Keeping up with the rest?

The EU faces both internal and external challenges to keep its economy competitive. While the member states have agreed on pacts and targets, business and analysts worry that these may not be enough for Europe to stay competitive.

There are as many different definitions for competitiveness as there are theories about how to achieve it. From the price of labour to the number of exports or the rate of productivity, all are different ways to measure a successful economy. Yet most economists and politicians agree that if Europe is to maintain high living standards, it must improve its competitiveness.

In Europe competitiveness has two aspects. First, internal competitiveness is vital if member states are to use productivity to push their economies forward. As can be seen only too clearly, some are managing this more successfully than others. Second, external competitiveness – where the EU faces a battle to remain an important world player in the face of other dynamic global economies – is arguably even more significant. One notable newtly published report, Daniel Hamilton’s “Europe 2020”, argues that the EU has just a decade left to get its house in order if it is not to be left behind for good.

ECB warning

Naturally, there is a link between internal and external competitiveness. Jean-Claude Trichet, the president of the European Central Bank, when asked for a definition of competitiveness, made this clear. Top of the league are countries whose economies make it easier for companies to be productive. The most productive companies tend to be those encouraged by their governments to do business abroad. In short, countries with highly productive firms are those that have “more intense domestic market competition, better technology and greater openness to foreign competitors”.

By that yardstick, it is not hard to be pessimistic about Europe’s competitiveness. The World Competitive Scoreboard 2010, published by IMD, a business research centre, placed only five EU member states above China for overall competitiveness. Europe’s ageing and dwindling population, high labour costs, lack of skilled migrants and expensive welfare systems all contribute to a sense that the EU will have to raise its game. And pretty soon.

Many analysts say that the economic crisis has provided the EU with an opportunity to do just that, by encouraging new structures and reforms. This is the idea behind the member states’ Pact for Competitiveness (later renamed the Pact for the Euro and finally agreed at the European Council of 24-25 March). Economists agree that the pact is on the right track in its stated goals of restraining wage increases, improving research and education, boosting the single market and reducing red tape for business. But many question whether the targets are tough enough.

Within the EU’s borders, Europe’s competitiveness problem is there for all to see. Imbalances between member states as a result of rising costs are damaging the EU’s peripheral economies.

Wage growth contributed too. In Greece, Portugal and Spain, labour costs have increased by 20% more than in Germany over the past ten years.

Wage restraint is one thing, but business leaders agree that a deepening of the single market should be a top priority. In January the European Round Table of Industrialists (ERT) – made up of the chief executives and chairmen of many of Europe’s top companies – called on the EU’s policymakers to open up the single market to services and the unrestricted movement of people.

Too little too late?

A year before the Pact for the Euro, the European Commission proposed a ten-year economic reform strategy, “Europe 2020”, with targets to improve employment rates, productivity and social cohesion. Many business leaders and economists believe the strategy has laudable aims but, if Europe really does have just a decade to get it right, it may be too little, too late.

Currently the EU is still hamstrung by problems within its own borders. Divergences in competitiveness mean that Europe is struggling to focus on its role on the world stage. All is not lost; Europe is starting from a strong position. But its leaders must grasp the nettle before it is too late.

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