How to boost Europe’s productivity

“The debate in Europe is too focused on fiscal and monetary policy: austerity and quantitative easing. That is misguided. Production creates growth, and it is obvious that Europe has a huge productivity problem, especially with respect to technology and innovation,” said Marco Annunziata, chief economist at GE. He was speaking at the high-level event “Let’s Get Europe Working” in Brussels on November 18 organised by The Economist and European Voice and sponsored by GE. Participants identified a range of areas where Europe needs to act urgently to boost growth and cope with rising global competition.

A key priority is to develop skills, especially in information and communications technology (ICT). The close to 900,000 vacancies for ICT jobs in the EU, at a time when the EU also has 24.5m unemployed, points to a severe skills mismatch. Better alignment of demand and skills will require greater labour-market flexibility, smart immigration policies, improved ICT education from an early age and programmes to equip the long-term unemployed with ICT skills. In addition, vocational training still has an important role to play to support traditional sectors with unmet demand, including plumbing and carpentry.

“Education is a central part of the EU strategy for growth and jobs. Europe’s education systems are good, but probably not good enough,” said Tibor Navracsics, European commissioner for education, culture, youth and sports. More investment in education is needed, argued Mr Navracsics, especially as leading emerging markets are catching up in this area, with spending (as a ratio to GDP levels) in South Korea, Chile, Mexico and Brazil exceeding the levels of at least 10 EU member states, according to the latest OECD data. Participants also argued that closer collaboration between business and schools would help to ensure that education better matches market needs. In addition, internship programmes should be made more effective, with longer durations that make them more useful for both the intern and the company and less prone to abuse in terms of remuneration.

Another key priority identified will be to create an environment in which small and medium-sized enterprises (SMEs) can thrive. What’s needed? Improved access to financing and removal of regulatory barriers that make it difficult for SMEs to scale up across the EU. More generally, market fragmentation arising from incomplete regulatory harmonisation costs European business €235bn a year in potential efficiency gains by making it more difficult for companies to trade across the EU. “We need to have a different strategy for each of the major European countries that we operate in. Europe is very challenging for a start-up,” said Drew Banks, head of international at Prezi.

SMEs would also benefit from a change in bankruptcy regulations and attitudes to failure so that start-ups can take the risks needed to succeed—participants noted that the situation in the US is considerably more favourable in these respects. US bankruptcy laws allow entrepreneurs to move on quickly from failed ventures, with failure seen as an acceptable step on the route to success.

Against this background, Elzbieta Bienkowska, European commissioner for internal market, industry, entrepreneurship and SMEs, said that one of her main priorities would be to pursue the implementation of the EU Services Directive to create a single European market, especially in business services, retail and construction. Completing a single market in services would help to boost jobs growth—more than two-thirds of European jobs are in the service sector—and could add more than 2% annually to EU GDP. Other priorities for Ms Bienkowska will include: promoting e-government and simplifying regulations to reduce the administrative burden for business, reforming public procurement to increase competition and improving access to finance and markets for small business.

Embracing a digital agenda and developing a digital single market to strengthen competitiveness will also help. This will include implementing  digital solutions such as cloud computing, big data and the Internet of Things, all of which could radically transform business across the EU economy and boost long-run EU GDP by 4% ,according to a 2014 report from the European Parliament.

Participants acknowledged that the environment in Europe was challenging for Internet start-ups and that Europe had thus far lagged the US in using digital to boost productivity. There was, however, optimism that, with the right policies, Europe could play a leading role in the next stage of the digital revolution. Participants also agreed that Europe is likely to take the lead over the US with respect to consumer protections—a key element to guarantee in any digitised economy.

Europe’s strengths include basically good human capital (despite skills gaps) and cities that, in general, are admired globally and are a major source of innovation and creativity. At the same time, failure to transform discussion of what needs to be done into action has meant that for the digital economy and for other areas involved in boosting competitiveness and growth Europe has lagged behind its potential.

“Europeans have to realise that the world is changing and that their current structures are not agile enough to cope: Doing nothing is a risk in itself,” said Simon Taylor, assistant editor of European Voice, at the conclusion of the event.

Published in collaboration with GE Look Ahead

Author: Aidan Manktelow is a writer for GE Look Ahead.

Image: A Bulgarian seamstress manufactures EU flags in a factory in the town of ParvomaiREUTERS/Stoyan Nenov