Europe at the Crossroads: The Challenge from Innovation-based Growth

Europe’s performance relative to the US and countries in Asia is a topic that greatly preoccupies policy-makers who are concerned that the EU is losing ground compared to other, more dynamic parts of the world. Although the recent crises in Asia gave a timely reminder that the grass often looks greener on the other side of the fence, this paper points to trends in EU performance that European policy-makers will find disconcerting. Productivity growth has slowed down relative to competitors. Export competitiveness has deteriorated in all areas except agriculture and raw materials. The losses have been most manifest in the technologically most sophisticated industries, particularly ICT. Europe has also failed to create employment on a scale at all comparable with the US or Japan, with obvious repercussions for unemployment. While until recently there was a tendency towards convergence in productivity and income between European regions, there are now signs of a reversal of this trend. Redressing this relatively disappointing performance will be neither easy nor quick, but if enduring answers to Europe’s problems are to be found, it is essential that the scale and nature of these problems are carefully diagnosed and solutions found. This paper argues that the problems that Europe faces in key areas such as growth, equality and employment are all related to its failure to take sufficient advantage of technological advances, particularly the ICT revolution. Consequently, a coherent European strategy for upgrading technological capability and quality competitiveness is long overdue. This cannot be limited to providing support to selected industries (or companies) in order to make them more competitive in global markets. Rather, what Europe has to do is to take steps to embed new technologies in society. This should bring together macro-economic policy, regulation, science and technology policy, and employment initiatives. The complementarities between policy areas, in particular, should be stressed.