Europe and the Issue of Competitiveness
Europe in International Economy
2015

Industrial and competitiveness policy
•ICP:
•is designed to improve country’s economic performance;
•not to specify and enforce particular outcomes – rather to alter market processes by attacking the
rigidities (which impede the market selection);
•private sector flexibility is encouraged and adjustment to shocks is facilitated;
•
•Formerly:
•attempt to lead the private sector through a planning procedure  (picking the winners) –
predicting emergence of sunrise (and subsidizing sunset) sectors;
•
•Modern ICP: also providing industry with appropriate resources - educated and trained labor force
+ an appropriate research base and infrastructure;

ICP in European Context
•
•1940s–1960s orthodoxy: government to correct market failures  by microeconomic intervention in
specific sectors;
•1970s ICP aimed to create super-firms to compete with the US giants (EoS);
•since 1980s: increasing respect for market forces (neoliberal-monetarist turn);
•since 1990s – EU Commission´s view:
•governments should promote adaptation to industrial change in open and competitive market;
•firms and sector specific policies are treated with suspicion Vs. approves horizontal/general
policies to support market activity in general:
•specific industrial policy (by states) constrained by EU rules on state aid;
•(microeconomic) policy is often contradictory – governments tend to simultaneously support sunrise
and sunset industries;
Instruments:
•Traditional industrial policy: subsidies, tax breaks, protection from competition;
•Contemporary: deregulation; reorientation of public services (education); subsidization of
infrastructure and research;

Industrial agglomerations
•Information/ideas circulate informally within an agglomeration:
•speeding up the process of product development;
•technology spillovers are concentrated locally;
•
•Pull factors :
•reducing costs for members of agglomeration = positive externalities based on production of
specialized inputs (specialized labor, specialized services, shared consumers, shared
infrastructure – e.g. universities, information flow);
•
•Agglomeration:
•reduces cost by allowing firms to contract out all but their core activities – only efficient if
the specialized suppliers can themselves operate on a large enough scale;
•while agglomeration is large – most firms will be small (extremely specialized and operating on
sufficient scale);
•
•EoS -> oligopolistic competition (non-price comp.), rents -> AGLO – NI (GOV role)!
•Centripetal and centrifugal tendencies.




Rank
Country/Region
Exp.(bill. US$, PPP)
 % of GDP
Exp. per capita
18
 Israel
9.4
4.2%
1,153.90
5
 South Korea
55.8
3.7%
1,111.12
3
 Japan
160.3
3.7%
1,260.42
16
 Sweden
11.9
3.3%
1,232.97
25
 Finland
6.3
3.1%
1,155.37
1
 United States
405.3
2.7%
1,275.64
19
 Austria
8.3
2.5%
975.91
27
 Denmark
5.1
2.4%
906.31
4
 Germany
69.5
2.3%
861.04
20
 Switzerland
7.5
2.3%
924.53
2
 China
296.8
2.0%
217.69
6
 France
42.2
1.9%
640.91
9
 Canada
24.3
1.8%
688.47
7
 United Kingdom
38.4
1.7%
602.78
15
 Australia
15.9
1.7%
978.97
21
 Belgium
6.9
1.7%
619.82
17
 Netherlands
10.8
1.6%
641.23
28
 Norway
4.2
1.6%
822.07
29
 Czech Republic
3.8
1.4%
361.43
36
 Ireland
2.6
1.4%
566.07
14
 Spain
17.2
1.3%
369.02
32
 Portugal
2.8
1.2%
266.99
12
 Italy
19.0
1.1%
316.70
10
 Russia
23.8
1.0%
165.62

General observations
•ICP should not target specific firms or sectors, but aim at improving the general functioning of
markets;
•difference between offering incentives to specific investor to invest into country and to make the
country more likely to attract investment;
•
•It is not enough to demonstrate existence of market failure:
•government action is costly and quickly becomes politicized and selective;
•once supported by industrial policy (public) funds – sector grows beyond their market - determined
size;
•exercising political influence - enjoying political support (employment, GDP share);
•industrial policies become path-dependent and self-perpetuating;

Airbus: producing
Airbus: not producing
Boeing: producing
B: -5     A: - 5
B: 100    A: 0
Boeing: not producing
B:  0     A: 100
B: 0        A: 0
Industrial policy of EU – subsidy 25
Airbus: producing
Airbus: not producing
Boeing: producing
B: -5     A: 20
B: 100    A: 0
Boeing: not producing
B:  0     A: 125
B: 0        A: 0
Oligopolistic Competition in High-tech
(150+ passengers airplane – example of natural monopoly)
Boeign having head start

Weaknesses of Europe (Eichengreen)
•R&D spending + limited cooperation between industry and academia;
•Small, new firms (tend to pioneer new niches, e.g. IT) – greater difficulties to cope with the
complexity of European regulation;
•
•Europe: immigration-unfriendly policies (less attractive for H-T specialist form Asia);
•Lower hiring and firing costs make it easier for US entrepreneurs to experiment with unproven
technologies (…of great promise but uncertain commercial potential);
•
•European financial system – well suited to mobilizing saving and deploying it for investment by
incumbent firms  - does not go to the start-ups and small firms (engines of output and productivity
growth);
•IT producing sector is where US excels – but only 6% GDP – cannot explain differences in
productivity trends:
•US productivity advantage since 1990s centered in retail trade, wholesale trade, financial
services – ICT using activities;
•
•Europe has faster productivity growth in telecommunications (privatization and uniform product
standards);
•Higher cost etc. computer hardware in Europe (localizing costs) – itself a barrier;


1970
1980
1990
2003
EU 15
Overall employment
59
60
62
64
Employment male
80
78
74
73
Employment female
39
43
49
56
Employment 15–24
51
45
45
40
Employment 25–54
65
70
73
77
Employment 55–64
47
44
39
42
US
Overall employment
64
67
72
71
Employment male
83
80
81
77
Employment female
46
55
64
66
Employment 15–24
53
59
60
54
Employment 25–54
70
74
80
79
Employment 55–64
60
54
54
60
Employment (%)

Strengths of Europe
•Europeans have vastly grater amounts of leisure time (Vs. US);
•Higher level of earnings equality - more people with health insurance, infant mortality rates are
lower, poverty rates are lower, rates of violent crime are lower;
•Number of prisoners is only 128/100k vs. 716 in US (2013, 22% of world total); homicide (per 100k)
2,7 vs. 5,9;
•Rigidities have not stood in the way of rapid export growth;
•European exporters dominate in quality HVA, H-T; premium goods; precision manufactures;
•
•Moving into H-T and premium goods is potential source of insulation from high competition of EM:
•Europe has not been subject to the kind of great financial scandals;


1913
1929
1938
1950
1973
2003
Product per worker as a % of US level
France
66
68
73
55
79
73
Germany
69
59
82
41
72
64
Italy
48
45
54
37
64
66
Britain
93
80
102
73
72
72
EU15 (aver.)
57
55
66
47
65
72
Product per hour as a % of US level
France
56
-
-
46
74
111
Germany
59
-
-
32
79
98
Italy
42
-
-
35
78
100
Britain
84
-
-
63
60
83
EU15 (aver.)
61
-
-
44
71
94
Output per head and hour of work (%)


1950
1973
1998
Britain
871
753
682
France
905
728
580
Germany
974
811
670
Italy
800
669
637
Spain
921
805
648
US
756
704
791
Worked hours per head
(hours/year)

Lisbon Agenda
•Lisbon European Council 2000: new strategic goal till 2010 – to become the most competitive and
dynamic knowledge-based economy in the world capable of sustainable economic growth with more and
better jobs and greater social cohesion;
•
•Strategy aimed to:
•transition to a knowledge-based economy by better policies for the information society and R&D;
•structural reform for competitiveness and innovation and by completing the internal market;
•modernize the European social model, investing in people and combating social exclusion;
•
•All-embracing - result of bargaining process + disagreement how economic performance should be
improved;
•
•Open method of coordination:
•Council agreeing guidelines that contain targets and recommendations which are adopted at the
discretion of member states (intergovernmental process);
•policy operates via reports – containing the policy, objectives and progress;
•„enforcement“ is by recommendation, peer pressure and benchmarking;
•no penalties – government implement policies in line with their own priorities;

•EU is continuing to lag behind – also in amount of inputs used: slower population growth and rigid
labor markets (late from school, less hours, early retirement + higher benefits and less part-time
jobs);
•
•Lisbon is about everything and thus nothing (Kok’s Report 2004);
•ccommitmentss are rhetorical (agreed at the height of the Dotcom boom);
•states are committed only to parts of agenda;
•
•Mid-term review (2005): Barroso’s Commission’s plans – three priorities for the policy
concentrating on growth and jobs (Revised Lisbon Agenda) :
•more attractive place to invest and work – completing the Single Market and business-friendly
regulation;
•knowledge and innovation for growth: raising expenditure on R&D to 3% of GDP;
•creating more and better jobs – increase employment by making the labor force more adaptable
through raising the level of education and skills;
•
•Concerns that slimmer agenda downgraded the environmental and social aspects of agenda;

Strategy Europe 2020
•Global crisis destroyed progress reached in last years (20 years of attempts for fiscal
consolidation – in 2009 average fiscal deficit 7% and public debt 70%) + there have to be careful
management of exit fiscal stimulus's;
•
•Goals:
•intelligent growth –> economy based on knowledge and innovations;
•sustainable growth –> support for more competitive and ecological economy less energy intensive;
•growth supporting social inclusion;
•
•Targets - 2020:
•Higher employment for 20-64 year old (from 69% to 75%);
•Increase investment into RD up to 3% GDP EU (US 2,9% vs. EU 1,7%);
•In energetic policy reach the goal 20-20-20 (less greenhouse gases, more renewable, more energy
efficiency);
•Share of tertiary educated from 31% to 40%;
•25% less people living in poverty (from 20 mil.);

http://www3.weforum.org/docs/img/WEF_GCR2014-15_Global_Image.png



http://www3.weforum.org/docs/img/WEF_GCR2014-15_Europe_Image.png



http://www3.weforum.org/docs/img/WEF_GCR2014-15_Education_Image.png



http://www3.weforum.org/docs/img/WEF_GCR2014-15_Infrastructure_Image.png



http://www3.weforum.org/docs/img/WEF_GCR2014-15_Innovation_Image.png



http://www3.weforum.org/docs/img/WEF_GCR2014-15_USAChina_Image.png












http://reports.weforum.org/global-competitiveness-report-2014-2015/wp-content/blogs.dir/54/mp/image
-cache/site/6/fig1-1.068d0755b969897fb3a8637aa70bf017.png