Europe’s loss in competitiveness: Home-made solutions for a home-made problem

Frank Heemskerk
Secretary General

Earlier this summer, the European Round Table for Industry (ERT) published its 2022 Benchmarking Report, a collection of 64 indicators comparing Europe’s industrial strength with our global peers in the US, China and elsewhere. Its findings aren’t particularly reassuring: Europe is losing its global competitiveness and is behind the curve on adopting the emerging production technologies that will secure future prosperity. Other jurisdictions, notably China, are taking on a prominent role, and in many key areas the US, too, are ahead of us as well.

Please note that our loss in competitiveness is not merely due to being overtaken by China. Rather, it is a consequence of Europeans having taken our industrial competitiveness for granted for too long.

But consider this good news: home-made problems have home-made solutions. If we act decisively now, we can still create the environment our industries need to maintain some leadership and secure prosperity for our children and grandchildren. In order for that to happen however, we cannot afford to lose any more time.

Let’s look at the landscape of sectors and what needs to be done:

  • Energy: The consequences of our dependency on imported fossil fuels have become painfully clear. The urgency of achieving the transition to renewable energy sources is more evident than ever. We must now direct our resources to rapidly creating the necessary energy infrastructures in Europe to generate sufficient green energy locally and a true single market for energy including transmission between countries, imported LNG and, in the future, green hydrogen.
  • Connectivity: Europe is far behind its peers in 5G infrastructure and Very High Capacity (fibre) networks. This delays the adoption of new technologies that are instrumental to productivity growth in Europe’s ageing societies. These include technologies in medical innovation, industrial robots and the Internet of Things. We risk falling behind not only on what we produce, but also on how we produce, which directly undermines future competitiveness. Catching up will become ever more difficult if we continue to lag our competitors on this point.
  • R&D: We are leading in terms of the number of researchers, but we do not perform top of the class when it comes to the number of patents in key innovation areas and putting innovation to market. There is a disconnect that is further compounded by the fact that European industry’s share of global R&D investment is decreasing, compared to its peers.
  • Semiconductors: the dependency on imported semiconductors and supply chains that are vulnerable to geopolitical risk have been recognised as an Achilles heel of all high technology sectors. The European Chips Act is an important initiative – a clear example where a strategic view of Europe’s position and exposure provide a much-needed impetus for action.
  • Industrial raw materials: Europe is highly dependent on raw materials – such as precious metals – that need to be imported. The Covid crisis and the Russian war have both laid bare our vulnerabilities. Whilst autarky is not a solution at all, these vulnerabilities need to be addressed in a smart way including via diversification, strategic partnerships and making Open Strategic Autonomy work.

Across all sectors, the EU is somehow allowing itself to neglect its greatest asset. The EU’s Single Market remains below its potential because so many barriers are allowed to persist. The opportunity costs for this are huge for companies and consumers. Last year, ERT published a collection of Single Market Stories, sharing very tangible examples of these problems. Most of our interlocutors agree that the problem is massive. And yet, we are keenly aware that strengthening our internal market cannot be solved with one bold, politically-rewarding strike, but only by a disciplined, persistent, ‘nitty-gritty’ effort across many fronts, requiring political courage and patience.

If the EU and its Member States do not invest political capital in completing the Single Market of 450 million consumers, Europe’s economy will always face a disadvantage vis-à-vis our most important global competitors, the US and China, with their more integrated home markets of 330 million and 1.4 billion consumers.

The boost an integrated Single Market would give to Europe’s economy is estimated at roughly the size of the EU Recovery and Resilience facility, with the additional advantage of being fiscally neutral.

Data on global companies’ market values show these concerns are real. Our share in the world’s highest capitalised companies has already shrunken dramatically. The risk of a downward spiral is real: with a loss in income comes a decrease in private and public investment. A cut in investment today will lead to a loss of jobs and relevance tomorrow.

Russia’s war in Ukraine is an outrage, a humanitarian disaster and a tragedy. It also deepens divisions between different types of economic and political systems depending on values and priorities. How much of this will become the “new normal” is unclear, but there is no escaping the fact that it is also accelerating change in energy, trade and more. Europe can no longer afford to leave so much of its economic potential untapped.

At ERT we compare the 2022 Benchmarking Report to a cold shower. The good thing about cold showers is that afterwards, you’re awake ready to take on the challenges of the moment.

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