We study Europe’s post-2008 productivity slowdown using novel total factor productivity (TFP) measures that follow production beyond individual industries in global value chains (GVCs). We collect a newset of stylized facts: (1) the slowdown is broad-based, with productivity growth weakening both in final-producer industries and in upstream industries; (2) the staggered entry into force of bilateral investment treaties with China is followed by higher value-chain TFP and greater business-intangible investment; while (3) the gains associated with technology intangibles are weak. We use these facts to discipline a stylized two-region general-equilibrium model with business capabilities, technology-related knowledge, and cross-border knowledge spillovers. The calibration supports a two-stage interpretation of Europe’s experience: (1) sizeable initial integration gains because accumulated business capabilities convert market access into productivity, and (2) later losses when technology improvements are converted into productivity more effectively elsewhere.
