Talking point
European industrial policy: Limited scope for action in short term

March 21, 2014

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Even though current political developments have disrupted the agenda for the spring summit of the European Council (March 20-21), competitiveness issues have in fact traditionally been an important topic at such gatherings. At the end of January the European Commission already issued a communication on this issue that once again called for a strengthening of European industry. While this political signal is to be welcomed, the Commission's short-term scope for taking action is limited in many areas. Firstly, this is the case because established economic structures in individual member states cannot be altered overnight. And secondly, decision-making powers in important policy areas largely rest with national governments.

Items on the European Council agenda include “global value chains, smart specialisation and key technologies”. Integration in global value chains is becoming ever more important for European industry. It is equally important to continue growing its share in segments where growth and exports are particularly strong. If Europe cannot and will not compete with the lower (wage) costs in the emerging markets, then specialisation is required in knowledge-intensive sectors in the higher technology segment – in manufacturing as well as in services – in order to remain internationally competitive.

Although industry in the EU has still not recovered from its slump triggered by the economic crisis, the output of high-technology sectors had already returned to its pre-crisis level in 2011 and has been growing steadily since then. According to Eurostat, high technology includes sectors such as the pharmaceutical industry, computers and consumer electronics, medical and optical equipment as well as the aerospace sector. The problem is simply that the EU countries benefit from this to very differing degrees because of the diversity of their economic structures. Drawing up common EU-wide objectives occasionally suggests a homogeneity between the member states that does not really exist.

aAlso sectors classified by Eurostat as “medium-high-tech” (such as the automotive, mechanical engineering and chemicals industries) have recently performed better than the average. Overall, in 2011 an EU average of roughly 45% of all industrial value added was generated in the high-tech and medium-high-tech segments – but there were major regional differences. In Germany the share of these industries came to around 57%, and in Ireland it was actually over 60%, whereas in Greece it was only 18% and in Portugal only 23%. If we then also take into account that the manufacturing share of total value added in Germany and Ireland is more than twice as high as in Greece, the share of the medium-high-tech segment in economic output in the countries mentioned first is some ten times higher than in Greece. On top of this, the sectoral differences between the countries barely narrowed, even during the phase of economic convergence following the introduction of the euro (see chart).

The importance of integration in higher-tech value chains is demonstrated by the example of most east European countries. Despite below-average per-capita income the share of high-tech sectors mostly exceeds 40% and is thus twice as high as in Greece and Portugal. Besides factors that cannot be influenced such as a geographical location on the periphery the causes are mostly to be found in the countries themselves, for example wages that were not linked to productivity, but also in an unfavourable general environment for business and poorly functioning state institutions. Responsibility for these areas rests at the national level; the European Commission can observe and evaluate developments, but it has very limited scope to exert direct influence.

Technology-intensive industries and knowledge-intensive services go hand in hand

Of course not every country can – simply by definition – specialise in more sophisticated industrial products. This would not even be necessary, since ultimately the service sector in all EU countries generates the highest share of total value added. Here, too, it is the technology and knowledge-intensive segments that are among the fastest-growing areas. Unfortunately, however, countries with a low level of technological intensity in their industry cannot make up for this by specialising in more sophisticated services. On the contrary, empirical observation shows a positive relationship between the significance of technology-intensive industries and knowledge-intensive services. In Italy and Portugal, for example, fewer than 35% of all employees work in knowledge-intensive service sectors (e.g. IT services, education, healthcare or financial services), whereas in Ireland, the UK and the Scandinavian countries the figure is higher than 45%. Digital technologies, for example, also provide opportunities for countries with a lower-tech specialization as the market entry costs are lower than in industry. This, however, requires not only marked improvements in the general business environment in the peripheral countries, but also in the EU's single digital market.

The big differences in industrial structure also have an impact on the Europe 2020 objective of boosting average R&D expenditure to 3% of GDP. Nearly two-thirds of EU-wide R&D spending comes from the private sector, and thereof some 80% from industry. Beefing up industry and boosting the research intensity of the economy thus inevitably go hand in hand. In this respect, too, it becomes clear that industrial policy measures in the EU must adopt a variety of approaches in order to respond to country-specific conditions.

Energy and climate policy: Differing degrees of EU influence

aIn the area of energy and climate policy, which will also be discussed at the EU summit, the picture is mixed. The EU did confirm in its communication in January that energy costs impact on competitiveness primarily in energy-intensive sectors of the economy. It also said that “it is important to avoid disproportionate cost energy increases due to taxes, levies or other instruments introduced by Member States […].” Nevertheless, it should be noted that the EU has little influence on energy prices in the member states. It is not for nothing that electricity prices for example vary considerably within the EU. They reflect among other things the differences in energy policy priorities and in the energy mix of the individual EU countries. The EU does, however, have one important function in the (international) expansion of the energy grids. More rapid progress in this area would help to enhance competition in the energy sector. Furthermore, the fluctuating amount of renewables could be utilised more efficiently. Both of these – all things being equal – would dampen energy prices and thus be amenable to industry's competitiveness.

With the climate policy targets, too, the elements come together at the EU level. After all, the EU is an important negotiating partner at the UN climate conferences. The European Commission recently proposed a 40% reduction in CO2 emissions in the EU by 2030 compared with the level in 1990. However, it is evidently also the case that the level of climate policy ambition does vary from one member state to another. It thus remains to be seen how this target – should it be agreed – can be transposed to the member state level.

The influence of the EU is particularly important when it is a matter of improving European firms' access to the growth markets outside Europe. In trade policy issues pertaining to non-EU countries the EU speaks for all member states with a single voice. Although trade issues are unlikely to feature prominently at the EU summit, a further abolition of duties and non-tariff trade barriers would, however, help put European industrial and service companies in a position to capture a bigger share of the growth in the emerging markets. Furthermore, the EU would become a more attractive region for investors, because there would be less incentive to relocate production as a consequence of insufficient market access. Especially for small and medium-sized companies that have hitherto undertaken few activities outside the EU, targeted export promotion (e.g. export credit insurance) would also be a logical step. The EU devotes a lot of attention to this issue in its latest communication, which is to be welcomed explicitly.

Even though the competitiveness issue is overshadowed at this spring summit of the European Council by several current developments (Ukraine, agreement on banking union), it will remain one of the decisive challenges for the next few years on the road to a lasting economic recovery. This recovery can only be achieved if both the EU and the member states create an environment that is conducive to innovation and business.

See also:
Europe's re-industrialisation: The gulf between aspiration and reality, EU Monitor, November 2013




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