final report observatory on europe 2013

OBSERVATORY ON EUROPE 2013

Improving European Integration and Competitiveness

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Advisory BoArd oBsErvATory oN EUroPE 2013

improving European Competitiveness and integration

Advisory Board Members – Scientific Committee:

José Maria Aznar President, FAES – Foundation for Economic and Social Analysis; Former Prime Minister, Spain

Antonio Borges Professor of Economics at Catolica Lisbon School of Business and Economics; Former Director of the European Department of the International Monetary Fund

Valerio De Molli Managing Partner, The European House - Ambrosetti; Chairman, Advisory Board “Observatory on Europe”

Wolfgang Schüssel Former Federal Chancellor of Austria

Advisory Board Members – Business Leaders:

Nani Beccalli-Falco President and Chief Executive Officer, GE Europe; Chief Executive Officer, GE Germany; Senior Vice President, GE and Member of the Group’s Corporate Executive Council

Hendrik Bourgeois Vice President European Affairs, GE

Nicolas Denis Vice President, Philip Morris Italy

Dario Caprioli Vice President, Legal Risk and Regulatory Affairs, Ing Direct Italy

Damiano Castelli Chief Executive Officer, Ing Direct Italy

Cliff Corso Chief Executive Officer & Chief Investment Officer, Cutwater Asset Management

Christopher Keating Managing Director, Global Sales & Distribution, Cutwater Asset Management

Livio Vanghetti Vice President EU Corporate Affairs, Philip Morris International

This report is a research study coordinated by the Advisory Board and carried out by the The European House - Ambrosetti project team composed of: Emiliano Briante, Costanza Monari, Ilaria Russi, Brian Terracciano.

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PREFACE by Valerio De Molli ...................................................................................................................................................................................... 6

1 INTRODUCTION ...................................................................................................................................................................................................... 11

1.1 The Observatory on Europe ................................................................................................................................................................... 11

1.2 The 2013 project aims and methodology .................................................................................................................................. 12

2 EU-27 COMPETITIVENESS INDEX ................................................................................................................................................................. 17

2.1 Introduction and methodology ........................................................................................................................................................... 17

2.2 External Openness ..................................................................................................................................................................................... 20

2.3 Innovation & Education ........................................................................................................................................................................... 26

2.4 Macroeconomic Stability ....................................................................................................................................................................... 32

2.5 Business Environment ................................................................................................................................................................................. 38

2.6 Labour Market ................................................................................................................................................................................................ 43

2.7 People & Wellbeing ................................................................................................................................................................................... 48

2.8 Finance ............................................................................................................................................................................................................... 55

2.9 Public Sector ..................................................................................................................................................................................................... 61

2.10 Environment .................................................................................................................................................................................................. 66

2.11 Networks ............................................................................................................................................................................................................ 71

2.12 The EU-27 Competitiveness Index final ranking .................................................................................................................... 76

3 MONITORING THE IMPLEMENTATION OF THE SINGLE MARKET ACT ................................................................................. 81

3.1 Twenty years of Single Market: main achievements ........................................................................................................... 81

3.2 Completing the Single Market: a work in progress ............................................................................................................. 83

3.3 The Single Market Act (SMA) .............................................................................................................................................................. 84

3.4 The Observatory on Europe’s assessment of the implementation of the Single Market Act ............... 85

3.5 The Single Market Act II (SMA II) ...................................................................................................................................................... 92

BOX - Citizens’ and businesses’ 20 main concerns ..................................................................................................................... 92

BOX - Many actions recommended by the Observatory on Europe last year are now included

in the Single Market Act II ............................................................................................................................................................... 94

3.6 The Observatory on Europe’s assessment of the implementation of the Single Market Act II ........... 94

4 THE AGENDA FOR THE COMPETITIVENESS OF EUROPE’S ECONOMY AND FINANCIAL SYSTEM

by Antonio Borges ............................................................................................................................................................................................ 103

4.1 The economic rationale behind the introduction of the Euro ................................................................................. 103

4.2 Failures and success stories: what went right and what wrong ............................................................................. 103

4.3 The effective causes of the financial crisis ............................................................................................................................ 106

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4.4 How to recover in those countries which face difficulties? ........................................................................................ 107

4.5 How to stimulate the development of capital markets in the EU? ....................................................................... 110

5 MANUFACTURING EUROPE: THE CHALLENGE OF REINDUSTRIALISATION ................................................................... 113

5.1 The changing face of manufacturing ......................................................................................................................................... 113

BOX - Re-shoring in the US .......................................................................................................................................................................... 116

5.2 Structural change, competitiveness and economic crisis: the state of the art

of manufacturing in Europe ............................................................................................................................................................... 118

5.3 The 7 pillars to re-launch manufacturing competitiveness .......................................................................................... 125

BOX - The German apprentice system .............................................................................................................................................. 136

6 INNOVATION: A CRUCIAL ENABLER TO PUSH EUROPE’S COMPETITIVENESS FRONTIER

TOWARDS THE FUTURE ...................................................................................................................................................................................... 143

6.1 Why innovation today ............................................................................................................................................................................. 143

BOX - Horizon 2020: a potential game changer? ................................................................................................................... 144

6.2 The EU innovation deficit in international perspective .................................................................................................... 147

BOX - Some paradigmatic European business stories: Nokia and Skype ................................................................. 151

6.3 The building blocks of the EU innovation gap ...................................................................................................................... 152

6.4 The role of the private sector ........................................................................................................................................................... 156

BOX - Innovation as the magic concept for growth today – by Wolfgang Schüssel ...................................... 160

6.5 Conclusions .................................................................................................................................................................................................... 163

7 A CRUCIAL LEVER FOR RELEASING THE EU’S GROWTH POTENTIAL: ENTREPRENEURSHIP ................................ 165

7.1 The challenge of entrepreneurship in the EU ......................................................................................................................... 165

7.2 Measuring the “Entrepreneurial” gap between the EU and the US ....................................................................... 166

7.3 The key determinants of entrepreneurship ............................................................................................................................. 170

7.4 Conclusions ..................................................................................................................................................................................................... 178

8 THE EUROPEAN BUSINESS LEADERS SURVEY .................................................................................................................................... 181

8.1 Why and how ................................................................................................................................................................................................ 181

8.2 Main results ..................................................................................................................................................................................................... 182

9 POLICY RECOMMENDATIONS .................................................................................................................................................................. 191

9.1 Manufacturing sector: towards a European business model ..................................................................................... 191

9.2 Regulatory environment: developing a common and facilitating framework for business ................. 192

9.3 Entrepreneurship: promoting a pro-business culture and the framework conditions

for the creation and growth of enterprises ............................................................................................................................ 193

9.4 Innovation: push Europe’s competitiveness frontier towards the future ............................................................. 194

9.5 Capital and financial markets: new channels for credit ............................................................................................... 195

BIBLIOGRAPHY ............................................................................................................................................................................................................... 197

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Preface

The Eurozone economy shrank more than expected in 2013: the 17-nation currency bloc has now been in recession for six consecutive quarters – even longer than the deep recession following the global financial crisis of 2008.

There is no doubt that Europe needs its real economy now more than ever to underpin the economic re-covery. Thus, EU actions should be designed to reverse the current downward trend and promote a path of reindustrialisation for Europe.

The phrase ‘Industrial Revolution’ may be hundreds of years old, but it will be reborn in the 21st century. Europe should invest in – and rely on – reindustrialisation to foster economic recovery, ease environmental strains and consolidate Europe’s standing as a global industrial leader. And while the last Industrial Revolution gave birth to modern technology, the next Industrial Revolution will help create future technology.

In a fast-changing world, if the EU wants to maintain its position as one of the world’s leading economic blocks, it must provide the right framework conditions capable of attracting companies to invest in Europe.

Having said that the Observatory on Europe very much welcomes the European Commission’s recent clear message stressing that industry is vital for economic recovery, that industrial output must grow and reach 20% of GDP and that the policy focus has shifted towards reaching this target, in terms of growth and job creation1.

As European Commission Vice-President Antonio Tajani, Commissioner for Industry and Entrepreneurship, re-cently underlined, “We cannot continue to let our industry leave Europe. Our figures are crystal clear: European industry can deliver growth and can create employment […] By working together and restoring confidence, we can bring back industry to Europe”.

The Observatory on Europe is eager to participate in the debate on how to achieve this goal: in this report we outline what we perceive as the right framework conditions and how Europe should operate to attain them. We highlight hereafter a number of core issues for our industry, as we believe improvements will help to trace the path towards a stronger manufacturing economy in Europe: we cover the areas of the internal market, the EU’s policies on regulation, labour market reforms, finance, innovation, human resources, skills and entrepreneurship, ultimately suggesting concrete recommendations to the European decision-makers.

We continued to make the results of all of our analyses available online. The website www.observatory- oneurope.eu allows everybody to access, in an interactive manner, the data and rankings developed by the Observatory on Europe, such as the EU-27 Competitiveness Index. Search criteria and a very user-friendly visu-al interface facilitate information retrieval and comparisons among States’ performances. We think this could

1 - Communication from the Commission to the European Parliament, the Council, the European economic and social committee and the Com-mittee of the Regions, “A Stronger European Industry for Growth and Economic Recovery, Industrial Policy Communication Update” Brussels, 10.10.2012

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be a very useful tool for policy makers, researchers, officials, and everybody actively involved in building a stronger and more competitive European Union.

We would like to express our deepest gratitude to our outstanding Scientific Committee for their work of guidance and supervision. It is composed of:

- José Maria Aznar (President, FAES – Foundation for Economic and Social Analysis; Former Prime Minister, Spain);- Antonio Borges (Professor of Economics at Catolica Lisbon School of Business and Economics; Former

Director of the European Department of the International Monetary Fund);- Wolfgang Schüssel (Former Federal Chancellor of Austria).

In addition we would like to thank very much Mr. Markus Kerber (CEO and General Director, BDI - Federation of German Industries) and Mr. Neville Reeve (Senior Policy Analyst, DG Research and Innovation, European Commission) for their contribution during our Advisory Board meetings.

As always, the Observatory’s approach was very practical in trying to meet business leaders’ expectations in the best possible way. Therefore, a special thanks goes to the business leaders that believed in this project and actively participated in the Advisory Board: Ferdinando “Nani” Beccalli Falco (President and Chief Execu-tive Officer, GE Europe; Chief Executive Officer, GE Germany; Senior Vice President, GE and Member of the Group’s Corporate Executive Council), Hendrik Bourgeois (Vice President European Affairs, GE), Alessandro Coppola (Director Government Affairs and Policy, GE Italy), Livio Vanghetti (Vice President EU Corporate Af-fairs, Philip Morris International), Nicolas Denis (Vice President, Philip Morris Italy), Eleonora Santi (Corporate Affairs, Philip Morris Italy); Damiano Castelli (Chief Executive Officer, Ing Direct Italy), Dario Caprioli (Vice President Legal Risk and Regulatory Affairs, Ing Direct Italy), Cliff Corso (Chief Executive Officer & Chief Invest-ment Officer, Cutwater Asset Management) and Christopher Keating (Managing Director, Global Sales & Distribution, Cutwater Asset Management).

Since its foundation, the Observatory has always adopted a pro-European position, with the clear objective of contributing to create a stronger Europe from an economic, social and political standpoint. For these reasons we are deeply concerned by the rising scepticism – of citizens and enterprises – towards Europe.

Recent data shows that public confidence in the European Union has fallen to historically low levels in the six biggest EU countries. After financial, currency and debt crises, wrenching budget and spending cuts, Euro scepticism is soaring, as figures from Eurobarometer – the EU’s polling organisation – show a vertiginous de-cline in trust in the EU in countries such as Spain, Germany and Italy that are historically very pro-European.

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Figure 1. Nationals who said they tended not to trust the EU, as an institution (% of total respondents), 2007-2012 –

Source: The European House - Ambrosetti re-elaboration on Eurobarometer data, 2013

On the contrary we believe that the crisis has amplified the urgent need for a stronger co-operation and governance at European level and bold reforms at national level.

In this sense, we sincerely hope that the 2013 Observatory on Europe’s analyses and recommendations – as well as the debate we would like to encourage during our annual Forum – can contribute to face the dif-ficult challenges we are experiencing and orient policy making towards a stronger and more united Europe in the near future.

To conclude, I would relish the opportunity to quote the inspiring words that Winston Churchill addressed to the academic youth, at the end of his speech at the University of Zurich in 1946:”There is a remedy which ... would in a few years make all Europe ... free and ... happy. It is to re-create the European family, or as much of it as we can, and to provide it with a structure under which it can dwell in peace, in safety and in freedom. We must build a kind of United States of Europe.”

Valerio De MolliCEO & Managing Partner, The European House - Ambrosetti

Chairman, Observatory on Europe

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1.1 The Observatory on Europe

The Observatory on Europe is a European think tank conceived and set up in 2005 by The European House - Ambrosetti with the contribution of an outstanding Scientific Committee1.

Mission of the Observatory on Europe

The aim of the Observatory is to pragmatically contribute to the success of the European Union, provi-ding its political and economic leaders, as well as its citizens, with high-quality studies, analyses and pro-posals in order to help them build a stronger Europe from an economic, social and political standpoint.

This mission is particularly important today, given the slow and weak recovery following the global crisis in many European countries and the Eurozone tensions.

The Observatory’s activity is overseen by an Advisory Board, made up both of European experts on the issues being analysed (Scientific Committee) and business leaders representing the international sponsor companies.

The Observatory on Europe aims to proffer concrete recommendations to enhance the EU’s integration process and European competitiveness. These recommendations are always accompanied by a fact-driven analysis of the competitive scenario at the Member State level and of the EU as a whole. Over the years, the Advisory Board has selected and focused on the critical issues that present significant risks and/or op-portunities for Europe.

The Observatory on Europe organises Forums in Brussels during which the work of the Advisory Board is pre-sented to an international audience and discussed with leading members of national and European institu-tions as well as business leaders.

Furthermore, since 2008, a Central and Eastern European “spin-off” of the Observatory has operated with a distinct focus on the newest European Member States, with a Forum held in Budapest (see Figure 1).

1 - It included Mario Monti, who advised the project up to the very moment that he accepted to become Prime Minister of Italy in November 2011, Laurent Fabius, and the late Loyola de Palacio.

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Figure 1. The Observatory on Europe Milestones

The Reports that were presented in past Forums are available online, on the think tank’s website (www.ob-servatoryoneurope.eu), which also contains a collection of tools, animated graphs and data resulting from the quantitative analyses of the project.

1.2 The 2013 project aims and methodology

The Observatory on Europe 2013 developed its analyses with the following aims:

- Update the Observatory on Europe EU-27 Competitiveness Index, which aims at measuring the cur-rent level of competitiveness of the EU-27 Member States and their trend over the past 5 years, iden-tifying strengths and weaknesses of the EU-27 MSs in relation to the diverse competitiveness factors and having a better understanding of the European competitive environment.

- Monitor the implementation of the Single Market Act and Single Market Act II proposals and to draw up a list of recommendations to be implemented in order to enforce the Internal Market.

- Carry out a survey addressed to a restricted sample of top managers of European-based companies in order to better understand what practitioners think about European integration and competitiveness.

- Study the performance of the European manufacturing sector and identify the key elements for its future development, focusing on some key pillars of manufacturing competitiveness, particularly:

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• thefinancialsystem;• innovation;• entrepreneurship;• theregulatoryenvironment.

- Draw up a list of recommendations that Europe should implement in order to improve its world-wide competitiveness (particularly regarding the manufacturing sector) and enhance the integration process.

As in the past editions, these topics have been studied and developed with the contribution of an Advisory Board comprising a qualified mix of experts who combine scientific knowledge with practical and pragmatic experience.

The Advisory Board guaranteed the scientific accuracy of the work carried out as well as its link to the busi-ness perspective. It comprises a Scientific Committee, business leaders and The European House - Ambro-setti team.

Some eminent external experts either took part in the Advisory Board meetings or were interviewed in func-tion of the needs that emerged over the course of the project2.

The Scientific Committee comprises:

- José Maria Aznar (President, FAES – Foundation for Economic and Social Analysis; Former Prime Minister, Spain)

- AntonioBorges(ProfessorofEconomicsatCatolicaLisbonSchoolofBusinessandEconomics;FormerDirector of the European Department of the International Monetary Fund)

- Wolfgang Schüssel (Former Federal Chancellor of Austria)

Business leaders are:

- Ferdinando“Nani”BeccalliFalco(PresidentandChiefExecutiveOfficer,GEEurope;ChiefExecutiveOfficer,GEGermany; SeniorVicePresident,GEandMemberof theGroup’sCorporateExecutiveCouncil)andHendrikBourgeois(VicePresidentEuropeanAffairs,GE)

- LivioVanghetti(VicePresidentEUCorporateAffairs,PhilipMorrisInternational)andNicolasDenis(VicePresident, Philip Morris Italy)

- DamianoCastelli(ChiefExecutiveOfficer,IngDirectItaly)andDarioCaprioli(VicePresidentLegalRiskand Regulatory Affairs, Ing Direct Italy)

- Cliff Corso (Chief Executive Officer & Chief Investment Officer, Cutwater Asset Management) and Christopher Keating (Managing Director, Global Sales & Distribution, Cutwater Asset Management)

This Report contains the analyses developed by and discussed among the Observatory on Europe’s Advisory Board members between October 2012 and May 2013 (Figure 2).

2 - In particular, we would like to thank very much Mr. Markus Kerber (CEO and General Director, BDI - Federation of German Industries) and Mr. Neville Reeve (Senior Policy Analyst, DG Research and Innovation, European Commission) for their contribution.

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Figure 2. The Observatory on Europe 2013 Project Framework

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2.1 introduction and methodology

The EU-27 Competitiveness Index measures, compares and examines the competitiveness of Europe’s coun-tries.

Competitiveness is defined as the capability of an economy to maintain increasing standards of living for those who participate within it, by attracting and maintaining firms with stable or rising market shares in an activity. As such, the competitiveness of a country will depend on its ability to anticipate and successfully adapt to internal and external economic and social challenges, by providing new economic opportunities. The importance of the concept of competitiveness is now firmly embedded within economic policymaking in Europe, and indeed around the world. Consequently, measuring, understanding and analysing competitive-ness at a number of geographic levels has become a vital factor in creating an informed dialogue that can contribute to a policy environment attuned to enhancing the economic performance of Europe’s nations.

The Observatory on Europe decided to focus its analysis on 10 Competitiveness Factors that are essential for measuring a country’s level of competitiveness (Figure 1).

Figure 1. EU-27 Competitiveness Index: Competitive Factors and Weights

Each Competitiveness Factor was analysed by measuring specific Key Performance Indicators (KPIs). These are basic quantitative indicators, chosen as suitable proxies for estimating the level of competitiveness of each considered Member State. Both the significance of the KPI and the availability of a complete data-base for all EU countries were considered very important. The logic followed was to select the “best” indica-tors for describing the current European situation in each Competitiveness Factor.

As shown in Figure 2, 55 KPIs were selected and analysed.

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Figure 2. EU-27 Competitiveness Index: KPIs and Weights

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The purpose of the EU-27 Competitiveness Index is to estimate the current level of competitiveness of the EU and its Member States. Through the comparison with the competitiveness levels reported five years ago, it is also possible to understand whether there were significant changes (both improvements and setbacks).

To allow comparisons and present an overall picture of the European Countries’ Competitiveness Index, the scores were consolidated as follows:

- The Observatory on Europe assigned a weight to each Competitiveness Factor / KPI according to its relative importance from a competitiveness standpoint (Figure 2).

- For each KPI, the best performer among the EU-27 Member States received a score of 10 (max score) and the worst performer received a score of 1 (min score).

- The remaining Member States’ scores varied between 1 and 10, according to their relative perfor-mance. The “scale” drove the scoring process and was calculated as follows:

Scale = (max value – min value) / (max score – min score)

- Having fixed the “scale”, each Member State’ score was computed as follows:

Score = [(country value – min value) / scale] + 1

- The Competitiveness Factors’ scores (i.e. each Member States’ level of competitiveness in that factor) were calculated as a weighted sum of the KPIs’ scores.

- The Final Competitiveness score was calculated as a weighted sum of the Competitiveness Factors’ scores.

The following paragraphs will present the analysis of the indicators for each of the ten Competitiveness Fac-tors. Each paragraph will close with an overall analysis of the Competitiveness Factor and a comparison with the countries’ past rankings.

2.2 External openness

The purpose of the Competitiveness Factor “External Openness” is to understand how European Member States interact with foreign entities, and particularly:

- whether EU Member States attract investments from abroad or not (i.e. can European countries be seen as an interesting business area?);

- whether EU Member States show a positive external balance on goods and services or not (i.e. can European countries be successful in foreign markets?);

- whether EU Member States have favourable conditions for exports or not (i.e. is there a low cost to export from European countries?).

Accordingly, the Competitiveness Factor “External Openness” has been analysed using the following KPIs (Figure 3-7) and weights:

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- Imports and Exports, as a percentage of Gross Domestic Product – relative weight 20%- External Balance of Goods and Services, as a percentage of Gross Domestic Product – relative weight

20%- Foreign Direct Investment Stocks, as a percentage of Gross Domestic Product – relative weight 20%- Foreign Direct Investment Flow Income, as a percentage of Gross Fixed Capital Formation – relative

weight 20%- Cost to Export, US Dollar per container – relative weight 20%

Figure 3. External Openness – Imports and Exports (% of GDP), 2012 – Source: The European House - Ambrosetti re-elaboration on Eurostat data, 2013

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Figure 4. External Openness – External Balance of Goods and Services (% of GDP), 2012 – Source: The European House - Ambrosetti re-elaboration on Eurostat data, 2013

Figure 5. External Openness – FDI Stocks (% of GDP), 2011 – Source: The European House - Ambrosetti re-elaboration on UNCTAD data, 2013

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Figure 6. External Openness – FDI Flow Income (% of Gross Fixed Capital Formation), average 2008-2010 – Source: The European House - Ambrosetti re-elaboration on UNCTAD data, 2013

Figure 7. External Openness – Cost to Export (US Dollar per container), 2012 – Source: The European House - Ambrosetti re-elaboration on Eurostat data, 2013

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The overall ranking of the Competitiveness Factor “External Openness” (Figure 8) is calculated as the weight-ed sum of the KPIs’ scores.

Figure 8. External Openness Current Competitiveness Index – Source: The European House - Ambrosetti, 2013

Luxembourg still tops the rank this year, thanks to a good performance under almost every KPI: the size of the economy has a considerable impact on the final score. However, as small as it may be, the economy of Luxembourg is impressively open and integrated within the EU. Malta also performs very well under this Index (2nd), thanks to an impressive volume of “FDI Stocks” which is 187% bigger than the country’s GDP. After Malta, we find Ireland in 3rd position with a score of 5.8 mainly related to the positive external balance of goods and services in 2012. The economies following Hungary all fair similar scores, ranging from 4.4 to 3.2. What is rather surprising is the performance of Poland (20th), which is comparable with the UK’s. Under this competitiveness factor Bulgaria (22nd) scores higher than economies such as France (23rd), Spain (24th) and Italy (25th). These countries are traditionally referred as closed economies and, in fact, all score rather poorly under the KPIs “Im-ports + Exports”, “FDI Stocks” and “FDI Flow income”. We find Greece (26th) and Romania (27th) at the bottom of the list: understandably Greece’s position was heavily penalised by performance areas related to exports, external balance and FDIs, while Romania obtains very low scores under practically every KPI.

By going 5 years back in time, we register that both Luxembourg and Malta managed to maintain their positions. However, one of the most interesting findings is Ireland, which has gained 11 positions thanks to a substantial improvement of its external trade balance and to an impressive increase in FDI income.

Slovenia has also gained 11 positions, entering in the EU’s top ten best performers: in five years, the cost of exporting has gone down by 25% (from 971$ to 745$), this had powerful implications on the country’s overall performance.

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Figure 9. External Openness Current and Past Competitiveness Index – Source: The European House - Ambrosetti, 2012

Lithuania has opened considerably its economy, gaining 10 positions (from 21st to 11th): if in 2007 the country’s imports and exports accounted for approximately 120% of its GDP, today the economy trades a volume of goods and services close to 170%.

The Czech Republic has lost ground in these years, going from 8th position down to 14th: FDI flow income has shrunk from an average of 20% of Gross Fixed Capital Formation (GFCF) down to 9%. Furthermore, export-ing costs have risen by almost 50% going from 775 up to 1,145 US $ per container.

A very similar situation has been reported in Slovakia which, in fact, has lost 8 positions: FDI flows have gone from 25% down to 7% of GFCF and exporting costs have risen by more than 50%.

A significant deterioration of the external trade balance costs 9 positions to Bulgaria which lands at 22nd position.

France, Spain and Italy hardly improved their positions in the ranking and in fact they remain at the bottom of the ranking, right before Greece and Romania.



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2.3 innovation & Education

The Competitiveness Factor “Innovation & Education” analysed the variables that directly affect Europe’s future. Among these are the following two fundamental concepts:

- current investments in education, lifelong learning, etc., will result in higher levels of human capital in the future;

- new technologies, products and processes currently are a prerequisite for future international competi-tiveness.

Accordingly, the Competitiveness Factor “Innovation & Education” was analysed using the following KPIs and weights:

- R&D Expenditure, as a percentage of Gross Domestic Product – relative weight 20%- ICT Expenditure, as a percentage of Gross Domestic Product – relative weight 10%- High-tech Exports, as a percentage of Total Exports – relative weight 10%- Patents, per million inhabitants – relative weight 20%- Tertiary Education, as a percentage of total population – relative weight 20%- P.I.S.A. Score in Math & Science – relative weight 20%

Figure 10. Innovation & Education – R&D Expenditure (% of GDP), 2011 – Source: The European House - Ambrosetti re-elaboration on Eurostat data, 2013

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Figure 11. Innovation & Education – ICT Expenditure (% of GDP), 2010 – Source: The European House - Ambrosetti re-elaboration on Eurostat data, 2013

Figure 12. Innovation & Education – High-tech Exports1 (% of total exports), 2011 – Source: The European House - Am-brosetti re-elaboration on Eurostat data, 2013

1 - This indicator is calculated as share of exports of all high technology products of total exports. High Technology products are defined as the sum of the following products: Aerospace, Computers-office machines, Electronics-telecommunications, Pharmacy, Scientific instruments, Elec-trical machinery, Chemistry, Non-electrical machinery, Armament (Eurostat).



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Figure 13. Innovation & Education – Patents (per million inhabitants), 2010 – Source: The European House - Ambrosetti re-elaboration on European Patent Office data, 2012

Figure 14. Innovation & Education – Tertiary Education (% of total population), 2012 – Source: The European House - Ambrosetti re-elaboration on Eurostat data, 2013

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Figure 15. Innovation & Education – P.I.S.A. Score in Math & Science2, 2009 – Source: The European House - Ambro-setti re-elaboration on OECD data, 2012

The overall ranking of the “Innovation & Education” Competitiveness Factor (Figure 16) was calculated as the weighted sum of the KPIs’ scores.

Figure 16. Innovation & Education Current Competitiveness Index – Source: The European House - Ambrosetti, 2013

2 - The Programme for International Student Assessment (PISA) is a worldwide study by the Organisation for Economic Co-operation and Develop-ment (OECD) in member and non-member nations of 15-year-old school pupils’ scholastic performance on mathematics, science, and reading.



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The Nordic countries obtain very high scores under this competitiveness factor: Finland is 1st with a score of 8.8, Sweden is 2nd with a score of 7.4 while Denmark is 5th with a score of 6.6. These high scores are mainly the result of large investments in R&D and a high number of issued patents. The strong educational systems of these countries confirm their positions.

Germany ranks 3rd with a score of 7.0: the country has been investing a considerable portion of GDP in R&D in the last years and an impressive volume of patents have been issued by the economy. The German educational system is also commonly referred as very effective and performing: the PISA study confirms that German students perform outstandingly under maths and sciences.

Shortly after Denmark, we find the UK and Luxembourg, both tied in 6th position with a score of 6.4: while the former scored very well in “ICT Expenditure” and “Tertiary Education”, the latter registers an outstanding performance as for “High Tech Exports” and “Patents”.

France is in 10th place (6.0), followed closely by Belgium (5.9): the overall performance of these countries is average, even though Belgium obtains an excellent mark under “Tertiary Education”.

Scrolling down the ranking we see that Spain ranks 15th (score 4.3), Italy ranks 23rd (score 3.1), and Greece ranks 25th (score 2.9). All of these countries had a low number of issued patents, scarce exports of high-tech products, and limited R&D.

The least competitive European economy in terms of Innovation and Education is Romania. The country performs poorly in almost all KPIs.

Making a comparison with the results from five years ago, we may observe that the first 7 positions have been stable throughout the period: Finland, Sweden, Germany, the Netherlands, Denmark, Luxembourg and the United Kingdom all managed to maintain their respective positions.

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Figure 17. Innovation & Education Current and Past Competitiveness Index – Source: The European House - Ambrosetti, 2013

The central section of the chart (from the 8th to the 19th position) has been subject to marginal variations. However, Portugal (from 23rd to 20th position), Poland (from 24th to 21st position) and Slovakia (from 25th to 22nd) have managed to climb 3 positions thanks to a moderate but comprehensive improvement of all KPIs: in particular Portugal’s performance under the “ICT Expenditure” KPI has improved significantly.

Lastly, the comparison with 5 years ago underlines that Greece and Bulgaria have lost ground under this crucial competitiveness factor: Greece has gone from 21st to 25th position while Bulgaria from 26th to 22nd. The two countries have registered some minor improvements; however these were not sufficient to keep up with the rest of the EU Member States.



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2.4 macroeconomic stability

The purpose of the Competitiveness Factor “Macroeconomic Stability” is to analyse the stability of economic systems, and particularly:

- whether EU Member States have sustainable debt or not (i.e., if European Countries may be at risk to default);

- how EU Member States are assessed by rating agencies;- whether the progressive aging of the population will be sustainable or not (i.e. if the number of work-

ers will support the increasing number of retirees).

Accordingly, the Competitiveness Factor “Macroeconomic Stability” was analysed using the following KPIs and weights:

- Inflation Rate – relative weight 12.5%- Government Gross Debt, as a percentage of Gross Domestic Product – relative weight 25%- Government Deficit/Surplus, as a percentage of Gross Domestic Product – relative weight 25%- S&P’s Rating – relative weight 12.5%- Old Age Dependency Ratio, ratio of 65 years old or over / 15-64 years – relative weight 25%

Figure 18. Macroeconomic Stability – Inflation Rate, 2012 – Source: The European House - Ambrosetti re-elaboration of Eurostat data, 2013

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Figure 19. Macroeconomic Stability – Gross Government Debt (% of GDP), 2012 – Source: The European House - Am-brosetti re-elaboration of IMF data, 2013

Figure 20. Macroeconomic Stability – Gross Deficit/Surplus (% of GDP), average 2009-2012 – Source: The European House - Ambrosetti re-elaboration of IMF data, 2013



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Figure 21. Macroeconomic Stability – S&P’s Rating, 2013 – Source: The European House - Ambrosetti re-elaboration of S&P’s data, 2013

Figure 22. Macroeconomic Stability – Old Age Dependency ratio (65 years old or over / 15-64 years old), 2012 – Source: The European House - Ambrosetti re-elaboration of Eurostat data, 2013

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The overall ranking of the “Macroeconomic Stability” Competitiveness Factor (Figure 23) was calculated as the weighted sum of the KPIs’ scores.

Figure 23. Macroeconomic Stability Current Competitiveness Index – Source: The European House - Ambrosetti, 2013

Luxembourg is the undisputed leader of this ranking. However an interesting finding is the impressive score of Estonia (7.7) which ties in for 2nd place with Sweden. Estonia’s performance is mainly due to its government gross debt, which is only 8.2% of its GDP. Eastern European countries like Slovakia (4th position) and the Czech Republic (5th position) but also Poland (tied in 5th position with the Czech Republic) score very well thanks to low government debt and good surpluses.

Despite excellent scores under almost every KPI, the performance of Nordic countries is undermined by cur-rent demographic trends: the extension of life expectancy in these countries also implied a higher old-age dependency ratio.

With a very good government surplus and rating, Austria reaches the 11th position with a score of 6.8.

France and Germany are tied for 14th place. France performs well in the KPI “Inflation Rate” while Germany’s overall good performance is somewhat undermined by the old-age dependency ratio.

The United Kingdom ranks 19th with a score of 5.9, while Spain falls back to the 21st position with a score of 5.3.

In the case of Italy, the most penalising factors are undoubtedly gross government debt (126% of national GDP) and old–age dependency ratio which is, by the way, the highest in Europe (32%). The recent struc-tural reforms have improved substantially the governments surplus, however the final score (4.5) places Italy at 24th position.



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The economic crisis also had serious repercussions on the macroeconomic stability of Greece which, in fact, scores 3.3 and ranks last under this competitiveness factor.

With respect to five years ago, the ranking has substantially changed: only Luxembourg has managed to keep its position.

Sweden has gained 5 positions thanks to a general improvement of all the observed KPIs (with the excep-tion of old age dependency ratio). In 5 years time, Estonia has managed to climb 8 positions, tying in with Sweden at 2nd: the impressive result is mainly due to a remarkable improvement of the country’s credit rating and government surplus. A very similar situation happened in Poland, which has managed to climb 12 posi-tions in 5 years: from 17th to 5th position.

Austria has gained 8 positions landing from 19th to 11th thanks to a general improvement of the government’s gross debt and surplus indicators.

Belgium (13th position) and Germany (14th position) have gained 9 positions under this competitiveness fac-tor: the former has sensibly improved its performance under the KPI “Gross Government Debt” while the latter has reduced its government net deficit.

Hungary has gone from the 26th position up to the 17th with a score of 5.9. The performance is mainly related to the dramatic reduction of the government’s deficit, which has gone from -7.16% of national GDP down to -1.87%. A relevant improvement has also been registered under the KPI “Government Gross Debt”.

The economic crisis had an impressive impact on Ireland, which went from 1st position down to 20th: the country’s performance was undermined by the significant deterioration registered under the KPIs “Gov-ernment Gross Debt” and “Government Deficit/Surplus”. In fact, between 2004 and 2007 the average balance of the government was +1.5% while the average between 2009 and 2012 was -16.5% of the economy’s GDP. The deterioration of Ireland’s financial stability also had an impact on the S&P rating, which has gone from AAA to BBB+. A similar pattern was registered in Spain, which has gone from 5th position down to 21st: the deterioration of the government’s deficit and the downgrading performed by S&P cost 16 positions to the country.

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Figure 24. Macroeconomic Stability Current and Past Competitiveness Index – Source: The European House - Ambro-setti, 2013

Ageing population had a significant impact on Lithuania’s score: due to poor performance under the KPI “Old-age Dependency Ratio”, the country has gone from 13th position down to 23rd (10 positions).

Rising inflation and the recent credit downgrade issued by Standard and Poor’s are the main reasons for Cy-prus’ poor performance: the country has lost 15 position going from 11th down to 26th with a final mark of 4.0.



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2.5 Business Environment

The Competitiveness Factor “Business Environment” measures the comfort of doing business in the European Member States, and more specifically:

- the amount of time and money required to start a business;- the tax burden;- the business environment dynamics.

Accordingly, the Competitiveness Factor “Business Environment” was analysed using the following KPIs and weights:

- Time to Start a Business, days – relative weight 10%- Cost to Start a Business, percentage of Gross National Income per capita – relative weight 10%- Total Tax Rate – relative weight 35%- Time to Enforce a Contract, days – relative weight 10%- Labour Freedom Index – relative weight 35%.

Figure 25. Business Environment – Time to Start a Business (days), 2012 – Source: The European House - Ambrosetti re-elaboration of World Bank data, 2013

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Figure 26. Business Environment – Cost to Start a Business (% of GNI per capita), 2012 – Source: The European House - Ambrosetti re-elaboration of World Bank data, 2013

Figure 27. Business Environment – Total Tax Rate3, 2012 – Source: The European House - Ambrosetti re-elaboration of World Bank data, 2013

3 - Total tax rate measures the amount of taxes and mandatory contributions payable by businesses after accounting for allowable deductions and exemptions as a share of commercial profits. Taxes withheld (such as personal income tax) or collected and remitted to tax authorities (such as value added taxes, sales taxes or goods and service taxes) are excluded (World Bank).



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Figure 28. Business Environment – Time to Enforce a Contract (days), 2012 – Source: The European House - Ambrosetti re-elaboration of World Bank data, 2013

Figure 29. Business Environment – Labour Freedom Index4, 2013 – Source: The European House - Ambrosetti re-elabora-tion of Heritage Foundation data, 2013

4 - Quantitative measure that looks into various aspects of the legal and regulatory framework of a country’s labour market. Six quantitative fac-tors are equally weighted, with each counted as one-sixth of the labour freedom component: Ratio of minimum wage to the average value added per worker; Hindrance to hiring additional workers; Rigidity of hours; Difficulty of firing redundant employees; Legally mandated notice period; Mandatory severance pay (The Heritage Foundation).

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The overall ranking of the Competitiveness Factor “Business Environment” (Figure 30) is calculated as the weighted sum of the KPIs’ scores.

Figure 30. Business Environment Current Competitiveness Index – Source: The European House - Ambrosetti, 2013

Denmark, with a score of 9.4, undoubtedly tops the rank: the economy excels under almost every KPI. In sec-ond place we find Ireland with a score of 8.3: the country performs very well under the KPIs “Cost of Starting a Business” and “Total Tax Rate”. Bulgaria also performs very well under these KPIs and lands in 3rd position with a score of 7.9. The United Kingdom and Cyprus are often regarded as economies with a business friendly environment, and in fact, they rank respectively 4th and 5th.

After Cyprus, the economies follow closely each other: from Latvia’s 6th position down to Spain’s 17th, scores range from 6.9 to 5.7. Overall, it should be noted that Eastern European and Baltic countries perform rather well under this competitiveness factor: the Czech Republic ranks 7th (with a score of 6.7) along with Luxem-bourg, while Slovakia, Lithuania and Romania are right after the Netherlands which is in 9th position.

Unexpectedly, Finland (16th position), Sweden (18th position) and Germany (20th), all fall back into the chart due to poor performance under the KPI “Labour Freedom”.

At the bottom of the chart we find France, Greece and Italy respectively in 25th, 26th and 27th position. All these countries present rigid labour markets and in fact perform poorly under the KPI “Labour Freedom”, how-ever there are also individual factors which explain such scores. For instance the French economy requires low costs to start a business but then presents a total tax rate close to 66% of business profits. Conversely, total tax rate in Greece is on the EU average, while the cost of starting a business is particularly high.



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The least performing country is Italy. The economy is burdened by a total tax rate of 68% on business profits and detains Europe’s negative record for time to enforce a contract: 1,210 days.

Figure 31. Business Environment Current and Past Competitiveness Index – Source: The European House - Ambrosetti, 2013

In the comparison with 5 years ago, Denmark and Ireland have remained stable at 1st and 2nd positions. Bulgaria gained 2 positions thanks to a significant reduction in costs to start a business and total tax rates.

By going from 14th to 7th, the Czech Republic has gained 7 positions. The result is largely explainable by the substantial improvement of the labour freedom index, which has gone from 66.1 to 85.5.

Spain has also climbed 9 positions, landing at 17th position with a score of 5.7: the economy has reduced its total tax rate from 50.2% of business profits to 38.7%. Furthermore, Spain has reduced the costs to start a business by 48%. Similarly, Slovenia gained 6 positions, tying in for 18th place with Sweden which has actually lost 6 positions.

On the other hand, Estonia has fallen back by 7 positions: a 36% increase in tax rates and the increased time to start a business have undermined the country’s performance under this indicator.

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2.6 Labour market

The Competitiveness Factor “Labour Market” is fundamental since companies demand skilled and adapt-able human capital. Labour economics seeks to understand the functioning and dynamics of the labour market. Moreover, labour economics studies the supply and demand of labour services, in order to predict the resulting pattern of productivity and employment.

Accordingly, the Competitiveness Factor “Labour Market” was analysed using the following KPIs and weights:

- Employment Rate – relative weight 25%- Labour Productivity Index, per person employed – relative weight 35%- Unemployment Rate – relative weight 20%- Youth Participation, (employment rate for persons aged 15 to 24 years) – relative weight 20%

Figure 32. Labour Market – Employment Rate, 2011 – Source: The European House - Ambrosetti re-elaboration of Eurostat

data, 2013



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Figure 33. Labour Market – Labour Productivity Index (per person employed, EU-27=100), 2011 – Source: The European

House - Ambrosetti re-elaboration of Eurostat data, 2013

Figure 34. Labour Market – Unemployment Rate, 2012 – Source: The European House - Ambrosetti re-elaboration of Eu-rostat data, 2013

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Figure 35. Labour Market – Youth Participation (employment rate for persons aged 15-24 years), 2011 – Source: The European House - Ambrosetti re-elaboration of Eurostat data, 2013

The overall ranking of the “Labour Market” Competitiveness Factor (Figure 36) was calculated as the weight-ed sum of the KPIs’ scores.

Figure 36. Labour Market Current Competitiveness Index – Source: The European House - Ambrosetti, 2013



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The Netherlands are safely placed in 1st position with a score of 8.5, thanks to a strong performance under the KPIs “Employment” (10.0), “Unemployment” (9.5) and “Youth Participation” (10.0). Thanks to an unem-ployment rate set at 4.2%, Austria reaches the 2nd position with a score of 8.0. Denmark follows closely thanks to a very good performance under the “Employment” KPI (9.2).

The other Nordic countries also perform quite well: Sweden is 4th with a score of 7.4 and Finland is 8th with a score of 6.6. Both countries present very good employment and unemployment rates and present a youth participation rate which is approximately 10 percentage points higher than the EU average.

Germany ties in 4th position with Sweden, thanks to an impressive employment rate: 72.5%. The German model is also particularly successful in involving younger generations into the labour market and in fact pres-ents a youth participation close to 48%.

France is in 10th place (5.6), followed by Ireland (5.2). Neither performed exceptionally in any KPIs.

Italy, Poland and Portugal rank respectively 17th, 18th and 19th. Italy presents a rather low employment rate (56.9%) and youth participation in the labour market (19.4%). Poland and Portugal also present low youth participation rates and, in addition, perform poorly under the KPI “Labour Productivity”.

The most critical aspects of the Spanish labour market today are high unemployment and low youth partici-pation. In fact, Eurostat has recently issued data which confirms the picture: Spain has the highest unemploy-ment rate in Europe (25%, even higher than in Greece) and a very low youth participation to the labour market. As a result, the country obtains a score of 3.1 and ranks 24th.

The economic crisis had an impressive impact on Greece’s labour market and it comes to no surprise that the country ranks last with a score of 2.2. Indeed Greece registers poor performances in all the observed indicators.

Over the past five years the Netherlands have managed to maintain the 1st position, Austria has gained one position (2nd) and Denmark has lost ground, still remaining, however, at the top of the rankings.

Thanks to a substantial increase of the employment rate (from 67.2% to 72.5%) and a reduction of the unemployment rate (from 8.7% down to 5.5%), Germany has gained 6 positions, jumping from 10th to 4th

place. A decline in all the KPIs, except “Labour Productivity Index”, brought Ireland down 8 positions: the country now stands in 11th place. The most staggering figure about Ireland is employment rate, which has gone from 68.7% in 2006 down to 58.9% in 2011.

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Figure 37. Labour Market Current and Past Competitiveness Index – Source: The European House - Ambrosetti, 2013

Despite the economic crisis and worsening conditions, the Italian Labour Market appears to show resilience and has lost only 1 position. In fact, despite all structural limitations and rigidities of the Italian Labour Market, the only KPI which has registered a deterioration is “Employment”.

Five years ago, Poland presented the least competitive European Labour Market. Thanks to a relative im-provement in the KPI “Unemployment Rate”, the country gained 8 positions and now ranks 19th. The same can be said for Slovakia, which has made a significant jump of 6 positions and is now 20th.

The consequences of the sovereign debt crisis had a considerable impact on Spain and Greece which have lost respectively 12 (from 12th to 24th position) and 5 positions (from 22th to 27th). In both cases, the main reasons of the “fall” are a substantial reduction of employment rates and a contextual increase in unemploy-ment rates.



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2.7 people & Wellbeing

By including a set of specific drivers, the Competitiveness Factor “People & Wellbeing” addresses the ques-tion: “Why should professionals, business leaders, researchers, students and tourists choose this territory in-stead of another destination?”

Accordingly, the Competitiveness Factor “People & Wellbeing” was analysed using the following KPIs and weights:

- Fertility Rate – relative weight 15%- Population Aged 65 and Above – relative weight 15%- Net Migration Rate – relative weight 15%- Immigration Rate – relative weight 15%- Monetary Poverty – relative weight 7.5%- Distribution of Income, Gini Index – relative weight 7.5%- Happiness Index – relative weight 10%- Healthy Life Expectancy – relative weight 15%

Figure 38. People & Wellbeing – Fertility Rate, 2011 – Source: The European House - Ambrosetti re-elaboration of Eurostat data, 2013

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Figure 39. People & Wellbeing – Population Aged 65 and Above, 2011 – Source: The European House - Ambrosetti re-elaboration of Eurostat data, 2013

Figure 40. People & Wellbeing – Net Migration Rate, 2011 – Source: The European House - Ambrosetti re-elaboration of Eurostat data, 2013



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Figure 41. People & Wellbeing – Immigration Rate, 2011 – Source: The European House - Ambrosetti re-elaboration of Eurostat data, 2013

Figure 42. People & Wellbeing – Monetary Poverty5, 2011 – Source: The European House - Ambrosetti re-elaboration of Eurostat data, 2013

5 - The at-risk-of-poverty threshold is 50% of median equivalent income.

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Figure 43. People & Wellbeing – Distribution of Income (Gini Index), 2009 – Source: The European House - Ambrosetti re-elaboration of CIA Factbook data, 2012

Figure 44. People & Wellbeing – Happiness Index6, 2012 – Source: The European House - Ambrosetti re-elaboration of The Happy Planet Index data, 2013

6 - The Happiness Index reflects the average years of happy life produced by a given society, nation or group of nations, per unit of planetary resources consumed. In other words, it represents the efficiency with which countries convert the earth’s finite resources into well-being expe-rienced by their citizens. The Global HPI incorporates three separate indicators: ecological footprint, life-satisfaction and life expectancy.


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Figure 45. People & Wellbeing – Healthy Life Expectancy, 2011 – Source: The European House - Ambrosetti re-elaboration of World Life Expectancy data, 2013

The “People & Wellbeing” Competitiveness Factor (Figure 46) was calculated as the weighted sum of the KPIs’ scores.

Figure 46. People & Wellbeing Current Competitiveness Index – Source: The European House - Ambrosetti, 2013

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Ireland is the leader of this ranking, closely followed by Sweden and France. With a score of 7.2, the United Kingdom ties in for 3rd place with France. The former was the best performer in the KPIs “Happiness Index”, while the latter achieved a score of 10 in the KPI “Immigration rate”.

Also the Netherlands (6.9) and Denmark (6.7) fair rather well, ranking respectively 4th and 5th. The perfor-mance of the Netherlands is mainly explainable by the high scores in the KPIs “Immigration rate” and “Life Expectancy”, while Denmark achieved very good results under the KPIs “Monetary Poverty” and “Distribution of Income (Gini Index)”.

Germany and Spain obtain identical scores (5.3) under this competitiveness factor and, in fact, they both land in 14th position. Germany presents one of the highest percentages of over 65 population (20.62% of total population) and this has substantial consequences on the economy’s final score. On the other hand, Spain would have obtained a far better score if the KPI “Net Migration Rate” would not have been so low (1.0).

Ageing population is one of the most problematic aspects of the Italian economy. Indeed, the country has a percentage of over 65 population which is only comparable to Germany’s (20.64%). Fertility rate is also lower than the EU average (1.40 vs. 1.57). The abovementioned elements have a considerable impact on the country’s performance: despite the high score achieved in some areas (e.g. the Happiness Index), the country ranks only 17th. Also Greece and the Czech Republic rank 17th due to poor performance in the ma-jority of KPIs.

The least competitive European country in terms of People & Wellbeing is Bulgaria, which performed poorly in almost all indicators.

Making a comparison with the ranking of five years ago, we notice that Ireland and Sweden have managed to maintain their respective positions in the ranking. Denmark and France have switched positions: the former now ranks 6th while the latter is 3rd. Thanks to an improvement of the Gini and Happiness Indexes, the UK has managed to climb 7 positions, ultimately ranking 3rd along with France.

An overall improvement of the fertility rate and of the Gini Index has moved Slovenia from 16th to 12th posi-tion. In Germany, distribution of income and citizen’s happiness has improved over the observed 5 years: as a matter of fact, Germany has gone from 18th up to 14th.

Poland has lost 5 positions and went from 20th to 25th: the Gini Index of the economy has deteriorated during the considered 5 years. Finally, Bulgaria has lost 6 positions, going from 21st down to 27th. The main reason of the downturn is the deterioration of the Gini Index, which has gone from 0,264 up to 0,3077.

7 - A higher score implies higher inequalities in income distribution

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Figure 47. People & Wellbeing Current and Past Competitiveness Index – Source: The European House - Ambrosetti, 2013

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2.8 Finance

The purpose of the Competitiveness Factor “Finance” is to measure the efficiency and pro-activeness of the EU financial markets, and particularly:

- the dynamism of the EU’s stock markets; - the number of Corporate Finance transactions in the EU;- companies’ relationships with financial markets in the EU.

Accordingly, the Competitiveness Factor “Finance” was analysed using the following KPIs and weights:

- Market Capitalisation, as a percentage of Gross Domestic Product – relative weight 10%- Stock traded (Turnover Ratio), as a percentage of Gross Domestic Product – relative weight 10%- Investor Protection Index – relative weight 10%- SMEs with Financing Problems, as a percentage of total SMEs – relative weight 15%- M&A Market Activity Index – relative weight 20%- Incidence of Insurance, Pension and Investment Funds, as a percent of Total Assets of the economy

– relative weight 15%- Venture Capital (Funds Raised), as a percentage of Gross Domestic Product – relative weight 20%

Figure 48. Finance – Market Capitalisation (% of GDP), 2011 – Source: The European House - Ambrosetti re-elaboration of World Bank data, 2013

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Figure 49. Finance – Stocks Traded, Turnover Ratio (% of GDP), 2011 – Source: The European House - Ambrosetti re-elaboration of World Bank data, 2013

Figure 50. Finance – Investor Protection Index8, 2013 – Source: The European House - Ambrosetti re-elaboration of World Bank data, 2013

8 - The Index measures the strength of minority shareholder protection against misuse of corporate assets by directors for their personal gain. The index is composed by other 3 sub-indices: extent of disclosure, extent of director liability, ease of shareholder suits

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Figure 51. Finance – M&A Market Activity9, 2012 – Source: The European House - Ambrosetti re-elaboration of Thomson Financial data, 2013

Figure 52. Finance – SMEs with Financing Problems10 (%), 2011 – Source: The European House - Ambrosetti re-elabora-tion of European Commission data, 2012

9 - It comprises M&A Market Volume and Number of M&A deals in a country (Thomson Financial).

10 - Percentage of SMEs that cited access to finance as the most pressing problem (European Commission, SMEs’ Access to Finance, Survey 2011, Analytical Report, 7 December 2011)

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Figure 53. Finance – Pension, Insurance and Investment Funds (% of Total Assets), 2011 – Source: The European House - Ambrosetti re-elaboration on ECB data, 2013

Figure 54. Finance – Venture Capital, Funds Raised (% of GDP), 2011 - Source: The European House - Ambrosetti re-elaboration on European Commission data, 2013

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The overall ranking of the Competitiveness Factor “Finance” (Figure 55) was calculated as the weighted sum of the KPIs’ scores.

Figure 55. Finance Current Competitiveness Index – Source: The European House - Ambrosetti, 2013

The United Kingdom easily tops the rank, thanks to an outstanding performance under the KPIs “Market Capi-talization”, “Stock Traded” and “M&A Market Activity”. The Nordic countries also perform rather well: Sweden is 2nd with a score of 7.7 while Denmark and Finland tie in for 4th position with a score of 5.9. The volume of venture capital funds is quite impressive in all these countries and, in fact, SMEs find it comparatively less difficult to access funding.

France, Belgium, Luxembourg, Germany, Ireland and Spain rank from 6th to 10th position. The five countries’ scores fall within a small range (from 5.7 to 5.2).

Spain follows closely in 11th position with a score of 4.8: the country performs well on the KPI “Stock traded”, however low levels of investor protection and considerable problems in access to funding penalise consider-ably the economy. To this end, it is interesting to see the correlation between SMEs problems in access to funding and venture capital market development. With a low to average performance under every KPI, Italy ties in for 14th position with Poland.

Eastern European countries are located in the lowest portion of the ranking: Hungary ranks 18th, the Czech Republic is 19th, Romania is 20th, Bulgaria 21st and Slovakia is at the bottom of the chart. In fact, all these countries are substantially penalised by the fact that they do not have sufficiently developed stock and venture capital markets.

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The Baltic countries fair rather poorly under this competitiveness factor: the clearest example is Estonia which ranks last with very low scores under every KPIs.

Making a comparison with the data from five years ago, it is possible to observe that the United Kingdom has managed to preserve its leadership, remaining stable in 1st place with a substantial distance from its competitors. Sweden has also kept its 2nd place, as its performance has remained stable throughout the five years. However the Netherlands have taken Finland’s 3rd place, thus gaining 1 position. In general, the chart was subject to few relevant changes during the considered time period: major variations regard Hungary and Portugal. Portugal has lost 4 positions due to a significant deterioration of the performance under the KPI “Venture Capital” and an overall worsening of stock market’s conditions, ultimately landing in 17th posi-tion. Conversely, Hungary has arrived in 18th position, thanks to an improvement of the KPI related to venture capital.

The last 3 positions of the chart remained relatively stable: if Slovenia, Slovakia and Estonia faired rather poorly five years earlier, the same could be said today.

Figure 56. Finance Current and Past Competitiveness Index – Source: The European House - Ambrosetti, 2013

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2.9 public sector

The Competitiveness Factor “Public Sector” measures the quality and efficiency of public institutions. The competitiveness of a country cannot ignore the quality of its public institutions: their proper functioning has strong social and economic implications.

Accordingly, the Competitiveness Factor “Public Sector” was constructed using the following KPIs and weights:

- Share of Enterprises Interacting Online with Public Authorities (% of total) – relative weight 20%- Government Effectiveness Index – relative weight 20%- Regulatory Quality Index – relative weight 20%- Cost Effectiveness of Public Servants (GDP on Public Servants ratio multiplied for the Government Ef-

fectiveness coefficient) – relative weight 20%- Share of unspent EU Structural Funds, % of Total Allocation for the Period 2007-2013 – relative weight

20%

Figure 57. Public Sector – Share of enterprises interacting online with public authorities (% of total), 2011 – Source: The European House - Ambrosetti re-elaboration on Eurostat data, 2013

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Figure 58. Public Sector – Government Effectiveness Index11, 2011 – Source: The European House - Ambrosetti re-elabo-ration of World Bank data, 2013

Figure 59. Public Sector – Regulatory Quality Index12, 2011 – Source: The European House - Ambrosetti re-elaboration of World Bank data, 2013

11 - The Government Effectiveness Index reflects perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation as well as the credibility of the government’s commitment to such policies (World Bank).

12 - The Regulatory Quality Index reflects perceptions of the ability of the government to formulate and implement sound policies and regulations which enable and foster private sector development (European Commission).

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Figure 60. Public Sector – Cost Efficiency of Public Servants (GDP on Public Servants ratio multiplied for the Government

Effectiveness coefficient13), 2011 – Source: The European House - Ambrosetti re-elaboration on Eurostat and World Bank data, 2013

Figure 61. Public Sector – Share of unspent EU Structural Funds (% of Total Allocation for the period 2007-2013), 2011

– Source: The European House - Ambrosetti re-elaboration of European Commission data, 2013

13 - The ratio serves as a proxy of efficiency in the public sector. The higher the ratio, the higher the efficiency (as the numerator is less affected by the denominator). The ratio has been then multiplied for a coefficient that takes into account the government effectiveness index developed by the World Bank.

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The overall ranking of the “Public Sector” Competitiveness Factor (Figure 62) was calculated as the weighted sum of the KPIs’ scores.

Figure 62. Public Sector Current Competiveness Index – Source: The European House - Ambrosetti, 2013

Luxembourg is firmly in first place with a score of 8.7. The Nordic countries follow closely with excellent perfor-mances: Finland is 2nd with a score of 8.4, Sweden is 3rd with a score of 8.3 and Denmark is 4th with a score of 8.1. Danish and Finnish citizens perceive their governments as particularly effective, while Sweden achieves excellent performance in the financial execution of Structural Funds.

Ireland is in 5th place just after the Netherlands. Ireland is often regarded as a successful case of Structural Funds implementation: by the end of 2011, the country has managed to effectively spend 53% of its avail-able budget against the EU average of 40%. It comes to no surprise that Ireland obtains the maximum score under the KPI “Share of unspent EU Structural Funds”.

Thanks to a good performance under the KPIs “Government Effectiveness” and “Share of Enterprises Inter-acting Online with Public Authorities”, Austria lands in 7th position with a score 7.3. The United Kingdom also performs rather well in almost every indicator, ranking 8th with a score of 7.2.

Germany (6.7), France (6.1) and Spain (5.4) occupy the 9th, 13th and 16th positions. The regulatory environ-ment and cost efficiency of public servants penalises Spain in its final score.

Greece and Italy rank respectively 24th and 25th: both countries suffer from poor performance under the KPIs “Government Effectiveness Index” and “Regulatory Quality Index”. Italy’s position is even more aggravated by the historical issue of Structural Funds implementation (especially in Southern Italy): at the end of 2011, the country has managed to spend 27% of the allocated funds against an EU average of 40%. The least

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competitive European country regarding the Public Sector is Romania. The country performed poorly in al-most all indicators.

Making a comparison with the data from five years ago we notice that there has been an interesting switch of positions between Luxembourg and Ireland: Luxembourg indeed has climbed 4 positions landing in 1st place, whereas Ireland has gone from 1st position down to 5th. In fact, while Luxembourg has significantly accelerated Structural Fund’s implementation, the “Regulatory Quality Index” of Ireland has sensibly deterio-rated.

Finland remained stable in 2nd position, while Sweden has managed to climb 3 positions, ultimately landing in 3rd place.

Figure 63. Public Sector Current and Past Competitiveness Index – Source: The European House - Ambrosetti, 2013

Austria has lost 4 positions, due to a significant deterioration of the “Regulatory Quality Index”: this being said the country still ranks 7th, with a satisfying score of 7.3.

Thanks to performance improvements related to almost every KPI, Lithuania has gone from 18th to 14th posi-tion, right after France (13th position).

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The Czech Republic has sensibly worsened its position within the chart, going from 13th down to 19th posi-tion. Poland, which has actually improved its position by 5 places, also ties in for 19th position: the outcome is due to a considerable improvement of the “Government Effectiveness Index” and the financial execution of Structural Funds. On the other hand, a sensible deterioration of the “Regulatory Quality Index” has caused an impressive deterioration of Greece’s position, which has gone from 16th to 24th place. Bulgaria and Romania have remained stable in 26th and 27th position.

2.10 Environment

The Competitiveness Factor “Environment” is fundamental since environmental policies have a direct impact on the global competitive arena. Environment protection should be a key competitive issue for all players, but unfortunately, it is often ignored by many countries. Nevertheless, the Observatory on Europe believes that it is important to praise environmentally friendly behaviours since they are essential to sustainable de-velopment for future generations.

Accordingly, the Competitiveness Factor “Environment” was analysed using the following KPIs and weights:

- Treatment of Waste, tonnes per inhabitant – relative weight 15%- Ecological Footprint, global hectares per capita – relative weight 15%- Air Pollution, Kg per inhabitant – relative weight 15%- Forest Area, as percentage of total land area – relative weight 15%- Electricity from renewable sources, as percentage of total energy – relative weight 20%- Greenhouse Gas, indexed to Kyoto base year – relative weight 20%

Figure 64. Environment – Treatment on Waste (tonnes per inhabitant), 2010 – Source: The European House - Ambro-setti re-elaboration of Eurostat data, 2013

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Figure 65. Environment – Ecological Footprint14 (global hectares per capita), 2012 – Source: The European House - Am-brosetti re-elaboration of NFA data, Global Footprint Network, 2013

Figure 66. Environment – Air Pollution (Kg per inhabitant), 2010 – Source: The European House - Ambrosetti re-elaboration of Eurostat data, 2013

14 - The ecological footprint is a measure of human demand on the Earth’s ecosystems. It is a standardized measure of demand for natural capital that may be contrasted with the planet’s ecological capacity to regenerate. It represents the amount of biologically productive land and sea area necessary to supply the resources a human population consumes, and to assimilate associated waste (Global Footprint Network).

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Figure 67. Environment – Forest Area (% of total land area), 2010 – Source: The European House - Ambrosetti re-elab-oration of World Bank data, 2013

Figure 68. Environment – Electricity from renewable sources (% of total energy), 2011 – Source: The European House - Ambrosetti re-elaboration of Eurostat data, 2013

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Figure 69. Environment – Greenhouse Gas (indexed to Kyoto Base year), 2010 – Source: The European House - Ambro-setti re-elaboration of Eurostat data, 2013

The overall ranking of the “Environment” Factor (Figure 70) was calculated as the weighted sum of the KPIs’ scores.

Figure 70. Environment Current Competitiveness Index – Source: The European House - Ambrosetti, 2013

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Latvia tops the chart with a score of 7.3, thanks to an excellent performance in the KPIs “Air Pollution” (10.0), “Ecological Footprint” (8.2) and “Greenhouse gas” (9.4). On the other hand, Sweden – which is in 2nd place – achieved outstanding performances under the KPIs “Air pollution” (9.7), “Forest Areas” (9.4) and, most im-portantly, “Electricity from Renewable Sources” (10.0).

Thanks to extensive forest areas, intense resorting to waste treatment and low air pollution, Finland achieved a score of 6.3 thus reaching the 4th place.

Austria’s electricity provision relies for more than 55% on renewable sources and the air pollution in the country is among the lowest in the EU: thus, the economy ranks 5th.

From Lithuania’s 7th place (with a score of 5.8) down to Italy’s 15th (with a score of 5.1), country scores follow closely each other. With some few exceptions, all these countries are rather penalised by low resorting to waste treatment and low reliance on renewable sources for electricity generation. France ranks only 17th due to poor performance under the KPIs “Waste Treatment” (2.7) and “Electricity from Renewable sources” (3.0).

The United Kingdom and Spain follow closely each other and rank respectively 19th and 20th: the former economy’s score is affected by low amounts of forest areas and renewable energy production, while the latter fairs poorly due to the increase in greenhouse gas emissions (from Kyoto base year 2005).

In the last 3 positions we find Ireland (25th), Malta (26th) and Cyprus (27th): all these countries perform rather poorly in every indicator of the competitiveness factor.

Comparing the findings with the ranking from five years ago, we notice that Sweden now shares the first position along with Latvia, which has climbed one position thanks to a sensible improvement of its ecologi-cal footprint. On the other hand Romania has lost one position and has landed in third position due to a reduction of available forest areas.

Lithuania, Estonia and Portugal have all gained 3 positions during the time lapse considered: the Baltic coun-tries owe their positions to an improvement of their ecological footprint, while Portugal has gone from 16th to 13th position thanks to higher resorting to renewable sources for electricity generation.

Conversely Slovakia, France and the Netherlands have all lost 3 positions: the performance of the KPI “Forest Areas” has deteriorated in all these countries.

The last 3 positions were subject to marginal changes: Malta and Cyprus remained stable in 26th and 27th

place, while Ireland has lost 1 position and ended up 25th.

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Figure 71. Environment Current and Past Competitiveness Index – Source: The European House - Ambrosetti, 2013

2.11 networks

Networks are certainly a Competitive Factor for fostering economic and social growth. Global economies indeed need networks that allow efficient exchange of goods and services, not to mention the fact that energy costs are rising sharply. These crucial problems, which noticeably affect the competitiveness of most countries, are all somehow related to the potential weaknesses of the network system.

The Observatory on Europe decided to analyse the “Networks” Competitive Factor, as it believes they are pivotal to the functioning of the EU internal market as well as to linking the EU system to the rest of the world.

Accordingly, the Competitiveness Factor “Networks” was analysed using the following KPIs and weights:

- Energy Dependency, as a percentage of net imports on inland consumption – relative weight 20%- Energy Price for Industrial Consumers, Euro per Kilowatt hour – relative weight 20%- Broadband Penetration, per 100 inhabitants – relative weight 30%- Road, Rail, Navigable Waterways, Km per inhabitant – relative weight 30%

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Figure 72. Networks – Energy Dependency (% of net imports on inland consumption), 2011 – Source: The European House - Ambrosetti re-elaboration of Eurostat data, 2013

Figure 73. Energy Price for Industrial Consumers (Euro/kWh), 2012 – Source: The European House - Ambrosetti re-elabo-ration of Eurostat data, 2013

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Figure 74. Broadband Penetration (per 100 Inhabitants), 2011 – Source: The European House - Ambrosetti re-elaboration of Eurostat data, 2013

Figure 75. Networks – Roads, Rails, Navigable Waterways (Km per 100 Inhabitants), 2010 – Source: The European House - Ambrosetti re-elaboration of CIA Factbook data, 2012

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The overall ranking of the “Networks” Competitiveness Factor (Figure 76) was calculated as the weighted sum of the KPIs’ scores.

Figure 76. Networks Current Competitiveness Index – Source: The European House - Ambrosetti, 2013

Sweden and Denmark top the chart with scores of 8.3 and 7.5. More specifically, Sweden achieved a score of 10 in the KPI “Roads, Rails, Navigable Waterways” while Denmark reached an impressive 10 for the “En-ergy Dependency” index. Denmark shares its 2nd place with Estonia, whose score under the KPI “Price for Industrial Consumers” was 10.

France and Finland place 5th and 6th, respectively, thanks to a satisfying performance in the KPI “Energy Price for Industrial Consumers”.

The UK achieved a score of 5.3 reaching 7th place thanks to low energy prices (for industrial consumers) and high broadband penetration. For the same reasons, Germany also ties in for 7th position. In general, it should be noted that from Finland’s (score 5.8) 6th place down to Latvia’s (5.1) 11th, score differentials are quite small: with the exception of Slovenia and Latvia all the countries comprehend within this interval excel in the KPIs “Energy Price for Industrial Consumers” and “Broadband penetration”.

Both Poland and Spain rank 17th: the two countries share a rather weak physical infrastructure but achieve high scores in the KPI “Energy Price for Industrial Consumers”. More specifically, Spain presents a higher de-gree of broadband penetration while Poland a lower energy dependency.

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Greece suffered from poor physical and broadband infrastructures, which contributed greatly to the low ranking (21st place).

In 23rd place we find both Italy and Portugal: the countries perform rather poorly in every indicator. More in detail, however, the former presents a slightly higher degree of broadband penetration while the latter presents a lower energy dependency ratio.

At the bottom of the chart we find Malta (25th place), Slovakia (26th place) and Cyprus (27th place). Slova-kia’s score is undermined by the low performance under the KPIs “Roads, Rail, Navigable Waterways” and “Broadband penetration”. Undoubtedly geography constitutes a factor of disadvantage for Cyprus and Malta: the two islands have a very high energy dependency and are forced to charge comparatively higher energy prices for the industrial sector.

Comparing these findings with the data from five years ago, we observe that the first 3 positions have re-mained stable: Sweden, Estonia and Denmark are exactly where they were 5 years earlier.

Figure 77. Networks Current and Past Competitiveness Index – Source: The European House - Ambrosetti, 2013

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The impressive improvement under the KPI “Energy dependency” has allowed the Netherlands to jump 3 positions and land 4th, right after Denmark. The same finding applies to the UK which has climbed 4 posi-tions, thus reaching the 7th place. Germany has sensibly reduced its energy dependency and improved its broadband penetration (which has improved by 150%): these two improvements have induced Germany to climb 11 positions of the ranking, from 18th to 7th.

Even Luxembourg has climbed 7 positions by reducing its energy dependency ratio: the country has gone from 19th to 12th position. Austria and Poland did not significantly worsen their performances, however, by not improving their infrastructures they have both lost 4 positions ending respectively from 11th to 15th position and from 13th to 17th.

The significant increase of energy dependency and the resulting increase in energy prices (107% in five years) are behind Lithuania’s fall in the ranking: the country has lost 8 positions, going from 8th to 16th.

With the exception of Malta, which has dropped 3 positions (due to rising energy prices), the last places have remained relatively stable during the considered time period: Slovakia and Cyprus did not improve their positions by any means.

2.12 the EU-27 Competitiveness index final ranking

The EU-27 Competitiveness Index (Figure 78) was calculated as the weighted sum of the Competitive Fac-tors’ scores.

On a final analysis, the Competitiveness Index shows just how much EU economies differ from one another. Luxembourg, having obtained the highest score in the Competitiveness Factors “External Openness”, “Mac-roeconomic Stability” and “Public Sector”, is 1st in the standings with a score of 7.07. Despite the excellent score, it is necessary to operate some caution with this benchmark: Luxembourg constitutes an outlier, as its economy is very small compared to others. In other words, the country’s economic structure is completely different from almost all of the other European countries and may not be comparable.

The real best performers are the Scandinavian countries: Sweden, Denmark and Finland are respectively in 2nd, 3rd and 4th place. These countries have excelled in 8 out of 10 Competitiveness Factors15. Their impressive results show that their government model is to be considered a best practice.

The Netherlands have also done rather well: ranking 5th with a score of 6.43. The economy appears to have the most competitive labour market and claimed relevant positions in many other competitiveness factors such as “Innovation & Education”, “People & Wellbeing”, “Finance”, “Public Sector” and “Networks”. In various occasions, the country was never too far off from the 1st of each competitiveness factor.

The United Kingdom also maintains a good ranking: with a score of 6.18, it ranks 6th in the standings. The good result is mainly due to an excellent performance in the Competitive Factor “Finance”, where the United Kingdom was the leader.

15 - Innovation & Education, Macroeconomic Stability, Business Environment, Labour Market, People & Wellbeing, Finance, Public Sector and Net-works.

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Figure 78. EU-27 Current Competitiveness Index – Source: The European House - Ambrosetti, 2013

Core economies of the EU, such as Germany and France have not excelled in any of the foreseen Competi-tiveness Factors, however their balanced performances guaranteed respectable scores: reaching respec-tively 9th and 11th place in the final ranking. A similar situation was registered in Austria, which was never far off from the 15th position in the rankings of the competitiveness factors. The economy ranks 10th in the final rankings.

The results for Spain are more disappointing: with a score of 4.39, it ranks 20th. The lack of external open-ness, macroeconomic stability and a labour market which is considerably under pressure, have significantly penalised the economy.

The last three positions in the ranking are occupied by Italy, Romania and Greece, which were often at the bottom of the rankings of the single Competitiveness Factors. Despite the apparent recovery of the Greek economy, it is still too early to appreciate any improvement in the structural factors: Greece ranks still at the 27th.

Making a comparison with the ranking of five years ago (Figure 79), we immediately notice that there have been some changes in the first positions of the ranking: Luxembourg has climbed two places, topping the final chart. On the other hand Sweden and Denmark have given up one position each, ending respectively 2nd and 3rd.

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Figure 79. EU-27 Current and Past Competitiveness Index – Source: The European House - Ambrosetti, 2013

Thanks to significant improvements of its labour market and macroeconomic stability, Germany has climbed three positions, finally entering in the EU’s top ten (at 9th place). Slovenia has also managed to jump from 17th position to 13th, thanks to a substantial improvement of its business environment and to a more consistent investment in Innovation and Education.

The greatest improvement in the ranking has been made by Hungary, which has gone from 23rd position all the way up to 17th. Indeed the country has improved many of its Competitiveness Factors and the most important are undoubtedly: “Macroeconomic Stability” (from a score of 3.5 to 6.9), “Networks” (from a score of 3.6 to 4.7), “Public Sector” (from a score of 4.0 to 4.9), “Finance” (from a score of 2.8 to 3.6) and “Business Environment” (from a score of 5.3 to 6.1).

On the other hand, the most noticeable “fall” in the ranking is, unsurprisingly, Cyprus: despite an average per-formance in most of the observed factors, the strong deterioration of the country’s macroeconomic stability (from 6.6 down to 4.0) and external openness (from 4.9 down to 3.9) has pushed the island further down in chart. As a matter of fact, Cyprus has lost 5 positions, going from 11th down to 16th.

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Understandably, Spain and Portugal were seriously affected by the events of the current crisis: scores related to “Macroeconomic Stability” and “Labour Market” have seen a substantial deterioration during the consid-ered time period. As a result, Spain has gone from 16th place down to 20th, while Portugal has gone from 21st to 23rd position.

The last four positions in the ranking have remained stable throughout time: Bulgaria, Italy, Romania and Greece have hardly improved their performances under any competitiveness factor.

Figure 80. GDP per Capita and Current Competitiveness Level Correlation – Source: The European House - Ambrosetti, 2013

The Competitiveness Index final ranking seems to accurately represent the current economic situation of the European countries. In fact, as shown in Figure 80, making a comparison with GDP per capita a high correlation can be seen16.

16 - Luxembourg and Greece were excluded from the comparison because they can be considered outliers: Luxembourg is difficult to compare to the other countries because it is so small and Greece had an extremely negative performance, which was heavily influenced by the impend-ing risk of default.

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MONITORING THE IMPLEMENTATION

OF THE SINGLE MARKET ACT

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3 MONITORING THE IMPLEMENTATION OF THE SINGLE MARKET ACT

3.1 Twenty years of Single Market: main achievements

The Single Market was launched more than 20 years ago, in 1992. Initially it was open to 345 million people in 12 European countries, but today it involves over 500 million people in 27 EU Member States.

Since 1992, the Single Market has contributed to make Europe more competitive, with three main positive impacts.

1. Macro-economic achievements

The GDP of the EU-27 is 2.13% (Euro 233 billion) higher than it would have been without the Single Market. The sum corresponds to around Euro 500 extra in income per EU citizen. Furthermore, the Single Market has contributed to create 2.77 million new jobs.

Trade between EU countries has increased by 250% since the creation of the Single Market, moving from Euro 800 billion to Euro 2,800 billion.

In the same way, EU exports to non-EU countries have increased by 200%, from Euro 500 billion to Euro 1,500 billion (from 8% of EU GDP to 12%).

Furthermore, the Single Market has made the EU more attractive to foreign investors: FDI flows between EU countries have increased by 306%, rising from Euro 64 billion to Euro 260 billion (before the economic downturn, it had reached Euro 730 billion).

2. More choices for citizen

The Single Market has increased choice and protection for citizens, while bringing down prices in many sec-tors. Below there are some clarifying examples.

- Today making or receiving an international telephone call is 73% cheaper than in 2005 (and it may even be free of charge via fixed or internet networks).

- Since e-commerce makes it possible to order goods online from companies based in another EU country, consumers have 16 times more choices through e-commerce than if it had not been imple-mented.

- Greater choice of energy suppliers determines more competition among companies, which contrib-utes to reductions of electricity tariffs (at least 14 European energy companies are now active in more than one EU Member State). In fact, EU consumers could save up to Euro 13 billion if they switched to the cheapest electricity tariff available.

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- The recognition of most diplomas and professional qualifications gained in another Member State facilitates the movement of EU citizens (to live, study, work, do research and retire in any Member State). It reflects in the fact that, by the end of 2010, around 13 million people were living in an EU country other than their own for a year or more.

- This increased mobility of citizens contributes to the creation of dynamic labour markets: around 6 million EU citizens work in a Member State other than their own.

- Furthermore, air transport contributes to enhance mobility: the number of intra-EU routes has more than doubled, resulting into greater choice, lower prices and ease of travel for passengers.

3. More customers for companies

Every company in the EU could provide goods and services, set up or transfer their operations to all the other Member States.

This has been favoured by initiatives aimed at:

- reducing the administrative burden (since 2007 Single Market laws have cut the burden for EU com-panies by 25%);

- reducing days and required costs to start up a business (in 2002 it would have taken on average 24 days and cost Euro 813; nowadays, the same could be done in 7 days for Euro 399 on average);

- favouring intra-EU trade of consumer goods. In particular, entertainment goods have seen a 140% increase, electronic products 130% and food and drink 70% (in the 12 newer Member States, the increases are between 400% and 500%).

Other interventions, such as regulations on mutual recognition, standards and services sector, ecodesign directive, intellectual property protection and public procurement rules, further favour the access of EU com-panies to all the 27 different national markets1.

1 - European Commission, Internal Market and Service DG, 2012

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3.2 Completing the Single Market: a work in progress

Over the years the implementation of the Single Market has constantly made progresses.

Considering the average EU transposition deficit (which shows the percentage of Internal Market directives not yet notified to the Commission, in relation to the total number of directives that should have been notified by the deadline), the degree of implementation of the Single Market has improved and European Member States have performed better than ever during 2012 in transposing EU rules into national law on time, ac-cording to the target set by the Commission.

Figure 1. Average EU transposition deficit, 2013 – Source: The European House - Ambrosetti re-elaboration on EU Com-mission data, 2013

The average transposition deficit has fallen to 0.6%, in line with the 1% target and is very close to the new 0.5% target proposed in the Single Market Act.

In total, 23 Member States have achieved the 1% target (only Portugal, Austria, Poland and Belgium have not achieved the 1% target) and 13 of these have reached also the 0.5% target. This shows clearly that the 0.5% target proposed by the European Commission in the Single Market Act in 2010 is feasible and could be reached with small further efforts by the majority of Member States2.

However, completing the Single Market is a work in progress, as Mr. Mario Monti, former Prime Minister of Italy, said: “by its very nature, the Single Market is an evolving concept. There are always missing links and parts to be completed, as there are new areas which need legal regulation or policy support”3.

In fact, despite its achievements, the Single Market is not complete yet and there are some shortcomings which have to be managed.

2 - European Commission, Internal Market and Services DG, Internal Market Scoreboard, February 2013

3 - Welcoming address of Sen. Prof. Mario Monti, Single Market Week Launch, European Parliament, 15 October 2012

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In particular, further improvements must be done both in new areas, such as the implementation of the digital economy, and in more traditional key areas, such as energy and services.

Moreover, the level of integration of European financial markets should be particularly taken in consideration: companies which have the same structure and creditworthiness, access credit at different rates, depending on the Member State in which they are located. Since it constitutes a real factor of fragmentation of the Single Market along Member States, this topic has been analysed more in depth in chapter 4.

The need to bridge the gaps which occurred gradually over time in the European integration process and to develop the full potential of the Single Market, has induced the Commission to present in April 2011 the Single Market Act (SMA).

The SMA sets out twelve levers to further develop the Single Market, reflecting the comprehensive approach that Mr. Mario Monti advocated in its report4 on the future of the Single Market.

Moreover, given the urgency of the crisis and the new challenges which emerged, the Commission an-nounced in October 2012 the Single Market Act II (SMA II)5 with a second set of priority actions. These ac-tions are designed to generate together with the SMA, concrete impacts on the ground and encourage citizens and businesses to use the Single Market to their advantage.

3.3 The Single Market Act (SMA)

In order to tackle the issue of missing integration, on 27 October 2010 the EU Commission published the Communication “Towards a Single Market Act”, outlining 50 potential priority measures to re-launch the Single Market and started a Europe-wide debate on the future priorities of Single Market policy.

For four months, debates were held throughout Europe – in Member States, EU institutions, consultative bod-ies, national parliaments, regions, local authorities, and with civil society, trade unions, business federations, NGOs and all other stakeholders. The purpose of the public debate was to generate a dialogue between citizens and stakeholders across Europe on Single Market issues that matter to them. As a result, more than 800 contributions were received from a wide range of respondents, reflecting the keen interest of European citizens, businesses, workers and civil society at large in the Single Market.

Following the wide-ranging public debate, the Commission adopted in April 2011 its Single Market Act (SMA), with twelve key priority measures or levers, as a fundamental catalyst for growth in the region.

4 - Monti M., “A new strategy for the Single Market at the service of Europe’s economy and society”, European Commission, 2010

5 - Brussels, 3.10.2012, COM(2012) 573, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. Single Market Act II: Together for new growth

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3Figure 2. Single Market Act: 12 levers for growth – Source: The European House - Ambrosetti re-elaboration on EU Com-mission data, 2012

These twelve levers range from worker mobility to small and medium-sized businesses (SME) finance and consumer protection, via digital content, taxation and trans-European networks. Their aim is to make life easier for everyone in the Single Market: businesses, citizens, consumers and workers.

3.4 The Observatory on Europe’s assessment of the implementation of the Single Market Act

Following the identification of the twelve levers, the Commission suggested that the EU adopted specific key actions with the aim of achieving the goals set for each lever by the end of 2012. In order to do so, the Commission presented the necessary legislative proposals.

On the basis of the scheduled timetable, in 2012 the working team of the Observatory on Europe monitored the state of play of the different proposals and evaluated whether the different key actions have been ac-complished and how close they are to be enacted.

This year a further assessment has been done in order to monitor on an ongoing basis the improvements in the SMA’s platform.

Once again, the Observatory on Europe proposed an evaluation method based on symbolic traffic lights:

- green light means that the key action considered has been accomplished and no particular delay is foreseen;

- yellow light means that the key action considered has been accomplished but implementation is set to be slow;

- red light means that the key action considered has not been accomplished or the concerning pro-posal is unlikely to pass soon.

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3Figure 3. Evaluation of the state of play – Source: The European House - Ambrosetti, 2013

Since our previous analysis in June 2012 recorded 7 green lights out of 12 levers, this year the Observatory on Europe evaluated the state of play of remaining 5 levers whose key actions recorded a yellow or a red light. These are:

- citizens’ mobility (lever 2);- intellectual property rights (lever 3);- networks (lever 6);- Digital Single Market (lever 7);- Public Procurement (lever 12).

CITIZENS’ MOBILITY

Mobility of skilled labour constitutes a fundamental instrument for making the European economy more competitive. Also, it will represent an increasingly important strategic need in the forthcoming decades due to ongoing demographic and social change.

However mobility of professionals remained low in the European Union with a limited 10% of EU citizens having worked abroad. On average, EU nationals represent only 3% of the total working force in Member States: a low figure compared to those of Extra-EU professionals6.

In order to make the free movement of citizens a reality, giving more opportunities for job seekers and matching better skills and qualifications in the Internal Market, on December 19th 2011 the Commission adopted a legislative proposal for modernising Directive 2005/36/EC on the recognition of professional qualifications7.

6 - European Commission, 2012

7 - Brussels, 19.12.2011, COM(2011) 883, Proposal for a Directive of the European Parliament and of the Council amending Directive 2005/36/EC on the recognition of professional qualifications and Regulation on administrative cooperation through the Internal Market Information System

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The proposal includes:

- the introduction of a European professional card that will offer to interested professionals the possibility of benefiting from easier and quicker recognition of their qualifications;

- better access to information on the recognition of professional qualifications for citizens through the availability of Points of Single Contact (PSCs) – created under the Services Directive – which will allow citizens to obtain information in one place about the documents required to have their qualifications recognised and where they can also complete all online recognition procedures;

- updating minimum training requirements for doctors, dentists, pharmacists, nurses, midwives, veterinary surgeons and architects, in order to reflect the evolution of these professions and of education in these fields (the minimum training requirements for these professions were harmonised 20 or 30 years ago);

- the introduction of an alert mechanism for health professionals benefiting from automatic recognition (competent authorities of a Member State will be obliged to alert competent authorities of all other Member States about a health professional who has been prohibited from exercising his professional activity by a public authority or a court);

- the introduction of common training frameworks and common training tests, replacing common plat-forms, should offer the possibility of extending the mechanism of automatic recognition to new profes-sions;

- the introduction of mutual evaluation exercise on regulated professions in order to ensure greater transparency and justification of the professions through a specific qualification requirement.

The SMA’s proposal has consistently advanced since its publication in December 2011:

- it has been voted in Committee last January 23rd 2013,- the indicative plenary sitting date is scheduled on June 11th 2013.

Considering these achievements the Observatory on Europe is pleased to assign a green light to the EU’s action concerning the citizens’ mobility lever.

INTELLECTUAL PROPERTY RIGHTS

European patents8 are in high demand across the globe, and Europe, in many senses, remains attractive for innovative industries. Yet, this primacy position must be preserved and enhanced in order for the EU to take advantage of its intellectual forces and transform them into vibrant growth.

However, until recent times the system of IPR protection in Europe did not match up with the existing eco-nomic scenario of increased international competition9.

8 - A patent is a form of intellectual property. It consists of a set of exclusive rights granted by a sovereign state to an inventor or their assignee for a limited period of time in exchange for the public disclosure of an invention. The procedure for granting patents, the requirements placed on the patentee, and the extent of the exclusive rights vary widely between countries according to national laws and international agreements. In general, the exclusive rights of a patent owner to exploit the invention commercially last for a maximum of 20 years, subject to the payment of regular renewal fees.

9 - Inventions could be protected in Europe either by national patents or European patents granted centrally by the European Patent Office (EPO). If the applicant chose to apply for a European patent, the application would have been dealt with by the EPO, which provided a single procedure for granting patents in Europe. However, for a European patent to be effective in a Member State, it needed to be validated in that Member State.

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In order to address inefficiencies and legal insecurity originated from a multiplication of patents and national patent litigation systems, on April 13th 2011, the SMA platform committed to the resolution of unitary patent stalemate through two main initiatives:

- the Proposal for a Council regulation implementing enhanced cooperation in the area of the creation of unitary patent10,

- the Proposal on a Council Regulation implementing enhanced cooperation in the area of the cre-ation of unitary patent protection with regard to the applicable translation arrangements11.

The two initiatives propose that:

- holders of European patents can apply for unitary patent protection for the territory of 25 Member States at the EPO. The patent will ensure the same level of protection for their inventions in all 25 countries;

- patent applications can be submitted in any language. However, building on its existing working pro-cedures, the EPO will continue to examine and grant applications in English, French or German (the official languages of the EPO);

- for a transitional period of maximum 12 years, European patents with unitary effect that were granted in French or German will need to be translated to English. The ones granted in English will need to be translated to another official language of the EU.

Last year, the Observatory on Europe noticed that the SMA’s proposed legislation had not managed to overcome a disagreement among EU Member States: the main obstacle to the creation of a unitary patent protection was the lack of unanimity on the choice of the language regime. In particular, Spain and Italy – which did not support the Commission’s proposal to launch enhanced cooperation12 – lodged a complaint with the European Court of Justice against attempts by other Member States to introduce an EU patent without them, claiming that the move went against the spirit of the EU single market.

However, after many difficulties and delays:

- the European Parliament adopted the proposals on December 17th 2012,- the final acts have been published in the Official Journal on December 31st 2012.

In light of these achievements, the Observatory on Europe assigns a green light to the EU’s action concerning intellectual property rights13.

10 - Brussels, 13.04.2011, COM(2011) 215, Proposal for a Regulation of the European Parliament and of the Council implementing enhanced co-operation in the area of the creation of unitary patent protection

11 - Brussels, 13.04.2011, COM(2011) 216, Proposal for a Regulation of the European Parliament and of the Council implementing Enhanced cooperation in the area of the creation of unitary patent protection: implementation; translation arrangements

12 - A procedure where a minimum of nine EU member states are allowed to establish advanced integration or cooperation in an area within EU structures but without the other members being involved.

13 - The regulations are implemented in only 25 Member States out of 27 (Italy and Spain do not participate).

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NETWORKS

The economic and financial crisis has revived the debate over the strategic aspects of infrastructure invest-ments.

However, the infrastructure network is affected by missing connections especially in the new Member States. Ultimately this results in dividing lines between the centre and periphery of the European Union.

In order to manage the need for considerable investment in infrastructures, on October 19th 2011 the Com-mission presented an investment plan (Connecting Europe Facility – CEF package)14 that will fund Euro 50 billion worth of investment to improve Europe’s transport, energy and digital networks, with the aim to finance projects which could fill the missing links in the abovementioned networks15.

Coherently with the Connecting Europe Facility, the Commission presented a proposal for a regulation on guidelines for trans-European energy infrastructures with the aim to establish rules for the timely develop-ment, integration and interoperability of trans-European energy networks16.

In particular, the proposal attributes priority to twelve strategic trans-European corridors and areas. Further-more, it establishes rules to identify projects of common interest (PCIs), which are pivotal to implement these priorities and have two main advantages:

- they benefit from a special permit-granting procedure that is easier, faster and more transparent than normal procedures (the whole permit-granting procedure, which usually would take about ten years, should not exceed three years);

- they should be eligible for EU funding (in the form of grants, project bonds or guarantees) allocated by the Connecting Europe Facility (CEF).

The Observatory on Europe is pleased to notice that further progress has been made with regard to the SMA’s key action related to European networks:

- the European Parliament adopted the proposal on March 12th 2013,- currently the procedure is completed and awaits publication in Official Journal.

The progress made leads the Observatory on Europe to assign a green light to the EU’s action concerning this lever.

14 - Brussels, 19.10.2011, COM(2011) 665, “Proposal for a Regulation of the European Parliament and of the Council establishing the Connecting Europe Facility”

15 - In practical terms, the CEF allocates:- Euro 31.7 billion to upgrade Europe’s transport infrastructure, build missing links and remove bottlenecks (this includes Euro 10 billion set aside for the Cohesion Fund for transport projects in the cohesion countries and the remaining Euro 21.7 billion for all Member States for investing in transport infrastructure)- Euro 9.2 billion to develop fast and very fast broadband networks and pan-European digital services- Euro 9.1 billion to support trans-European energy infrastructure, helping develop an internal market for energy.

16 - Brussels, 19.10.2011, COM(2011) 658, Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on guidelines for trans-European energy infrastructure and repealing Decision No 1364/2006/EC

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DIGITAL SINGLE MARKET

In order to define the key enabling role that the use of ITC will play in achieving the ambitions of the Europe 2020 Strategy, in 2010 the Commission launched the Digital Agenda for Europe with the aim to chart a course of action to spur innovation, economic growth and improvements in daily life for both European citi-zens and businesses, by maximizing the potential of ICT (most notably internet).

According to the above mentioned objectives, the European Commission has proposed on June 6th 2012 new rules to enable cross-border and secure electronic transactions in Europe17. The proposed Regulation will:

- ensure that people and businesses can use their own national electronic identification schemes (e-IDs) to access public services in other EU countries where e-IDs are available;

- create an internal market for e-Signatures and related online trust services across borders, by ensuring these services will work across borders and have the same legal status as traditional paper based processes.

The Observatory on Europe is pleased to notice that further progress has been made during the last months:

- the vote in Committee is scheduled on September 18th 2013,- the indicative plenary sitting date is scheduled on December 10th 2013.

The progress made leads the Observatory on Europe to assign a green light to the key action concerning digital Single Market.

PUBLIC PROCUREMENT (PP)

Public procurement rules define how public authorities spend public money when buying goods, works or services on the open market. Solid public procurement rules prevent governments from favoring a specific economic operator and guarantee sound competition between market players.

Public procurement legislation in the EU, since the seventies, has been aimed at:

- creating a common market by ensuring free movement of goods, persons, services and capital;- promoting effective competition in the Internal Market by following guiding principles (such as the

equal treatment of all economic operators, transparency and non-discrimination based on nationality).

However, to date these goals have only been partially achieved. In fact, the bulk of total public expenditure on goods, services, and works is not organised in accordance with EU procurement legislation, and public procurement procedures still impose a major administrative burden on firms.

Since PP plays a key role in the Europe 2020 strategy (as one of the market-based instruments that should be used to achieve its objectives of smart, sustainable and inclusive growth), the Commission adopted on December 20th 2011 a Proposal for a directive on Public Procurement18 as part of an overall programme

17 - Brussels, 06.06.2012, COM(2012) 328, Proposal for a Regulation of the European Parliament and of the Council on electronic identification and trust services for electronic transactions in the internal market

18 - Brussels, 20.12.2011, COM(2011) 896, Proposal for a Directive of the European Parliament and of the Council on public procurement

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aiming at an in-depth modernisation of public procurement in the European Union through the revision of Directives 2004/17/EC and 2004/18/EC.

The proposed reform aims at modernising the existing PP tools and instruments as well as simplifying rules and procedures making them more flexible. In particular it proposes:

- the possibility of increased recourse to negotiation with suppliers, thus enabling the contracting au-thorities to purchase goods and services that are better tailored to their needs at the best price;

- the extension and, in the medium term, generalisation of electronic communication in public procure-ment, since it offers an essential means of simplifying public tendering;

- a drastic cut in the administrative burden, including the number of documents required from eco-nomic operators;

- improvements to the existing guarantees aimed at combating conflicts of interest, favouritism and corruption;

- the appointment by the Member States of a single national authority responsible for monitoring, per-forming and checking public contracts to ensure that the rules are properly applied in practice.

Additionally, on 20th December 2011 the Commission also proposed a Directive on concessions19 with a special focus on service concessions and the aim to establish a clear legal framework to ensure the neces-sary legal certainty for public authorities when performing their duties.

The SMA’s proposal on public procurement has consistently advanced since its publication in December 2011:

- it has been voted in Committee on December 18th 2012,- the indicative plenary sitting date is scheduled on September 10th 2013.

Considering these achievements, the Observatory on Europe is pleased to assign a green light to the EU’s action.

The final assessment of the implementation of the SMA reports that to date the Commission has submitted legislative proposals for all the key actions. In fact, all the levers, whose implementation resulted in June 2012 to be in delay, have been accomplished and now record a green light.

Currently, their adoption by the EU legislator is ongoing, however the process is not fast enough. Indeed only 3 out of 12 key action proposals have currently been agreed by the European Parliament and Council: Regulations on European standardisation and on enhanced cooperation in the area of creation of unitary patent protection have already been approved and published in the Official Journal, while the Regulation on guidelines for trans-European energy infrastructure has been approved and is currently awaiting its final publication.

Given this situation, the Observatory on Europe recommends to further strengthen further the implementa-tion and the enforcement processes of the key actions set in the SMA’s levers.

19 - Brussels, 20.12.2011, COM(2011) 897, Proposal for a Directive of the European Parliament and of the Council on the award of concession contracts

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3.5 The Single Market Act II (SMA II)

As already announced, in October 2012 the European Commission adopted the Single Market Act II (SMA II), which sets out twelve new immediate priorities and related key actions in order to make a contribution to growth, employment and confidence in the Single Market. It builds upon the SMA, also reflecting the 20 main concerns highlighted by citizens and businesses20 (insight reported in the dedicated box).

BOX – CITIZENS’ AND BUSINESSES’ 20 MAIN CONCERNS

To promote a culture of dialogue and learning from experiences on the ground, the Commission has published a list of people’s main concerns about the Single Market.

It identifies the main areas where progress is required to close the gap between what people expect from the Single Market, and what they experience in practice.

As a general point, the list confirms that the divide between expectations and reality stems from three inter-related gaps:

- an information gap (people often do not sufficiently know or understand their rights and do not know where to look for information or help);

- an implementation gap (in many areas, a gap can be noted between the EU legal framework and the way it is implemented and applied in practice);

- a legislative gap (in some areas, the EU legal framework itself does not match citizens’ and busi-nesses’ expectations).

The problems identified affect:

- EU nationals (and sometimes their families) using their EU rights in cross-border situations;- consumers shopping across EU borders or within their own country;- EU companies trying to do business in other EU countries.

The 20 main concerns together offer a robust snapshot of the Single Market as seen and experienced “on the ground” and they record:

1. cumbersome social security procedures discourage citizens’ mobility; 2. citizens receiving healthcare abroad are often frustrated when receiving the bill; 3. obtaining a residence card in another Member State for non-EU family members is too complex; 4. professionals have difficulties getting their qualifications recognised in another Member State; 5. workers can be victims of discriminatory employment practices in another Member State; 6. tax barriers for cross-border workers and employers; 7. opening a bank account abroad remains too difficult;8. students facing discrimination regarding recognition of diplomas, fees and financial support; 9. retiring abroad and inheriting across borders leads to complex taxation issues; 10. taking a car to another Member State is costly and burdensome; 11. passengers find it difficult to defend their rights.

20 - European Commission, The Single Market through the lens of the people: a snapshot of citizens’ and businesses’ 20 main concerns, 2011

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The SMA II defines twelve new levers, which are focused on four main drivers for growth.

A. Developing fully integrated networks in the Single Market Efficient and fully integrated transport and energy networks are the backbone of the Single Market. In

order to exploit all their potential, the opportunities offered by Cohesion and Structural Funds must be accompanied by a firm commitment towards competition, choice and good quality services across the EU.

B. Fostering mobility of citizens and businesses across borders Free movement across borders is at the very basis of a Single Market and one of the foundations of

the European Union. However practical and legal barriers to the mobility of citizens, business activities and investment funding still persist and must be removed.

C. Supporting the digital economy across Europe The digital economy revolution remains an opportunity that cannot be missed. Since it could deliver

sustainable economic and social benefits through modern online services and fast internet connec-tions, all citizens and businesses must have the opportunity to be part of the digital economy.

D. Strengthening social entrepreneurship, cohesion and consumer confidence Consumers need to be confident and all EU citizens must have the chance to tap into the opportuni-

ties the single market offers.

Figure 4. Single Market Act II: 12 levers and 4 drivers for new growth – Source: The European House - Ambrosetti, 2013

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BOX – MANy ACTION RECOMMENDED By THE OBSERvATORy ON EUROPE LAST yEAR ARE NOw INCLUDED IN THE SINGLE MARKET ACT II

The Observatory on Europe is pleased to note that many actions recommended in the final report pre-sented on June 18th 2012 in Brussels have been included in the SMA II.

In particular, reference is made to the measures proposed for access to finance, citizens’ mobility, con-sumers’ confidence, services, networks, Digital Single Market and social business.

In fact, the Observatory on Europ proposed in 2012 to:

- liberalise the provision of rail passengers services and enhance infrastructural inter-operability among Member States with the aim to improve the quality and cost efficiency of rail passenger services (lever 6);

- accelerate the implementation of the Single European Sky in order to improve the competitiveness of the European aviation (lever 6);

- take actions to ensure energy security, support renewable energies and shift from national energy markets to a pan-European energy market system in order to fully exploit the potential of energy networks in the Single Market (lever number 6);

- promote a broader use of the EURES Job Mobility Portal in order to enhance citizens’ mobility (lever number 2);

- fully transpose the Service Directive and ensure its effective implementation (lever number 5);- address current credit problems (especially for SMEs) and enact policies to allow credit institutions to

grant credit conditions at higher risk levers in order to support investments for private companies and long-term projects (lever number 1);

- take actions to facilitate cross border e-commerce, build customer trust and make electronic pay-ments and e-Invoicing easier to use and more trustworthy (lever 4 and 7);

- achieve the targets of broadband coverage and promote investment in high speed broadband con-nection, especially in those Member States which lagging behind the EU average (lever number 7);

- promote awareness about social enterprises activities (lever number 8).

3.6 The Observatory on Europe’s assessment of the implementation of the Single Market Act II

The Commission commits to deliver all key legislative proposals by spring 2013 and all key non-legislative actions by the end of that year at the latest.

In order to monitor the state of play of the different actions proposed, the Observatory on Europe adopted the same methodology proposed for the assessment of the implementation of the SMA (symbolic traffic lights):

- green light means that the key action considered has been accomplished in line with the scheduled timetable and no particular delay is foreseen;

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- yellow light means that the key action considered has not been accomplished but its implementation still respects the scheduled timetable;

- red light means that the key action considered has not been accomplished and its implementation is in delay respect the scheduled timetable.

LEVER 1 – RAIL TRANSPORT

It is recognised that in order to improve service quality and cost efficiency for rail passengers across the EU, it is necessary to open domestic rail passenger services to competition from operators of other Member States.

However in the area of rail transport, currently operators from one Member State are still not allowed to transport passengers on domestic lines within another Member State.

In this context, the Commission will propose a 4th railway package, aimed at granting to all EU railway un-dertakings the right to:

- provide open access domestic passengers services in the EU;- bid for public service contracts.

The Observatory on Europe noticed that the Commission is in slight delay in presenting the SMA II’s legislative proposal, which has to be presented in the 4th quarter of 2012.

Consequently, the Observatory on Europe is forced to assign a red light to the key action con-cerning SMA II’s lever on rail transport.

LEVER 2 – MARITIME TRANSPORT

Approximately 40% of Single Market goods are currently transported via short sea shipping between EU ports. However ships delivering cargo which travel between EU ports are deemed to have left the EU Cus-toms Territory and still encounter a significant number of complex procedures which put intra-EU shipping at a disadvantage in comparison to other transport modes.

In order to establish a true Single Market for maritime transport and no longer subject EU goods (transported between EU seaports) to administrative and customs formalities applied to goods arriving from overseas ports, the Commission will present a “Blue Belt” package.

The package will include legislative and non-legislative initiatives, aimed at:

- reducing the administrative burden for intra-EU maritime transport to a level comparable to that of the other transport models (air, rail, road);

- enhancing the efficiency and overall quality of port services.

Since the deadline for proposing the legislative and non-legislative measures is set in the 2nd

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quarter of 2013, the Observatory on Europe’s Advisory Board assigns a yellow light to the key action regard-ing maritime transport: the Commission is in line with the scheduled timetable, but it is necessary to propose the expected measures as soon as possible.

LEVER 3 – AIR TRANSPORT

The fragmentation of the European airspace has significant negative repercussions on air travellers users. It results in unnecessary flight detours rather than direct routes and suffering from air traffic delays.

To avoid so, the Commission wants to accelerate the implementation of the Single European Sky through a new package of actions.

The new measures aim at improving safety, capacity, efficiency and the environmental impact of aviation. In particular they will:

- clarify the institutional setup;- reinforce market principles for the provision of air navigation services;- accelerate SESAR deployment;- redefine the performance scheme;- provide the Commission with clear enforcement tools (i.e. functional airspace blocks).

Like the case of the “Blue Belt” package, since the deadline is set in the 2nd quarter of 2013, the Observatory on Europe assigns a yellow light to the key action with reference to air transport.

LEVER 4 – ENERGY

As already highlighted in the SMA, an efficient, interconnected and transparent European internal energy market is crucial:

- it contributes to lower energy prices and facilitates investments (it has been estimated that consum-ers throughout the EU could save up to Euro 13 billion per year if they all switched to the cheapest electricity fee available);

- it could deliver more secure energy to the EU than 27 smaller scale energy markets could;- it could facilitate the transition towards low-carbon energy systems at the lowest possible cost.

Despite the adoption of the third energy package - which is the cornerstone of the integration of the gas and electricity market21 - no fully integrated European internal energy market has yet been achieved.

In order to exploit the full potential of a truly integrated European market and achieve the agreed objective of a completed internal energy market by 2014, the Commission proposed some interventions aimed at improving the implementation and enforcement of the 3rd energy package and make cross-border markets

21 - The 3rd energy market package (Directives 2009/72/EC and 2009/73/EC) entails the following measures:- the unbundling of networks (the separation of network activities for electricity and gas from generation, production and supply);- consumer protection issues (particularly with regard to Member States’ obligation to protect vulnerable consumers, provide transparent billing and contractual information to consumers, establish a Single point of contact and an Alternative Dispute Resolution mechanism for the out- of-Court solution of disputes);- the independence and powers of the national regulatory authorities.

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that benefit consumers, a reality.

The proposal presented by the Commission in November 201222 includes an action plan for:

- implementing internal market law and enforcing competition rules, since some Member States have not yet fully transposed the third energy market package (even if the transposition deadline was set in March 2011);

- empowering consumers (it refers to the possibility to switch from one supplier to the other in three weeks without any financial costs; the promotion of roll-out of smart metering systems to allow con-sumers to manage their consumption in real time and better control their energy bills; the EU Retail Energy Markets Transparency Report to provide recommendations for clear presentation of prices, tariffs and offers);

- ensuring flexible market design (it means that cross-border solutions should be considered before Member States intervene in the market on a national basis);

- setting guidelines on support schemes for renewables that will enhance the effectiveness of the inter-nal market.

The Observatory on Europe noticed that the Commission’s proposal respected the deadline:

- it has been presented in the 4th quarter of 2012; - the vote in Committee is scheduled on May 30th 2013;- the indicative plenary sitting date is scheduled on July 1st, 2013.

Since the proposal is in line with the announced timetable, the Observatory on Europe is pleased to assign a green light to the SMA II’s key action on energy.

LEVER 5 – MOBILITY OF CITIZENS

The EU has already taken important measures to facilitate the mobility of citizens:

- it allows for the export of citizen statutory social security rights to the Member State where they seek work;

- it provides for the recognition of citizen professional qualifications acquired in another Member State;- the EURES network and its portal links national public employment services and offers information and

advice on job vacancies and working conditions in other Member States.

Despite these measures, other actions can be implemented in order to better match job offers and jobseek-ers across Member States and to create a true and integrated European labour market.

To this end, the Commission wants to develop the EURES portal into a true European job place-ment and recruitment tool, through:

- the introduction of online instruments to increase transparency and interoperability of skills and qualifications;

- the possible inclusion of apprenticeships and traineeships.

22 - Brussels, 15.11.2012, COM(2012) 663 final, “Making the internal energy market work”

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However, at the moment the Commission is in delay in the presentation of the legislative proposal, whose deadline has been set in the 4th quarter of 2012. For this reason, the Observatory on Europe’s Advisory Board is forced to assign a red light to the EU’s action concerning this lever.

LEVER 6 – ACCESS TO FINANCE

Since sustainable growth deeply depends on the availability of finance over an extended time horizon, the promotion of long-term investments in the real economy is pivotal.

However, as a result of the financial crises, access to finance for many companies in the EU has become more difficult, especially for start-ups and SMEs and in countries whose economies have been hit most se-verely by the crisis.

In this context, in order to facilitate the access to long-term investment funds, the Commission aims to de-velop a new set of EU rules by the 2nd quarter of 2013. The new rules will:

- propose possible forms of investment funds;- promote venture capital as a vital complement to bank financing for small companies

with high growth potential.

Since the Commission has not proposed anything yet, the Observatory on Europe’s Advisory Board assigns a yellow light to the EU’s action with reference to the SMA II’s sixth lever: the ex-pected measures must be presented as soon as possible.

LEVER 7 – BUSINESS ENVIRONMENT

In order to develop a business environment which strongly supports entrepreneurship, Europe needs modern insolvency laws which:

- help basically sound companies to survive;- encourage entrepreneurs to take reasonable risks;- permit creditors to lend on more favourable terms.

Furthermore, a modern insolvency law could allow entrepreneurs to get a second chance and ensure speedy procedures of high quality in the interest of both debtors and creditors.

To this end, the Commission intends to present a legislative proposal modernising the European Insolvency Regulation in order to:

- establish conditions for the EU wide recognition of national insolvency and debt-discharge schemes;- ensure simple and efficient insolvency proceedings, whenever there are assets or debts in several

Member States;- set new rules for the insolvency of groups of companies in order to maximise their chances of survival.

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In addition to that, the Commission intends to present a Communication for the development of measures and incentives for Member States to take away the stigma of failure associated with insolvency and to reduce overly long debt discharge periods.

However, legislative proposal and Communication had to be presented by the 4th quarter of 2012. Since they are in delay respect the scheduled timetable, the Observatory on Europe is forced to assign a red light to the EU’s actions concerning business environment.

LEVER 8 – SERVICES

As already highlighted in the SMA, within the services sector, payment services and delivery services for goods ordered online require particular attention.

Since 35% of internet users do not buy online because they have doubts over payment methods and some barriers to market entry still exist, the Commission intends to revise the Payment Services Directive and make a proposal for multilateral interchange fees to make payment services in the EU more efficient. These interventions aim to address issues in online buying procedures, such as insufficient harmonisation, ineffective competition in some areas of the card, internet payments and lack of incentives for technical standardisa-tion.

Furthermore other actions perceived as pivotal are:

- ensure efficient, reliable and affordable delivery services for goods ordered online;- give particular attention to full compliance with the Services Directive23 and ensure full application of

the “non discrimination” clause (which imposes to service providers not to differentiate between their customers on the basis of their nationality or place of residence unless objectively

justified);- intensify the fight against unfair trading practices.

The deadline for the revision of the Payment Services Directive and for making a legislative proposal for multilateral interchange fees has been set in the 2nd quarter of 2013: the timetable is still respected and the Observatory on Europe assigns a yellow light to the EU’s action with reference to the SMA II’s lever.

LEVER 9 – DIGITAL SINGLE MARKET

Access to high-speed broadband is a crucial factor both for competitiveness and employment. In fact it is estimated that:

- a 10% increase in broadband penetration can result in a 1-1.5% annual GDP annually and in 1.5% labour productivity gains;

- the innovation induced by broadband introduction creates employment and has the potential to generate 2 million extra jobs by 2020.

23 - Directive 2006/123/Ec of the European Parliament and of the Council of 12 December 2006 on services in the internal market

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Despite the progress made, the EU is still suffering from underinvestment in the deployment of high-speed broadband networks across the Single Market and is far from achieving the Digital Agenda high-speed Internet targets.

In order to bridge the existing gap and improve availability of high speed communication infrastructures for citizens and businesses, the Commission’s objective is to present a legislative proposal for the adoption of common rules to reduce cost and increase efficiency. In particular, the Commission wants to address one of the key causes of European investment “latency” in broadband infrastructures, which is related to unneces-sarily high civil engineering costs (i.e. by favouring re-use of existing infrastructures of other common public services).

Furthermore the European Union needs to address other pivotal issues, such as:

- optimising the use of spectrum in the Single Market;- further adapting the EU telecommunications law and copyright law.

Since the legislative proposal had to be presented by the 1st quarter of 2013, the Commission seems to be in slight delay. The Observatory on Europe is forced to assign a red light to this SMA II’s key action: the expected measures must be presented as soon as possible.

LEVER 10 – ELECTRONIC INVOICING IN PUBLIC PROCUREMENT

Considering that the Digital Agenda for Europe includes a call to increase the use of eGovernment services by 50% of EU citizens and 80% of EU businesses by 2015, the Commission intends to adopt a legislation for making electronic invoicing the standard invoicing method for public procurement. The final objective is to generate savings for administrations and businesses and help reducing payments delays.

It is also perceived as necessary to adopt actions in order to avoid further fragmentation of the Single Market: the on-going establishment of national e-invoicing systems operating on the basis of different (often national) standards needs to be addressed.

The Observatory on Europe is forced to assign a red light to the EU’s key action, since the legisla-tive proposal had to be presented by the 1st quarter of 2013.

LEVER 11 – CONSUMERS

Market surveillance needs to be highly coordinated to permit quick intervention across a large area, espe-cially in the Single Market where products circulate freely across 27 national territories.

Even if the EU has a fast, efficient and reliable network in place to ensure compliance with safety rules, the coherence and enforcement of the existing mechanisms can be further improved.

To this end, the Commission key action aims to improve the safety of products circulating in the EU through a revised General Product Safety Directive, a new single Regulation on Market Surveillance and a flanking action plan.

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The main measures considered will:

- provide consumers with a more homogenous Single Market for safe and compliant products and better protection of health, safety and environment;

- eliminate unfair competition from dishonest operators, in particular through better coordination of product safety checks at the EU external border;

- ensuring more transparency and comparability of informations in order to permit to consumers to make intelligent choices.

Since the legislative proposal had to be presented by the 4th quarter of 2012, the Commission seems to be in delay and the Observatory on Europe is forced to assign a red light to the key action of SMA II’s eleventh lever.

LEVER 12 – SOCIAL COHESION AND SOCIAL ENTREPRENEURSHIP

A payment account plays an important role in the integration of citizens into the wider social and eco-nomic community. However discrimination (for instance on grounds of residence, nationality or low level of resources) does still occur.

In order to ensure that all citizens can have access to a bank account and that clients are able to make an informed choice when choosing their bank, the Commission aims to adopt a legislative initiative to give all EU citizens access to a basic payment account, ensure bank account fees are transparent and comparable and make switching bank accounts easier.

Furthermore, the Commission will discuss what more needs to be done to promote social entrepreneurship, especially with reference to:

- the need for enhancing trust in, and visibility of social enterprises;- the issue of co-operatives and employee shared-ownership;- the need for enhancing the access of people with disabilities to goods and services

within the Single Market.

At the moment the Commission is in delay in the presentation of the legislative initiative on social cohesion and entrepreneurship (its deadline has been set in the 4th quarter of 2012). For this reason, the Observatory on Europe is forced to assign a red light to the key action related to SMA II’s twelfth lever.

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THE AGENDA FOR THE

COMPETITIVENESS OF EUROPE’S

ECONOMY AND FINANCIAL SYSTEM

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4 THE AGENDA FOR THE COMPETITIVENESS OF EUROPE’S ECONOMY AND FINANCIAL SYSTEM

(by Antonio Borges1)

4.1 The economic rationale behind the introduction of the Euro

The establishment of the Economic and Monetary Union (EMU) in 1999 marked an important step towards financial integration in Europe. In this sense, the Euro has become a very important milestone for European competitiveness.

Over the last 10 years we have seen a real re-organisation of European industry. Companies have become less national and more European: reallocating their production and re-engineering their supply chains all over Europe, taking advantage of the different set of conditions in order to identify the most efficient way to organise production.

The exploitation of different production costs across Europe led to competitiveness gains (in some countries more than in others). Germany makes a good case study in this sense: in the last decade the country took advantage of EU integration by reallocating its industry in Europe for better conditions, reorganising its entire supply chain and boosting trade.

This process would have been impossible with floating exchange rates and without a monetary union. The Monetary Union’s aim was to gain effectiveness and make Europe more competitive in comparison to the rest of the world.

4.2 Failures and success stories: what went right and what wrong

The elimination of exchange rate risk in the wake of monetary integration led to rapid reductions in risk pre-miums and to interest rate convergence, particularly for money market and government bond rates.

However some countries did not perform well as others: by looking at the European Union as a whole, we have to distinguish success stories from failures.

On one side, in countries where income and interest rate levels had already converged, financial integration did not further compress interest rates, and domestic demand remained suppressed.

On the other side, the decline in interest rates boosted investment and reduced savings in countries where interest rates had been high previously. The impact was particularly pronounced in relatively poor countries since the expected rapid income growth made borrowing more attractive.

1 - Professor of Economics at Catolica Lisbon School of Business and Economics, Former Director of the European Department of the International Monetary Fund, Member of the Advisory Board “Observatory on Europe”

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Success stories

There have been remarkable progress in those countries which pushed for further integration and opened their economies, by exporting and importing more.

Considering GDP growth from 2001 to 2011, Austria, Poland (even if officially not in the Union before 2004), Sweden and Finland could be considered the best performers: the Euro provided a natural anchor for these States in order to manage their exchange rates, avoid massive fluctuations of their national currencies and ultimately allow economic integration with the rest of Europe in an efficient way.

Figure 1. GDP growth rate, 2001-2011 – Source: The European House - Ambrosetti re-elaboration on EU Commission data, 2013

In particular, considering economic openness, Poland and Germany are the best examples of integration: through specialisation, they achieved substantial trade gains. Economic integration, thus resulted in a win-win situation.

Figure 2. Imports and exports as % of GDP, index 2000=100, 2012 – Source: The European House - Ambrosetti re-elaboration on EU Commission data, 2013

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Failures

On the other hand, the lack of economic integration and openness resulted in some failures.

As it has been previously mentioned, the decline in interest rates boosted investments and large credit in-flows, especially in some countries of the Eurozone periphery. In fact, the access to cheap credit led to a consistent increase in spending, both private and public.

The most important consequence of this phenomenon was a dramatic reduction in savings rates. Countries such as Greece, Portugal, Spain and even Ireland moved towards large current account deficits, funded through credit inflows. Domestic demand exceeded by far the GDP of these countries. For a decade, this looked like a new phase of prosperity, entirely justified by the need to catch up with other members of the Eurozone.

However most of the growth in spending benefited the non-tradable sector (such as construction and fi-nancial intermediation), whose prices kept rising steadily, in comparison to tradables. This process precisely corresponded to a real exchange rate appreciation and made these countries progressively less and less competitive. Their current account deficits where not just a matter of excessive spending, but a more struc-tural and permanent issue.

Furthermore, by considering exports scaled to GDP, it is possible to note that these countries did not opened enough to European integration.

Figure 3. Exports as % of GDP, 2012 – Source: The European House - Ambrosetti re-elaboration on EU Commission data, 2013

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Greece is a remarkable case in this sense: after 12 years of integration, only 5% of its GDP is exported to the Eurozone while another 15% is not.

Some countries joined the Euro to improve efficiency and get productivity gains from further integration, trade and reconfiguration of their industry; some others simply joined the Euro in order to get access to cheap credit and stimulate their domestic market in a process of spend and spend: the result was the sov-ereign debt crisis.

4.3 The effective causes of the financial crisis

The key point is that irresponsible policies not only led to high debt, but also to a loss of competitiveness: the two things went together.

There is not conceptual flaw in the design of the Euro, its implementation entirely depends on the policies of Member States.

In fact, policies which specifically stimulate internal demand, do not affect all the economy sectors in the same way: these policies are beneficial only for specific sectors (the non-tradables), and are harmful for others (the tradable sectors). They contribute to rising wages, which put profitability in the tradable sector under pressure and make countries less attractive for FDI and, in general, less efficient and competitive.

Figure 4. Ratio of the price of non-tradable and tradable sector, index 1996=100-2008 – Source: The European House - Ambrosetti re-elaboration on IMF data, 2013

On a final analysis, the EU sovereign debt crisis is not an issue of fiscal profligacy, but rather a much more complex issue of competitiveness and growth. Fiscal deficits can be cut rather quickly; restoring growth is much more difficult if the obstacles to growth are still in place.

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4.4 How to recover in those countries which face difficulties?

A crucial point is rebalancing supply demand.

This refers to initiatives of austerity, which imply to control lending and reduce levels of indebtedness. To a very large extent, interventions of austerity have already been implemented among Europe and some coun-tries have adopted policies aimed at rebalancing public debt.

Once it is done, austerity is no longer necessary: a realignment of prices is required nonetheless. To do so, there are 3 main components to act on: wage moderation, productivity gains and a change in profit mar-gins. Currently, productivity gains are crucial in order to shift resources from less productive (non-tradable) to more productive (tradable) sectors, possibly in a time frame of 2-3 years.

In order to achieve productivity gains, investments in recovery are needed. However, investments cannot happen without financing.

Figure 5. Loans to General Government in the Eurozone, % of GDP, 2000-2012 – Source: The European House - Am-brosetti re-elaboration on ECB data, 2013

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4Figure 6. Loans to private sector in the Eurozone, excluding banks, % of GDP, 2000-2012 – Source: The European House - Ambrosetti re-elaboration on ECB data, 2013

There are reasons for renewed optimism:

- Spain, Ireland and Portugal are gradually recovering and as risk perception goes down, investors start to perceive these countries as good opportunities, given the high interest rates;

- Italy has a good primary deficit account and requires no further austerity measures;- EU countries have mitigated their policy divergences in order to step out of the crisis;- the competitive German economy may afford considerable salary increases, boosting internal de-

mand and providing further stimulus to economic growth.

However, a crucial bottleneck to economic growth remains the EU’s dependence from the banking sector. Indeed monetary policy is currently useless: the European Central Bank (ECB) is already doing whatever it can to provide liquidity to the system. The problem however, is market confidence, not liquidity: financial institutions perceive lending as too risky in the present situation and simply return the money to the ECB. In other terms, the injected liquidity struggles to reach out to the real economy and eventually goes back to the ECB as deposits.

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Figure 7. Structure of the financial sector in the US and in the EU: weight in total assets, 2011 – Source: The European House - Ambrosetti re-elaboration on ECB data, 2013

Data shows that the EU is highly dependent from the banking sector and this constitutes a relevant bottle-neck to economic growth in times of crisis: EU enterprises struggle to find alternative sources of financing as banks are obliged to undertake a cautious approach to investments. Compared with the EU, the US financial sector is definitely more diversified, as insurance corporations, pension and investment funds cover a higher quota on total assets. Thus, enterprises are provided with a plurality of financing options in the US, whereas the EU mainly relies on the banking sector.

In 2011, US credit institutions accounted for 28% of the total assets of the economy, while the remaining 72% was represented by assets of Insurance corporations, Pension and Investment funds. The risk sharing within the financial sector allows for more flexibility: if the banking system does not perform well enough, alternative sources of finance may be identified.

However, alternative sources of finance are extremely underdeveloped in the EU: financial strategies are too dependent from banks. Consequently, when credit institutions cannot operate there are no alternatives for financing.

The present situation in Europe is the result of structural and regulatory implications:

- the EU social security system (pay as you go) results in a financial sector which is scarcely reliant on pension funds (except in the Netherlands). Pension funds are a critical source of financing of start ups;

- opinion towards financial markets and investors is generally negative in the EU and policy makers prefer to apply tighter regulations on such markets.

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4.5 How to stimulate the development of capital markets in the EU?

In order to work with the market and to start trusting it, it is necessary:

- to promote funding to long term investment in capital markets;- to open regulation in order to penalise less long term investments formation;- to foster the creation of non bank financial intermediaries.

All these issues should be adequately addressed and a common approach is required among the different European Member States: a single European framework must replace the different national capital markets.

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ChAllENGE OF REINdUsTRIAlIsATION

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5 MANUFACTURING EUROPE: ThE ChAllENGE OF REINdUsTRIAlIsATION

5.1 The changing face of manufacturing

Over the past decades, the globalisation of manufacturing has impacted on the prosperity of companies, nations and people at unprecedented levels: such changes have been experienced only during the first Industrial Revolution. The nations which took part in the process have benefited from rapid globalisation and expansion of the manufacturing industry. Globalisation of manufacturing has been a key driver for high-value jobs creation and has improved living standards of the growing middle class of emerging economies.

The manufacturing’s share of global value added has declined steadily over the past nearly 30 years as the global value added of services has grown. In 1985, manufacturing’s share of global value added was 35%. By 2010, it had declined to 27%. Services grew from 59% to 70% over the same period. This trend has largely been driven by developed economies.

According to a recent United Nations Industrial Development Organization (UNIDO) report, this can be explained by the decrease in relative prices of consumption goods, in conjunction with the simultaneous growth of the demand for services. An added explanation is the often-cited multiplier effect of manufactur-ing on services jobs. The US Department of Commerce, Bureau of Economic Analysis indicates that manufac-turing has a higher multiplier effect on the US economy than any other sector (1.40 US$ in additional value added in other sectors for every US$ 1.00 in manufacturing). If manufacturing is having a multiplier effect on services while simultaneously reducing the prices of manufactured goods, services should indeed be grow-ing more rapidly, assuming manufacturing is also growing.

The entrance of new actors in the international manufacturing scene has radically transformed production distribution around the world. Emerging economies’ manufacturing production has grown tremendously as demonstrated by the 11.8% around average growth rates registered by emerging economies in Asia and Africa (China, India, South Africa, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam) as well as in South America (6.3%) and Europe (7.1%).

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Figure 1. Compound annual growth rate of manufacturing value added in selected areas, 1995-2011, current Dollars –

Source: The European House - Ambrosetti re-elaboration on BDI data, 2013

In particular, as showed in Figure 2, China, once producing only 5% of worldwide manufacturing value added, is now the second manufactured goods producer in the World (15%) and has reached a share of world production that is similar to that of the US, and only four percentage points below EU-27 production.

Figure 2. Shares of global manufacturing value added, 2000-2010 – Source: The European House - Ambrosetti re-elaboration on World Bank data, 2013

The transformation of manufacturing is going to intensify in the next 10-20 years. Two major drivers are go-ing to guide this change and radically transform the nature of international production and competition: the transformation of delocalisation hotspots into technologically competitive countries (as well as primordial consumers markets) and manufacturing technological upgrade, which is going to lead to a radical review of global production processes.

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As far as the first driver is concerned, it must be noted that many emerging nations – once the main suppliers of low-cost labour – have developed significant manufacturing and innovation capabilities. This allows them to produce increasingly advanced products. These economies have begun to experience a corresponding escalation in wages and costs: greater prosperity and higher wages are a powerful driver for consumption demand in the growing middle classes. Such process will increasingly lead these markets to be perceived by international producers as direct competitors in mid-technology products, but also as enormous market opportunities in the consumer goods industry.

On the other hand, technological improvements are radically changing manufacturing techniques. Over the past few decades, manufacturing has gone from a highly labour-intensive set of mechanical processes to an increasingly sophisticated set of information technology-intensive processes. The ubiquitous role of infor-mation technology, the increased flexibility of production methods, as well as the increased focus on sustain-ability – driven both by resource scarcity and by a new tendency towards the respect of the environment – are some of the major characteristics connected to what is starting to be defined as the “third industrial revolution1”. Several new technology areas are converging to lay the foundation of such a phenomenon based on green energy, clean transport, new production methods, novel materials and smart communica-tion systems.

The abovementioned elements imply a new scenario which will require adaptive changes by national and regional systems in an environment of enhanced international competition. Thus, fundamental factors such as FDI attraction policies, innovation policies, qualified human resources’ attraction, energy and networks infrastructure development will become more and more crucial for manufacturing competitiveness.

Is the EU ready to address these issues? The answer to this question is mixed. On the one hand, as showed in the sections below, the European manufacturing sector was deeply affected by the economic crisis and has lost clout in the last ten years. On the other hand encouraging signals emerge, not only for the protracted competitiveness that EU shows in advanced sectors, but also in terms of EU institutions’ commitment to rein-forcing the European manufacturing ecosystem. As recently stated by the Commission’s Communication “A Stronger European Industry for Growth and Economic Recovery”2:

“Europe needs to reverse the declining role of industry in Europe for the 21st century. This is the only way to deliver sustainable growth, create high-value jobs and solve the societal challenges that we face. Immediate action should contribute to reverse the current downward trend from its current level of 15.6% of EU GDP to as much as 20% by 2020”.

As it will be argued in the last section of this chapter, if the EU wants to meet the “manufacturing of the fu-ture’s challenge”, it needs to pursue three mid/long term priorities: reinforce market integration and policies in support of SMEs, exploit differentiation among Member States to further integrate European value chains (for exploiting internal cost differentials and specialisations) and ultimately take action to reinforce EU Mem-ber States’ performances on those 7 pillars of manufacturing competitiveness (productivity, export, business environment, innovation and education, entrepreneurship, infrastructure and access to finance) which are fundamental for the re-launch of the European manufacturing sector.

1 - For more information on the topic see: Economist Intelligence Unit (2012), “Special Report. Manufacturing and Innovation”, London.

2 - COM(2012) 582 final (10/10/12).

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BOX – RE-shORING IN ThE Us

Re-shoring is defined as the tendency by North American manufacturing companies to repatriate the production which will be sold on the national market. This recent phenomenon had a considerable impact on China, where labour costs are slowly converging to US standards.

The number of firms known to have “re-shored” manufacturing to America is well under 100, at least for now. Examples range from tiny (ET Water Systems) to enormous firms (General Electric). Last year General Electric has moved its manufacturing of washing machines, fridges and heaters back from China to a factory in Kentucky, which was expected to close. Google has attracted a great deal of attention for deciding to make its Nexus Q, a new media streamer, in San Jose.

Figure 3. Re-shoring in the US – Source: The European House - Ambrosetti on Economist Intelligence Unit, 2013

The re-shoring movement has to be kept in proportion. Most of the multinationals involved are bringing back only some of their production to the American market. Much of what has been moved over the past few decades remains overseas. For many of the biggest firms, the amount of work outsourced abroad outweighs the amount brought back onshore. Caterpillar, for example, is opening a new factory in Texas to make excavators, but has also recently announced that it will expand its research and development activities in China.

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The crucial change that has taken place over the past decade or so is that wages in low-cost countries have soared. According to the International Labour Organisation, real wages in Asia between 2000 and 2008 rose by 7.1-7.8% a year. Pay for senior management in several emerging markets, such as China, Turkey and Brazil, now matches or even exceeds pay in America and Europe. Pay in advanced econo-mies, on the other hand, rose by just 0.5% to 0.9% a year between 2000 and 2008. In manufacturing, the financial crisis actually reduced pay: real wages in American manufacturing have declined by 2.2% since 2005.

By contrast, pay and benefits for the average Chinese factory worker rose by 10% a year between 2000 and 2005 and speeded up to 19% a year between 2005 and 2010. The Chinese government has set a target for annual increases in the minimum wage of 13% until 2015. Strikes are becoming more frequent and the government often appease them by obliging companies to meet workers’ demands immediately3. Higher labour costs alone are not enough to prompt companies to leave China. The coun-try has the world’s best supply chains of components for industry and its infrastructure works well. Firms have already invested heavily in being there. And companies that initially came for the low labour costs now want to stay because it has become a huge market in its own right. Nonetheless, several additional transformation affect the country’s attractiveness.

On the one hand, other low-cost countries, are becoming increasingly competitive in this sense. Myanmar, Vietnam Cambodia and Mexico, among others, present productive advantages both in terms of costs (especially in Asia) and proximity to the US. On the other hand, costs in America are falling. The successful extraction of natural gas from shale has dramatically lowered the price of energy.

Finally, in the longer term reshoring will be boosted by the use of advanced manufacturing techniques that promise to alter the economics of production, making it a far less labour-intensive process.

3 - Following labour unrest, wages at some factories have gone up steeply. Honda, a japanese carmaker, gave its chinese workers a 47% pay rise after strikes in 2010. Foxconn technology group, a subsidiary of Hon Hai precision industries, a Taiwanese firm that does a lot of manufacturing for Apple and other big technology firms, doubled pay at its factory complex in Shenzhen after a series of suicides. Its labour troubles are still continuing. Economist Intelligence Unit, 2012.

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5.2 structural change, competitiveness and economic crisis: the state of the art of manufacturing in Europe

In the last decade, the European Union has entered a period of deep structural change and de-industrial-isation which have penalised more EU Member States than other international competitors. Indeed, the EU was the region that registered the most pronounced decline in terms of manufacturing share of GDP (-2.9%) surpassing China (-2.5%) the United States (-2.7%) and Japan (-1.9%).

Figure 4. Manufacturing as a percentage of GDP, 2010 – Source: The European House - Ambrosetti re-elaboration on World Bank data, 2013

Few Member States nowadays can count on manufacturing shares of GDP higher than 20%: no EU-15 country – except Germany – belongs to this group. On average the loss of manufacturing GDP between 2000 and 2010 has been strong and generalised (between -9% in Malta and -0.5% in Poland) with Romania representing the only country gaining shares since 2000 (from 15% to 22% of GDP).

Figure 5. Manufacturing as a percentage of GDP, 2010 and ∆ 2000-2010 – Source: The European House -Ambro-setti re-elaboration on World Bank and Eurostat Data, 2013

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The economic crisis has exacerbated this de-industrialisation trend. Industrial production has dramatically slowed down since the beginning of the recession. As showed by Figure 6, the steep decline registered in 2009 has not recovered yet. Between 2008 and 2009, industrial production declined by 12.8% in the EU: while this result is relatively positive compared to Japan (-21.0%), the same cannot be said with refer-ence to the US, where the recovery has been slow but constant since 2009. But there is more to it: starting from the end of 2011, the financial turmoil in the EU has further exacerbated the negative trend in terms of industrial output.

Figure 6. Industrial production index (excluding construction), 2005=100 – Source: The European House - Ambrosetti re-elaboration on OECD data, 2013

In fact, the manufacturing sector represents the economic activity that has been more strongly affected by the economic crisis. Data shows that the value added of the manufacturing declined by over 12.1% since 2008: worse than agriculture (-11.6%), construction (-7.1%), services (-4,5%) and the public sector (whose weight in value added production increased by 0.7%).

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Figure 7. Value added per sector in EU-27, 2008=100; (*) excluding financial and insurance services, real values –

Source: The European House - Ambrosetti re-elaboration on Eurostat data, 2013

This decline goes hand in hand with a strong decrease in FDI and employment in the manufacturing sector. Concerning the first point, FDI in Europe registered a much higher decrease (-12%) between 2008 and 2010 than in the US. In fact, while in the service segment the US has experienced a stronger decline (-55% vs. -22%), the situation in the manufacturing is exactly the opposite: the EU’s manufacturing attractiveness proved to be more vulnerable to the economic crisis.

Figure 8. FDI inflows to EU-27 Member States and to the US in manufacturing and services, percentage change between

2008 and 2010 – Source: The European House - Ambrosetti re-elaboration on Eurostat, 2013

In terms of employment, according to EU’s recent estimates, between 2008 and 2011, the manufacturing sector has lost over 3 million jobs with changes in employment that range from the 16.8% registered in Latvia to the -1.5% of Cyprus.

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*Excluding Luxembourg

Figure 9. Changes in employment in manufacturing, EU-27, percentage change 2008-11 – Source: The European House - Ambrosetti re-elaboration on Eurostat data, 2013

The crisis however did not affect all sectors and geographical areas at the same level. On the contrary, one of its major characteristics was that it exacerbated differences among EU Member States.

Concerning the first point, it must be noted that the recession involved low-tech production more strongly than high-tech production. For instance, recent Eurostat data confirms that high-technology manufacturing production4 increased by 26% between the first quarter of 2005 and the third quarter of 2012. In contrast, for industry as a whole, the level of production output in 2012 was almost the same of 2005. Medium low-technology and low-technology production has even shrunk during the period under observation (-5% and -6%).

The positive performance of high technology manufacturing production was driven by the pharmaceuti-cal and aerospace sectors (see figure 10). Conversely, the worst sectoral performances relate to transport (particularly military vehicles), recorded media, and textiles.

4 - According to Eurostat definition they are: basic pharmaceutical products and pharmaceutical preparations, computer, electronic and optical products, aerospace and related machinery.

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5Figure 10. Index of production for main manufacturing technology groups in EU-27, seasonally adjusted (2005=100),

2005-2013 – Source: The European House - Ambrosetti re-elaboration on Eurostat data, 2013

Technological specialisation and territorial specialisation go hand in hand and follow the same geographical borders. In this sense differentiation among Member States is particularly remarkable: in Europe, the historical divide between a strong industrial centre – specialised in more resilient sectors – and a weak periphery, with loose specialisation in low tech sectors, has nothing but reinforced during the crisis.

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Figure 11. Geographical specialisation in high and medium high-technology sectors – Source: European Cluster Observa-tory, 2012

Building on this premises and recognising the need to re-launch its manufacturing sector, the EU has recently launched a series of important activities. Particularly, in October 2012, the European Commission published an update on its Industrial Policy Communication “A Stronger European Industry for Growth and Economic Recovery”, which emphasises the importance of strengthening industrial competitiveness in order to underpin growth and jobs and facilitate the transition to a low emission and resource efficient economy. These objec-

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tives are in continuity with the Europe 2020 flagship initiative “An industrial Policy for the Globalisation Era”5.

The October 2012 Communication is based on a simple idea: Europe needs its real economy now more than ever to underpin the recovery of economic growth and jobs and revert the declining trend of its indus-try. If Europe does not stabilise investments in new technologies, its future competitiveness will be seriously compromised.

The Communication outlines a policy to lay the foundations for Europe’s industry of the future. To this end, it puts four major milestones as the foundations of the overall EU’s policy: a new focus on facilitating invest-ment, a well-functioning Single Market, enhanced access to finance and policies aimed at job creation and at improving labor skills in a manufacturing enhancing logic.

As a first step, six priority lines for short term actions are proposed to be implemented in markets that are par-ticularly strategic for the EU: markets for advanced manufacturing technologies for clean production tech-nologies6; markets for key enabling technologies; bio-based product markets; sustainable industrial policy and construction and raw materials; clean vehicles; smart grids.

Additional action is articulated, among others, with reference to:

- improving the Internal Market for goods through standardisation of national technical regulations7;- fostering entrepreneurship especially with regards to the digital single market which is expected to

grow by 10% a year up to 2016. For every job destroyed by the internet, 2.6 new jobs were created8;- protecting and promoting intellectual property rights (e.g. the unitary patent will remove barriers for

SMEs enabling them to fully exploit the market of trading intellectual property). New IPR helpdesks will be established and become operational in 2013 to support SMEs;

- Further promoting the internationalisation of European SMEs around the world, reaching 25% (from 13%) in the medium term;

- improving access to raw materials: further develop the “raw materials diplomacy” and promote in-ternational regulatory cooperation and convergence, notably vis-à-vis neighbouring countries (e.g. Morocco and Tunisia);

- facilitating access to credit to the real economy by better mobilising and targeting public resources and venture capital funds;

- equipping labour force for industrial transformations, notably by better anticipating skills needs and mismatches.

5 - The program identifies 10 major actions to be implemented: 1) “competitiveness proofing” i.e. analysis of the impact on competitiveness of all policy proposals, 2) “fitness checks” of existing legislation aiming at reduction of the cumulative effects of legislation so as to cut the costs for businesses in Europe; 3) making it easier for SMEs to access credit and help their internationalisation; 4) a strategy to strengthen European standardisation; 5) more efficient European transport, energy and communication infrastructure and services to serve European industry; 6) a new strategy on raw materials creating the right framework conditions for sustainable supply and management of domestic primary raw materials; 7) addressing sector-specific innovation performance with actions in such areas as advanced manufacturing technologies, construc-tion, bio-fuels and road and rail transport, particularly in view of improving resource efficiency; 8) actions to improve framework conditions and support innovation in energy-intensive industries; 9) a space industrial policy creating a solid industrial base and covering the whole supply chain; 10) reporting on Europe’s and Member State’s competitiveness, industrial policies and performances on an annual basis.

6 - For example, markets for clean production technologies are expected to grow strongly with the world market almost doubling up from some Euro 380 billion in 2007 to Euro 765 billion in 2020.

7 - Half of the internal market is regulated by national technical regulations or not at all. In the last 10 years Member States notified 6,882 technical regulations on which the Commission and the other Member States reacted by delivering 1,230 detailed opinions which prevented several obstacles to the free movement of goods from arising.

8 - Moreover an ambitious action plan to boost entrepreneurship at all levels will be presented in November 2012 (IP/12/797).

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Industry’s active role is deemed crucial in the success of the proposed actions. The Communication creates an alliance between public authorities and industry with the clear objective of delivering growth and jobs. Following the adoption of the Communication, the Commission will work with stakeholders to define road-maps and targets to ensure the faster adoption and industrial diffusion of new and cleaner technologies for which a dedicated working group will be set up.

The proposals devised undoubtedly prove a positive change in approach by the EU and one that seems extremely resolute in tackling the “manufacturing of the future” challenges on an innovative (and innovation-driven) basis.

In order to support the Commission’s activities in this realm, the Observatory on Europe has identified “7 manufacturing competitiveness pillars” that correspond to critical issues for EU’s manufacturing. Additional/complementary action in these sectors – as it will be stated in the next paragraph – will be a necessary pre-requisite to build the foundations for the actual success of the EU’s industrial policy of the 21st century.

5.3 The 7 pillars to re-launch manufacturing competitiveness

The impact of the economic crisis on the EU’s manufacturing sector cannot be merely read as a passing phenomenon: the comparatively negative performance registered by the region is closely connected to structural causes that are rooted in EU Member States productive systems and which the integration process did not manage to overcome.

The Observatory on Europe has identified seven critical areas (pillars) that will need to be tackled in a sys-temic way in order to re-launch the EU’s manufacturing competitiveness on a new basis:

- Productivity;- Export;- Regulatory environment;- Innovation and education;- Entrepreneurship;- Infrastructure;- Access to finance.

The following paragraphs will provide a brief description of the challenges connected to each pillar: we will underline the reasons why it is pivotal to revert the current trend in the EU’s manufacturing sector and in the European economy as a whole. Given their relevance and position in today’s policy making agendas, access to finance, innovation and entrepreneurship are the object of an in-depth focus (see chapter 4, 6 and 7).

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Pillar 1 – Productivity

The growth of an economy depends on the quantity and quality of production factors and how efficiently they are combined. Almost all of the average growth in real output per capita in the past four decades has been determined by labour productivity growth.

Productivity growth depends on innovation, R&D expenditure, as well as on technology dynamism and dif-fusion. Similarly, the abovementioned elements are all influenced by institutional factors, such as regulation and preferences. Ultimately labour productivity captures the improvements in all the dimensions of competi-tiveness. However, for countries to fully benefit from investment in innovation and technological progress, structural reforms have to provide a fertile environment that allows firms to profit from these investments.

For fifty years after the end of World War II, Europe’s productivity growth outstripped the US by approximately one percentage point per year, a process that most observers assumed would have continued until Europe eventually caught up with the US9. But from the mid-1990s US productivity growth accelerated while Europe decreased. This unexpected trend reversion was called the “US productivity miracle” by the observers.

More recently, EU’s manufacturing productivity decline has been exacerbated by the economic crisis. In the last 5 years, it has strongly declined and is currently stuck at levels that are 2% below their 2005 values. This trend is worrying, also because it is in stark contrast with what experienced by US and, even more inter-estingly, by Japan: in both countries after a strong stop in 2009 (in Japan, productivity decreased by 15 percentage points) productivity is today back on track. Alas, the same cannot be said for Europe, whose labour productivity has been progressively declining since 2007 (see Figure 12).

Figure 12. Labour Productivity in manufacturing, gross value added/employee, 2005=100 – Source: The European House - Ambrosetti re-elaboration on OECD data, 2013

Manufacturing productivity’s differentiation is closely related to the different approach showed by Member States to innovation, critical structural reforms, and openness. Productivity is high in Belgium, Austria, the Neth-

9 - European Central Bank, (2011), “Productivity and Growth in Europe. Long terms trends, current challenges, and the role of economic dynamism”, Luxembourg.

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erlands, Sweden, Finland and Germany, reflecting their relative specialisation in highly knowledge intensive manufacturing, their production systems equipped with modern technology as well as their open mentality towards economic liberalisation10. Manufacturing plays a smaller role in France’s economy and its productiv-ity is slightly lower than the best performers’, reflecting an industrial structure that is less specialised in high innovation sectors and more closed. Italy has a large manufacturing sector but a productivity which is lower than the EU average: this is mainly due to its specialisation in less technology-intensive sectors, small firm size, and a backlog in implementing new policies in educational, competition and product markets.

Figure 13. Labour Productivity in manufacturing, Gross value added/employee (selected countries), 2010 – Source: The European House - Ambrosetti on Eurostat data, 2013

Against this backdrop, structural reforms in Europe are more necessary than ever, in order to build a “Euro-pean socio-economic model for the 21st century” and re-launch productivity. Completing the Single Market, reforming competition and financial-sector regulations and using EU funds more effectively would help EU countries to grow out of the crisis. More in general a new approach needs to be pursued for:

- removing entry barriers to markets and make room for newcomers;- encouraging reallocation of resources (capital and labour) towards more productive uses, which may

require geographical and sectoral mobility, less employment protection, and stronger work incentives;- fostering attainment levels and quality in education and stepping up life-long learning to help people

cope with faster technological change; - pushing the pace of technological change through R&D – including by a better balance between

legitimate intellectual property protection and the anti-competitive use of patents – and accelerat-ing the diffusion of ICT and innovation;

- cutting wasteful subsidies and other government expenditure to create space for targeted public investment in strategic infrastructure projects.

10 - The high productivity of Ireland is also affected by the operations of foreign multinationals and their activities undertaken outside the country.

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Pillar 2 – Export

Trade performance is considered as a proxy of economic growth: generally speaking it is characterised by measures of openness, such as the ratio between trade and national GDP.

Considering exports of manufactures as a share of GDP, it is possible to note that the European Union oc-cupies the top position in international rankings, before Japan and the United States (Figure 14).

Figure 14. Manufactures exports, % of GDP, 2011 – Source: The European House - Ambrosetti re-elaboration on WTO and World Bank data, 2013

The lion’s share of European manufacturing exports is composed by intra-EU trade (16.1% of GDP), especially in new Member States (Figure 15). This further confirms that regional integration affects positively the com-mercial relations, also in terms of manufacturing, between Member States and, in general, boost economic growth.

Figura 15. Manufactures exports in EU countries: intra and extra-EU trade, % of GDP, 2011 – Source: The European House - Ambrosetti re-elaboration on WTO and World Bank data, 2013

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Recent research on the relationship between trade and growth suggests that openness alone is not a suf-ficient condition for determining high levels of growth. Other factors, such as the type of available products, the level of market and economic diversification, the positioning on quality ladders, are also significant for explaining growth.

In order to tackle the complex and multidimensional nature of trade patterns, WTO and UNCTAD jointly developed a proxy for export’s competitiveness in international trade: the Trade Performance Index (TPI)11.

It is a composite indicator that ranks the competitiveness of 184 countries in 14 world trade macro-sectors. The macro-sectors are: fresh food, processed food, wood products, textiles, chemicals, leather products, basic manufactures, non-electronic machinery, IT & consumer electronics, electronic components, transport equipment, clothing, miscellaneous manufacturing, minerals.

For each country and each sector, the TPI provides a ranking which shows the country’s degree of competi-tiveness, based on:

- the value of net export,- export per capita;- shares of global export;- market diversification level;- product diversification level;

The classification below shows the top ten countries in terms of international trade competitiveness in the 14 sectors under examination (Figure 16).

Figure 16. Number of placements in the top 10 positions of the rankings of competitiveness of foreign trade in 14 sectors,

2011 – Source: The European House - Ambrosetti re-elaboration on UNCTAD/WTO data, 2013

11 - “Trade and competitiveness map. Benchmarking national and sectoral trade performance – Trade Performance Index”, International Trade Centre, 2013

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According to the TPI, Germany is the most competitive country in the world, by raking for 8 times at the best position and once in second position in the overall ranking. It is the best performer in transport equipment, non-electronic machinery, chemicals, basic manufactures, miscellaneous manufacturing, IT & consumer elec-tronics, processed food and wood products, while the second position refers to textiles.

In summary, the EU’s performance with reference to trade are already more than satisfying, however it is necessary to reinforce and strengthen this competitive advantage in the future.

Pillar 3 – Regulatory Environment

A dynamic manufacturing system requires a regulatory environment, in which rules are transparent and accessible to all. These regulations should be efficient, striking a balance between safeguarding some im-portant aspects of the business environment and avoiding distortions that impose unreasonable costs on businesses.

Some indicators on the ease of doing business are given by the World Bank. Even if these indicators do not account for all relevant factors for doing business (such as macroeconomic conditions, market size, work-force skills and security) and do not refer to the manufacturing sector in particular, they capture some key aspects of the regulatory and institutional environment that matter for firms.

The World Bank measures and tracks changes in the regulations applied to domestic small and medium sized companies in 185 different economies. It produces an aggregate ranking on the ease of doing busi-ness, which is based on two types of indicators, measuring 10 different areas of companies’ life cycle:

- indicators relating to the strength of legal institutions relevant to business regulation (they focus on the legal and regulatory framework for getting credit, protecting investors, enforcing contracts and resolving insolvency);

- indicators relating to the complexity and cost of regulatory processes (they focus on the cost and efficiency of regulatory processes for starting a business, dealing with construction permits, getting electricity, registering property, paying taxes and trading across borders).

By assigning a ranking to the average values of the World Bank index (in which the 0 score corresponds to the least attractive business environment and the score 100 corresponds to the most attractive one), it is possible to notice that European Member States are not equally attractive for doing business and that the European attractiveness average (score of 51 out of 100) is lower than US’s and Japan’s (Figure 17).

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Figure 17. Business environment (0=least attractive / 100=most attractive), 2013 – Source: The European House - Am-brosetti re-elaboration on World Bank data, 2013

The divergence of European business environments is also confirmed by the absolute positions assumed by the different European Member States in the World Bank final ranking (Figure 18).

Figure 18. Ease of doing business ranking, the EU-27 in world ranking: 2012-2013 comparison – Source: The European House - Ambrosetti re-elaboration on World Bank data, 2013

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The comparison between 2012 and 2013 rankings reveals that Denmark, the United Kingdom, Finland, Swe-den, Ireland and Germany are included one more time in the top 20 economies with the most business friendly environment.

Denmark is confirmed as the European top performer: it covers the 5th position in the world ranking, following Singapore (which covers the worldwide first position), Hong Kong SAR, New Zealand and the United States.

Furthermore, the World Bank ranking reveals that Poland is the European economy which has mostly im-proved its position, moving from the 74th to the 55th position in the last year.

In addition, in order to provide an absolute measure of business regulatory efficiency (which does not de-pend on the performance of others), the World Bank has introduced another measure which complements the ease of doing business ranking.

By showing the distance of each economy to the “frontier” (which represents the best performance ob-served on each of the doing business indicators across all economies), it tracks the improvement of the different national regulatory environments over time and provides information on how large the gaps are between economies at a single point in time.

The measure is normalised to range between 0 and 100, with 100 representing the frontier: a higher score indicates a more efficient business environment.

Analysing the distance to the frontier we realise that the burden of regulation has declined over the last 7 years: economies at the top ranking positions in the doing business index are closer to the frontier on aver-age, however other countries (especially in eastern Europe) have done so the most (Figure 19).

Figure 19. Improvements in distance to the frontier among EU Member States – Source: The European House - Ambro-setti re-elaboration on World Bank data, 2013

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Among the best improvers, Poland, the Czech Republic and Slovenia reduced particularly the distance to the frontier.

Since 2006 Poland registered 20 institutional and regulatory reforms, 4 of which were implemented only last year. The country has:

- improved the process of transferring property (through the progressive digitalisation of cadastral, mortgage and land registries);

- facilitated tax paying procedures (it promoted the use of electronic filing and payment system);- reduced time to enforce contracts (through the amendment of the civil procedure code and ap-

pointment of more judges to commercial courts);- improved the process of resolving insolvency (through the updating of the guidelines for bankruptcy

petition and enforcement of creditors’ rights in case of liquidation).

In the same way the Czech Republic has improved particularly in resolving insolvency and in paying taxes procedures. During the last year, the economy has:

- made registering property easier (by increasing the efficiency of the online cadastral office);- made paying taxes procedures faster (through the promotion of the use of electronic facilities for

companies);- reduced the time to trade across borders (by introducing an electronic submission for custom decla-

rations and other documents);- improved employment regulation (it increased the maximum duration of fixed-term contracts and

reduction in the severance pay applicable in cases of redundancy dismissal).

Finally Slovenia has also made strong efforts in order to create a more friendly business environment, by reducing the gap in starting a business and registering property procedures. More specifically, the govern-ment has:

- strengthened investors’ protection (by introducing new law regulating the approval of related-party transactions);

- made paying taxes procedures easier and less costly (through the introduction of electronic filing and payment of social security contributions and the reduction of corporate income tax rate);

- strengthened the insolvency process (which requires that the debtor offer creditors payment of at least 50% of the claims within 4 years, gives greater power to the creditors’ committee in a bank-ruptcy proceeding, establishes fines for members of management that violate obligations or prohibi-tions).

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Pillar 4 – Innovation and Education

The ability to innovate, at an accelerated pace, will be the most decisive variable for the success of the manufacturing sector in Europe. Countries that are more successful at fostering innovation perform better, whether looking at GDP or per capita GDP. Companies must innovate to stay ahead of competition, but infrastructure and policy environment are also crucial elements. More specifically, the policy environment should further support university/research lab breakthroughs in science and technology and promote in-vestment budgets that permit dedicated pursuits. Being able to develop creative ideas, addressing new and complex problems and delivering innovative products and services to global markets will be the most relished capabilities by both countries and companies in the 21st century.

The EU’s performance in producing new ideas is disappointing in comparison to the US and Japan: the EU produces only 70% of US patents and one third of Japanese patents. This trend – as argued in chapter 6 – must be reverted through targeted policies that enhance the capacity of EU countries to transform research into market ideas.

Figure 20. N. of patents12/million inhabitants, 2010 – Source: The European House - Ambrosetti re-elaboration on OECD data, 2013

Even more essential is the provision of a qualified workforce, capable of driving innovation in Europe. Talent-ed human capital will be the most critical resource differentiating the prosperity of countries and companies. In this sense, the EU must enhance its talent pool in the manufacturing sector both at the tertiary level (see Figure 21) and the secondary one (see box below).

12 - International patents (the so-called triadic families of patents) registered contemporarily at the European Patent Office, at the Japanese Pat-ent Office and at the US Patent Office.

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Figure 21. Tertiary gross enrolment ratio, 2010 – Source: The European House - Ambrosetti re-elaboration on World Bank data, 2013

Today’s complex business environment demands a strong emphasis on employees’ skills and qualifications. A well-trained workforce equipped with an appropriate skill set is indispensable for a competitive and sustainably-growing economy. The current situation of strong unemployment (22.9 million people in the EU, of which 5 million belong to young generations) is somehow paradoxical given the lack – denounced by enterprises – of labour force that satisfy the requests of the job market.

In the next decade, we expect some 80 million job opportunities to arise, including almost 7 million new ad-ditional jobs. Sixteen millions of these jobs will require highly skilled workforce. Job creation is mainly expected to occur for qualified positions. Recent data helps understanding the phenomenon13:

- the demand for science and technology professionals in the UK will grow by 18% by 2014 compared with 4% growth for all other occupations;

- evidence from Germany shows that the shortage of skilled workers is not a cyclical problem but a structural one. In 2008, which was a boom year for business activity, over 114,000 people with such skills were missing. Obviously, this figure decreased during the economic and financial crisis, but is now already picking up again and reached 117,000 in February 2011;

- in Belgium, the shortage of engineers is particularly important in spite of 2,000 engineers graduating each year. In 2009, the number of unfilled vacancies for engineering professions reached 2,500.

Against this backdrop, it is urgent for the EU to act and ensure that investments in education deliver the skills required by labour markets. Quality of initial education should be ensured by governments and the right framework conditions should be put in place at national level to encourage companies and workers to invest in continuing education. To end the longstanding and growing skill mismatch observed on European labour markets, all actors (education and employment experts, companies and social partners) should act together as part of a renewed EU skills governance, so that education actually resolves into employment.

13 - Businesseurope, (2011), “Plugging The Skills Gap The Clock Is Ticking”, Brussels

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The European Union should support Member States’ efforts to reform their education and training systems. In particular, EU financial support could help reduce youth unemployment by allowing Member States that wish to establish, reform or expand their dual-learning systems. Finally, the remaining obstacles to worker mobility and to skilled migration should be removed.

BOX - ThE GERMAN APPRENTICE sysTEM

The dual system of Vocational and Education Training (VET) has a long history in German-speaking regions and has become deeply embedded and widely respected. It consists of two elements: i) vocational training in private enterprises and ii) part-time teaching in special vocational schools.

Apprenticeships exist for a wide range of jobs – whether in manufacturing, services or agriculture. Over the years, new types of apprenticeships have been added to reflect industry developments – in information technology, for instance – and the system currently offers more than 300 types of apprenticeships which involve approximately 60% of Germany’s younger generations.

The dual system provides an example of a mutually-beneficial collaboration between the private and public sectors. The public sector is responsible for bearing the costs associated with education in the part-time VET schools, while the private sector assumes the cost of providing workplace training (which includes costs for paying trainers, of the equipment used and so on). The private sector also pays monthly apprenticeship salaries, which are determined through collective bargaining.

The key strength of the dual system is that it combines the more theoretical knowledge imparted in school and in-company training with the more practical skills taught at the workplace. This integration between theory and practice has proven very successful in enabling a relatively smooth transition to full-time em-ployment. The VET system is at least partially responsible for the relatively low youth unemployment in Germany (7.9% as of June 2012) as well as for the low rate unqualified population. Overall, the example demonstrates how the public and private sectors can work together and benefit from the collaboration.

Pillar 5 – Entrepreneurship

To return to growth and higher levels of employment, Europe needs more entrepreneurs. With 4 million new jobs created every year, new companies, especially small and medium sized enterprises (SMEs), create the newest jobs in Europe. Firms depend on entrepreneurs - individuals with new ideas and the will to take the necessary risks to start up a firm. With reference to the US, the case for entrepreneurship is even stronger: research indicates that firms less than five years old have been responsible for all net job creation in the United States over the past 30 years – approximately 40 million jobs.

The EU presents a restraining environment for entrepreneurship, as it will be further argued in chapter 7.

As showed by the TEA Index, which measures the level of dynamic entrepreneurial activity in an economy by considering the incidence of start-up businesses and new firms (up to 3.5 years old) in the adult popula-tion (i.e. individuals aged 18–64 years), the performance is highly variable. TEA rates vary sensibly across EU

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Member States and a significant gap is present between the US and the so-called EU Big 5. While some EU countries present higher or comparable data to the US (Estonia, Latvia, Austria and the Netherlands), others hardly reach half as much.

Figure 22. Total early-stage Entrepreneurial Activity Rate - TEA (%) , 2011 – Source: The European House - Ambrosetti re-elaboration on Global Entrepreneurship Monitor data, 2013

The EU, since the publication of the 2003’s Green paper “Entrepreneurship in Europe” has put this issue at the centre of a series of specific interventions, including the “Entrepreneurship Action Plans14”.

These topics – as well as a quantitative focus on entrepreneurship data – will be further studied in chapter 7.

Pillar 6 – Infrastructures

Today’s global infrastructure demand is estimated at approximately US$ 4 trillion in annual expenditure, with a gap – or missed opportunity – of at least US$ 1 trillion every year. We live in an internationally competitive world where established nations and emerging economies produce transformative investments in sea, air and surface transportation in order to move products to domestic and international markets. New telecom-munication infrastructures are also becoming progressively important for economic development. The EU must be active in reinforcing infrastructures: as showed by the logistic performance index of the World Bank, the performance within the EU is profoundly differentiated.

14 - The “Entrepreneurship Action Plans ” is a blueprint for decisive action to unleash Europe’s entrepreneurial potential. The plan cover six areas: access to finance, support during the crucial phases of the business lifecycle (first 5 years), support to the creation of business opportunities in the digital sector, simplification of transfers of business ownership’s procedures, help to businesses in overcoming financial difficulties and administrative simplification.

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Figure 23. Logistic Performance Index15, 2012 score (1 = min; 5 = max) – Source: The European House - Ambrosetti re-elaboration on World Bank data, 2012

European infrastructure’s spending rose by only 1.5 percent last year (up to $741 billion), compared to global growth of 4.5 percent and a 7.1 percent rise in the Asia-Pacific. Spending in Europe will increase slightly over the next four years, to 4.3 percent growth by 2016, but it will continue to underperform significantly in com-parison to the world average. Only the United States will do worse, with a growth of only 1.8 percent by 2016.

The European Union risks of falling behind its competitors, with potentially irreversible consequences. The EU’s main infrastructure funding budget – the Connecting Europe Facility – was recently cut from 50 to 29.3 billion Euros (over an overarching period of seven years). Broadband and digital infrastructure were mostly affected, with a cut ranging from 9.2 to just 1 billion Euros.

The budget for spending on major transportation through 2020 was cut by 38%, from 21 billion to 13 billion Euros, forcing the Transport Commission to drop some air and road projects, which will have to seek funding elsewhere.

The current financial decisions are definitely not aligned with the EU’s long-term strategic goal of creating jobs, increasing competitiveness and growth in a single European market. The EU Commission has hoped for an investment of over 1.5 trillion Euros by 2030 in transportation networks.

The EU’s infrastructure is good but also old: it will need billions of investments just for normal maintenance. As other world regions are launching ambitious transport modernisation and development programs, it is crucial that European transport continues to develop and invest in order to maintain its competitive position.

15 - Weighted average of national scores on six dimensions: efficiency of the clearance process, quality of trade/transport related infrastructures, competitiveness of price shipments, competence of logistic services, ability to track consignments, timeliness of shipping. Data are from Logis-tics Performance Index surveys conducted by the World Bank in partnership with academic and international institutions and private companies and individuals engaged in international logistics.

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Figure 24. Freight transport by means, billions ton/km, 2010 – Source: The European House - Ambrosetti re-elaboration on World Bank Data, 2012

Trade within Europe represents 22% of the world’s cargo by value and it is expected to double in the up-coming decade.

Before the recent budget cuts the EU determined that 550 billion Euros in high-priority projects were needed through 2020 to create a core transportation network to meet the increased demand. The investment would connect 120 major ports and airports to rail, upgrade 15,000 km (9,300 miles) of rail tracks to high speed and remove 35 key cross-border bottlenecks. The region’s railways use seven different gauges and only 20 major airports and 35 major ports are directly connected to the rail network. These upgrades are required for making the distribution of goods faster and cheaper but also for meeting the EU environmental targets16. Against this backdrop of financial insecurity the EU must find new forms for enhancing public-private partnership on strategic infrastructure, especially in the digital field. Without innovative financing and delivery models, as well as private companies that are suited to carry out the much-needed infrastructure projects, it will not be possible to meet the demand and create a truly and harmonised European infrastruc-ture network.

16 - To reduce carbon emissions by 60 percent, halve conventional car use and shift 50 percent of long distance freight onto trains and ships by 2050.

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Pillar 7 – Access to finance

Finance is one of the most important instruments for re-launching the European manufacturing sector, par-ticularly SMEs. Small businesses often have difficulties financing their growth and innovations. The crisis has highlighted the tight interdependence between the financial sector and the functioning of the broader economy. The sudden breakdown in the credit supply chain has led to major disruptions to trade, investment and business activity worldwide.

Figure 25. Credit to the private sector, % of GDP, 2011 – Source: The European House - Ambrosetti re-elaboration on World Bank data, 2012

Further data on these issues were discussed in chapter 4 of this report. One of the most important point raised by the chapter growth remains the EU’s dependence from the banking sector. Data shows that the EU is highly dependent from the banking sector and this constitutes a relevant bottleneck to economic growth in times of crisis: EU enterprises struggle to find alternative sources of financing as banks are obliged to undertake a cautious approach to investments. Compared with the EU, the US financial sector is definitely more diversified, as insurance corporations, pension and investment funds cover a higher quota on total as-sets. Thus, enterprises are provided with a plurality of financing options in the US, whereas the EU mainly relies on the banking sector.

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Figure 26. Structure of the financial sector in the US and in the EU: weight in total assets, 2011 – Source: The European House - Ambrosetti re-elaboration on ECB data, 2013

In 2011, US credit institutions accounted for 28% of the total assets of the economy, while the remaining 72% was represented by assets of Insurance corporations, Pension and Investment Funds. The risk sharing within the financial sector allows for more flexibility: if the banking system does not perform well enough, alternative sources of finance may be identified.

In order to work with the market and to start trusting it, it is necessary to:

- promote funding to long term investment in capital markets;- open regulation in order to penalise less long term investments formation;- foster the creation of non bank financial intermediaries.

All these issues should be adequately addressed and a common approach is required among the different European Member States: a single European framework must replace the different national capital markets.

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INNOVATION: A CRUCIAL ENABLER TO

PUSH EUROPE’S COMPETITIVENESS

FRONTIER TOWARDS THE

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6 INNOVATION: A CRUCIAL ENABLER TO PUSH EUROPE’S COMPETITIVENESS FRONTIER TOWARDS THE FUTURE

6.1 Why innovation today

Innovation has been a conditio sine qua non for economic, social and industrial progress since the begin-ning of history. It is the means by which we support the quality of our lifestyle as well as the tool which has enabled us to respond adaptively to the constant transformation of value chains, demographic structures and environmental conditions typical of human history.

Innovation and countries’ competitiveness are evidently linked. Innovation, in the form of new products, processes, and management techniques, underpins the growth of countries’ economic performance, as showed in Figure 1, by the strong correlation existing between expenditures in research and development and countries’ competitiveness (r2: 0.7).

In fact innovative capacity, as a major driver of countries’ productivity, is heavily rooted in areas such as the intensity of scientists and engineers in the national workforce, the degree of protection of intellectual property, the presence of a dynamic capital market with a strong investment drive towards innovative enterprises and the depth of enterprise-research business links.

Figure 1. Correlation between R&D expenditure (2005-2010) and competitiveness as measured by the Observatory on

Europe Competitiveness Index (2006-2012) – Source: The European House - Ambrosetti on Eurostat and OECD data, 2012

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Evading the challenge of innovation today is not an option, especially for advanced economies. At the time of the so-called 3rd industrial revolution1, prosperity depends and will be increasingly depending on the ability to withstand the increasing international competition of emerging countries, by moving forward the frontier of innovation, by anticipating technological change and market trends and by maximising the speed and efficiency of the processes of transfer/commercialisation of new discoveries.

Since the launch of the Lisbon Strategy2, the EU has been active in positioning innovation at the centre of its socio-economic policies. The Europe 2020 Strategy represents the latest comprehensive attempt in this sense: as a complex agenda aimed at enhancing European competitiveness, this framework assigns to innovation – within the Innovation Union Flagship Initiative – a leading role in contributing to EU’s recovery from the economic crisis.

BOX – HORIZON 2020: A POTENTIAL GAME CHANGER?

The European States are currently facing serious challenges in attempting to stabilise financial and eco-nomic systems whilst maintaining high standards of living and dealing with important societal challenges such as ageing population. In an effort to collectively address these challenges, the EU adopted in 2011 the Europe 2020 Strategy which aims at promoting smart, sustainable and inclusive growth. One of the flagship initiatives under the strategy is the Innovation Union which provides a set of actions for increasing research and innovation performance with the aim of delivering jobs, prosperity, quality of life and global public goods. The EU’s new funding programme for research and innovation – Horizon 2020 – will be a key tool in implementing the Innovation Union flagship initiative.

In 2000 the EU adopted the Lisbon Strategy which was an action plan with the central theme of making the EU “the most competitive and dynamic knowledge-based economy in the world capable of sustai-nable economic growth with more and better jobs and greater social cohesion”3. To achieve this objec-tive the EU implemented instruments in the form of Framework Programmes for Research and Innovation which consolidated together all research-related EU initiatives under a single approach, the most recent of which was the Seventh Framework Programme also known as FP7.

This is the EU’s main instrument for funding research in Europe for the period 2007–2013 and was sup-ported by a budget of Euro 50,521 million. Under the FP7, broad objectives were grouped into four main categories: “Cooperation”, “Ideas”, “People” and “Capacities”. For each of these objectives a specific programme corresponding to the main areas of EU research policy was implemented. The programmes worked together to promote and encourage the creation of European areas of scientific excellence.

1 - See chapter 5 on manufacturing competitiveness.

2 - The Lisbon Strategy, also known as the Lisbon Agenda or Lisbon Process, was an action and development plan devised in 2000, for the economy of the European Union between 2000 and 2010. Its aim was to make the EU “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”, by 2010. It was set out by the European Council in Lisbon in March 2000.

3 - European Council, “Presidency conclusions at the Lisbon Council”, 2000. Available at: http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/00100-r1.en0.htm

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The Europe 2020 Strategy was introduced in 2011 as the successor to the Lisbon Strategy seeking to build upon its achievements with a central theme of promoting smart, sustainable and inclusive growth. As part of this strategy, the European Commission announced in November 2011 the Horizon 2020 Framework Programme for Research and Innovation 2014-2020, supported by a budget of Euro 80 mil-lion (now under review).

Horizon 2020 will contribute to build an economy based on knowledge and innovation across the whole EU by leveraging sufficient additional research, development and innovation funding. One of the key de-velopments that will be introduced under Horizon 2020 is a simplification of the applicable procedures and rules. This should help to reduce the administrative burden for participants and encourage new entrants.

Horizon 2020 will also merge and consolidate all existing EU research and innovation funding including the Framework Programme for Research, the Competitiveness and Innovation Framework Programme (CIP) and the European Institute of Innovation and Technology (EIT).

The programme looks to stimulate research and innovation across three main priorities:

1. Excellent science: the aim of this priority is to raise the level of excellence in Europe’s science base ensuring a steady stream of first-class research to secure Europe’s long term competitiveness. It will look to provide support for ideas, develop talent within Europe, provide researchers with access to priority research infrastructure and make Europe an attractive location for researchers. Actions under this pri-ority will be supported by Euro 24.598 million which represents 31% of the programmes total budget.

2. Industrial leadership: the aim of this priority is to make Europe a more attractive location to invest in re-search and innovation by promoting activities in which businesses set the agenda. It will look to provide investment in key industrial technologies, maximise the growth potential of European companies by providing adequate levels of finance and assist innovative SME’s to expand into leading companies. Actions under this priority will be supported by Euro 17.938 million which represents 23% of the pro-grammes total budget.

3. Societal challenges: this priority will adopt a challenge-based approach which will bring together resources and knowledge addressing several issues such as climate change and transport. One of the major societal challenges that will be addressed is health, demographic change and wellbeing. Actions under this priority will be supported by Euro 31.748 million which represents 40% of the pro-gramme’s total budget.

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Will the Innovation Union4 programme be capable of releasing the EU innovation potential? Does the EU show a sufficient endowment in those fundamental “innovative resources” that are crucial to achieve its ambitious objectives? And what are the critical issues which should be tackled in order to maximise the innovation-productivity linkage, allowing growth and new employment creation?

The answers to these questions are mixed. In spite of the strong emphasis on innovation maintained at of-ficial level:

- the EU innovation gap is a fact both in actual and in perspective terms. The EU 2020’s 3% investment in research and development (R&D) target is not likely to be achieved; European companies have hard times in positioning themselves at the frontier of innovation and in reaping the fruits of their – often valuable – research efforts;

- the European innovation deficit continues to present many facets: human resources endowment, quality of the research system, academic-business relations, capacity of producing “radical” new ideas – among others – continue to register deceiving performances by international standards;

- the differentiation among EU Member States becomes increasingly critical: in the context of the cur-rent economic crisis, the “gap” between EU’s best performers and “Modest innovators” continues to widen and to block the construction of a sound and dynamic Innovation Union;

- European businesses’ modest inclination to innovation is among the major factors holding back EU’s innovation performance: the lack of unitary incentive policies to private R&D at national level, the low development of equity and risk capital markets and the partial realisation of the Single Market actu-ally block (with few exceptions) the creation of a critical mass of new innovative enterprises capable of progressively developing economies of scale.

The following paragraphs will analyse these four points by offering an international view on Europe’s per-formance in comparison to its international peers. In doing so, and with the general goal of identifying the major critical areas to be addressed by European institutions in the next few years, this chapter will focus on three basic topics:

- the EU innovation deficit in international perspective;- the building blocks of EU’s innovation gap;- the role of the private sector.

4 - For specific information concerning the different projects involved refer to the website: http://ec.europa.eu/research/innovation-union/in-dex_en.cfm

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6.2 The EU innovation deficit in international perspective

The EU’s so-called innovation deficit can be related to 2 phenomena:

- comparative and structural underinvestment in R&D, both actual and prospective;- an innovation model that in many cases does not maximise the transformation of innovative ideas

into “market/industrial hits” (European paradox5).

As far as the first point is concerned, underinvestment can be described as one of the most critical areas affecting the EU’s innovation performance. At aggregate level, and despite the 3% R&D expenditures ob-jective, EU’s R&D investment has been stagnating since 2000, recording a modest increase of 0.1% points from 1.9% to 2.0% of GDP.

The EU-rest of the world gap has been increasing, particularly with reference to emerging economies in the last decade. While EU’s investment deficit compared to the US has remained constant, the same cannot be said about the increasing innovation investment gap with new innovative “Asian giants”.

If, in this sense, the Chinese rise in R&D expenditure is impressive on a “quantitative basis” (R&D investment in the country has passed from 0.9% of GDP to 1.8%), South Korea’s strong commitment to innovation is more representative of an international competition that is becoming progressively more “quality oriented”: with an increase in R&D investment from 2.3% to 3.7% of GDP and over $200,000 invested/per researcher (full-time equivalent – FTE6), South Korea is well positioned to become an important hub in the international innovation arena.

Figure 2. Gross Domestic Expenditures on R&D as a percentage of GDP and per researcher full time equivalent, 2000-

2011 – Source: The European House - Ambrosetti on OECD data, 2013. Note: data for FTE researchers in Israel are not available

5 - European Commission, “Green Paper on Innovation”, 1995

6 - Unit that indicates the workload of an employed person in a way that makes workloads comparable across various contexts

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EU’s underinvestment in innovation, of course, is the result of a very differentiated situation at Member States’ level: the EU hosts, at the same time, traditionally high-investing countries, with R&D expenditures rates well beyond the regional average (Finland, Sweden, Denmark, Germany, Austria), and low investing countries not only among the New Member states (such as Ireland, Portugal, Spain, Italy and Greece).

Figure 3. Gross Domestic Expenditures on R&D in major innovation hubs and in EU countries, 2010 – Source: The Euro-pean House – Ambrosetti on Eurostat and OECD Data, 2013

The highly scattered situation described above sheds doubts on the actual capacity and possibility for Eu-ropean countries to revert their tendency to under-investment.

The highly publicised 3% target7 of R&D expenditure by 2020 is unlikely to be met, especially in the current context of economic crisis and budgetary cuts. The European target, Member States’ goals and their actual investment effort strongly diverge: at current growth rates, R&D investment in 2020 will amount to a rough 2.2% of GDP.

7 - The EU’s target is set at 3% by 2020, with a combination of public funding (1%) and private sector investment (2%).

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Figure 4. Gross Domestic Expenditures on R&D projections in the EU, % of GDP, 2000-2020 – Source: The European House - Ambrosetti re-elaboration on European Commission data8

This innovation deficit is nothing but reinforced by the so-called European paradox: the EU fails in maximis-ing the efficiency between research and market outputs. For quite some time, Europe has been a leader in basic research, both in terms of quantity (it produces 31% of scientific papers in the world) and in terms of quality (it’s the first region of the world in terms of scientific citations). However, the ability to take this basic research and commercialise it – in order to bring it to the market in the form of products and services for people willing to pay money for (in other words, translating research into innovation) – has been lacking in many European economies, especially with reference to international competitors (most notably North America).

Figure 5. Share of scientific publications and citations by regional area, 2011 – Source: The European House - Ambro-setti on Scimago Journal and country ranks, 2012

8 - Proposed targets at the Member State level. Belgium: 3.0%, Lithuania: 1.9%, Bulgaria: 1.5%, Luxembourg: 2.6%, Czech Rep.: 1.0% (public sector), Hungary: 1.8%, Denmark: 3.0%, Malta: 0.7%, Germany: 3.0%, Netherlands: 2.5%, Estonia: 3.0%, Austria: 3.76%, Ireland: 2.25%, Cyprus: 0.5%, Greece: 1.2% (to be revised), Spain: 3.0% (to be revised); Finland: 4.0%; France: 3.0%, Italy: 1.5%, Latvia: 1.5%, Poland: 1.7%, Portugal: 1.0%, Romania: 2.0%, Sweden: 4.0%; Slovenia: 3.0% (to be revised), Slovakia: 1.0%; UK: no target.

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The persistence of the European paradox is due, among others, to:

- low university-business linkages;- the incompleteness of the Single Market and the differentiation in terms of regulatory environments;- the general weakness of financial instruments in support to innovation, especially at early stage levels.

No wonder Google is not an European success story. Its model is indeed strongly rooted in the US innovation system, especially in terms of:

- universities that — through close links to firms — start and nurture the agglomeration of expertise and enterprise (Google’s success story is strongly anchored to Stanford and it’s tremendous facility for sup-porting entrepreneurship);

- financial support from the US government (Google began as part of a project at Stanford University funded by US National Science Foundation);

- proximity to specialised and risk-taking financial support (Google was funded by several venture capi-tal funds from Silicon Valley);

- the ability to attract global talent (Bechtolsheim, one of the researcher that are behind Google’s suc-cess, grew up in Germany before coming to the US on a Fulbright scholarship, and he stayed on after his studies).

In many if not all of these fields, the EU presents a strong deficit that still needs to be tackled as it will be argued in the following section of the chapter.

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BOX – SOME PARADIGMATIC EUROPEAN BUSINESS STORIES: NOkIA AND SkyPE

The rise and (relative) fall of Nokia, a typically European success story, as well as the (American) success of Skype, are indicative of the model’s contradictions and of the importance of developing a dynamic and truly European market for innovation.

The success of Nokia and mobile telephony, indeed, originated with the Nordic decision to create the common standard Nordic Mobile Telephony (NMT). This provided Nokia with a common Nordic market of 20 million customers. When Nokia had grown sufficiently large on the back of this market it was blessed by the European Union’s decision to create a common European standard for mobile telephony – GSM. At that time, Nokia was among the most favoured companies to take advantage of the world’s largest uniform market for mobile phones. For almost twenty years Nokia took advantage of its position as the undisputed global market leader in mobile handsets. However, this fortunate situation was bound to come to an end. An end which came for Nokia when Apple decided to enter the market with its smart phone – i-Phone and related i-Tune platforms for music and applications. For too long, the company remained within its market ‘comfort zone’. It seems that Nokia forfeited a connection with mobile software develop-ers and thereby missed out on the opportunities of the smart-phone emerging market.

Figure 6. Global market share held by Nokia in the mobile phone market, 2008-2012 – Source: The European House-Ambrosetti re-elaboration on Bloomberg data, 2013

The story of Skype gives us some hints on another important aspect of the European paradox: the low performance in transforming good ideas into successful business due to the lack of financial instruments for supporting young companies. In fact, Skype was founded in 2003 by four Estonian programmers, along with a Swedish and a Danish entrepreneur.

The company’s development though has been completely based on the support of US venture capi-tal firms: companies such as DraperCo (US), that financed the company’s seed phase before product launch. Also the launch and initial pickup attracted top US VC names: DFJ (US), Mangrove Capital Part-ners (LU), Bessemer (US), Index Venture (US). In 2005 the company was eventually bought by eBay Inc. (2005) and, in 2011 finally was acquired by Microsoft.

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6.3 The building blocks of the EU innovation gap

EU’s innovation deficit, at a macro-level, presents many facets: it is related to poor endowment in qualified resources, low attractiveness of scientific careers for young generations, scarce tendency – at the systemic level – to produce “new” knowledge and to transform it into GDP points.

Figura 7. The European Innovation Deficit: a synthetic view – Source: The European House - Ambrosetti re-elaboration on Eurostat data, 2012

Some comparative data for the EU, Japan and the US additionally reinforce this argument:

- against the background of a generally poor endowment in terms of tertiary-educated workforce (33.6% of people aged 25 to 34, vs. the 41.1% and 55.7% scored respectively by the US and Ja-pan), tertiary graduates in science and technology are relatively few (12.5% of population aged 20 to 29 vs. 13.8% registered by Japan):

- researchers are under-represented in the labour force (0.7% vs. 1.1% in the US and 1.3% in Japan);- the production of new ideas, as demonstrated by the number of patents registered per million inhab-

itant (116.3, a half of what is produced by the US and Japan) is low; in addition economic revenues (also from abroad) are modest by international standards;

- also from a university-business linkage point of view, the EU registers deceiving results: as an example, public/private joint publications (per million inhabitant) are on average 1/2 of those co-published in the US.

These low scores are nothing but exacerbated by two additional factors: the limited presence of interna-tional centres of excellence among European tertiary education institutions and the low exchange of human resources between the public system and the private one that can be retraced at the research level.

The first point is demonstrated by the “Times” Higher Education International Ranking 2013. The pictures that emerges of EU universities is one of “intermediate quality” rather than excellence. In a context where universi-

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ties are increasingly called to produce veritable scientific breakthroughs and to become progressively more “entrepreneurial”, the EU seems not to be endowed with a tertiary education system that is ready to meet this challenge. The top 10 of the sample9 shows an 80% prevalence of US universities and a more general superiority of the Anglo-Saxon system compared to the continental Europe’s one; a situation which can be found – again – in the top 100 of the ranking. In order to see Europe as a leader, it is necessary to look at the lower tier of the rankings (the top 400 ranking), where European Universities amount to 40% of the institutions mapped.

Figure 8. Top university institutions of the 2012-2013 Times “Higher Education Ranking” – Source: The European House - Ambrosetti re-elaboration on Times Higher Education Rankings 2013

The reasons behind such phenomenon can be retraced into the existence (and persistence in time) of a typically European innovation model, which has privileged broad access to education rather than the cre-ation of a highly selective and predominantly private education system as the US one. The public predomi-nance in the European research world is also testified by data on the research workforce.

Figure 9. Researchers per sector percentage, total researchers=100, 2011 – Source: The European House - Ambrosetti re-elaboration on Eurostat data, 2013

9 - University are ranked on a voluntary basis (total number of university evaluated: 400, total number of Universities worldwide: 17,000). Source: Times Higher Education Ranking Methodology.

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In the EU over 50% of researchers is employed by the public sector rather than the private one: a stunning share, not only in comparison to the US but also with reference to China, where around 70% of researchers work in private institutions.

Besides, a last fundamental component of the EU’s innovation deficit – probably one of its crucial explana-tory variable – is certainly represented by the “EU innovative internal gap”. The EU is composed of countries that vary considerably in terms of technological expertise. While some of them, such as Sweden and Finland, are world innovation leaders, others are lagging behind. Moreover, the 2004 and 2007 enlargements have substantially increased not just the number of Member States, but also the range of countries’ technological expertise and stages of development. Even more than before, EU policy needs to take explicitly into account the existing variety in technological competence, innovation performance and industrial structure.

In contrast to the US and Japan, a proper European System of Innovation is still far from being in place. Rather, the EU still appears to be an agglomeration of autonomous and highly diverse national innovation systems.

Figure 10. Research and innovation performance of the EU Member States as measured by the Innovation Union Score-

board ranking 2013 – Source: The European House - Ambrosetti re-elaboration on European Commission data, 2013

The crisis has further intensified differences among Member States. As showed by the figure below on EU’s innovation performance as measured by the EU’s innovation scoreboard10, in the last five years a group of

10 - Quantitative instrument that measures EU countries innovation performance and ranks Member states in 4 group: Innovation Leaders, Inno-vation Followers, Moderate Innovators, Modest Innovators. The index construction includes 29 innovation indicators, grouped over 7 different innovation dimensions and 3 major groups of dimensions (from R&D expenditure, to economic weight of R&D sector in the total economy). The group of ‘Enablers’ captures the main drivers of innovation that are external to the firm and is divided into a ‘Human resources’ and a ‘Finance and support’ dimensions, capturing in total 9 indicators. ‘Firm activities’ captures innovation efforts that firms undertake recognising the fundamental importance of firms’ activities in the innovation process. This group covers 3 dimensions: ‘Firm investments’, covering a range of different investments firms make in order to generate innovations; ‘Linkages & entrepreneurship’, capturing the entrepreneurial efforts and the related collaboration efforts among innovating firms and also the public sector; and ‘Throughputs’, capturing the Intellectual Property Rights (IPR) generated as a throughput in the innovation process. This group includes 11 indicators in total. ‘Outputs’ captures the outputs of firm activities and is divided in 2 dimensions using 9 indicators. ‘Innovators’ captures the success of innovation by the number of firms that have introduced innovations onto the market or within their organisations.’Economic effects’ captures the economic success of innovation in employ-ment, exports and sales.

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“modest” and “moderate” innovators have reported a deterioration of performances (Spain, Greece, Cyprus, Portugal, Poland, Bulgaria, Romania), while countries such as Germany, Denmark, the Netherlands, Finland and France have seen an additional consolidation of their already leading positions in the innovation field.

Figure 11. Research and innovation performance of the EU Member, IUS ranking 2013 and 2008-2013 average varia-

tion in innovation performance – Source: The European House - Ambrosetti re-elaboration on European Commission data, 2013

One missing factor is still to be analysed for the view of the EU innovation deficit to be completed: the private sector and its tendency to underinvest in innovation by international standards.

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6.4 The role of the private sector

Europe’s low investment in innovation is closely connected to the moderate performance of the private sector in this field.

As showed by the figure below, this is the main determinant of the EU’s moderate expenditure in R&D, dur-ing the last decade. Indeed, while the contribution to research and development by public institutions is in line with international standards (0.3-0.4% of GDP), the weight of R&D performed by private organisations is strongly under-represented. This is also true with reference to less developed R&D systems such as China where private expenditures in innovation have experienced a sharp rise from 0.6% to 1.35% of GDP in the last ten years (in the same time range, EU’s private expenditures have only registered a moderate increase from 1.20 to 1.26% of GDP).

Figure 12. R&D expenditure by sector of performance as a percentage GDP, 2000 and 2011 – Source: The European House - Ambrosetti re-elaboration on OECD and Eurostat data, 2013(*) In the Chinese case, no data is available for Higher education and no-profit sector’s investment; the green rectangles represent “other sources of R&D” as registered by the China Bureau of Statistics

The moderate presence of the private sector in the R&D system is due to two main factors: the EU industrial structure – particularly specialised in sectors of medium R&D intensity – and the shortage of incentives and instruments in support of innovative businesses.

The first point can be easily illustrated by comparing the Relative Technological Advantage (RTA) of the EU and the US. RTA is a proxy which identifies the industrial sectors in which a country is most specialised.

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This indicator is calculated as the ratio between R&D expenditure of a region’s specific sector (calculated as a percentage of Added Value) and the region’s total R&D expenditure (calculated as a percentage of GDP). A value greater than 1 implies that the region is specialised in the sector under study, a value minor than 1 means that the country is not specialised in that specific sector.

Considering high R&D sectors as those that show higher R&D rates, it is possible to identify eight R&D intensive sectors: the aerospace, biotech, computer hardware and services, internet, pharmaceuticals, semiconduc-tors, software and telecom equipment sectors. By looking at the RTAs of the US and the EU, it is possible to notice that the EU is under-represented in most of these R&D intensive sectors.

Figure 13. Relative Technological Advantage (RTA) by sector (High R&D intensity sectors in bold) – Source: The European House - Ambrosetti re-elaboration on OECD and Eurostat data, 2013

The US is specialised in all high R&D sectors, and presents a stronger RTA in 5 out of 8 high R&D sectors (biotech, computer hardware and services internet, software, semiconductors). More interestingly though, in such sectors the lead of the US is extremely clear, whereas in the 3 high R&D intensity sectors where the EU is specialised (Aerospace and defence, pharmaceuticals and TLC equipment) the distance between the US and the EU is less evident (e.g. in the biotech sector the US presents a RTA of 2.20 vs. 0.32 of the EU, whereas in the pharmaceuticals one the EU has a RTA of 1.27 and the US of 1.16).

This tendency is also reflected at aggregate level: overall the US present a RTA of 1.39 in high R&D sectors, whereas the EU’s score is lower than 1. This constitutes a sign of the general under-representation of the region in those industrial sectors which represent the basis for future discoveries and industrial breakthrough.

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Figure 14. Average relative technological advantage in High R&D intensity sectors – Source: The European House - Am-brosetti re-elaboration on OECD and Eurostat data, 2013

The under-representation of the EU in high R&D intensity sectors is strongly related to low presence of instru-ments for supporting R&D and innovative enterprises. The overall lack of instruments of support to firms’ re-search and development efforts is proved by the general shortage of direct government funding of business R&D and tax incentives that support expenditures in R&D.

Figure 15. Direct government funding of business R&D and tax incentives for R&D as a percentage of GDP, 2010 –

Source: The European House - Ambrosetti re-elaboration on OECD and Eurostat data, 2013

An exception can be made, among others, in the case of France (the first country above average in terms of total State support to R&D, within the sample), a country that has put together an incentive scheme for innovative enterprises that include:

- reduced tax rates and exemptions: the Young Innovative Companies (Jeunes Entreprises Innovantes) benefit from an exemption of 100% for the first three years in profit, and 50% for the two subse-quent years for a maximum of Euro 100,000 of taxable income;

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- tax loss carry forward of 100%, up to Euro 1 million, and 60% for the surplus, without time limits;- tax credit of 30% on R&D expenditures with particularly favourable conditions for SME and start-ups11;- tax reduction on incomes from intellectual property (patents, etc.);- grants for financing business R&D;- tax exemption from capital gains incurring from investment in innovative enterprises.

A second and final critical area is represented by the lack of a strong and dynamic venture capital market and low support to early stage companies which results into fewer financing opportunities for innovative entrepreneurs. The latest available cross-country data shows that venture capital markets are much more developed in the US: in Europe there are countries like Italy, Spain or even Germany where Venture Capital accounts for a comparatively small part of GDP. However, it should be noted that countries like Sweden, France, Ireland and Finland present an incidence of venture capital over GDP comparable to the US.

Figura 16. Venture capital (Euros of Venture Capital for every 100,000 Euros of GDP), 2009 – Source: The European House - Ambrosetti re-elaboration on OECD/Eurostat data, 2011

11 - For SMEs (EU definition), Start-ups (companies for which 50% of the share capital is held on a continuous basis by individuals or by com-panies of VC or PE, regional development funds, etc..) and young innovative enterprises, the tax credit is refundable immediately, while for other businesses it can be returned for three years after which, if not used, it can ask for a refund. The main categories of costs eligible for aid include: i) costs of personnel engaged in R&D; ii) general and administrative expenses (calculated according to a formula), iii) depreciation and amortisation of assets used in R&D, contract research (with a cap equal to three times the other expenses, the sub-contractor must be credited), and costs for services. From 1 January 2013, the tax credit will be extended to cover certain expenses for product innovation (design, prototyping and pilot plants) by SMEs, the rate forecast is 20% of a maximum expenditure of Euro 400 thousand.

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BOX – INNOVATION AS THE MAGIC CONCEPT FOR GROWTH TODAy – By WOLFGANG SCHüSSEL12

Some months ago, the European Commission launched the “Innovation Union” flagship initiative. The Commission’s decision was made in accordance with the underlying world debate on innovation:

- in his inaugural State of the Union Address, US President Obama made several references to innovation, manufacturing and re-industrialisation;

- the Economist issued a cover story on 12 January 2013 on innovation, outlining the core theory that the pace of innovative progress is likely to slow down, resulting in a serious lack of grand ideas that should be changing our lives;

- on a global level, there is enormous competition for talented scientists and innovators. Not to forget Schumpeter’s theory that innovation (creative destruction) is the key to renewal of the economy and society, with entrepreneurs playing a central role.

The topic is particularly relevant as the degree and speed of innovation have a direct impact on our pro-ductivity and economic growth rates. This holds particularly true for ageing societies. In fact, the progress of innovation has apparently slowed down, despite the fact that there are now more researchers who have more funds available.

Indeed, governments, companies and universities together spend some 1.4 trillion US dollars on innovation each year – far more than ever before. But the simple figure on R&D expenditure may be a misleading indicator: the countries that dominate the world’s economy spend enormous sums on R&D – but so do companies. For instance, Apple is certainly the most innovative company but spends significantly less on research and development than Google.

What is often forgotten within this debate, however, is the considerable time lag between an invention and its industrial application: a century passed from James Watt’s development of the steam engine to its widespread use in the British industry. Between the introduction of electrification and its large-scale use some 40 years have passed. Lastly there is also the case of information technology – our generation’s contribution – which is still in its infancy.

The European Commission has been trying to address the issue of innovation for quite some time, stress-ing its relevance for Europe’s competitiveness and growth. Recent EC data estimated that, if the overall European R&D goal of 3% should be reached by 2020, more than 4 million jobs could be created and the annual GDP could be raised by some 800 billion Euros over the next 12 years.

However, the picture of Europe today is not particularly promising: 80% of the world’s scientists and re-searchers, 75% of the R&D spending and 69% of all patents come from outside Europe. Not to mention the fact that R&D spending varies greatly among Member States within the Union, ranging from 0.4 to 3.7% of GDP.

More specifically there are a series of tumbling blocks and weaknesses which should be adequately ad-dressed:

12 - Former Federal Chancellor of Austria, Member of the Advisory Board “Observatory on Europe”

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1. too little investment in knowledge factors. The US and Japan are investing much more and China is quickly catching up;

2. poor access to financing and high costs of intellectual property rights;3. little to no innovative approach in public tenders;4. too much fragmentation, red tape and cost-intensive duplication – Europe will simply have to use its

resources more efficiently.

Nonetheless there are still reasons to be optimistic: Europe lacks neither potential nor perspectives. It still has first-rate researchers and business innovators and can draw on the European potential based upon its values, traditions, creativity and diversity.

The biggest challenge for the EU and its Member States is a more pronounced strategic approach to innovation. The objectives defined are clear and should be welcomed:

1. the EU objective for education, research and innovation for the year 2020 is 10% (3% R&D, 7% education);

2. once again, the incidence of the manufacturing sector should amount to 20% of GDP, in 2020 (to-day it is only 16-17%) – this is easy to plan, but difficult to achieve;

3. the EU financial framework for the 2014 - 2020 budget is a major step into the future. The R&D bud-get should hopefully be increased from 91 to 126 billion euros (+37%), 13% of the EU overall budget. Part of the Community Structural Funds (325 billion euros) could, however, be added as approximately 20% of the funds are already today earmarked for education and research. The aim is to raise this rate up to 30%, which could mobilise an additional input of 100 billion euros for this purpose.

The European Union is slowly gaining consciousness on its issues and the upcoming budget is actually try-ing to address them, but Member States need to focus more specifically on their objectives.

The EU budget objectives should be undisputed in the upcoming negotiations between Council and Parliament. The entire budget should eventually comprise 126 billion R&D plus 100 billion from the Struc-tural Funds (30%). The Commission’s proposal for a Single Innovation Market should be welcomed with enthusiasm.

Another problem: issuing patents in Europe is up to 15 times more costly than in the US. The European patent to become effective in 2014 should make the situation easier.

Furthermore, access to EU programmes should be made much simpler – especially for SMEs.

The Framework Programme for Research and Development needs to be opened for partners from out-side Europe when they can contribute through appropriate funding. Considerations, in this regard, should be given to Israel and Russia and their knowledge potential.

Another key aspect is public tenders which account to approximately 17% of the GDP in Europe. The use of innovative techniques and principles could release enormous potential that is often overlooked, especially in the healthcare sector, in transport, e-government, education and training.

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The European Union should put more effort in valorising its human capital: visa policies and work permits are delicate but decisive questions for a European innovation space. It must be possible for researchers and innovators to work as easily in the entire EU area as within the borders of their own countries. It is highly regrettable that European educational institutions – in particular universities – train hundred thousands of young people who have to leave the EU after graduation because they are unable to obtain work permits.

The educational systems and educational institutions need thorough modernisation at all levels. Germany, Switzerland and Austria have a sought-after export article to offer: their dual professional training systems. Italy, Spain, the United Kingdom and even Greece are currently contemplating the introduction of such a dual system. And the developed countries also need to focus more on the STEM subjects (science, technology, engineering, maths).

The European Investment Bank (EIB) will play a decisive role in innovative approaches to financing. Pilot projects are being tested, and 2013 could become a decisive year:

- the 7th Framework Programme included Risk Sharing Programmes and guarantees to the amount of 20-25 billion euros for the next two years;

- under its Risk Sharing Initiative, the European Investment Fund provides individual risk guarantees for SMEs to their respective banks (2-3 billion euros);

- innovation could be financed with EIF venture capital, in particular for micro-financing purposes;- another pilot programme will be dedicated to long-term infrastructure investments (project bonds),

which could be largely directed to and attractive for pension funds that would obtain an investment grade for projects from the EIB. The volume of these investments in 2013 will range from 8 to 9 billion Euros in 2013.

The role of governments and public administration will be vital in this context. However, caution is of para-mount importance – little government influence makes innovation easier and more productive. And yet, certain projects will be impossible without marked involvement of administration and policy. In the 1950s and 1960s, networks were drivers for innovation of the transport, energy and later also the IT sector. It should not be forgotten that energy research accounted for 12% of the total R&D in the eighties. The share today is 3%. The decisive question that Europe must answer after the shale gas revolution in the US is how to handle the renewable energy source. On the one hand it entails a fascinating cost regression (approximately 70% cost reduction in 4 years), on the other hand it is characterised by high volatility.

The second big question refers to integration of the highly fluctuating renewable energies in existing grids. The integration requires flexible power stations, smart grids, storage, decentralisation and e-mobility.

What is also needed is a cultural change on the part of policy-makers, administration and the public. There are too many taboos. A general attitude of hostility to risk prevails and the popular media tend to spread pessimistic views, exaggerating risks and underestimating possibilities. In Europe, this normally results in red flags for nuclear research, fusion research, hydraulic fracturing, genetically modified organisms, stem cell research, animal testing, carbon capture storage (CCS), and much more. Russia, China or Singapore are not hampered by these red flags that are constantly waved in Europe.

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We must not ignore the fascinating options that technological future perspectives can open for us. Driver-less cars will be a reality on our streets within a decade. 3D printing could trigger a new industrial revolu-tion. Human prostheses, robots to support old or care-dependent people will become normal. Synthetic biology using bio-bricks is an exciting topic of research – so is the discovery of new materials and urban mining (molecular sorting of waste). Computers are becoming capable of interpreting and using human language.

If national governments and the European Union understand and implement these fascinating opportuni-ties and meet the challenges involved, if they open their windows and doors, if they refrain from putting stumbling blocks in the way of innovative entrepreneurs, and subject the public sector to innovative re-forms – the reward for such strategies could be enormous and the economic effects altogether breath-taking.

6.5 Conclusions

The analysis of the previous paragraphs underlines the strategic need for the EU to prioritise actions in four main areas:

1. Human Resources. The EU education system, especially at the second and tertiary levels must be re-formed in order to create the preconditions for establishing high-international ranking tertiary educa-tion institutions and produce “innovation driven” workforce at all relevant levels of education (including the secondary one), in order to meet the innovative labour market future needs.

2. Business investment in innovation. Europe needs to re-launch business investment in innovation and create a dynamic venture capital market for supporting start-ups and innovative businesses.

3. Foster the European market for innovation. The EU needs to push innovation demand throughout society by increasing innovation in the public sector.

4. Maximise Research/business interactions. Europe needs to make the inter-relation between the re-search and the productive system more efficient, contextually creating market opportunities for firms and facilitating/supporting the adoption of an “entrepreneurial attitude” by research institutions and researchers.

Some operational recommendations concerning these areas are developed in the chapter 9 of this report.

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165

A CRUCIAL LEVER FOR RELEASING

THE EU’S GROWTH POTENTIAL:

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7 A CRUCIAL LEVER FOR RELEASING THE EU’S GROWTH POTENTIAL: ENTREPRENEURSHIP

7.1 The challenge of entrepreneurship in the EU

For over a decade, policy makers in the EU have been debating over the growing need to promote entre-preneurial activity within Member States. Back in 2003, the EU Commission initially reacted with the publi-cation of the “Green Paper on Entrepreneurship” and the “Action Plan for Promoting Entrepreneurship”. Both documents stressed the relevance of boosting entrepreneurship within the EU:

“The EU is not fully exploiting its entrepreneurial potential. It is failing to encourage enough people to become an entrepreneur […] Europe, unlike the US, suffers from low expansion rates after start-up […]. Whereas US entrepreneurs appear to test the market and, if successful, expand rapidly, many business ideas in Europe never come to market, as their viability is questioned before they can be tested in the market place.”1

The communications of 2003 and 2004 were no casual event. In fact starting from 2004, the Euroba-rometer surveys registered a growing, and rather worrying tendency: the percentage of EU citizens with a preference towards self-employment shrunk in 23 out of 27 Member States. The trend has even worsened in recent years: while three years ago for 45% of Europeans self-employment was their first choice, today this percentage has gone down to 37%. By contrast in the US and China this proportion is much higher despite the harsh macro-economic context: respectively 51% and 56%.

Figure 1. Job preferences (% on total respondents), 2012 – Source: The European House - Ambrosetti re-elaboration on EU Commission data, 2012

1 - EU Commission, Action Plan for Promoting Entrepreneurship, 2004; p. 3-4

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The Annual Growth Survey 2013 has also emphasised the need to improve the business environment to increase the competitiveness of EU economies.2 In the current debate, the US has become a significant benchmark. Some studies3 point out that there is a powerful correlation between the performance of an economy and its business environment: the US is often regarded as a best practice in this case.

Thus, the first section of this chapter addresses the following question: is entrepreneurial activity actually hin-dered in Europe? In order to answer this question, comparable cross-country data is analysed and potential differences with the US economy observed.

This section argues that:

1. there are noticeable differences among EU Member States;2. in general, there is a significant gap in start up rates and business demography between the EU and

the US;3. EU small enterprises face impressive difficulties while trying to grow bigger and go beyond the “micro”

threshold, indeed very few of them join the ranks of the world’s largest firms.

The underlying question of this first section is particularly relevant: entrepreneurship is a powerful driver of economic growth and job creation. It creates new companies and jobs, opens new markets and nurtures new skills and capabilities. The EU Commission has estimated that young innovative firms create 4 million new jobs every year4. Furthermore, the Kauffmann Foundation released a recent study which argued that without the jobs provided by new firms, average net employment growth would be negative5.

Having answered the first question, a set of determinants, which have a documented impact on entrepre-neurship, will be identified. In analysing such determinants the US will constitute a constant benchmark. The objective of the comparative analysis is to highlight cause and effect relations and finally offer some policy proposals to improve the current framework.

7.2 Measuring the “entrepreneurial” gap between the EU and the US

Measuring business start-ups and entrepreneurship is a problematic and controversial issue: SMEs definitions are different between EU countries and the US6, and regulatory aspects may prove to be an obstacle when measuring business density among the population. Thus, two indicators will be observed in order to demon-strate the gap between the EU and the US in terms of entrepreneurial activity.

The first definition adopted in this study is the one provided by the Global Entrepreneurship Monitor (GEM). GEM constitutes the longest ongoing study7 on entrepreneurial dynamics in the world, and is promoted by Babson College, the London School of Economics, Universidad del Desarollo and the University of Tun Abdul

2 - European Commission, “Annual Growth Survey”, December 2012

3 - Hoffmann Anders. A, “Promoting Entrepreneurship – what are the real policy challenges for the European Union?”, 2009

4 - European Commission, “Entrepreneurship 2020 Action Plan”, January 2013

5 - Kauffman Foundation “Business Dynamics Statistics Briefing: Jobs created from business start-ups in the United States”, 2009

6 - EU countries define SMEs those enterprises with a number of employees lower than 250, while the US classify SMEs as firms with 500 or less employees

7 - The 2012 GEM study covered an estimated 74% of the world’s population and 87% of the world’s total GDP (198,000 people in 69 econo-mies)

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Razak. The study defines entrepreneurship as “any attempt at new business or new venture creation, such as self-employment, a new business organisation, or the expansion of an existing business, by an individual, a team of individuals, or an established business”8. In order to measure entrepreneurship, GEM has developed the “Total Early-Stage Entrepreneurial Activity” Index (TEA). The TEA Index, measures the level of dynamic en-trepreneurial activity in an economy by considering the incidence of start-up businesses and new firms (up to 3.5 years old) in the adult population (i.e. individuals aged 18–64 years). In other words, the TEA rate is defined as the percentage of 18-64 population who are either a nascent entrepreneur or owner manager of a new business:

• anascententrepreneurisanindividualwhoisactivelyinvolvedinsettingupabusinessthatwillownor co-own; this business has not paid salaries, wages or any other payments to the owners for more than 3 months;

• anewbusinessownerisanindividualwhoiscurrentlyowningandmanagingarunningbusinesswhichhas paid salaries, wages or any other payment to the owners for more than three months, but not more than 3.5 years.

Figure 2. Total early-stage Entrepreneurial Activity Rate (% on total population of working age), 2012 – Source: The Eu-ropean House - Ambrosetti re-elaboration on Global Entrepreneurship Monitor data, 2013

On the one hand, the represented data shows that TEA rates vary sensibly across EU Member States, on the other hand a significant gap is present between the US and the so-called EU Big 59. While some EU countries present higher or comparable data to the US (Latvia, Estonia, Austria and the Netherlands), others hardly reach half as much. However, the data should be analysed considering two relevant implications: the GEM

8 - Bosma et al., GEM Manual, 2012; p. 20

9 - Germany, France, Italy, Spain and the UK

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study is based on survey data and it only considers very young firms (no more than 3.5 years). Thus, in order to capture the differences between entrepreneurial activity in the EU and the US, more data is required.

Another useful indicator to measure the abovementioned gap is the density of small manufacturing enter-prises10, which is calculated as the ratio between the total number of such enterprises and the population of a given country, multiplied by 1000.

Figure 3. Business intensity of small manufacturing enterprises (small manufacturing enterprises/total population)*1000,

2010 – Source: The European House - Ambrosetti re-elaboration on Eurostat data, 2013

While controlling for the age of enterprises, this indicator shows that there is a consistent gap between busi-ness development in the EU and the US. While the US presents 24.2 small manufacturing enterprises per thou-sand inhabitants, the EU-27 average is 6.3, while the EU Big 5 average11 is even lower: 5.6. However, it should be noted that there are impressive differences among EU countries, with countries like the Czech Republic, Slovakia, Italy and Slovenia which are endowed with high business density of small manufacturing enterprises.

EU manufacturing enterprises face serious difficulties when trying to go beyond the so-called “micro threshold”12 (see Figure 4). The breakdown of EU small manufacturing enterprises reveals that almost 85% of the total is composed by micro-enterprises while the remaining 15% are enterprises with a number of employees between 10 and 49. Data for the US is different: US micro-enterprises roughly account for 77% of the total, while larger enterprises reach 23%.

10 - Enterprises with less than 50 employees are classified as small by EU standards

11 - Weighted average

12 - Less than 10 employees

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Figure 4. Composition of small manufacturing enterprises by number of employees, 2010 – Source: The European House - Ambrosetti re-elaboration on OECD/Eurostat data, 2013

With some noticeable exceptions, very few small EU enterprises go international and join the ranks of the world’s largest firms. Not surprisingly, the average size of enterprises differs sensibly between the EU and the US: this finding applies for SMEs but also to enterprises overall. In fact, European SMEs are smaller by more than 36% (14 vs. 9 employees) while US enterprises, on average, are two times bigger than EU ones (35 vs. 16 employees).

Figure 5. Average size of manufacturing enterprises (n. of employees), 2010 – Source: The European House - Ambro-setti re-elaboration on Eurostat data, 2011

Another problematic aspect of EU enterprises is their survival rate: in its recent Action Plan, the European Commission stated that only 50% of the enterprises manage to survive the first 5 years.13

On a final analysis, the data presented answers quite clearly to the underlying question of this first section: there is a considerable difference between the EU and the US in terms of entrepreneurial activity. The next section will look at the US case study in order to identify similarities and differences. Identifying the cause and effect relationships and ultimately the key policy areas is particularly relevant for stimulating entrepreneurship through effective policies.

13 - European Commission, “Entrepreneurship 2020 Action Plan”, 2013, p.10

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7.3 The key determinants of entrepreneurship

There is a wide and impressive literature14 concerning the determinants of entrepreneurship, the indicators and policy areas identified by these studies are numerous and a selection was therefore required. The cri-teria for the selection of indicators has been two-fold: relevance and difference. On the one hand, policy areas with a documented impact on entrepreneurship have been selected, on the other it was necessary to consider those areas where a consistent difference was present between the EU and the US. Ultimately, the designed framework outlines 6 policy areas as well as a series of indicators:

- venture capital, funds raised (Euros of venture capital every 100,000 Euros of GDP);- stock markets, total market capitalisation (% of GDP);- taxation, total business tax rate (% on profits);- labour market regulation, rigidity of employment index;- bankruptcy regulation, time and costs for resolving insolvency;- entrepreneurial education, role of primary, secondary and vocational education for understanding

the role of entrepreneurs.

Venture Capital

There is a strong belief that financing is an important enabling factor to entrepreneurship. In the case of small young firms, venture capital proves to be one of the most relevant sources of funding. Venture capital is private equity provided by specialised firms acting as intermediaries between primary sources of finance (insurance, pension funds, banks, etc) and private companies whose shares are not freely traded in any pub-lic stock market. Ultimately, venture capital is a relevant source of funding for entrepreneurial firms, especially young, technology-based firms with high growth potential.

Cross-country data shows that venture capital markets are much more developed in the US: in Europe there are countries like Italy, Spain or even Germany where Venture Capital accounts for a comparatively small part of GDP. However, it should be noted that countries like Sweden, France, Ireland and Finland present an incidence of venture capital over GDP comparable to the US.

The underdevelopment of venture capital in the EU is related to the structure of the financial sector, which is mainly almost entirely reliant on banking institutions. In fact, with the exception of Luxembourg and the Netherlands, the lion’s share of total assets within EU economies comes from the banking sector: insurance corporations, pension and investment funds cover a small percentage (see chapter 4).

Venture capital constitutes a significant financing issue in the EU and needs to be addressed with a coher-ent and even resolution among Member States. In order to enlarge the domestic supply of venture capital, governments can either take initiatives to develop national venture funds or improve venture market regula-tion to grow existing venture markets.

14 - Lundstrom and Stevenson (2005), Verheul et al. (2002), Hoffman et al. (2006) and other OECD Working papers

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Figure 6. Venture capital (Euros of Venture Capital for every 100,000 Euros of GDP), 2009 – Source: The European House - Ambrosetti re-elaboration on OECD/Eurostat data, 2011

Stock Markets

Efficient primary and (especially) secondary stock markets are also particularly important to gather needed capital for the expansion of firms. Furthermore, effective stock markets increase the supply of venture capital and also serve as an indirect source to more capital in earlier investment phases.

Figure 7. Total market capitalisation of stock markets (% of GDP), 2011 – Source: The European House - Ambrosetti re-elaboration on World Bank data, 2013

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While market capitalisation tops the GDP (roughly 14.000 bn. $ in 2011) in the US, it is less than half the GDP in the EU on average. Economies like Luxembourg, Sweden and the Netherlands have very high market capitalisations in comparison with the GDP. Conversely, market capitalisation in the European Union, as well as in the 5 biggest European economies, is less than half the figure of the US.

Many countries face the problem of obtaining a critical mass of new firms for a secondary stock market. The development of critical mass must balance two interests. Listing requirements and regulations must be simple enough to encourage small firms to make their initial public listing offerings through a secondary market. Sufficient disclosure, supervision and enforcement to protect and attract investors are therefore required.

Taxation

Another factor highlighted by the existing literature is corporate taxation: an excessive tax rate may deter potential entrepreneurs from starting a business or even force some to end prematurely their activity.

The total business tax rate records taxes and mandatory contributions that a company must pay in a given year: corporate income tax, social contributions and labour taxes paid by the employer, property taxes, property transfer taxes, dividend tax, capital gains tax, financial transactions tax, waste collection taxes, vehicle and road taxes, and any other small taxes or fees. The indicator is particularly useful as it goes be-yond the mere measurement of corporate income tax but also identifies other elements which may burden private enterprises.

In this case the comparison frames a more diversified and complex picture. The US has a lower corporate tax rate than the average of the five biggest EU countries. In fact, major economies, like Italy (68.3%), France (65.7%), Austria (53.1%) but also Germany (46.8%) score rather poorly under this indicator. However, both Spain and the UK have a tax rate which is 8-10 percentage points lower than the US. Under this aspect, US enterprises have a slighter advantage but still pay corporate tax rates which are moderately high (46.8%). In this case, however, the most striking finding resulting from the comparison is the divergence among EU countries. For instance, corporate tax rate in Luxembourg is 21% while it is almost 70% in Italy: that is almost three times as much.

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Figure 8. Total business tax rates (% of profit), 2012 – Source: The European House - Ambrosetti re-elaboration on World Bank data, 2013

As globalisation continues to develop, corporate taxation will become a central factor for companies choos-ing the extent to which they will locate operations abroad. In order to remain competitive on the global scenario, it is crucial for EU economies to device intelligent tax schemes capable of attracting enterprises. Minimum common standards and benchmarks should be introduced at EU level and integrated within Mem-ber States even through mandatory means.

Labour market regulation

A significant deterrent towards entrepreneurship is also labour market rigidity. Strict labour market regulations, such as high minimum wages and rigid firing regulation, have a negative impact on entrepreneurship. For instance, the consequences of high minimum wages on entrepreneurship are twofold:

- they reduce the margins of a nascent enterprise, discouraging start up;- as wage employment becomes more attractive, the opportunity cost to become an entrepreneur

increases.

Limitations such as hiring and firing inflexibility have a consistent impact on a corporation trying to grow or to develop a business culture, often through trial and error, that fits with the overall vision and strategy of the company. On the basis of the abovementioned considerations, the rigidity of employment index tries to capture various aspects of labour regulation and it is based on the average of three sub-indicators:

1. rigidity of hiring index: which measures the restrictions and limitations faced by an employer when try-ing to hire and employee;

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2. rigidity of hours index: which measures the flexibility of working hours;3. difficulty of redundancy index: which measures the restrictions and limitations faced by an employer

when trying to fire and employee.

High values of the index imply high rigidity of the economy’s labour market.

Figure 9. Rigidity of employment index, 2012 – The European House - Ambrosetti re-elaboration on World Bank data, 2013

It comes to no surprise that labour markets are comparatively more rigid in the EU than in the US. However, the comparison with some EU countries is staggering: France has an index which is almost 60 compared with 7 of the US. According to the index, few EU countries have actually designed flexible labour markets: the only exceptions may be Denmark (7), the UK (10), Belgium (10), Ireland (12), Slovak Republic (13) and Bulgaria (16).

Key action proposals to improve labour flexibility and mobility should include:

- using the funds of the European Social Fund for the creation of PPP between the Public and entrepre-neurial universities, especially in Regions with high unemployment, in order to promote re-conversion the skills of the unemployed;

- harmonising labour regulations and labour mobility among EU Member States;- designing a “migrant” entrepreneur visa in order to attract the best entrepreneurs over Europe.

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Bankruptcy regulation

The final regulatory aspect which may hamper entrepreneurship is bankruptcy legislation. Recent studies un-derline a correlation between fear of failure among entrepreneurs and the burden of bankruptcy regulation. Failure in Europe bears a heavy social stigma and also creates a series of barriers to re-starting business: this reduces the number of potential entrepreneurs.

The World Bank “Doing Business” study has recently developed two indicators which are particularly useful in measuring the burden of complex bankruptcy legislation:

- time for resolving insolvency: which expresses the time from the company’s default until the payment of some or all of the money owed to the creditor;

- cost for resolving insolvency: which calculates the cost of the bankruptcy proceedings as a percent-age of the debtor’s assets.

Figure 10. Time necessary for resolving insolvency (years), 2011 – Source: The European House - Ambrosetti re-elabora-tion on World Bank data, 2013

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Figure 11. Cost for resolving insolvency (% of corporate assets), 2011 – Source: The European House - Ambrosetti re-elaboration on World Bank data, 2013

Both indicators are calculated on a standard case business that has a downtown real estate, where it runs a hotel, as its major asset: the business involves 201 employees and 50 suppliers, each of which is owed money for the last delivery. The cost is calculated on the basis of questionnaire responses and includes court fees and government levies; fees of insolvency administrators, auctioneers, assessors and lawyers; and all other fees and costs.

While there is no significant difference between the US and the EU as for the time necessary for resolving insolvency (both in the US and in the EU Big 5 the required time is 1.5 years) the costs vary significantly: in the US resolving procedures cost roughly 7% of the debtor’s total assets while it is more than 11% in the EU Big 5. The worst case is Italy, where resolving procedure may account for 22% of the debtor’s assets (almost six times the rate of the best EU performer). With the exception of Ireland (4%), the Netherlands (4%), Denmark (4%), Finland (4%), Slovenia (4%) and the UK (6%) all other EU countries have higher costs for resolving insolvency when compared to the US. Not surprisingly, in those countries where the costs for resolving in-solvency is particularly high, fear of failure prevents many citizens from even starting a business. Bankruptcy times and costs need to be harmonised within the EU, as the consequences of failure constitute a significant obstacle to starting a business.

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Figure 12. Positive answer to the question: would fear of failure prevent you from starting a business? (% of total respon-

dents), 2012 – The European House - Ambrosetti re-elaboration on GEM data, 2013

Entrepreneurial education

One last element which may account for the level of entrepreneurial activity within an economy is educa-tion. There is a widespread culture that does not recognise or reward entrepreneurial endeavours enough. As a matter of fact, in very few countries the role of the entrepreneur is positively perceived as a creator of jobs and prosperity: this is primarily an issue of education.

Figure 13. Answers to the question: school helped in understanding the role of entrepreneurs (% of respondents), 2010

– Source: The European House - Ambrosetti re-elaboration on OECD data, 2012

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In fact, OECD data shows that 71% of US students find school useful for understanding the role of entrepre-neurs (only 28.5% found school not useful under this aspect). With the exception of Portugal (with 65.7% of students agreeing that schools are useful for understanding entrepreneurship) the percentage are much lower in the other EU countries. In countries like Austria (54.3% of positive answers), Finland (54.2%), the Netherlands (53.3%) and Spain (51%), a higher percentage of students found schools useful for under-standing the role of entrepreneurship, whereas in countries like Italy (36.4%) and surprisingly the UK (34.2), the majority of respondents where quite skeptical.

In order to strengthen entrepreneurial abilities through education, teaching methods must be defined from primary schools to universities. Some countries include basic business education in the core curriculum of both primary and secondary schools, whereas in other countries it is available only through electives or dedi-cated business schools. Activities that go beyond traditional teaching, such as dedicated entrepreneurship centres, internships, teacher and advisor education, and research are necessary for success. Policy initiatives should ensure the supply and quality of entrepreneurship education. Ultimately, classes on entrepreneurship should be considered on the same level of mathematics or literature: in order to train and motivate younger generations towards starting a business, it is crucial to integrate the curricula of primary, secondary and vo-cational education with classes on entrepreneurship.

Other key actions under this policy area may comprise:

- encouraging Universities to interact more with private companies in order to provide graduates with the necessary “field experience”;

- creating awareness on the positive role of entrepreneurs within the society through wide public sup-port initiatives;

- designing a single contact point where entrepreneurs could easily get in touch with Angel Investors from all over Europe. In the US, young entrepreneurs with innovative ideas are encouraged to get in touch with Angel Investors through many public institutionalised channels.

7.4 Conclusions

The level of entrepreneurship and its nature vary widely between Member States, and the reasons for low enthusiasm for an entrepreneurial career are therefore diverse. Some Member States with higher levels of entrepreneurship are less successful than others at helping new and small enterprises to grow. Overall, potential entrepreneurs in Europe find themselves in a tough environment characterised by: difficult access to credit and markets, punitive sanctions in case of failure, burdensome administrative procedures and an educational system that does not offer the right foundations for an entrepreneurial career. Lastly, support measures for SMEs remain unbalanced, with a substantial number of EU Member States still neglecting to take into account the characteristics of small businesses, in particular micro-businesses.

Key levers for recovering from the economic crisis are entrepreneurship and job creation. However, for many years enterprise creation in the EU occurred at low rates and, more importantly, only 50% of the enterprises manage to survive the first 5 years.

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The analysis presented a series of bottlenecks which constitute a powerful deterrent towards enterprise cre-ation and growth: low attention to the topic in the education field and social stigma, bureaucratic burdens, uneven labour and bankruptcy regulation across the EU. What should be carefully considered when looking at figures, is that situations vary impressively from country to country in the EU: countries like Estonia, Latvia, Austria and the Netherlands present levels of entrepreneurial activity comparable, if not higher, to the US. Benchmarks and exchanges of best practices can and should be done.

On a final analysis, in order to seriously bring back entrepreneurship into the agenda, it is crucial to address the issue on two different playing fields: culture and framework conditions.

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8 THE EUROPEAN BUSINESS LEADERS SURVEY

8.1 Why and how

Given the business driven bias of the Advisory Board “Observatory on Europe”, it was clear from the outset that the European business community’s involvement in the project was necessary.

The most efficient and effective way to assure this involvement was to carry out a survey on a selected group of top European executives, in order to collect their opinions, needs and expectations with regard to a vision for Europe and European integration and competitiveness.

The survey’s methodology was similar to the one adopted in 2005, 2007, 2009 and 2011. In fact, the 2013 survey was submitted to a broad group of top executives, including associations based in the EU.

These kind of surveys neither have, nor pretend to have, any kind of statistical relevance. The selected sample does not intend to be representative from a statistical standpoint. On the contrary, the executives represent a selected group of top companies that, thanks to their leadership, dimension, business model, etc., play an important role in the European (and international) economic and social context. They are famil-iar with global competition since they face it on a daily basis. Their perspective is thus very valuable.

The questionnaire was designed in order to collect practitioners’ feedback primarily on the following issues:

- the vision of the future for the EU;- the European markets’ level of integration;- the importance of a series of recommendations for increasing EU competitiveness with regard to

manufacturing (main challenges and top priorities for the EU manufacturing sector in Europe) and the financial system;

- the perceived barriers and enablers for entrepreneurship in the EU.

The survey was carried out throughout two months, from beginning of April 2013 to the end of May 2013.

The top executives of more than 120 European-based companies and associations filled out the question-naire. They are mainly Chairmen, CEOs, Directors or Senior Managers: they therefore represent a highly quali-fied and authoritative panel.

The sample comprises companies from a variety of European countries. In line with past editions, the most represented nations are Italy (28%), Spain (20%), France (13%) and Germany (10%).

Questionnaire were filled out mainly by companies operating in the manufacturing industry (nearly 50% of the total), the financial sector (about 20%) and the utility sector (more than 25%).

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8.2 Main results

The first question, regarding the EU’s vision of the future, was aimed at finding out if practitioners still believe in the “motivating power” of the European dream.

The practitioners’ responses were very encouraging: “defining a clear, challenging and exciting long-term vi-sion of the future” obtained an average score of 8.92 (where 1 = not important at all, and 10 = of the utmost importance), which is in line with the scores obtained in previous years.

Figure 1. The importance for the EU to define a clear, challenging and exciting long-term vision of the future – Source: The European House - Ambrosetti 2005, 2007, 2009, 2011 and 2013 European Business Leaders Survey, May 2013

The survey revealed the predominance of a climate of uncertainty on the future of the European manufac-turing sector in terms of growth expectations in the upcoming years. In fact, considering that the EU intends to increase the manufacturing industry’s contribution to GDP from the current 17% to 20% by 2020, the majority of respondents (51.4%) believed that, on the contrary, the contribution of manufacturing to GDP will fall under the current 17%.

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Figure 2. Growth expectations for manufacturing in the upcoming years in terms of industry’s contribution to GDP –

Source: The European House - Ambrosetti 2013 European Business Leaders Survey, May 2013

The following questions aimed at understanding the perceived level of integration of the European market and its impact on the level of competitiveness of different industries – i.e. how the European integration pro-cess has affected the competitiveness of the European manufacturing and banking industries.

Figure 3. How the European integration process has impacted the competitiveness of the European manufacturing and

banking industries – Source: The European House-Ambrosetti 2013 European Business Leaders Survey, May 2013

The business leaders pointed out a poor impact on competitiveness levels, especially for the banking industry (score of 5.38, where 1 = very negatively and 10 = very positively).

Furthermore, the respondents reported a modest level of integration (6.12 in a scale from 1 to 10) in their own sectors. Nevertheless, comparing that score with the ones collected in our previous surveys, a certain improvement towards the completion of the Single Market can be noticed.

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Figure 4. The level of integration noted by the respondents in their own sectors – Source: The European House - Ambro-setti 2005, 2007, 2009, 2011 and 2013 European Business Leaders Survey, May 2013

In any case, a further reduction of barriers to integration is one of the priorities identified by the interviewed practitioners. The question “How important is it for your organisation to operate in a fully-integrated single Euro-pean market?” received an average score of 8.17, which is in line with the score recorded in 2011.

Figure 5. The importance for the organizations to operate in a fully-integrated single European market – Source: The European House - Ambrosetti 2005, 2007, 2009, 2011 and 2013 European Business Leaders Survey, May 2013

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The following section of the questionnaire entered the part focused on EU manufacturing competitiveness. Practitioners were asked to assign a score from 1 to 10 to a list of actions according to their priority order:

- score 1 indicates an action which is not at all important for competitiveness;- score 5 indicates an action which is important for competitiveness;- score 10 indicates an action which is very important and urgent for competitiveness.

The actions proposed are about two key factors for manufacturing competitiveness, as seen in chapter 5. We asked practitioner their perception of what “the European Union should do to improve the competitive-ness of its manufacturing sector” regarding innovation (Figure 6) and the regulatory environment (Figure 7).

Figure 6. What practitioners feel the European Union should do to improve competitiveness of its manufacturing sector

with regard to innovation – Source: The European House - Ambrosetti 2013 European Business Leaders Survey, May 2013

All the actions proposed to boost European competitiveness in the field of innovation were perceived as very important, as they recorded scores above 7. According to the respondents, the issues related to the need to introduce tax exemptions for R&D investments (score of 8.54) and to facilitate getting credit proce-dures (score of 8.49), especially for innovative firms, were the most important and urgent challenges to face.

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Figure 7. What practitioners feel the European Union should do to improve competitiveness of its manufacturing sector

with regard to regulatory environment – Source: The European House - Ambrosetti 2013 European Business Leaders Survey, May 2013

In comparison with those in the field of innovation, the actions proposed with reference to the improvement of European regulatory environment were perceived as more important and urgent, recording scores be-tween 7.5 and more than 9.

Even if all the actions are equally imperative, the respondents perceived as pivotal the need to reduce the number of procedures, days and costs required to start a new business, with an average score of 9.04.

After analysing the importance of a series of recommendations for increasing European manufacturing competitiveness, the next questions were about the suggested measures the EU should adopt “in order to improve the regulatory framework for the European financial sector”.

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The questionnaire proposed five pivotal actions, which had been evaluated by the business leaders accord-ing to their perceived priority degree. Scores were included in a scale from 1 to 10, where:

- score 1 indicates an action which is not at all important for the financial sector;- score 5 indicates an action which is important for the financial sector;- score 10 indicates an action which is very important and urgent for the financial sector.

Figure 8. Measures which the EU should adopt in order to improve the regulatory framework for the European financial

sector – Source: The European House - Ambrosetti 2013 European Business Leaders Survey, May 2013

With scores of 8.25, promoting the harmonisation of banking conditions within the EU Member States is the top priority for the respondents. Practitioners also emphasised the great importance of supporting the super-vision mechanism of the European Banking Union (score of 8.17).

Finally, the questionnaire focused on the evaluation of the drivers for entrepreneurship in the European Union (Figure 9). The practitioners identified the key enablers among six different factors.

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Figure 9. Factors considered as the main enablers for entrepreneurship in the European Union – Source: The European House - Ambrosetti 2013 European Business Leaders Survey, May 2013

As shown in Figure 9, the respondents currently believe that the most important enabling factor for entrepre-neurship among EU Member States is by far access to credit (score of 8.25). While the scores related to the other factors were very similar between them, ranging from 7.63 to 7.21, the one related to perceived restart possibilities and fear of failure recorded a value decisively lower than the others (score of 6.71).

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9 POLICY RECOMMENDATIONS

The debates held during the “Observatory on Europe” Advisory Board meetings ultimately converged in a series of ambitious, yet feasible, policy proposals for the future of Europe. Backed by the analysis presented in the previous chapters, we will hereinafter propose some policy recommendations which, in our own opinion, should be carefully taken into consideration by EU Institutions. The recommendations refer to the strengthen-ing of Europe’s manufacturing competiveness and to four, strictly related, key areas: regulatory environment, entrepreneurship, innovation and financial system.

Figure 1. Policy recommendations topics

9.1 Manufacturing sector: towards a European business model

The European manufacturing sector is complex and different, with a strong centre and weak periphery. The rationale behind the EU integration process was to make economies more open towards each other: the German case shows just how much there is to gain when supply chains are re-engineered taking into account the opportunities offered by an open, integrated market. Instead of focusing on harmonising its economies, the EU should build a comprehensive and coherent framework which valorises such differences across Member States and uses them to its own advantage.

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1. The EU should design an integrated European business model, capable of combining the different competitive advantages and profiles of Member States. It is therefore crucial to re-design the business models of each country into a single integrated one with a clear division of tasks, labour and respon-sibilities.

2 In order to build a competitive European manufacturing sector, it is pivotal to invest in wide public infra-structure projects in the fields of broadband, traffic as well as common electricity grids. Public funding should be channelled into networks and infrastructures and it is necessary to capitalise on the positive experience of the TEN networks.

3. The EU should continue to liberalise and de-regularise structural rigidities in the manufacturing sector in order to foster growth and competitiveness.

4. EU integration should be more thorough but also more inclusive. The EU should foster economic open-ness in Member States and EU trade policy should focus on open global markets and access for EU industries to emerging and developing markets (Turkey, China, Russia, India, Latin America and South East Asia).

9.2 Regulatory Environment: developing a common and facilitating framework for business

In these challenging economic and financial times, Europe needs to send out a clear message that it is open for business. Furthermore the EU must make sure that administrative burdens for companies are limited to those that are strictly necessary to strengthen European competitiveness, sustainable growth and employment.

5. In order to bolster integration and to create a widespread pro-business environment, three action lines are conceived as pivotal:

- reduce the excessive burden of public bureaucracy;- assess and improve existing rules instead of creating new regulation;- introduce common standards and methodologies.

6. Data shows that there’s no homogeneous regulatory environment for businesses in the EU. In order to balance business opportunities among EU Member States, the key actions to enforce are:

- capitalise on success stories and promote best practices within the EU;- introduce in the consultation processes an impact assessment of costs related to the new regula-

tions proposed;- pay more attention during the assessment of crime impact of proposed regulations as new regula-

tions could inadvertently create opportunities for crime.

7. In order to create the framework conditions for a dynamic labour market, it is crucial to:

- apply at the EU and national level the idea of flexicurity and introduce a paradigm shift from job protection to employment protection;

- take into account national efforts of reforming overregulated labour markets before introducing EU-level initiatives such as regulation on company restructuring or posting of workers.

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9.3 Entrepreneurship: promoting a pro-business culture and the framework conditions for the creation and growth of enterprises

Key levers for recovering from the economic crisis are entrepreneurship and job creation. However, for many years enterprise creation in the EU occurred at low rates and, more importantly, only 50% of the enterprises manage to survive the first 5 years. The analysis presented a series of bottlenecks which constitute a power-ful deterrent towards enterprise creation and growth: low attention to the topic in the education field and social stigma, bureaucratic burdens, uneven labour and bankruptcy regulation across the EU. What should be carefully considered when looking at figures, is that situations vary impressively from country to country in the EU. Benchmarking and exchanges of best practices can and should be done. On a final analysis, in order to seriously bring back entrepreneurship into the agenda, it is crucial to address the issue on two different playing fields: framework conditions and culture.

8. Framework conditions for entrepreneurship

- The time and costs to start businesses vary impressively among EU countries: this has repercussions on the motivation and attitudes towards entrepreneurship. Minimum common standards and bench-marks should be introduced at EU level and integrated within Member States even through manda-tory means.

- Also bankruptcy times and costs need to be harmonised within the EU, as the consequences of failure constitute a significant obstacle to starting a business.

- Use the resources of the European Social Fund for the creation of PPP between the Public and en-trepreneurial universities – especially in Regions with high unemployment – in order to reconvert the skills of the unemployed.

- Improve labour mobility, harmonising labour regulations.- Design “migrant” entrepreneur visa in order to attract the best entrepreneurs over Europe.

9. Entrepreneurial culture

- Eurobarometer data shows that in very few countries the role of the entrepreneur is positively per-ceived as a creator of jobs and prosperity. This is primarily an issue of education. Indeed classes on entrepreneurship should be considered on the same level of mathematics or literature: it is therefore pivotal to integrate the curricula of primary, secondary and vocational education with classes on entrepreneurship.

- Encourage Universities to interact more with private companies in order to provide graduates with the necessary “field experience”.

- Create awareness on the positive role of entrepreneurs within the society through wide public sup-port initiatives.

- In the US, young entrepreneurs with innovative ideas are encouraged to get in touch with Angel Investors through many public institutionalised channels. The EU and Member States should design a single contact point where entrepreneurs could easily get in touch with Angel Investors from all over Europe. A web-site – where all potential financing opportunities and contact points are available – should also be designed.

- Promote lifelong learning and a culture of practical education from primary school onwards with the objective of a better linkage of skills (offer) and labour market needs (demand).

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9.4 Innovation: push Europe’s competitiveness frontier towards the future

While globalisation has increased the prospects for many European businesses, open markets have also brought challenges as competition has increased. In order to remain competitive, European firms are facing increased pressure to be more inventive so that they can react quickly to consumer demands, and respond to global challenges such as climate change and fluctuations in energy prices.

The Innovation performance of the EU is highly diversified with Leading Innovation countries experiencing ever increasing improvements and Moderate/Modest innovators lagging behind.

In order to revert this trend, a new set of actions must be taken. The Observatory on Europe – building on the success registered by the Single Market Act Framework (SMA) initiatives in increasing cohesion and integra-tion among Member States – deems essential the following points.

10. The EU should launch a strategic program included in the SMA platform with measures for the cre-ation of a EU Single Market for research and industrial innovation which includes actions in the follow-ing crucial fields.

- Human Resources: devise secondary and tertiary education programs that really reflect the current and future needs of an innovative Europe and invest on talented individuals (e.g. technical and scientific education in high schools, policies to attract world talents into the EU research system, etc.).

- Business investment in innovation: design a single European scheme of incentives and regulatory simplification related to the innovative sector.

- Innovative financial schemes: help the venture capital market to develop in scale and depth.- Innovation demand-side policies: spur a dynamic innovation market by capitalizing on Public Ad-

ministrations innovation needs.- Research/business interactions: maximise the inter-relation between the research and the produc-

tive system on issues at the hearth of the EU industrial policies (e.g. key enabling technology, green industry, etc.) also building on the new Horizon 2020 platform.

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9.5 Capital and financial markets: new channels for credit

Data shows that the EU financial strategies are too dependent from the banking sector and this constitutes a relevant bottleneck to economic growth in times of crisis: EU enterprises struggle to find alternative sources of financing as banks are obliged to undertake a cautious approach to investments. Compared with the EU, the US financial sector is definitely more diversified, as insurance corporations, pension and investment funds cover a higher quota on total assets. Thus, enterprises are provided with a plurality of financing options in the US, whereas in the EU when credit institutions cannot operate there are no alternatives for financing.

11. In order to stimulate the development of capital markets in the EU, it is necessary to:

- promote funding to long term investment in capital markets;- open regulation in order to facilitate long term investments formation;- foster the creation of non banking financial intermediaries;- foster and promote the development of crowdsource funding (which is already very popular in the

US);- promote a common approach among the different European Member States (a single European

framework must replace the different national capital markets).

The cost of borrowing and access to credit (especially for SMEs) still varies sensibly among Member States. Such a situation, generates losses on both sides: on the one hand creditors obtain poor gains on their invest-ments, on the other businesses urgently need liquidity but have strict credit conditions.

12. In order to guarantee equal access to credit and boost return on investments in the entire Monetary Union, it is necessary to design innovative financial schemes which may allow for more intelligent credit allocation and risk sharing among the EU. In this context the European Stability Mechanism (ESM) could serve as a credit warrantor.

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