Fit to compete?
<h>The European Union’s</h> member states want to make Europe the most competitive knowledge-based economy in the world. Not an easy task, writes Brian Groom. Five years ago, the European Union’s leaders suffered their own collective version of irrational exuberance. In Lisbon, at what was dubbed “the dotcom summit,” they issued a ringing pledge to turn stodgy old Europe into “the most competitive and dynamic knowledge-based economy in theworld” by 2010. Pouring out a shower of commitments and targets to embrace the Internet age, modernize welfare systems and catch up with the United States, the leaders promised to raise real economic growth to an annual average of 3 percent - up from 2 percent - and create 20 million jobs in a decade. Better than its reputation Ever since then, EU leaders have tried to live this down. Exuberance turned to disappointment and then to self-flagellation. The “Lisbon Agenda” has become synonymous with missed targets and failure of political will. Europe has continued to fall behind: Gross domestic product per capita is stuck at 71 percent of the American level. There is an argument to be made that Europe, having overdosed on optimism, is now overdoing the gloom. It already has some of the world’s most successful economies - mostly those of Nordic countries - and even its reform laggards are making efforts to catch up. | ||
Germany pushed though painful changes to curb unemployment benefits, health costs and pension costs. The French government has tried to relax the 35-hour working week and give small businesses more power to fire recently hired workers; it has also rolled back public-sector pensions. Increased competition for investment Where governments are not moving fast enough, corporate Europe is taking up the challenge. Companies, particularly in Germany, are restructuring to cut wage bills, helping drive profits to levels well above the historical average. Helping push change is increased competition for investment - especially from the 10 countries that joined the EU last May. In spite of the EU’s failure to meet the Lisbon midterm goals, its economic performance is routinely portrayed too negatively, according to Goldman Sachs, the US investment bank. The bank says the main reason the US economy has recently grown above 3 percent a year, compared with just above 2 percent for the EU, is because of faster population growth. In GDP per capita, the growth gap was much narrower: 1.8 percent in the EU, compared to 1.9 percent in the United States. In productivity growth it was 1.8 percent versus 2 percent. Facing significant challenges Goldman believes average growth in the EU will continue at about 2.2 percent over the next 10 years. Faster growth in Germany will be balanced by slower increases in France and Spain. The bank’s forecasts are at the optimistic end, however. Many economists believe the eurozone’s potential noninflationary growth rate has fallen to 1.5 - 2 percent. The EU’s executive arm thinks slower productivity growth is dragging down levels of wealth and that Europe is not investing enough. It also faces the alarming prospect of decline in the working-age population - something caused by falling birth rates and rising life expectancy, which the Commission believes will cut average potential GDP growth in the EU to 1.25 percent by 2040. | ||
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As for corporate Europe, it can boast many companies with leading positions in their sectors - such as Vodafone in telecommunications services, Nokia in mobile phone handsets, Nestlé in food, SAP in enterprise planning software, Airbus in aircraft manufacture, Novartis in pharmaceuticals, BP in oil and HSBC in banking.
Some of these have grown to prominence only in the past 20 years, proof of the dynamism the Old World can still produce. These are not enough, however, and competition is tough. For instance, the pharmaceuticals industry, a traditional European strength, has seen a big part of its research base move across the Atlantic. Furthermore, much of European industry is in mature sectors rather than those with the biggest growth potential. Reform from above or below? Businesspeople themselves have a litany of complaints about their regulatory environment, from the cost of patenting inventions in Europe - four times greater than in the United States - to the constraints of red tape and an array of labor market rules. Few in Europe would disagree that further reform is needed, but can it be done in a top-down fashion, as the EU leaders tried in Lisbon? José Manuel Barroso, Commission president, sees this as a grand project to compare to the single market in 1992 and the euro in 1999. Whereas these were achieved by legislation, the Lisbon Agenda is an intergovernmental initiative that lacks enforcement. Yet if countries do not reform simply because they are urged to, surely they will do so in the face of competition from China, India and Eastern Europe? It is not a foregone conclusion that Europe will lose the global battle for investment. Its return on capital compares reasonably favorably with other parts of the world. If Europe does succeed in turning itself around, few will care whether it comes through exhortation or raw competition. The important thing is that it should try. Brian Groom is the comment and analysis editor for "The Financial Times".He and his staff were Roland Berger’s editorial partners for the Best of European Business competition. His article was first published in a special edition of "think:act", the executive magazine by Roland Berger Strategy Consultants. The Best of European Business capstone European Summit will take place in Brussels on February 22, 2006. Nine prizes will be awarded in the industry categories automotive, fast moving consumer goods/retail, financial services, industrials, oil/gas, pharma/chemicals, telecommunications, logistics and utilities. EU Commission Vice-President Günter Verheugen will be presenting the Best of European Business Corporate Governance Prize and the evening's Grand Prix at the Gala Dinner. Coverage of the event will be published on this website on the following day. If you have any questions or remarks please don't hesitate to contact us:  |
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