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Brussels, 21 November 2007

EU Economy 2007 Review: moving Europe's productivity frontier

The past two years have seen a renewed acceleration of productivity growth in the European Union, narrowing the transatlantic productivity gap that emerged in the mid-1990s. However, a large part of the pick-up in productivity reflects the cyclical upswing which the EU has enjoyed in this period. To secure a sustained increase in productivity and compete for economic leadership, the EU must tackle the root causes of slow productivity growth. This is the main message from the EU Economy 2007 Review, which provides an in-depth analysis of productivity developments and policies to push Europe's productivity frontier forward

"Europe needs to sharpen its competitive edge to enjoy the full benefits of globalisation. And improving productivity is one of the necessary conditions for improving competitiveness. Member States must persevere with, and indeed strengthen, the implementation of their current reform strategies if they are truly to overcome their productivity problems. The Lisbon Strategy provides the appropriate framework to take this work forward", said Joaquín Almunia, the Economic and Monetary Affairs Commissioner.

Trend reversal yet to be confirmed

The EU has lagged behind the US in the labour productivity stakes since the mid-1990s. This has been a broad-based trend across sectors and Member States alike (see table 1). Sectoral composition effects have also played a role in the productivity slowdown as some higher-productivity sectors, for example in manufacturing, have grown less than lower-productivity sectors, such as trade services.

But this decline in productivity growth appears to have come to a halt, and indeed actual data even show a significant pick-up in labour productivity growth since mid-2005, alongside fast and accelerating employment growth[1]. In 2006, productivity growth increased to 1.5% in the EU (1.4% in the euro area) as opposed to 0.9% in the US and the comparison is expected to stay favourable for Europe in 2007-8 although at somewhat lower rates.

While the quickening pace of productivity growth was fairly general across countries and sectors, a significant part of the acceleration at the euro-area level seems to be due to improvements in the private sector in Germany. Although a permanent improvement cannot be excluded, available data so far indicate that a large part of the apparent acceleration in productivity growth must be attributed to the cyclical upswing which the economy has enjoyed in this period.

In 2006, EU growth reached its highest level since 2000 at 3.0% of GDP (2.8% in the euro area), well above what is generally considered to be the potential growth rate of the region. This year and next the EU and euro area are also set to grow faster than the US although at rates around potential[2].

Yet in spite of these encouraging signals, the evidence for a structural and, therefore, durable pick-up in productivity growth remains scant to date.

Productivity gap particularly entrenched in the services sector

The root of the structural productivity growth differential with the US lies mainly in the wholesale and retail trade, in financial services and in real estate and other business services. Productivity gains have also been sluggish in a handful of industries, particularly electrical and optical equipment (see graph 1).

The smaller information and communication technologies (ICT) producing sector in Europe is part of the explanation, but only part. Even more important are structural productivity factors, i.e. the less effective use of ICT, the slower adaptation of our work practices, the insufficient promotion of competition and other types of policies that drive productivity, in particular in the services sector.

Regulatory issues, especially market entry and exit rules, also appear to play a role in business and financial services, while the weak productivity performance of the EU's retail and wholesale industries is in part explained by constraints on the use of economies of scale.

On a positive note, the EU has done significantly better than the US in the so-called network industries, helped by efficiency gains associated with the deregulation drive over the last two decades.

The Lisbon Strategy is the way to go

Further examining the determinants of structural productivity growth, the analysis shows that overall progress is increasingly associated with innovation and technological spill-over in countries positioned at the technology frontier, thus confirming the crucial importance of investments in R&D and human capital and of competitive and flexible markets.

There is considerable scope to boost Europe's productivity still further, by pursuing the policies agreed in the revised Lisbon Strategy for Growth and Jobs and, in particular, by promoting:

  • higher levels of better targeted R&D investment, with more market-based financing systems,
  • developing world-class research and educational establishments in the pursuit of top managerial and research skills to lead the economy to high rates of innovation and diffusion of new technologies,
  • a fully functioning single market – and actively promoting competition in the sectors which most lack it and, last but not least,
  • improving the quality of public finances so as to free up resources for more investment and other growth-oriented policies.

The Communication and accompanying EU Economy 2007 Review are available on the internet at:

See in this context also the Communication from the Commission "Raising productivity growth: key messages from the European Competitiveness Report 2007". COM(2007)final. Available at

Table 1

[ Figures and graphics available in PDF and WORD PROCESSED ]

Graph 1: Breakdown of structural productivity growth differential between the US and the EU (1996-2004)
[ Figures and graphics available in PDF and WORD PROCESSED ]

Graph 2: Sectoral contribution from ICT to the total economy change in value added, US minus EU (1996-2004)

[ Figures and graphics available in PDF and WORD PROCESSED ]

[1] The EU has created more than 11 million jobs since 2000, including 8 million in the euro area. This compares with 7.5 million in the US (Commission, AMECO).

[2] For comparative forecasts see IP/07/1666

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