Europe once dominated the world on the back of its technological innovation.
Now, however, the lack of research and development (R&D) activities has placed European companies uncompetitive against threats from China.
Europe’s longstanding approach of outsourcing economic needs, including manufacturing, to China and depending on the United States for an export market are now haunting it. While cheap imports from China flood European markets at the cost of European manufacturers, the threat of incoming US President Donald Trump’s tariffs deal a further blow.
Europe an innovation desert
Europe ruled the world through the 19th century and also the large part of the 20th century with a series of path-breaking inventions — from the new automobile to the telephone, radio, television and pharmaceuticals. However, Europe is now an innovation desert.
Former Italian Prime Minister and central banker Mario Draghi’s report released in September on Europe’s flagging competitiveness says that Europe has only four of the world’s top 50 tech companies. It doesn’t have a single entry among the 15 best-selling electric vehicles.
Draghi said the R&D drought is an “existential challenge” for Europe.
Draghi said, “If Europe cannot become more productive, we will be forced to choose. We will not be able to become, at once, a leader in new technologies, a beacon of climate responsibility and an independent player on the world stage. We will not be able to finance our social model. We will have to scale back some, if not all, of our ambitions. This is an existential challenge.”
Draghi further said that if the economic growth is not sustained, then the values of prosperity, equity, freedom, peace and democracy in a sustainable environment that Europe stands for would not be realised.
European Central Bank (ECB) President Christine Lagarde told a Paris event in November that Europe’s vaunted social model would be at risk if it doesn’t change course quickly. She said, “We are living through a period of rapid technological change, driven in particular by advances in digital innovation and unlike in the past, Europe is no longer at the forefront of progress.”
Overdependence on the US
The EU exports more than €500 billion a year to the United States. A 20 per cent tariff by Trump would mean an economic disaster for Europe when its biggest economies —Germany, France and Italy— are struggling not only economically but also politically with no signs from Russian President Vladimir Putin that he would end Russia’s Ukraine invasion.
Last year, the United States had a share of 20 per cent in EU’s exports.
During Trump’s first term, tariffs were imposed on steel and aluminum from Europe. As similar moves are expected now, Europe may have little choice than to placate Trump by importing more from the United States, particularly in terms of energy imports.
European Commission President Ursula von der Leyen, in her first response to Trump’s reelection, has suggested that Europe should start purchasing more liquefied natural gas (LNG) from the United States to please Trump so that the EU could buy some time to fix its issues — clearly a strategy betraying extreme desperation of EU leaders
The lost ground
During 2010-23, the cumulative GDP growth rate reached 34 per cent in the United States, compared with just 21 per cent in the EU. The gap in GDP per capita, for example, has doubled by some metrics to 30 per cent, due mainly to lower productivity growth in the EU.
An IMF report says that market valuations (share market value) of US-listed firms have more than tripled since 2005 while Europe’s have grown by only 60 per cent.
Europeans are ‘lazy’
The IMF report, which came after and in response to the Draghi’s report to the EU, pointed to low productivity of European firms compared to US firms.
The report says while productivity for US technology firms has surged by nearly 40 per cent since 2005, it has hardly changed for European companies. Labour productivity grew by 22 per cent in the United States and 5 per cent in the eurozone.
Falling skill-set and missed R&D investment targets
The gap between the skill-set of European workers and American or Chinese workers has increased in recent decades.
A report by France’s Polytechnique insights earlier this year said it can be explained by insufficient investment in new technologies in Europe.
The report said that investment in new technologies such as computers and artificial intelligence (AI) and spending on R&D have a direct impact on productivity.
A 1-point increase in the rate of investment in new technologies leads to a 0.8-point increase per year in productivity gains and a 1‑point increase in GDP for R&D expenditure leads to a 0.9‑point increase per year in productivity gains, noted the report.
In 2000, the EU adopted the Lisbon Strategy to make “Europe’s economy the most competitive in the world” with “a decisive leap in investment for higher education, research and innovation”. Europe aimed to spend three per cent of the bloc’s GDP on R&D, recognising it as the main driver of economic innovation.
However, a quarter of a century later, Europe has not only failed to achieve its goal, it has fallen well behind both the United States and China, according to Politico. Data shows spending on new technology research by European companies and the public sector has never met the intended target, staying around 2 per cent — almost where it was in 2000 when the Lisbon Strategy was adopted.
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