Global Competitiveness: an Uncertain Outcome of the EU Uphill Struggle for Competitiveness

bridges vol. 20, December 2008/ Feature Articles

By Attilio Stajano

In order to maintain its share in the global market, ensure sustainable growth and employment, and prepare for a knowledge-based society, the EU should invest in education, training, lifelong learning, research, and innovation. Other priorities include improving ITC infrastructures, diffusion, and literacy. In reality, this proposed remedy is not expected to solve all the competitiveness problems for each EU member state. However, it might counteract a trend that has seen several EU countries decline in competitiveness rankings under the combined pressure of the most advanced countries in the Triad (i.e., North America, Western Europe, and Japan) and the emerging economies. But even if the EU only succeeds in maintaining its current position, Europe will continue to contribute to the world a model of development and a system of values.
 

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The European Union is a region with high labor costs. The costs for salaries, social services, education, training, health, and environmental protection can be only partly compensated by increasing the productivity of the labor force, improving efficiency of public administration, and taking full advantage of the internal market and the monetary union. The ability to compete in world markets depends on the capacity to demonstrate the superiority of European products and services in terms of their quality, design, innovativeness, and ability to satisfy the requirements of an ever-changing market demand. The higher quality of European products and services may enable them to be competitive despite their cost, which is attributable to the high salaries and high standard of living within the EU.

In my most recent book, Research, Quality, Competitiveness, I compare the EU and the US economies. Even though European industry is behind the US in key sectors linked to the new economy, it is successful in other sectors, including some high-tech sectors. It is primarily in mature sectors such as fashion, luxury cars, or food products that European industry beats the US competition. In most cases, the competitive advantage derives from quality rather than price. However, the challenge to the European economy comes not only from the US. Emerging countries, particularly the BRICKs (Brazil, Russia, India, China, and Korea), are growing in importance and upsetting economic and trade relationships. In addition, a new phenomenon is changing the market demand worldwide: An ever-growing number of price-conscious customers value good enough products more than best products, if sufficient quality is offered at a budget price.

The large part of European industry that has achieved a leading position in international markets in sectors where the technological challenge is less aggressive will have to face a new form of competition - one in which maintaining competitive advantage depends on the capacity to integrate innovative content into processes, products, and services. In these sectors - including those producing household appliances and cars - strong competition is offered by the emerging countries. EU industries will be able to maintain their competitive position only by increasing high-tech content and innovation.

On the other hand, companies that have acquired a leading position in the international markets for complex technological products (aerospace, transport, chemical sectors) but that are highly dependent on the acquisition of patents and licenses will face new challenges linked to acceleration of the innovation process and the consequent difficulty in offering the most technologically advanced products without having an endogenous capability for innovation.

In the EU member states where enterprises have low innovation propensity, signs of decline are already apparent and negative effects are also evident in low-tech activities.  Because of the ubiquity of technology, a competitive advantage is also linked to introducing advanced technology into products and services traditionally considered low-tech (e.g., ceramics, textile industry, shoes, furniture, and tourism). Even low-tech products benefit from the high-tech processes used to manufacture or market them.

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Nanotechnology - the new high-technology.

To ensure sustainable growth and employment, and to prepare for a knowledge-based society, the EU must invest in education, training, lifelong learning, research, and innovation. Lifelong learning is of value not only for the competitiveness and economic prosperity of the EU, but also for social inclusion, employability, active citizenship, and individuals' personal fulfillment. People must be able to update and complement their knowledge, competences, and skills throughout life. In addition, higher investments in R&D are correlated with best trade performance for high-tech products, the fastest-growing segment of international trade.

The Lisbon Strategy

In the year 2000, the European Union realized that her prosperity depended on the ability to face the challenges of a knowledge-based society and formulated the Lisbon Strategy.  In the following years the strategy was revamped to correct some of its flaws, and the EU placed center-stage the building of a competitive economy in a knowledge-based society, adopting as Lisbon's objectives new, strong, and effective instruments supported by major financial investments. The 7th Framework Program (FP7) - one of the main instruments to implement the strategy - is not only the largest-ever financial support for European Community R&D, but also an initiative designed with an innovative approach and a stronger connection to other Community actions than previous FPs.  New features in FP7 include the institution of the European Research Council, a funding agency for frontier research, and the European Institute of Technology, a flagship for excellence in innovation, research, and higher education. Community-funded R&D can do more than enhance European competitiveness - it can contribute to EU integration. In fact, although the main objective of EU research policy is to strengthen the scientific and technological basis of EU industrial activities to make them more competitive, R&D also contributes to adding skills and know-how to the workforce, the realization of the internal market, and the cohesion and integration of the member states.

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growth and jobs: the Lisbon Strategy.

So far, the member states' response to the Lisbon Strategy has been far from homogeneous. Some countries prepare for their long-term prosperity with large investments in education and R&D, while other countries lag far behind. The accession countries demonstrated their ability to benefit from full membership and posted higher GDP growth than the EU average. But this might be a flash in the pan, if the long-term future is not secured by overcoming the labor skills mismatch and their lack of preparation for a knowledge-based society. These countries, and - to a major extent - the candidate countries, are undergoing structural transformations that increase the productivity of the agricultural sector and other activities not in tune with the new economy. Such transformations create redundancies and mismatches in the labor market, with the risk of excluding a significant part of the population from productive employment. Only very focused educational and lifelong learning programs can transform the above-mentioned redundancies in valuable resources in ways that contribute to the personal, economic, and social development of those involved and avoid excluding younger generations as well as older workers not adapted to the changing structure of the productive society.

The evolution and revamping of the Lisbon Strategy is happening in a decade when the EU is undergoing the major institutional changes of enlargement and reform of the Treaty forming the EU.  The political Union, an idea waiting to happen for 50 years, might eventually come about by tying up the loose ends of the Nice Treaty with the ratification of the reformed Lisbon Treaty on EU. In implementing the Lisbon objectives and in pursuing the institutional changes, the member states are not harmonized, synchronized, and unanimous. The vision of a multi-speed Union is gaining ground and manifests itself in prioritizing national interests over shared values and sharpening institutional instruments (such as the enhanced cooperations) to overcome the stumbling blocks introduced by reluctant members.

A multi-faceted Union was visible during the 2007 negotiations for the Lisbon Treaty:  in the constitution of groups of three or four countries to deal with the crisis in Iran; in the year-end 2007 economic crisis; in member states' attitudes towards enlargement to include Turkey; and later, in the member states' economic performance and their educational, research, and other Lisbon Strategy-related attainments. In fact, the multi-faceted nature of the EU is in her genes and, by the way, in her motto: "United in diversity."  European diversity is not a problem, rather it is one of the strengths that makes the EU fit to cope with the complexity and variety of the globalized world.

The leading position of northern European countries, whose economic and technological performance ranks over and above the US, is a testimonial to Europe's ability to compete worldwide. However, there is no place for complacency because, in a fair comparison, individual American states should be considered separately - in which case only one European country would rank among the top ten most competitive economies of the knowledge-based society. And the Asian competition is endangering the long-term market position of European firms.  

Can the EU as a whole find ways to successfully position herself in front of her competitors? Is there a way to prepare a bright future for the next generations of European citizens? Or has the time come to give way to new countries, which can take the economic lead that has been in the hands of European people for centuries? The answers will be gloomy unless the ongoing institutional transformation finds a successful solution with ratification of the Treaty on EU before the new College of European Commissioners is in office in 2009.  A strong and united Union would be able to focus her actions on building a better future for her citizens and strengthening her external actions with the reinforced instruments of a full-time standing president and a high representative for EU foreign affairs and security policy.  

R&D can help by overcoming the fragmentation of a multi-speed EU with policies that create a bottom-up process of cohesion among the components of a "variable geometry" EU. Research programs have created a community of scientists, industrialists, and researchers who are united in temporary and voluntary associations based on common development objectives. These associations have often defined the rules for integration on an industrial scale rather than just at the research level. Working together, and with the help of EU funding, some partnerships created from the bottom up have contributed to the implementation of an EU-wide process of innovation and cohesion that has proven much more effective than any top-down action. On a broader scale, R&D policy implemented in the early 1990s anticipated institutional instruments, such as majority voting, before their enshrinement in the Treaty on EU.  

It is unrealistic to expect that the proposed remedy based on education, lifelong learning, research, innovation, and infrastructures would solve the competitiveness problems for each of the EU member states. However, it might reduce the worsening of a trend that has seen several EU countries, mainly those in the "garlic belt," lose positions in the World Economic Forum rankings and decline under the combined pressure of the most advanced countries in the Triad and of the emerging economies.

But even if the EU only maintains its current position, Europe will continue to provide guidance to the world as a model of development and a system of values. I am convinced that European citizens, under the EU flag, will ensure that Europe continues to be one of the reference points in the world and inspires humankind with her values, her vision, and her dream of a better future funded on solidarity, multicultural tolerance, peace, and prosperity. I find it encouraging that an American author recently wrote a landmark book on "the European dream" (The European Dream by Jeremy Rifkin).

The people of Europe have contributed greatly to the construction of a better world, anticipating the new instruments of foreign policy offered by the institutional transformation of the EU. These contributions are epitomized by important achievements of recent years: the United Nations interim peace-keeping force in Lebanon (2006); the United Nations General Assembly resolution - following a EU proposal - calling for a global moratorium on executions with a view to eventually abolishing the death penalty entirely (2007); the EU leadership in securing success of the United Nations Climate Change Conference in Bali, Indonesia (2007); the message from the EU to the rest of the world during the ongoing EU enlargement negotiations with Turkey, declaring that the EU supports the way to democracy with solidarity and assistance and that the "Clash of Civilizations" is not the ineluctable destiny of mankind.

The EU model provides heartening evidence of an alternative to the exclusive, sectarian, and closed society propagated by religious radicalism and to the pipe dream of exporting democracy with the instruments of war. This model, and the values it represents, is the true European dream.


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The author, Attilio Stajano, is a lecturer at the University of Bologna, Italy, on Research and Technology Policy in the European Union.


References

Christensen, Clayton M. The Innovator's Solution.  Harvard Business School Press, 2003.

European Commission. Raising productivity growth: key messages from the European Competitiveness Report 2007.  SEC (2007): 1444.

Muldur, Ugur, et al. A New Deal for an Effective European Research Policy.
Springer, 2006.

Rifkin, Jeremy. The European Dream. Penguin, 2004.

Stajano, Attilio. Research, Quality, Competitiveness. 2nd ed., Springer, 2009.
Hardcover ISBN: 978-0-387-79264-4; Extras online, flyer

World Economic Forum, Annual Report 2005-2006.

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