EUROPEAN COMMISSION MEMO Brussels, 10 October 2012 Overview of competitiveness in 27 Member States Member States have made good progress in strengthening the sustainability of industry, improving support to small and medium-sized enterprises (SMEs), and reforming public administration. They show a continued shift to a more knowledge-based economy, with increased labour productivity and highly-skilled labour. Member States have engaged in reforms to improve business prospects and strengthen their competitiveness: As a whole, innovation performance has improved, but the convergence between more and less innovative countries seems to have slowed down in recent years. the innovation gap between Member States risks widening due to the different ways they have responded to the economic crisis. significant challenges remain in promoting private research and enhancing competition in network industries (energy, telecommunication, and transport). Access to finance has worsened in the majority of Member States, particularly for SMEs. The new industrial performance scoreboard looks at the Member States' industrial performance in five key areas: manufacturing productivity, export performance, innovation and sustainability, the business environment and infrastructure, and finance and investment. Based on the results of these indicators, three main groups emerge: The consistent performers, whose industries are dominated by technologically advanced firms and whose workforces are highly skilled. This group includes: Germany, Denmark, Finland, Sweden, Austria, Ireland, the Netherlands, the United Kingdom, Belgium and France. The group of uneven performers, who tend to show uneven performance, good in some criteria, but below average in others. This group comprises of Estonia, Slovenia, Spain, Italy, Portugal, Greece, Malta, Cyprus and Luxembourg. The catching-up group, which face significant challenges, as their move towards more knowledge- and skills-oriented industries is hampered by weak innovation capacity and knowledge transfer. This group consists of Bulgaria, Romania, the Czech Republic, Poland, Hungary, Slovakia, Latvia and Lithuania. Increased manufacturing labour productivity and skills Between 2006 and 2011, labour productivity in manufacturing improved in most Member States. With all but two Member States showing an increasing proportion of highly-skilled labour force, the overall trend since 2006 suggests a continued shift to a more knowledgebased economy and an accompanying increase in medium and highly-qualified labour, at the expense of low-skilled jobs. MEMO/12/760
Figure: Change in manufacturing productivity (2011, 2006=100) Source: Eurostat (except for LU STATEC); using Nace Rev 1 Note: Luxembourg, Ireland and EU averages are for 2010; data for Bulgaria, Romania and the UK is not available. EU's share of global exports is maintained but mixed performance at Member State level While the EU has broadly held to a 20% share of global exports (excluding energy), the relative share of individual Member States has shown mixed performance. Since 2006, Germany, the Netherlands, Poland and Spain have expanded their share of EU goods exports, while those of France, Italy, the United Kingdom and Ireland have declined. Figure: Country share of EU exports of goods Source: Eurostat Note: The exports cover both intra-eu and extra-eu exports. The EU s export share of the world trade in goods declined in 2006-2010 from 17.3 % to 16.0 %. 2
Tightening credit conditions and difficulties in accessing finance Since 2009, access to bank loans has deteriorated in more than half of EU Member States. Alongside supply-side effects, the impact of falling demand for loans, in particular from SMEs, has been also important for some countries. Access to bank lending remained easiest in Finland, followed by Latvia, Sweden, Poland and Austria. The situation remained relatively difficult or deteriorated in Italy, France, Luxembourg, Hungary, the UK, the Netherlands and Spain. The interest rate differentials for corporate loans have widened considerably within the euro area, reflecting the sovereign debt problems. At the same time, obtaining financing from alternative sources (e.g. corporate bonds, venture capital) remains difficult for most firms. Figure: SMEs' access to bank lending Source: ECB/Commission, Commission calculations; (0=worst possible / 1=best possible) 3
Country breakdown Belgium The Belgian economy has high labour productivity and a high level of foreign direct investment (FDI). However, Belgium has lost its relatively good competitive position in recent years and exporters have progressively lost share in world markets. Although the share of high-tech exports has risen, exports are mainly composed of low/medium-tech goods that face fierce competition from lower-cost countries. A key challenge for Belgium is how to speed up the transition towards a more knowledgeintensive economy by fully exploiting the strengths of its research system, including developing the support given to clusters and better conditions for the growth of innovative firms. Belgium's competitiveness profile is in many ways average in Western Europe. In general, pro-business policies, despite high taxation, provide the right conditions for business. However, challenges remain: the fragmented research system, the relatively low level of private investment, the deficiencies in leveraging intellectual assets and the need to simplify and streamline administrative procedures. Finally, improving energy and resource efficiency would lower costs and directly boost productivity by making better use of inputs. Bulgaria Bulgaria is a country with a relatively low income level and a dominance of labourintensive industries. Bulgaria continues to reinforce its public institutions; its challenge is to make them stable and more efficient, while at the same time increasing their capacity to improve the business environment. Important structural reforms to improve Bulgaria s competitiveness have been continuously postponed. Such reforms include cutting red tape at national and local levels, fostering innovation, creating a more integrated research and innovation system and improving energy efficiency across the economy. Bulgarian research and innovation systems are of variable quality. The country has committed to double its current research and innovation spending by 2020, which requires the effective use of all existing policy instruments. This will mean a focus on key sectors and enhanced cooperation of industry and business in innovation. The modernisation of the transport and energy infrastructure is another major challenge. An improved capacity to use structural funds will be essential in facing these challenges. 4
Czech Republic Denmark The Czech Republic is one of the most energy intensive countries in the EU so moving towards a cleaner and more efficient use of energy is important. The Government should publish its long-term energy policy as soon as possible and establish a target for energy efficiency. The Czech Republic also has work ahead in improving its business environment. A key concern is access to finance for business. Although progress has been achieved in improving public administration and fighting corruption, more needs to be done. Innovation performance needs improvement; as does co-operation between research institutions and businesses. At government level, responsibilities for innovation policy lack co-ordination and are fragmented. Denmark is one of the most competitive countries of the EU. However, the cost competitiveness of Danish manufacturing has deteriorated in the last decade. Improvements could be made in removing obstacles to competition and in the quality of the educational system. More focused policies to increase the supply of skilled labour should be considered. Ambitious Danish policies to improve the business environment and public administration have been largely successful. Ambitions for industry sustainability are very high: measures have been adopted to reduce the use of fossil fuels and to increase energy efficiency throughout the economy. The policy response to the financial crisis has included a comprehensive set of measures on access to finance. 5
Germany The crisis has harmed the German economy less than initially expected. This is largely due to the competitiveness of German industry, its export orientation, a resilient labour market, the absence of a credit crunch and a favourable business environment. Germany is one of the innovation leaders in the EU and the framework conditions (e.g. High-Tech Strategy 2020, Zentrales Innovationsprogramm Mittelstand, Konzept für Fachkräfte etc.) favour research and innovation. Its industry's capacity to innovate and to remain at the technological frontier is increasingly important in securing Germany s competitive position, also in the medium and long term. An important challenge will be to avoid a systematic skills shortage by adapting both the educational system and the labour market to the changing requirements of technology and innovation. In the long term, the declining number of entrepreneurs could also have a negative impact on Germany s economic growth and innovation performance. Germany's new energy strategy creates opportunities for growth, but also entails considerable challenges: the overall economic costs and the timely deployment of the required infrastructure. Estonia Estonia has a well performing business environment, supported by strong e- government and a developed entrepreneurship culture. In many ways, Estonia is rapidly catching up with countries that have much higher level of GDP per head, and its manufacturing production has already regained the ground lost earlier in the crisis. A challenge for Estonia is to move towards a more innovative business culture with higher R&D intensity, which would increase productivity and thus improve its competitiveness. Encouraging companies to innovate would lead to an increase in products and services with high added value, including exports. A more coherent approach to industrial policy with a comprehensive research and innovation strategy would also help. A move towards greener growth presents another challenge, as Estonian industry is very dependent on non-renewable resources, in particular in energy generation. Increased cooperation in the Baltic region could provide opportunities in this field. 6
Ireland average. Ireland has made good progress in achieving its adjustment programme's goals. Despite the remaining challenges, these efforts have improved business prospects and strengthened competitiveness. The challenge for Ireland is to improve the prospects of the domestic SMEs. The sector is held back by weak domestic demand, lack of innovation, problems with access to finance, and rising costs of doing business at local level. The government should continue to keep a close eye on access to finance, as improvement in this area is crucial for future growth. The lack of domestic demand and lack of finance have lowered the level of investment in equipment, which remains under the EU The Irish government s Action Plan for Jobs 2012 is a broad-based plan to address these challenges. If implemented steadfastly, it could considerably reduce the differences in the competitiveness of the domestic and multinational sectors. The challenge is to avoid the fragmentation of efforts, and to increase policy focus on the most promising initiatives enhancing innovation and growth. Greece The Greek recession since 2008 has been one of the most severe ever experienced by a Member State. Difficult economic conditions and continuing uncertainty are taking a heavy toll on Greek business. In addition to the difficulties in implementing structural reforms, the lack of growth has made it challenging to meet fiscal targets. Greece has recognised weaknesses in its business environment. An effort has been made to simplify procedures and to boost competitiveness. Examples include the simplification of licencing procedures, fasttrack investment authorisations, the creation of a single business registry, and a one stop shop system for all registration procedures. However, the implementation of these measures has been slow and further reform of the Greek public administration remains a major challenge. Greek companies face serious problems in obtaining access to finance due to the severe recession and the difficult situation for the banking sector which has seen outflows of deposits and a rise in non-performing loans. This difficult economic situation has led to a decrease in R&D investments both from the public and private sectors. 7
Spain Among the large economies of the EU, Spain has been hardest hit by the economic crisis it has affected unemployment, GDP, growth, profit margins, and bankruptcies. This has perhaps been aggravated by a smaller average business size, lower productivity and a lack of innovation and internationalisation. Inadequate access to finance is a major concern, especially for SMEs. Reinforcing the system of government-backed guarantees and loans for SMEs could be helpful. Spain has not yet been able to move towards a more knowledge-based economy. However, recent reforms to improve the research and innovation system may provide an opportunity to pursue structural change. The government is also working on a number of initiatives to improve the business environment. The remaining structural challenges include slow bureaucracy, a low level of internationalisation of enterprises, and lack of competition in certain sectors. France France is among the consistent performers, although its external competitiveness has significantly deteriorated over the last decade. This reflects the persistent rise in labour costs, which has lowered firms profitability, reduced their innovation capacity, and their ability to invest in research. As a consequence, exports of knowledgeintensive manufacturing industries have suffered. The effects of the crisis are aggravating the situation as tight credit conditions, lack of equity financing and lower profit margins lead to lower business investment, in particular in SMEs. This has the potential to further weaken their growth prospects and their ability to expand to new markets. Challenges facing France also include the lack of investment in private business research (e.g. level of investment in private business research is too low) and the complex and burdensome regulatory environment for business. 8
Italy The economic crisis has had a seriously negative effect on Italian industry. At the same time public resources have become very scarce. These new developments come after a period of declining competitiveness since the end-1990s, due to both cost and non-cost factors. One of the challenges in improving productivity is the backlog of structural reforms yet to be implemented. There has been relatively more progress on the improvement of the business environment and on the opening of services sectors to competition. However, the challenge remains to promote a more innovative industry, where implementation of measures has been disappointing. More ambition is necessary to improve competitiveness, as well as access to finance, which remains a particularly problematic issue especially for SMEs. Cyprus The Cypriot economy's cost competitiveness has deteriorated significantly over the last decade. Labour productivity growth has been offset by the growth of prices and wages. The challenge is to maintain and increase exports so as to keep the current account balance from posing serious long-term problems. The system of wage indexation and high electricity prices limit the competitiveness of Cypriot industry. Its government is trying to modernise the indexation system to better reflect productivity gains, while in the long term the discovery of natural gas can create opportunities to build a more diversified energy system. The move towards knowledge-intensive and high-growth economy would benefit from improved research and innovation policies. 9
Latvia Latvia needs to move towards a more knowledge-based economy. This would be helped by improving the performance of public administration, reducing the administrative burden on businesses, and striving towards a more competitive environment, especially in sectors like: construction, healthcare and pharmacy, public services and food supply, which is dominated by two big chains. Latvia has improved the sustainability of its industries, and its manufacturing production has bounced back and now exceeds precrisis levels. However, Latvia s poor innovation performance is a drag on its long-run competitiveness. A comprehensive industrial policy could be a catalyst for companies to engage in technological innovation and better exploit the resources offered by universities. Latvia's energy intensity is more than double the EU27 average due to the structure of its industry. Latvia would benefit by promoting greener growth, improving energy efficiency, increasing the share of renewable energy sources, and modernising its transport infrastructure. Increased cooperation in the Baltic region could provide opportunities in this field. Latvia could strengthen its growth potential through more structural reforms, in particular by improving the business environment. Lithuania Since 2008, Lithuania has managed to correct its previous loss in price competitiveness and to diversify its export markets. Lithuania has also taken broadbased action to boost competitiveness, although the economy still faces a number of challenges. In particular, more private investment in research and innovation capacity would facilitate the long-term move towards a more knowledge-intensive economy. Research policies should aim to benefit from the scientific fields in which Lithuania is competitive. On-going reforms in the higher education system can help to match the demand and supply of skills. Lithuania s energy infrastructure would benefit from more competition and greater interconnectivity to bring down energy prices and better support growth. Improvements can also be made in energy efficiency. 10
Although measures have been taken to improve tax compliance, there is still a high degree of tax evasion; this drains public finances and holds back spending in growth enhancing areas. Luxembourg Hungary Luxembourg is a competitive economy. Its challenges include decreasing productivity gains and increasing unit labour costs, which may harm its long-term potential; and achieving the national target for the reduction of greenhouse gas emissions. Good progress has been made towards a more knowledge-intensive economy by strengthening the links between education, research, innovation and businesses. However, its ability to commercialise research and innovation results is limited. Measures have been adopted to improve the business environment, including a simplification of administrative procedures. However, further efforts could be encouraged in some areas, such as reducing the time required to start up a company. Frequent changes in policy and in the legal and institutional framework have created an unpredictable economic environment for Hungarian enterprises. In addition, cost competitiveness has deteriorated over the last decade, although labour productivity has increased slightly after the crisis. Hungary's industrial competitiveness faces a series of challenges. These include tight credit conditions, in particular for SMEs, a low level of innovation, weak competition in many services, and low effectiveness of public administration. While there have been positive developments in some areas, increased competitiveness requires a stable and predictable economic policy framework. Further efforts are also required to reform the public administration and to reduce administrative burdens. 11
Malta Growth in Malta is strongly driven by foreign investment and exports. Improving external trade and a pickup in business investment contributed to a strong rebound in economic activity in 2010. The increased proportion of highly-skilled labour force since 2006 has contributed to improvement in competitiveness. Challenges include the dependency on imported oil, and sustaining the improvements in business environment over time. Finally, the promotion of private research remains a challenge. The Netherlands Netherlands is one of the most competitive economies in the EU, although problems remain. For example, in the area of sustainable industry, the adopted measures are probably insufficient to reach the legally binding 14% renewable energy target by 2020. Phasing out environmentally harmful subsidies could improve energy efficiency, reduce emissions and increase government revenues. Access to finance for innovative SMEs seems to pose problems, although the situation has improved since 2009. The problems seem to be with certain sizes of financing, in particular in loans between EUR 0,5 and 3 million. The Dutch research and innovation system performs well and has maintained or improved its innovative capacity. However, worrying developments in private research expenditure may have a negative effect on the future competitiveness of the economy. 12
Austria Austrian competitiveness is based on solid performance in many areas, and in the short run it has no major bottlenecks. However, it faces relative structural weaknesses in some areas, which may harm the long-term potential of its economy. Austria is one of two Member States in which the share of highly-skilled labour force in manufacturing has declined like in Denmark. The need for action to support the knowledge triangle (education, research and innovation) has been recognised by the government. The generally favourable business environment would, however, benefit from more streamlined administrative procedures for start-ups, and from an increased availability of non-bank financing. Poland Thanks to strong internal demand and good export performance, Polish companies have fared well through the crisis and continue to grow. Despite some weaknesses in the capital markets, Poland has also avoided credit crunch and access to finance is not a major concern. However, without further structural reforms the current growth model might not be sustainable. Reform of the education and science system has not yet improved the companies' weak innovation performance. To address this problem, stronger strategic linkages between industrial, education and innovation policies are necessary. Reforms to the business environment have progressed rather slowly. The main challenges remain the high administrative compliance costs, slow legislative processes and unstable legislation. In addition, in spite of gradual modernisation, underdeveloped transport infrastructure continues to be a serious obstacle for industry s growth. The Polish economy has managed to reduce its energy intensity, but has still not reached the European average. Sustainability goals should be better incorporated in energy and transport policies, which would facilitate adjustment and encourage companies to adopt environmental technologies. 13
Portugal Portugal is implementing a series of reforms to improve competition, labour and several product markets, business conditions, efficiency in public administration and the stability and resilience of the financial sector. These reforms have the potential to facilitate and speed-up structural change and contribute to improved productivity and competitiveness. Difficulties in accessing finance pose a serious challenge to SMEs. To counter this, effective alternative funding and recapitalisation mechanisms are needed. Such mechanisms should ease credit constraints for SMEs, as well as facilitate the reduction of their high leverage levels and dependency on bank loans. The share of highly qualified labour in manufacturing has improved since 2006. However it remains well below EU average, due to the prevalence of low-skill, labour-intensive industries. Finally, despite the severe budgetary restrictions, sustaining and improving the efficiency of investments in research, innovation, entrepreneurship, education and overall skills development will be essential for long-term growth and competitiveness. Romania Although Romania is catching up in some ways, it needs to encourage moves towards more research and innovation oriented industries. More efforts should be directed to foster private sector R&D and innovation. The support of knowledge-based start-up companies through nurturing services and funding for innovative product development is one of the main challenges. Romania is one of the most energy intensive economies in the EU. The challenge is to improve energy efficiency and increase use of renewable energies. To improve its long-term competitiveness, Romania faces the challenge of setting and implementing a national strategy for industry and innovation with clear, coherent and coordinated policies and priorities, refocusing resources on areas of comparative advantage. Romania needs an effective reform of the public administration. Its current weaknesses limit reforms, hinder the absorption of EU funds, and keep investors away. In particular, improved transparency, accountability and independence would be beneficial. 14
Businesses also need a better environment with quality regulations. They would also benefit from an improved transport and communication infrastructure. Slovenia The crisis has clouded the perspectives for Slovenian businesses. The access to bank loans is extremely difficult, and many viable firms especially SMEs face tightened borrowing conditions. The challenge is to maintain the move towards more knowledge-intensive products and services, and a more sustainable economy. Particular problems have been weak demand and tighter borrowing conditions for SMEs. Although public financing institutions have helped maintain access to finance, it remains a problem for many Slovenian businesses. The business and competition environment holds back foreign direct investment. A more competitive environment could increase investment, also from abroad. The business environment would also benefit from the full implementation of the Small Business Act, including shorter payment times, and a streamlined spatial planning system. The share of highly-skilled labour force in manufacturing has increased since 2006, although meeting the challenge of moving towards a more knowledge-based economy will require more effort. Slovakia Recovery in Slovakia has been based on external demand and strong manufacturing activity, which also makes it vulnerable to deterioration in the global environment. Technology imports have been a source of productivity gains. However, further potential is limited due to lower foreign investment. Slovakia's industrial base is relatively narrow and the economy could benefit from diversifying to services. Relatively small improvements in innovation capacity have not created significant movement towards a more knowledgeintensive economy. Although the transparency of public procurement and judicial authorities has somewhat improved recently, weaker institutions and problems in public administration still drag down the productivity of enterprises, and remain a major challenge. The combination of high energy prices and high energy-intensity pose another problem. 15
Finland Finland remains one of the most competitive Member States in the EU and is identified as one of the innovation leaders. However, a key challenge is to make the economy more diversified in terms of sources of growth. Without a significant increase in the number of innovative high-growth firms, Finland s ranking as an EU innovation leader risks declining. Avoiding this would require facilitating broader innovation, enabling the commercialisation of research results, and stronger export orientation. Furthermore, the capacity to exploit and disseminate the extensive ICT knowhow both in the business and public sectors, including absorbing the available highly skilled human resources, is a determinant for future growth. Creating more competitive product and services markets, especially in the retail sector, remains a challenge. Moreover productivity gains and cost savings in public service provision in view of the ageing population will be crucial. Finnish industries are more energy-intensive than the EU average, but perhaps the strategy for greener growth and the goal of improved strategic positioning in the environmental technology sector will help. Further, the level of investment in equipment has suffered during the crisis. It has decreased since 2006 and is below the EU average. Sweden Sweden has consolidated its position as one of the most competitive economies in the world and remains an innovation leader in the EU. In the short term there are no particular threats to its competitive edge. However, in the longer term it needs to address its skills needs, in particular in science, technology, engineering and mathematics. While business investment in research is high by international standards, it has fallen as a result of the relocation of multinational corporations. Moreover, the limited commercialisation of research results remains a weakness of the Swedish research and innovation system. 16
The United Kingdom The crisis has created challenges to the growth and competitiveness of the UK economy. However, the UK has an excellent business environment that is strengthened by the quality of its public administration. A major challenge is access to finance, in particular for SMEs. The Government has adopted a series of policy initiatives to get the banks to lend again, although it is too early to assess their impact. The UK's labour productivity is lower than that of its main competitors. This seems to reflect underlying weaknesses in skills, investment and the planning system. UK businesses would benefit from an improved energy infrastructure, although the commitment to fiscal consolidation is likely to limit investment in infrastructure. Clearly, the cumulative effects of low investment in infrastructure could in the future hamper the ability of businesses to rely on it and private investment may therefore be necessary. Background This memo presents an abridged look at industrial competitiveness in all 27 EU Member States, drawn from the 2012 edition of the annual report on "Member States competitiveness performance and policies". The report analyses industrial competitiveness across the EU and presents policy measures adopted by Member States to improve their competitiveness, and by implication, the competitiveness of Europe as a whole. To facilitate reform and policy learning, the report also includes a new yearly industrial performance scoreboard that focuses on five key areas for competitiveness in Member States. More information 17