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European Commission

MEMO

Brussels, 11 September 2014

Progress in industrial competitiveness per EU country

The 2014 Member States’ Competitiveness Report "Reindustrialising Europe" found that European firms fought hard to maintain their competitiveness during the crisis originating in 2008. However, despite these efforts, without appropriate action at EU and Member State level the severe legacy of the crisis cannot be overcome.

Aggregate data demonstrates the recovery of exports and an increase in productivity in most Member States. However this positive data at EU level masks considerable differences between the performance and policies of Member States and sectors. The report indicates that many factors which hinder competiveness are common across Member States. Examples include lack of investment, limited access to finance and access to markets, in particular for SMEs; high energy prices, and the need for a more business friendly environment and a public administration.

Manufacturing and the legacy of the crisis

The financial crisis underlined the importance of the real economy and a strong industrial base to achieve the growth and competitiveness needed to sustain and strengthen the EU's recovery, and to achieve the goals of the Europe 2020 agenda.

Since 2008, 3.5 million jobs have been lost in manufacturing, and the pressure of external competition on prices has led to a deterioration of margins in a number of Member States. In addition, investment dynamics have been slowed by decreasing demand and reduced credit availability. Manufacturing's share of the EU gross value added diminished from 15.8% in 2008 to 15.1% in 2013, as against the target of 20% in 2020.

It is important to combat the decline in manufacturing as it plays a major role in the EU's economic success. Industry accounts for over 80% of Europe’s exports, private research and innovation. Nearly one in four private-sector jobs is in industry. These are often highly skilled and each additional job in manufacturing creates 0.5-2 jobs in other sectors.

Manufacturing and job creation

Overall, the reports finds that labour productivity has risen in many Member States, but sometimes this is due to reduced production having been outweighed by an even larger reduction of employees in manufacturing. Over the five years from 2007 to 2012, only Germany has managed to increase employment in manufacturing.

Performance per Member State

To remain a leading industrial exporter in the world, and to grow and create jobs, the EU and its Member States need to be innovative, create value out of knowledge, and use natural resources in a sustainable fashion. Looking at how well the Member States are doing, and whether they are improving or not, four groups emerge:

  1. Member States with high and improving competitiveness: the Netherlands, Germany, Denmark and Ireland.

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

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

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

To examine in detail the competiveness results per EU country, please see the end of this document for a link to the country reports. These are available both in English and the language of the respective country

Common areas for improvement

To allow the EU economy to fully recovery, improvements are still needed in a number of areas:

  1. Additional investment is needed across all sectors to ensure that European industry can maintain its competitiveness. This would be supported by more efficient innovation and commercialisation of research, and access to highly-skilled labour

  2. It is essential that the lack of credit available to companies in many Member States does not stifle the recovery.

  3. Volatile prices and supply risks make increased energy and raw material efficiency essential. Efficient markets for electricity and diversified energy sources are also needed to ensure that energy is available at a competitive price across Europe.

  4. Competitiveness also requires reducing costs and uncertainties for businesses when dealing with public administration. Most Member States need to better take into account the effects of rules and legislation in other fields on competitiveness.

Investment

Higher growth and maintaining and increasing the competitiveness of European firms require additional investment in all sectors of the economy and across Europe.

Generally firms’ decisions concerning investment in equipment follows demand, and investment in equipment is expected to strengthen as the economic outlook improves. The investment rate in equipment is high in Estonia, the Czech Republic, Slovakia, Romania, Bulgaria and Latvia, although the latter three - together with Slovenia - have seen the biggest falls during the crisis

Access to finance

The availability of external finance has an impact on European firms’ investment, productivity, employment and expansion into international markets. Easing the access to finance for businesses is therefore critical to the survival of Europe's industry.

The report shows that lending to non-financial corporations continued to decrease in the euro area last year, although the rate of decrease was slower in the second half of the year. The graph below reveals that lending to the real economy is growing both in the US and in Japan.

Many Member States need to continue to continue to pay attention to access to finance so that it does not constrain investment and growth.

Large firms can obtain finance but smaller firms continue to have difficulties in many countries. Financing conditions for SMEs also differ significantly across the euro area.

The internal market for bank credit remains fragmented, and in some countries small firms are paying much more than in others. This can be seen in the wide spread of interest rate differentials between different Member States.

Innovation

Improving innovation systems in the EU is essential to make the economies of Member States more efficient and competitive, and to close the productivity gap between the EU and some of its main trading partners.

Global sourcing has bound European firms more tightly into complex international value chains. To capture value, firms need strategies that combine product, service and process innovation.

Increasing the share of high-value goods and services requires more efficient innovation and commercialisation of research in most Member States. To support this, it would be useful if Member States’ policies could remove any remaining barriers to innovation, in particular those obstructing small and medium-sized firms.

Strong innovation performance, as measured by the Innovation Union Scoreboard (IUS) indicator, is related to high levels of economic efficiency, as measured for example by labour per-hour productivity levels. Those countries with a high innovation performance, such as Sweden, Denmark and Finland, also tend to have strong labour productivity levels.

Skills

The changing economies of EU Member States require constant upgrading of skills and matching of skills with firms’ needs.

Skills shortages exist across Europe. Many vacancies cannot be filled with the right talent, despite competitive wage rates. In a 2013 survey, 39% of companies reported difficulty in finding staff with the right skills, compared with 36% in 2008 and 35% in 2005.

Problems with finding suitably skilled employees are most common in the manufacturing sector (43%), and least common in financial services (30%). Over 60% of establishments in Austria and the Baltic states struggle to hire employees with appropriate skills, whereas Croatia, Cyprus, Greece, and Spain are doing slightly better (less than 25% each).

Access to markets

Access to markets and integration in global value chains are the basis of European firms' global competitiveness. Between 2008 and 2013 trade integration increased in many Member States, reflecting their ability to increase exports and imports even in challenging circumstances.

The figure below shows the change in relative openness to total trade of Member States between 2008 and 2013.

Energy use and prices

Europe's energy sector is in the midst of a major transformation. Its gas and electricity sectors are moving from public monopolies to competitive private companies in liberalised markets and electricity generation is being decarbonised, with strong growth of wind and solar power in particular.

Access to cheap gas in the US has changed the dynamics of energy prices in the US, but not in Europe. High energy prices affect energy-intensive industries, as energy represents a significant share of their total costs.

Investment in energy-intensive industries has dropped in the EU, but not in China, Japan or the US. In particular, a lot of new investment in energy-intensive industries goes to the US. Thus European energy prices pose a challenge to competitiveness.

European electricity prices are high compared to global competitors. Electricity prices also differ greatly between EU Member States:

  1. The Nordic energy market is well-integrated and competitive. Integration and hydropower generation in the Nordic countries keep electricity relatively cheap in Finland and Sweden.

  2. Industrial electricity prices in Germany have increased sharply partly as a result of increases in taxes and levies.

  3. Italy, Malta and Cyprus have the highest prices in the EU. In Cyprus industrial electricity prices are almost double the EU average.

Public administration

To achieve the EU policy’s objectives, taking competitiveness concerns into account in other policy areas is essential. The basic tool for doing this is the consistent and rigorous use of competitiveness proofing techniques for all rules affecting businesses, and making this proofing an integral part of a wider impact assessment process when making new rules.

Many Member States need to reduce costs and uncertainties for businesses when dealing with public administration. Government effectiveness (see graph below) is a summary assessment of the quality of a public administration in general, depending on its regulatory system, its impartiality and the quality of the services it provides.

On average, government effectiveness has not much improved across the EU over the past five years. While many Member States either maintained or improved their position relative to 2008, twelve countries’ ranking fell: Belgium, Denmark, Germany, Estonia, Ireland, Greece, France, Cyprus, Hungary, Austria, Sweden and the United Kingdom. Greece, Austria and Denmark showed a marked deterioration in their performance, while the biggest improvements were in Italy, Latvia, Croatia, Bulgaria and Finland.

About the Member States’ Competitiveness Report

The Member States’ Competitiveness Report outlines the current situation of European industry and compares progress achieved by EU countries. This scoreboard, which gives a country by country breakdown, is based on indicators in the area of investment and access to finance; innovation and skills; energy, raw materials and sustainability; and access to markets infrastructure and services. It also looks at how industrial policy has been implemented at European level and in the Member States. This years’ report has an expanded analysis of how to improve the business environment through growth friendly public administration.

The Member States’ Competitiveness Report has been published annually since 2010. It is issued in response to a Treaty call for the EU and its Member States to ensure that the conditions necessary for the competitiveness of the EU's industry exist.

This report will be used by the Commission during the 2015 European semester, as an input to the Commission's recommendations on the fiscal and structural reform policies of every Member State.

For the full report and the separate country reports – click here


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