Is Europe’s competitiveness torn in half?

In recent years, many studies have highlighted the stark competitiveness divide that exists and persists between a highly productive and internationally competitive North, and a lagging South and East Europe. However, new results coming from the World Economic Forum’s Global Competitiveness Report 2014-15, suggests that Europe’s divide may be taking on a different complexion altogether.

Unsurprisingly, given the structural nature of many of the factors driving competitiveness, this year’s report continues to show a stubbornly high gap between the highly competitive Nordic countries, along with some of their neighbours in Western Europe and the South. These countries continue to enjoy transparent and efficient institutions, stable macroeconomic conditions and high levels of education that enables them to innovate and produce high quality, high value-added products and services.

In contrast, the laggards – often in the South – continue to suffer from poor performing institutions, inefficient markets and an ability to invest adequately in the skills needed to drive innovation and growth.

This much we know. However, a more nuanced analysis of the results hints to a new divide in Europe, notably in terms of how different countries are, or are not, addressing their competitiveness challenges.

In actual fact, several countries in Southern Europe, notably Greece, Portugal and Spain, seem to be making significant progress in starting to bridge the existing competitiveness gap. These countries are adopting important reforms in the products market, enhancing the level of competition and facilitating the entry of newcomers in previously protected or regulated activities. Most notably, this is happening in the service sectors, but financial sectors, too, are becoming increasingly robust.

In addition, reforms in the labour market have increased which, while providing less protection for incumbents, is nevertheless having an impact on improving the prospects of those seeking work. As a result, while these countries are far from having reformed their way out of trouble, they certainly are generating encouraging momentum.

These countries’ record contrasts favourably with countries like France or Italy, which also suffer from competitiveness weaknesses to different degrees. They also, surprisingly, contrast with countries such as Germany and the Netherlands, which have thus far weathered the crisis comfortably due to previous timely reforms, but which have in fact made little progress of late in addressing competitiveness weaknesses of their own. In these countries, failure to reform certain key areas such as the functioning of their labour market could bode ill for the future.

As a result, and in light of these results, a new understanding of Europe’s competitiveness divide could arise complementing the traditional divide between North and South; by distinguishing between those countries that are implementing reforms and making the necessary strides to improve their competitiveness edge, and those that do not and have fallen or are falling under complacency.

As Germany was the sick man of Europe in the early 2000s and recovered thanks to an appropriate dose of reforms, countries in Southern Europe – such as Portugal, Spain or Greece – now also appear to be entering recovery mode. Other countries should be more aware as the symptoms of weak competitiveness, whether acute or at a starting stage, will only get worse if not acted on swiftly and effectively.

Read the Global Competitiveness Report 2014-15.

See how well different countries perform on our latest Global Competitiveness Index:

Author: Beñat Bilbao, Associate Director, Senior Economist, Global Competitiveness and Risk, World Economic Forum

Image: Protestors carry flags of Portugal, Italy, Greece and Spain in central Athens November 7, 2012. REUTERS/Yannis Behrakis