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European Economic and Social Committee

CCMI/134Shifting economics and EU

competitiveness

Brussels, 17 September 2015

INFORMATION REPORTof the

European Economic and Social Committeeon the

Shifting economics in the world, consequences for EU competitiveness(Information report)

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Rapporteur: Mr van IerselCo-rapporteur: Mr Gibellieri

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CCMI/134 – EESC-2015-01586-00-02-RI-TRA (EN) 1/14

http://www.eesc.europa.eu/

On 11 December 2014 the European Economic and Social Committee, acting under Rule 29(2) of its Rules of Procedure, decided to draw up an information report on the

Shifting economics in the world, consequences for EU competitiveness(Information Report).

The Consultative Commission on Industrial Change (CCMI), which was responsible for preparing the Committee's work on the subject, adopted its information report on 15 July 2015.

At its 510th plenary session, held on 16 and 17 September 2015 (meeting of 17 September 2015), the European Economic and Social Committee adopted the following information report by 93 votes to 1 with 3 abstentions.

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Need for in-depth analysis to return to the path of convergence

Seven years of sluggish economic development, caused and characterised by a deep financial and socio-economic crisis, have left a clear mark on the European economy. Following adjustments in EU policies in the monetary and economic field each Member State has adapted its own policy tools. A glimmering recovery is currently underway. One intriguing question is to what extent the crisis has affected the situation structurally in the EU and the Member States. Is Europe simply going back to normal? Will the EU pick up easily, or is it a multi-faceted process with variations among the Member States, and, if so, how could the state of play of the mutual socio-economic relations be described and evaluated?

According to the EESC the new landscape must be mapped accurately to the benefit of policy-makers and business. It may give rise to adjustments of policies and to targeted actions towards individual countries. Among the analyses of the situation from this perspective is a report of 2014 by the Boston Consulting Group1, called Shifting Economies. It starts from the 27 major exporting countries worldwide, looking at their varying performances over the last years. It subsequently analyses trends that, in their view, are determinants for the near future. In this landscape some emerging economies are looking to perform well, while among the Europeans some remain world class while others suffer from structural drawbacks. The suggestion arises that heterogeneity in Europe is rising. According to the EESC a further analysis is required. It should go deeper into the analysis of the manifold factors that are determining competitive relations among countries and look at possible structural trends in the socio-economic relations between EU countries, arising since the crisis.1 The Boston Consulting Group (BCG) is a management consulting firm belonging to the Big Three management consulting

companies worldwide. Considered one of the most prestigious companies in its field, the firm advises its clients from the private, public, and non-profit sectors.


This Information report does not embrace the whole picture. It is rather to be seen as an introductory report concerning a very complicated picture. It addresses the Commission and the Council. It is meant as an incentive for both bodies to deepen the understanding of the trends that are determining the performances of the Member States, of the European economy as a whole and of the Eurozone. A well-structured analysis by the Commission should be a starting point to return to the path of convergence by fine-tuning monitoring developments in Member States and by targeting policies, related to competitiveness, to specific situations. Finally, business itself can also benefit from such well-structured analysis in its investment decisions.

1. Introduction

1.1 The EESC starts its reflections on the basis of a paper of the Boston Consulting Group (BCG) of August 2014 on The Shifting Economics of Global Manufacturing. This paper highlights that manufacturers need to rethink their industrial strategy, since the cost competitiveness profiles of the countries in which they produce have evolved over the last three decades.

1.2 This Information Report focuses essentially on enumerating a list of factors that look decisive for the picture of framework conditions that determine European competitiveness. As BCG rightly argues, this is a moving picture. After a period of seven very difficult years an update of relevant factors seems quite appropriate. This update should be presented in a holistic way, but must reflect correctly as well the state of play in individual countries. This Information Report does not provide an in-depth analysis. It contains rather a coherent description of factors as they are.

1.3 Overall, the BCG paper highlights the need for Europe to define unequivocally what competitiveness is. At the moment, the EESC believes that accurately evaluating the performance of the European Union and its Member States may prove difficult.

1.4 Despite its shortcomings, the BCG paper provides the EESC with interesting and valuable findings on how a number of EU countries have evolved compared with each other and with the rest of the world that will affect the European Union in the future. Notably, BCG and various other studies highlight a new European paradigm: since the crisis, EU Member States have experienced divergent competitiveness patterns. Discrepancies in the EU tend to increase between countries, as well as between regions2.

1.5 In particular, convergence did not occur among Eurozone Member States, despite the expectations of an endogenous optimal currency area, like the Eurozone, suggesting that economic and monetary integration is a self-reinforcing process. Among the Member States,

2 This means a growing socio-economic heterogeneity. Discrepancies should not be confused with diversity. Cultural diversity is rightly seen as an asset for Europe as a whole. It fosters creativity. It enhances competitiveness in various sectors. Multi-cultural teams on a European scale are often a source of new ideas.


Portugal, Ireland, Italy, Greece, Spain and to a lesser extent France, distanced themselves the most from best performers during the first decade following the creation of the Euro in 19993.

2. Analysis by BCG

2.1 The BCG paper relies on three main assumptions:

It uses the United States as a case reference for the study. It covers a period from 2004 to 2014. It defines competitiveness through four price factors: wages, exchange rates, labour

productivity and energy costs.

2.2 A new global manufacturing paradigm needs to be taken into account by the European Union. It focuses on the 27 top trading countries to appreciate industrial and competitive forces at a global scale, and to present a comprehensive view of the issue. It also provides the reader with a clear and understandable framework for analysis.

2.3 Despite these strengths, analyses like the BCG paper present important shortcomings when its framework is applied to the European economic context.

2.4 Firstly, the use of the United States as a reference case is questionable, as the US price evolution over the 2004-2014 period is not representative of the rest of the world. Indeed, the US is one of the few countries that has experienced an exceptional fall in energy prices resulting from shale gas exploitation.

2.5 Secondly, BCG’s analysis excludes indirect costs4 influencing competitiveness. Moreover, wages are exclusively regarded as a cost factor instead of driver of internal demand and indicator of social wellbeing. An important shortcoming is also that the connection to productivity is underexposed.

2.6 Thirdly, as BCG made its analysis on a worldwide scale, it understandably selected a limited number of countries on the basis of export performances. This means that only a limited number of EU Member States were examined. Such an approach hampers the view on the state of competitiveness of the EU as a whole. Furthermore, the BGC - as often happens in studies from outside the EU - does not consider the EU as a single entity and only focuses on its Member States. For a balanced assessment, however, this is a highly questionable and asymmetrical method, as the economic scale of and decision-making processes in the United States and China is not comparable to individual European countries. Such countries should rather be compared with the EU as such.

3 Vieira, C., and Vieira, I., "Assessing the Endogeneity of OCA Conditions in EMU", The Manchester School, Vol. 80, Issue Supplement S1, pp. 71-91, September 2012.

4 The BCG paper refers to price factors and non-price factors. For the sake of clarity, this Information Report relies on the economic denomination of direct costs and indirect costs.


2.7 BCG looks to the world from a certain angle. One may conclude that its criteria are valuable, but they are obviously too restrictive and they can easily be misused. They do not take into account manifold other indicators that are relevant for both companies and governments. Analytical shortcomings should be overcome by widening the analytical basis.

3. Analytical observations on important factors in the European context

3.1 The understanding of competitiveness widely varies according to the socio-economic groups considered, or even according to economic literature. Furthermore, competitiveness is a dynamic concept that is strongly impacted by the global economic environment. Putting all relevant factors in a commonly agreed definition across Europe would help to develop a common and unequivocal view on the situation, as it is, and on the socio-economic transformation European society, per se, is currently undergoing.

Member States’ competitiveness profiles according to the European Commission

In its Member States’ Competitiveness Report 20145, the European Commission defines competitiveness using three indicators over the last five years: labour productivity, exports, and innovation. It consequently classifies EU Member States' competitiveness profiles as:

Member States with strong and improving competitiveness in all three dimensions: Denmark, Germany, Ireland and the Netherlands.

Member States with strong but declining competitiveness: Belgium, France, Italy, Luxembourg, Austria, Finland, Sweden and the United Kingdom.

Member States with modest but improving competitiveness: Czech Republic, Greece, Spain, Estonia, Latvia, Lithuania, Hungary, Poland, Portugal, Romania and Slovakia.

Member States with modest and declining competitiveness: Bulgaria, Croatia, Cyprus, Malta, Slovenia.

EESC comment: The box above is proving that the analyses must be carried out more accurately. A broader spectrum of indicators may well change the order of well and less well performing countries and may make ranking more understandable. In particular, focusing on exports rather than on balances conceals the good trade performance of the European economies. The EU is still by far the largest trade partner in the world. Moreover, a more nuanced set of indicators to measure competitiveness would result in a more precise ranking than the one above.

5 European Commission, Reindustrialising Europe, Member States’ Competitiveness Report 2014, SWD(2014) 278, European Union, 2014.


3.2 Expanding the notion of competitiveness to indirect costs would greatly improve the fit of any analysis to the European Union. Indirect costs, generated primarily by the environment business is working in, notably include:

Indirect costs such as logistics costs, the overall ease of doing business, governance, quality and common sense of purpose of national administrations, corruption, attitude towards entrepreneurship and private business, environmental costs, or the lack of labour mobility across Member States.

Access to raw materials (e.g. high tech metals and rubber), as highlighted by the 2010 Raw Material Initiative6 of the European Commission.

Private and public debt levels, as a country will experience greater difficulties in restoring its competitiveness with limited financial resources.

Detrimental demographics that weigh increasingly on social systems in the absence of a satisfactory birth rate and qualified migration.

Investment in education, schooling, and training (in common language these are usually presented as cost factors instead of investments).

The political feasibility of reform programmes, a sensitive point of discussion in the EU and the Eurozone between governments, interest groups of all kinds, and social partners: the democratic decision making process in a multi-level governance framework requires a considerable amount of time. National reforms are often challenged by civil society groups, affecting the implementation process.

Public administration in some Member States is able to react more rapidly than others. Public administrations in a number of Member States are not effective. Usually, better administrative practices imply a more appropriate business environment. Accordingly, red tape and overburdens of regulations must also be taken into account.

Public and private debt levels: public support for investment as well as for saving influence investment (saving-investment ratio). Governments tend to strive for equilibrium of public finances rather than for supporting investment.

3.3 A comparative study in the EU would also benefit from a reflection on the sustainability of competitiveness, i.e. to examine to what extent price factors alone provide lasting competitiveness either between the EU and the rest of the world or between EU Member States. The discrepancies between EU Member States can largely be attributed the following factors:

The role of education, training, and other mechanisms put in place to improve skills and knowledge throughout society, and to improve labour force adaptability. The OECD strongly emphasises the need for appropriate education that is by far the most important factor to sustain in the long run an innovative economy. Education concerns the whole of society. The EU is becoming more vigilant in terms of fostering a set of skills adapted to economic needs and the environment.

6 http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2008:0699:FIN:en:PDF


http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2008:0699:FIN:en:PDF

The effect of R&D investment, public and private. New technologies (digitalisation, biotechnologies, nanotechnologies, renewable energies, etc.).

The absence of European champions able to compete with major technological firms (e.g. Google, Facebook, Apple).

The role of digitalisation, a new phenomenon that is hardly shown in statistics as yet. The digital society is evolving fast. It changes the landscape of the economy, affects deeply business and society, will have determinant consequences on the labour market, and will create new relationships between government and citizen as well as between business and consumer.

The role of Industry 4.0 and disruptive technologies as well as the "servitisation of manufacturing" as a crosscutting development in business. Businesses in Member States with low digital skills have more difficulties in implementing cutting-edge innovation, modernisation techniques, and up-to-date business models. This worrying phenomenon reflects a trend of increasing discrepancies. European strongholds and weak points have to be analysed properly to measure competitiveness as well as to collect data for the adjustment of policies and attitudes in the public and private sector alike.

Differences in productivity. Due to rapid diffusion and commercialisation of new technologies there is a huge immediate impact on productivity.

The role of economic clusters in advanced regions. As, due to the blurring between manufacturing and services, product chains are more and

more fragmented, the value chain is a very special point of attention. Transport facilities and costs. The stabilising effects of strong social partnerships and reliable collective agreements. Risk aversion in Europe, in other words a dramatic feeling to preserve security above

taking risks, hampers a willingness to invest in the future. The role of the circular economy and resource efficiency. The incentives for energy efficiency, fostered by high energy costs, reduces the negative

impact of the latter on competitiveness7. The role of the public sector as a regulator but also as an investor. The role of administrative capacities that are crucial to foster a fruitful business

environment. Regulation and its impact on competitiveness. A stable regulatory environment is

essential to attract long-term investment from within the EU as well from outside, that sustains EU competitiveness.

Time considerations count heavily, as some reforms and adjustments in the economy have an impact in the long term (e.g. investment in education) and others are efficient only in the short term. Given the rapid technological developments, time is increasingly becoming a real competition tool.

7 According to the American Council for an Energy-Efficient Economy, the European Union ranked as the third most energy efficient economy while the United States only stands at thirteenth. American Council for an Energy-Efficient Economy (ACEEE), The International Energy Efficiency Scorecard. Available at: http://aceee.org/portal/national-policy/international-scorecard.


http://aceee.org/portal/national-policy/international-scorecard

The reliability of statistics. Unreliable statistics, computed by Member States, lead to poor evaluation of EU policies and unclear assessment of their positive impact on the economy.

3.4 The developments must be examined short-term as well as over a longer period of time. In which areas and to what extent are the discrepancies between countries widening, in which fields is convergence taking place? To what extent do developments affect international competitiveness and prosperity of European countries? A crosscutting survey of clearly defined enabling prerequisites can be of great help to support policies to strengthen competitiveness.

3.5 The Annual Growth Survey and the Country-specific recommendations already reveal some striking realities per country, either in illustrating the progress being made or stagnation or, possibly, backward steps in analysed areas. But it is a limited assessment. And, in so far as assessments exist, they are never discussed openly. Consequently, the policy relevance for MS remains limited. The instrument of the Semester, on the basis of correct and complete socio-economic statistics, can and should be applied much more effectively8.

4. The European Union as an entity

4.1 Many reports are analysing large economic and political entities, like the US and China, in the same way as far smaller countries. They tend to overlook the European Union as such. For all purposes, the EU should also be put on the same level as other big countries that have a huge internal market, a common legal framework, and a centre of decision-making.

4.2 Although these fundamental requirements are not as well fulfilled in Europe, for an adequate appraisal of developments, the EU as such has to be taken into account, besides the MS. This means thus a parallel analysis of the performances of individual countries and those of the EU per se. They have to be seen from each other's perspective which is rarely done, if ever.

4.3 Analytical pictures must also be improved in examining to what extent the EU is a vehicle for optimal integration, i.e. the spill-over effect that occurred within the EU for five decades (1957-2007). It is already clear that the 2007 financial crisis and the subsequent economic crisis have fostered risks of a multi-speed Europe.

8 The strong emphasis on the need for a more effective Semester in the Five Presidents’ Report "Completing Europe’s Economic and Monetary Union", 22 June 2015, is remarkable and very welcome.


4.4 All must be analysed accordingly:

The European Union seen as an entity. Large countries have similar geographic, regional, and demographic problems as has the EU. The difference, however, is that they are unified political and economic entities as opposed to the EU. The EU looks like a half-built house: on the one hand European integration has strongly fostered trade in goods and services and promoted cross-border knowledge and value chains as well as mobility, on the other hand, however, there are still 28 different legislative systems, 28 industrial policies, and, due to the crisis, fragmentation of the Single market is looming9. The EESC thereby emphasises the need to foster common dynamics across the EU.

Remarkably, from the point of view of the expectation of convergence that was at the basis of the concept of the EU Internal market thinking, current reality is that, comparable to the reality of strengths and weaknesses in the US and China, European countries and regions have by and large preserved their economic specialities, for instance manufacturing in Germany, logistics in the Netherlands and Belgium, services in the UK, luxury specialties in Italy and so on. More importantly, structural economic differences between the MS tend to remain also more or less the same.

Just as in the US and China, however, it should be analysed how the variety of strengths should be optimised in one economic system. How could this create additional common dynamics, and add to the completion the Single market? In particular, shifts in competitiveness patterns across and within Member States impact investment decisions. In the light of recent developments, relocating within and to the EU can prove very profitable to European companies thanks to improved production quality, better services, adjusted business models, lower transport costs, and reduced tariffs and trade barriers.

The Eurozone paradigm or the absence of an optimal currency area: the EMU was created on a unified monetary policy without common economic governance, based on the belief that convergence would occur among Eurozone Member States. The EMU benefits from increased integration compared to the EU as a whole, but still suffers from an underdeveloped economic governance and a lack of integration, disadvantaging it in comparison to large economies such as the United States. The malfunctioning and incomplete architecture of the EMU also limits the development of competitive financial markets while the uncertainties around the future of the EMU discourage long-term investment.

Moreover, differences between economic governance of the Eurozone and the EU may arise. Amongst others, the current situation generates insufficient stability for cross-border investment decisions in the private sector.

9 The Five Presidents’ Report "Completing Europe’s Economic and Monetary Union", 22 June 2015, acknowledges this also and proposes, accordingly, a sense of purpose to the EU as well as a pragmatic, but ambitious roadmap to improvement.


An unintended consequence of the EMU has been that, initially, it worked in a number of countries as a sleeping pill with rather damaging effects, as it boosted investments beyond real economic possibilities while, simultaneously, social and economic policy adjustments were unduly postponed.

The EU is a very relevant entity as its main competitors are large countries in which companies can thrive thanks to a benevolent business environment. The EU, unfortunately, suffers from fragmentation. Due to all sorts of inconsistences between MS, businesses can unsatisfactorily thrive within the Eurozone/EU. As opposed to the US, over the past 50 years, Europe has not created new large companies, the current large EU businesses being long established10. It is partly due to the lack of a predictable internal market and an effective decision-making centre. Moreover, practical experience proves that EU economic players are, despite bright performances in science and fundamental research in the EU, far less capable in applying these in the market than competitors in the US.

Despite the EU having made huge progress over the years, and even during the crisis, in fighting protection and in putting in place legal provisions in many important areas, it has failed as yet to develop in central areas such as energy, transport, telecommunication, and the defence sector, where national governance is dominant and decisive, undermining the functioning and financial and economic benefits of a Single market.

In particular, successful EU energy policies are decisive for competitiveness of European businesses. In that framework, the Emission Trading System (achieving carbon efficiency, risks of carbon leakages) has to be examined with particular attention, as high energy costs incentivise energy-intensive industries to relocate outside the EU.

An analysis must pay due attention to the position of the EU in global value chains. The place of a given country along the value chain is not permanent, leading to variations in specialisation between the EU and the rest of the world, but also among EU Member States. Such changes of circumstances can and must be closely analysed.

There is as yet no systematic evaluation of successful and failing EU policies, and no evaluation of how they work out in the MS.

A stable or unstable regulatory environment is decisive for business investments. What is the contribution of the EU to a beneficial environment either though its own regulatory work or by EU engagement to reduce administrative burdens in the MS? Which conditions have to be put in place in order to improve the unclear and ambiguous relationship between the EU regulatory framework and diverging national frameworks (implementation!) in favour of the Single market.

10 An illustrative exception is Airbus, but this company is largely supported by government interference.


The EMU has not experienced enhanced convergence since the crisis started in 2008 but has moved towards heterogeneity (e.g. Portugal-Ireland-Italy-Greece-Spain versus the rest of the Eurozone, and high ranked European economies versus Central-European MS)11 12. Analysis should clarify this trend in order to reverse it into a positive direction and to design possible solutions.

As far as the regionalisation of world trade (e.g. the US versus China versus the EU) is concerned, the EU is of critical importance. Exporting and importing countries act for themselves but also for the EU as a whole. It should be analysed to what extent the EU as such is relevant for the main EU exporting countries and in what manner free trade within the EU is contributing to the success of the export achievements of the main exporters. In what way is the persistence of bilateral trade relations disadvantageous for the overall performance of the EU as a whole?

Brussels, 17 September 2015.

The Presidentof the

European Economic and Social Committee

Henri Malosse

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N.B.: Appendix overleaf.

11 Vieira, C., and Vieira, I., "Assessing the Endogeneity of OCA Conditions in EMU", The Manchester School, Vol. 80, Issue Supplement S1, pp. 71-91, September 2012.

12 Cf. Appendix.


APPENDIX

Computed by the World Economic Forum, the Global Competitiveness Index (GCI) offers a more comprehensive appreciation of competitiveness than the analysis provided by the BCG paper on The Shifting Economics of Global Manufacturing. It ranks countries' competitiveness profiles according to twelve criteria:

Institutional environment Quality of infrastructures Macroeconomic environment Health and primary education Higher education and training Goods market efficiency Labour market efficiency Financial market development Technological readiness Market size Business sophistication Innovation.

Plotting the GCI values for EU Member States (in orange) and selected countries (in blue) (Figure 1) suggests that:

Some EU Member States have improved their competitiveness profile while others became less competitive between 2006 and 2014, leading to the emergence of three country groups within the European Union.

Despite its shortcomings, the BCG''s paper conclusions hold that some countries have improved their competitiveness while others have not.

The European Commission’s findings in its Member States’ Competitiveness Report 201413 confirm these findings (Figures 3 and 4).

A complementary study could provide in-depth analysis of these preliminary findings.

13 European Commission, Reindustrialising Europe, Member States’ Competitiveness Report 2014, SWD(2014) 278, European Union, 2014.


Figure 1: Competitiveness in 2006 and 2014 (source: World Economic Forum)

Figure 2: Global Competitiveness Index (source: World Economic Forum)


Figure 3: Changes in performance and relative innovation intensity in the Member States (source: European Commission)

Figure 4: Trade integration in the single market (source: European Commission)

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