Industrial policy in an enlarged Europe

1) OBJECTIVE

To trigger a debate on how industrial policy can improve the competitiveness of industry and to refine the integration of the various policy instruments that have an impact on industrial competitiveness.

2) ACT

Commission Communication of 11 December 2002 on industrial policy in an enlarged Europe [COM (2002) 714 final - Not published in the Official Journal].

3) SUMMARY

Background

The communication is to be seen in the context of the European Councils in Lisbon in 2000 and Gothenburg in 2001. The Commission had, in a previous communication, stated that the current economic recession could jeopardise the goal set at Lisbon of making the European Union (EU), by 2010, 'the most competitive and dynamic knowledge-based economy in the world, capable of sustainable growth with more and better jobs and greater social cohesion'. In addition, the Gothenburg summit had emphasised the need to promote the objective of sustainable development, whilst aiming at the simultaneous pursuit of the objectives under the economic, social and environmental pillars.

Industrial policy has a key role to play in helping the European Union meet the objectives it set itself at Lisbon and Gothenburg.

The communication takes a brief look at the situation of industry in the EU, listing its assets and handicaps. It also examines the implications of the future enlargement of the EU. The document also gives an overview of the challenges which European industry will have to face and suggests a number of actions to be taken to make it more competitive.

Analysis of the situation

In the face of competition which is now conducted at a global level, most sectors of European industry have made substantial efforts to upgrade their production infrastructures and integrate new forms of organisation.

In addition, following the emergence of certain decisive factors such as the growing importance of the internal market and the introduction of the euro, EU industry, and especially the services sector, experienced significant mergers and acquisitions activity in the second half of the 1990s.

The European Union is a major force in international trade. The reduction in the EU's market share of world trade is relative, given that whilst its figures fell from 19.3% over the 1991-95 period to 18.4% in 2002, the falls experienced by its main competitors were greater. Over the same period, the US share went down from 15.1% to 12.1%, and Japan's from 12.2% to 8.2%. Furthermore, the trade balance for EU goods was in surplus in nine of the last ten years.

Despite enterprises' demands for a more highly skilled workforce, levels of educational attainment are not high enough. Whilst the average duration of education of the working population in the European Union is increasing, the figures fall below those recorded in the USA and Japan, with the average duration in the EU being 87% and 90% of the average US and Japan levels respectively. When it comes to the EU's public spending on education and training as a percentage of gross domestic product (GDP), the figure has actually fallen from 5.7% in 1990 to 5% in 2001.

In the EU, labour productivity growth (GDP growth divided by the number of persons in employment) between 1995 and 2001 was lower (1.2%) than in the United States (1.9%), whereas the comparison was still in the EU's favour between 1985 and 1990. More specifically, two main reasons for this adverse trend have been analysed: the fact that investment in information and communication technologies (ICT) is not sufficiently translated into productivity gains and a lack of innovative activity as illustrated by the EU's low share of patent and research and development (R&D) activity compared to the USA and Japan. Especially in some sectors of industry, such as electronics, biotechnology or nanotechnology, the EU is lagging behind its competitors.

Even though they account for about two thirds of employment and 60% of total value added, relatively few small and medium-sized enterprises (SMEs) in Europe grow to the necessary critical size to compete effectively with large dominant incumbents or to enter foreign markets.

Enlargement

There are sizeable differences between the structure of manufacturing industry in the existing Member States and in the candidate countries. This is due to the fact that industry in the candidate countries is less specialised and more centred on low-technology sectors, such as food and beverages, textiles, basic metal industries and wood products. Significant progress has, however, been made in recent years in increasing labour productivity, even if this is, in all cases, still below 50% of the EU average.

All sectors have to cope with a difficult environment for companies to flourish: the cost of complying with the Community acquis, especially environmental legislation; difficulties in accessing finance; insufficient support from the public authorities, etc. On the other hand, some SMEs in the existing Member States, mainly in border regions, could be faced with competition.

EU enlargement should offer opportunities for competitive reorganisation. For example, given the increased heterogeneity of wage structures and technological skills, the candidate countries have tended to specialise in low-cost production, which is reflected in limited transfers of production from the current Member States to the candidate countries. In addition, many EU enterprises have acquired companies in the candidate countries on the basis of local technological inputs and skills.

The challenges for a new industrial policy

The main challenges which European Union industrial policy will have to face are analysed in this communication as being:

• globalisation: geographical location remains a crucial factor for research and innovation. It is therefore vital to improve the attractiveness of the EU as a productive location;
• technological change: the aim is to combine information and communication technologies, new managerial and organisational techniques and develop a skilled labour force to help substantially improve the competitiveness of industry;
• innovation and entrepreneurship: the competitiveness of companies is based on factors such as the continuous creation of new firms, and the growth of existing ones, particularly in times of rapid technological progress. European industry also requires the development and economic exploitation of new or improved products and services, and the optimisation of business processes. There is also a need to increase R&D expenditure relative to GDP, as the European Union lags behind its main competitors in this area;
• sustainability and new societal demands: there is also a need to face up to the growing demand for safety, health, consumer and social protection, which in part reflects public concerns about the environmental, ethical, or public health implications of some new technologies. A fair balance must be struck between the Lisbon and Gothenburg goals.

The way forward

The communication is largely focused on the future and the outlook for industrial policy and improving the competitiveness of industry.

The framework conditions: framework conditions are essential for the competitiveness of enterprises. Despite monetary union, the internal market and the liberalisation of certain sectors such as telecommunications, energy and transport, the efforts to introduce a more business-friendly environment still fall short of the mark. The following factors are particularly damaging in this respect, as they limit the room for manoeuvre in companies' activities:

• regulatory barriers;
• technical barriers;
• the poor financial environment;
• shortcomings in intellectual property protection in that there is no Community patent;
• differences in indirect taxation and national corporate tax systems;
• an inadequate corporate governance framework.

A more systematic approach to industrial policy: the European Union has developed a number of general approaches to improve the business environment:

• at EU level, the aim is to limit regulation to essential requirements linked to product safety or interoperability, allow manufacturers to declare conformity with the essential requirements, ask standards organisation bodies to develop harmonised European standards, and carry out an assessment of the impact of legislative initiatives on various categories of stakeholders, as provided for by the Commission in its 2002 Action Plan (FR) (pdf);
• at Member State level, the new open method of coordination should be put into practice. This involves compiling scoreboards, comparing the performances of individual Member States, exchanging best practices and setting quantitative targets.

Improving the integration of EU policies: the competitiveness of enterprises is determined by a large number of policies. The EC Treaty takes this into account when it stipulates in Article 157 that the Community shall contribute to the achievement of the objectives of industrial policy through its other policies. It is essential to ensure appropriate integration between all EU activities that can contribute to meeting these objectives. These are, in particular, trade policy, single market-related policies, energy and transport policies, R&D policy, competition policy, regional policy and macroeconomic policy. In order to reconcile the objectives of the Lisbon European Council with those of the Gothenburg European Council, and simultaneously pursue economic, social and environmental objectives within the framework of the sustainability strategy, other policies need to be taken into account. These include social, employment and vocational training policies, consumer protection and public health policy, environmental protection and corporate social responsibility.

Enlargement, global governance and the horizontal approach: Some industrial policy instruments should be adapted to the specific needs of the candidate countries, such as skills upgrading and SME development.

In addition, it is very much in the interest of the European Union to continue to develop globally accepted principles in fields such as environmental protection, consumer safety and social and labour standards, so that European companies are not placed at a disadvantage vis-à-vis their global competitors.

Industrial policy will continue to follow a horizontal approach in, for instance, actions to foster entrepreneurship and innovation. A vertical approach will also, however, be required to take account of the specific characteristics of certain sectors of industry: the strong requirement for R&D in the steel industry, environmental and consumer protection aspects in the chemical and biotechnology sectors, the fact that the internal market is still incomplete in the aerospace industry, and over-capacity in the telecommunications sector.

Specific tasks for the European Union: more specifically, the following activities should be pursued:

• Promotion of innovation, knowledge and research:- achieve the objective set by the European Union at the Barcelona European Council of raising the level of R&D investment to 3% of GDP by 2010;- develop technological platforms in order to foster cooperation between stakeholders and work out a long-term strategy for R&D and innovation, thus ensuring synergy among public authorities, users, regulators, industry, consumers, and poles of excellence;- invest in intangible assets and human capital in order to make the most efficient use of existing knowledge and maximise its diffusion;- look closely at the defence industries, in view of the specific nature of their high record in terms of research and innovation and their dependence on orders from the State.
• Entrepreneurship:- increase entrepreneurial activity by improving the environment in which companies operate:- easier access to finance in the earlier stages of a company's life cycle;- enhance skills;- reduce regulatory and tax burdens.
• The marketing of more environmentally-friendly products that are increasingly demanded by regulators and consumers:- the promotion of a viable recycling industry;- the development of voluntary agreements;- the diffusion of clean technologies;- the use of environmental management schemes.

Last updated: 23.06.2006