What do we actually mean by EU ‘competitiveness’?
In an increasingly hostile and geopolitically complex world where tensions between the US and China grow every day, enhancing competitiveness is fundamental for the future of the European Union. This is why Enrico Letta and Mario Draghi have been tasked to come up with reports on the EU’s single market and competitiveness, respectively.
But to identify the keys to foster EU’s competitiveness, it is important to come up with a clear definition. And although competitiveness has become a buzzword in many conversations, there does not seem to be a consensus about the driving forces behind. This is why the work by the EU Commission outlining nine mutually reinforcing drivers of EU’s competitiveness, accompanied by a set of Key Performance Indicators, is especially praiseworthy.
The nine drivers identified by the commission are the following:
1. a functioning single market.
2. access to private capital and investment.
3. public investment and infrastructure
4. research and innovation.
5. energy.
6. circularity.
7. trade and open strategic autonomy.
8. digitalisation.
9. education and skills.
Of course, one could even go beyond the nine mentioned factors and include other very relevant indicators, where the EU is not doing particularly well if compared to the US, such as total factor productivity, companies’ size or regulatory landscape.
A rapid review of the factors mentioned above gives some hints about the weaknesses of the EU economy and thus, the areas where policy measures need to be enacted.
Starting with the single market, which last year turned 30 and is deemed to be one of the most important sources of prosperity of the EU project, there are stark differences of more than 30 percentage points between intra-EU trade in goods (50 percent to GDP) and services (15 percent to GDP) according to Eurostat and OECD data.
Given the relevant weight of services in the EU economy, this points to the existence of regulatory and administrative barriers in intra-EU trade in services. Measures should be enacted to remove all unjustified regulatory and administrative barriers that hinder a more integrated single market.
The permacrisis situation, especially due to Covid-19 and the energy shock, as well as the reaction to economic measures such as the US Inflation Reduction to avoid the relocation of EU companies to other jurisdictions, have prompted a relaxation of state aid rules through the approval of several temporary frameworks.
Bigger member states’ advantage?
Such relaxation is benefitting mostly large member states with fiscal room of manoeuvre, thus threatening the single market.
In a context where huge investment needs have been identified for security, defence and the green and digital transitions, having access to private funding and ensuring an adequate level of public investment seem of utmost importance.
When it comes to private funding, one of the main weak points of the EU economy is the over-reliance on bank funding sources and the lack of a well-developed venture capital industry to support innovative start-ups and scale-ups.
Revamping and making real progress on the Capital Markets Union project should be a priority for the next EU legislative cycle.
Furthermore, public investment in EU public goods should be mutualised and increased. Even if the fiscal space of the US is more challenging than that of the EU on average (the public debt to GDP ratio in the US stood above 120 percent at the end of 2023 and the Congressional Budget Office expects pubic deficit in the US to be six percent of GDP on average up until 2034.), public investment figures to GDP are higher in the US compared to the EU. Of course, this is not a call for laxity in fiscal discipline, but rather a more optimal use of the joint EU fiscal capacities.
Regarding investment in research and innovation, the EU has still way to go if compared to other major jurisdictions: spending in R&D in South Korea and the US in 2022 was respectively 2.2 and 1.5 times higher than in the EU based on Eurostat data.
From lab to fab
Moreover, the EU should really make an effort to move ‘from lab to fab’, i.e. bring all the very talented research from universities and research centres to apply it at industry level.
Energy has become a top priority in the EU especially after the unjustified Russian invasion of Ukraine. Though the EU is at the global top when it comes to renewable energy consumption as a share of total energy according to World Bank data, it is doing poorly in terms of energy costs, which are higher in the EU on average compared to other jurisdictions like the US.
The EU is not only dependent from the outside world energy-wise, but also when it comes to Critical Raw Materials.
This is why circularity and trade, two of the nine drivers identified by the European Commission are key.
As for circularity, the EU already has a high recycling potential for materials such as copper, zinc and aluminium, but little or no recycling potential for other materials. In addition, recycling is often complicated by a lack of adaptation of end products for subsequent recycling and even poor labelling, which makes it difficult to know precisely what materials the product is made of.
It is therefore imperative that the European Union continues to promote the recycling industry, with mutually consistent regulations that favour the circular economy.
When it comes to trade, many of the traditional pillars of EU trade policy are experiencing dramatic changes: coming to free trade agreements is increasingly difficult and the World Trade Organisation is in a very complex situation.
Plus, one should not take it for granted that, for instance, African countries, which are rich in natural resources, will prefer collaboration with the EU rather than China.
The perception of Chinese initiatives like the Belt and Road Initiative if far more negative in the US and the EU than in some African countries. Thus, it would be important for Latin America and Africa to perceive the EU as a reliable long-term partner willing to make commercial sacrifices. This includes, for example, commitments to develop the entire mineral value chain in their territories and not only to extract the materials and then refine them in other jurisdictions with greater legal certainty and better skilled staff.
Digitalisation and education come hand in hand. In fact, digital skills are one of the four cardinal points of the Digital Compass, together with digital infrastructures, digitalisation of businesses and digitalisation of public services. All of them are key for the future competitiveness of the EU.
On top of specific policy recommendations to foster each cardinal point, it is crucial that the governance of national digital plans is better coordinated and that coherence between innovation and digital policies increases.
Moreover, if the EU is to catch up in the digital race, it will not do so by becoming more protectionist. Instead, it should incorporate cutting-edge technologies into its production processes and identify areas where it can gain a competitive advantage by advancing the frontier of knowledge.
In spite of the tremendous and excellent work done by the European Commission in identifying the nine factors outlined above, other should also be added to the analysis, like total factor productivity.
One does not have to be afraid to bring to light elements where the EU is clearly underperforming vis-à-vis other jurisdictions like the US. There is still time to identify our weaknesses and address them.
In this respect, all my hopes are with the Letta and Draghi reports and with the political commitment to implement the measures suggested.