A new report examines the EU economy sector by sector, and country by country, to identify the major drivers, patterns and trends in European competitiveness.

The EU’s flagship Lisbon Strategy seeks to fulfil an ambitious set of goals: to boost Europe’s competitiveness and create jobs, while transforming the Union into an innovative knowledge-based economy and society. Lisbon has macroeconomic aspirations but requires action at both the macro and microeconomic levels, as well as in the area of employment policy.

The comparison of aggregate measures can only provide an incomplete picture of European competitiveness. The devil, as the saying goes, is in the detail. Getting Europe’s economic engine to whirr and purr its way to Lisbon requires the EU and its Member States to ensure that each component of the economy is well-calibrated and fine-tuned. And building up a detailed picture of this sort, in turn, needs accurate and extensive data and statistics.

Moreover, enterprise and industrial policies require a detailed understanding of the competitive process at the level of individual industries. In order to build up that understanding, the European Commission has financed an in-depth report, entitled ‘Sectoral growth drivers and competitiveness in the European Union’ (9 MB).

The document looks at the EU economy sector by sector, and country by country, and identifies the major determinants, patterns and trends in European competitiveness. It aims to analyse the impact of a series of drivers on economic growth. It analyses the performance and the responsiveness to particular drivers of individual industries and Member States.

It also compares the situation within Europe, and between Europe and its main rivals. One of the main transatlantic differences the report uncovered was the difference in the contribution of multifactor productivity to value added growth, which is consistently higher in the United States, particularly in the electrical machinery, post and communications and distribution sectors.

Drivers and indicators

The report is divided into two sections. Employing ten competitiveness indicators, the first part provides a comprehensive assessment of the relative strengths and weaknesses of European industries with respect to the growth of value added and employment, labour and multifactor productivity, profitability, international trade and investments. The second part investigates the determinants of sectoral growth, identifying the industry-specific impacts of macroeconomic conditions, demand-side factors, inputs to production, market structure, and trade openness.

Macroeconomic conditions – such as changes in national income, interest rates, currency exchange rates, tax levels and comparative prices – define the general business environment. For that reason, the report examines how macroeconomic factors affect sectoral growth and performance.

Crucial drivers within firms include inputs to production, such as physical capital and labour which constitute the resource base of companies and sectors. Their importance lies in the fact that the accumulation of productive resources lies at the heart of economic growth.

R&D and innovation are key drivers behind changes in the production function (or, more generally, the function of revenue generation). In economies with high per-capita income, innovation provides the main route for escaping pure price competition.

Low trade barriers are also crucial. They not only raise overall competition within an industry, but also enlarge accessible sales areas and ease transactions with international partners, thus fostering gains from specialisation and the diffusion of knowledge. The document also explores how demand and production inputs influence the competitiveness and performance of different sectors.

Compound topography

The EU, with 27 Member States and some 500 million citizens, is a complex place. This complexity is highlighted by the report, which reveals that the competitive performance of European industries and their responsiveness to various drivers is highly variable, both across countries and between sectors.

Across the EU, the data highlight a pronounced ranking in the economic growth performance of broad sectors, with the service industries, particularly ICT and telecommunications, leading the pack and the steadily shrinking mining sector bringing up the rear.

Certain factors were found to have a significant influence across the board. Unsurprisingly, price was found to have a major impact on competitiveness. For instance, relative prices tend to dampen growth, particularly in the newer Member States, in sectors where prices rise faster than in other industries. In the majority of sectors, higher long-term interest rates, exchange rates and implied tax rates, as well as large government deficits, represented significant barriers to growth. As would be expected, the report uncovered a strong positive correlation between innovation and growth. However, this relationship is not simple, straightforward or linear.

‘Sectoral growth drivers and competitiveness in the European Union’ has broken new ground and will certainly prove to be an essential tool for policy-makers in their quest to make policy more responsive to the intricate balance between sectors and to fine tune it to individual sectoral needs. The beauty of the report’s approach is that it provides a detailed and thorough snapshot of the EU’s sectoral landscape, while leaving policy-makers and other stakeholders to draw their own conclusions and prescribe their own courses of action.