16 February 2015

Europe's Competitiveness Gap

When taken as a whole, Europe’s economy performed a little better than expected in the fourth quarter of 2014.  Altogether, the European Union expanded by 1.3% year-on-year in the fourth quarter, matching the growth rates recorded in the previous two quarters.  Meanwhile, the 19-member Eurozone saw its economy expand by 0.9% year-on-year, a slight increase over the growth recorded in the previous quarter.  While these rates of growth were well below that of most of the world’s other leading economies, they were above the expected growth rates for Europe in late 2014. 

The overall performance of the European Union’s economy in the fourth quarter masks deep divisions within the region as the competitiveness gap that has plagued Europe in recent years clearly remains in place.  For example, the region’s most competitive economies, such as Britain (2.7% GDP growth in the fourth quarter) and Germany (2.0% growth), performed well, thanks in large part to strong growth in their domestic markets and the ability of their leading industries to compete on a global basis.  Likewise, those once-struggling European economies that have enacted serious economic reforms in recent years also performed relatively well, led by Spain, which recorded GDP growth of 2.0% in the fourth quarter of last year.  

In contrast, those European economies that have failed to enact major economic reforms in the wake of Europe’s recent economy downturn continued to struggle.  France, for example, has seen its competitiveness level vis-à-vis Britain and Germany fall significantly over the past decade and this is reflected in the anemic 0.2% year-on-year GDP growth rate that the European Union’s second-largest economy recorded in the fourth quarter.  Meanwhile, no European Union economy (including Greece) has performed worse over the past 15 years than Italy and this is reflected in the -0.3% GDP growth rate that Italy attained last quarter.  These poor results are even more damning when one considers the economic stimulus that the region has received in recent months due the sharp fall in oil prices and the depreciation of the euro against most other major currencies. 

This growth gap in Europe has been in place for a number of years now and shows few signs of shrinking.  On one side, there are those European economies that have the combination of world-class industrial or service sectors and the business climate in place to foster innovation and competitiveness.  These include Britain, whose Europe-leading service sector enables it to attract huge amounts of foreign investment, and Germany, who’s specialized industrial sectors are able to export successfully around the world.  On the other side are those European economies that have been left behind by the high-tech 21st century economy and have failed to enact the reforms needed to compete with competitors across the globe.  These include France, whose lack of serious economic reforms has severely weakened its competitiveness and Italy, which suffers from both a lack of reform and a near-complete lack of high-tech and high-growth domestic industries. 

Looking ahead, this competitiveness gap appears set to remain in place in Europe over the near-term.  This is due to the fact that the economic crisis of the past seven years has made it increasingly difficult for many European governments to enact the reforms needed to boost their economies’ competitiveness.  For example, it should be noted that Britain and Germany’s economic reforms were put in place before the recent crisis.  Now, those countries that need such competitiveness-boosting reforms the most are facing a surge in support for political movements opposed to just those sorts of reforms.  Already, Greece has elected an anti-reform left-wing government, while Spain faces the prospects of a new far-left political party (Podemos) winning this year’s national elections and rolling back the recent reforms that have allowed Spain’s economy to grow again.  With such a political climate, it is difficult to see how Europe’s laggards can close the gap with the region’s (and the world’s) more competitive economies and this poses a major challenge to the future of European unity.