the US’ 2.1 percent annual projected growth.

However, things may not be as dire as they seem.

For one, Europe’s new "Readiness 2030" rearmament program will provide 150 billion euros (US$174.5 billion) in loans under the SAFE (Security Action for Europe) initiative that are not reflected in the OECD’s long-term projections.

And if EU member states increase their defense spending in line with the new NATO goals, the total may reach 800 billion euros ($930 billion) in the next 10 years, resulting in additional defense investment of 4.5 percent of EU GDP over 10 years.

This has the potential to boost European growth significantly. Research by BBVA shows that defense spending in Europe has a much higher fiscal multiplier than in the US

While studies usually put the fiscal multiplier for US defense spending in the range of 0.5 to 1.0, they find that fiscal multipliers for defense expenditures in Europe are consistently above 1.0. The BBVA analysis found that for every 1 percent of GDP in defense spending in Europe, trend GDP in the region increases by 1.6 percent after two years, after which the impact of the spending dissipates.

This means that 150 billion euros ($174.5 billion) in defense loans have the potential to boost EU GDP growth by 1.6 percent over two years if deployed at once. However, the spending is instead expected to be spread out over 10 years, meaning the region could see a persistent GDP bump over the next decade. And this would, of course, be magnified if the region reaches the full 800 billion euro ($930 billion) target.

One country that already has committed to a large upsurge in defense spending is Germany. Europe’s largest economy plans to increase its defense budget to 3.5 percent of GDP by 2030, rather than by 2035 as NATO requires.

Germany will also start to roll out its 500 billion euro ($581.9 billion) infrastructure investment programs next year.

The German government, unlike those in several other EU member states, has been able to agree on a budget and implement the necessary processes to get the money flowing. And starting in 2026, Germany intends to spend 58 billion euros ($67.5 billion) per year on infrastructure, up from 38 billion euros ($44.2 billion) in 2025.

Most of these investments will be in transport infrastructure, with another large chunk in energy transition and digital infrastructure.

These investments are likely to give German productivity and GDP growth a powerful boost. A new study indicated that German government investments in infrastructure have a fiscal multiplier above 2.0, with levels approaching 2.5 in Germany and the eurozone after three years.

If that proves accurate, then Germany’s infrastructure spending could lift German GDP by an eye-popping 29 percent over 10 years. That would, in turn, boost EU GDP by 7 percent over the coming decade.

To be sure, Germany’s infrastructure spending may not be that successful, since it will replace some investments that would have been made anyway.

But even if it is just half as effective as these studies predict, Germany’s GDP could still rise by an additional 1.4 percent per year for the coming decade, giving a 0.3 percent annual boost to the EU’s GDP growth. Add that to the expected 0.6 percent annual increase in EU GDP growth from "Readiness 2030", and Europe’s economic growth in the next five to 10 years could match or even surpass that of the US

Draghi could scarcely have hoped for a better outcome.

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The writer is an investment strategist at independent investment bank Panmure Liberum. The views expressed are personal.