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31. Volkswirtschaftliche Tagung
Why does Europe’s Growth lag?
Fostering Economic Growth in Europe – 31. Volkswirtschaftiche Tagung
Norbert Zimmermann
Vienna, 12. 6. 2003
1. Which part of Europe is the laggard?
Latest GDP forecasts in 2003 for all EU members show an average annual growth of 1,1%. This compares with US 2,2% and Japan 0,7%.
The spread in the EU is wide. On the lower end there is Germany with an annual GDP growth of 0,4%, Netherlands with 0,5%. On the high end we find Spain with a growth rate of 2,1%, UK with 1,8% and Sweden with 1,5%.
The European laggards are Germany, Netherlands, Austria, Italy and France.
This disastrous performance has to be benchmarked with the Presidency conclusions of the Lisbon European Council March 2000 saying "EU has today set itself a new strategic goal for the next decade – to become the most competitive and dynamic knowledge based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion."
UNICE – the European umbrella organisation of industrial and employer’s federations of 27 countries is speaking for more than 16 million companies – evaluates the status 2003 of implementation of LISBON STRATEGY as follows:
" The LISBON STRATEGY enters its third year and the European economy is failing to break out of its lethargic state.
Growth rates are not taking off. Consumers lack confidence. Entrepreneurs are postponing investments, watching the uncertain economic climate mistrustfully. Rigidities in key markets persist. And excessive labour costs are adding to the gloomy employment situation. Lower costs and taxes for business, simplicity and less red tape are necessary. Several large countries in the Euro zone are failing to abide by the rules of the Stability and Growth Pact and thus undermining political credibility of the whole zone. This does not have to be so! Although the world economy has slowed down overall, our main competitor the United States, is still experiencing higher growth rates!"
2. How to achieve Lisbon strategic goals?
- doing business in Europe must be much easier. Deregulation in major business areas and more simplicity of labour rules should create a better entrepreneurial culture . There is still a big issue of administrative and bureaucratic burdens due to overregulation. Tax incentives should be given as rewards for entrepreneurial risk taking. Entrepreneurs have to get access to financing and qualified workforce. For this better functioning capital markets are required and mobility of qualified employees has to be supported.
- quantity and quality of R&D spending have to be increased to support innovation potentials.
Governments should use public financing more effectively, make national research policy more coherent with EU policies. EU must increase R&D expenditures and use the funds more efficiently. Affordable Community Patent has to be established immediately - improve public communication in order to restore confidence in technology and research
- the essential infrastructure for an information society has to be implemented. Correct the big mistake charging huge tax loads on communication technologies. These licences almost killed a dynamic development of European communication technologies.
- complete the implementation of the packages to improve the European transport networks
- employment and education strategy
Promote job creation through encouraging of entrepreneurship. More than 90 % of the German companies are SME`s and these provide 70 % of total jobs. Encourage flexible form of work, enhance mobility Promote active ageing and offer education programs for older employees Reduce regulatory burden on labour Reduce indirect labour cost particularly for older employees Attraction of the unemployed to education first and than to return to work Build bridges between education world and work, promote apprenticeship - modernisation of pension systems
Economic stability for future generations should be the main goal of reforms.
3. The danger of inflation
ECB has to change quickly the strategy of relatively high interest rates and restrictive monetary policy. Interest in the Euro area are at this moment 2,5 % whereas in the US only 1,25 %
The EU laggards particularly Germany are heading into deflation. Measurement of inflation has to be redesigned because the new EU members still have a need to increase income and to raise costs, so the desires among the EU members will be quite different. "Economist" May 17th 2003: "Inflation in the developed world is at its lowest in almost half a century…. Prices have been falling in Japan since 1995; in America and Germany the risk of deflation is greater than at any time since the 1930s…… the ECB has the lowest inflation target of any central bank in the world."
This and the consequence of the sharply risen $/€ exchange rate could dramatically damage European export business and destroy any chance for growth.
Lower interest rates and better liquidity in the finance markets would support growth of innovative companies. Innovative SME’s are additionally challenged by the consequences of Basel II .
4. The challenge of overaged Europe
About 40 % of the population in Euroland today is older than 45 years. In many companies the majority of employees is over 45. Today only 5 % of training budgets is reserved for the over 40’s. In the generation of the over 55’s only 1/3 rd is not chronically sick. This demands action from politics as well as company management.
5. The good news: There are companies who perform better than their economy
Some companies in Europe are better than their economies and outperform them clearly, although Eurolands have traditionally established rigid labour laws and high labour cost. Nevertheless some companies have flourished , because they followed a few key rules:
- Excellent management
- Solid finances and tight cost control
- Champions in their core business
- Go global: If countries are deflating, companies have to go abroad and access demand elsewhere. Production follows into new markets, thus Germany lost approximately 3 Million jobs since early 1990’s.
- Excellent at logistics and Information Technology
- Focus less on making things than on selling them, change organisation from being focussed on function to being focussed on customers
Our company created more than 1000 jobs over the last 10 years. 70 % of them outside Euroland. Euroland should make much more efforts to be attractive for investors.