The European Union and the world economy went through a deep financial and economic crisis in 2008 and 2009. The first signs of recovery were visible in 2009 and were confirmed in the first half of 2010. These developments and the quickly evolving world market situation are a compelling call for the importance of remaining competitive.
The 2010 edition of the European Competitiveness Report looks first at the implications of the economic downturn for productivity — the key factor for competitiveness in the long run — and at some of the main future determinants of EU competitiveness on world markets: in the changing pattern of trade in intermediate products and EU manufacturing supply chains. Large shifts have taken place in the geographical structure of trade in intermediates for the EU-27 countries. BRICs (Brazil, Russia, India and China) have become more important for EU exports and imports. The present edition of the European Competitiveness Report 2010 examines the potential impact of the boom years (2000-2007) on competitiveness. The accumulation of large imbalances has the potential to distort significantly the allocation of resources in the Union’s economies. However, a glance at the evidence shows that exports performance does not seem to have been severely affected by these developments. Nonetheless, the financial and economic crisis hit international trade in intermediate goods (especially parts and components) quite hard, accounting for something like 50% of all international trade. It also disrupted some of the established international supply chains (for example, in the automotive industry) and resulted in some changes to multinational corporations’ sourcing strategies, such as shifting to domestic suppliers. If confirmed, this may have longer term consequences — by at least temporarily restricting the internationalisation of certain companies’ activities, and perhaps by delaying the recovery in some industries.
European Union to carry on promoting competitiveness
The Europe 2020 Strategy puts forward as a key priority for the Union the promotion of a more resource efficient, greener and more competitive economy.
Bulgaria’s real effective exchange rate depreciated slightly from its 1999 level to 2005 but appreciated strongly from 2005 to 2009, indicating significantly decreased competitiveness. Bulgaria was confronted with one of the biggest drops of manufacturing output in the European Union during the crisis. It fell by almost 35%, but regained 17% in July 2010.
According to the EU report, in Romania, the innovation performance is weak compared to the EU average (third to last in the EU) but it is one of the growth leaders in the ‘catching–up’ group of countries. The current set of innovation policy instruments in Romania includes direct instruments, which continue to be the dominant funding mechanism, and a few indirect instruments, such as tax incentives, which are largely insufficient.
While the short-term priority is to bring the public finances under control and stabilise the macro-economic framework, the implementation of a number of urgent structural reforms should help to significantly improve the business environment. Effective reform of public administration at central and local level would be a key undertaking for Romania.
In Hungary, the improvement of the business environment, especially the reduction of administrative burden, remains a key issue. In order to achieve the goal of 25% reduction by 2012, Hungary would have to take important steps in the short term. Reallocation of EU funds to SMEs has been an additional response to ease the lack of financing for small enterprises in the recent period. The new government plans to reinforce the support granted to SMEs.
Poland is one of the few EU members where the cost competitiveness position (as measured by the real effective exchange rate) remained almost unchanged since 1999. The Polish economy stood well during the crisis. It could rely on its still flourishing domestic market, good prudential financial market regulations and a floating exchange rate. Yet, the country faces several challenges, notably to upgrade and develop road, rail and energy networks.
Manufacturing in the Czech Republic fell by 23% during the crisis but as of July 2010 it stood at 85% of pre-crisis level. The crisis hit the Czech Republic relatively late and economic recovery is expected within the next two years. Manufacturing accounted for 25% of GDP in 2008 with basic metal and metal products, transport equipment, electrical, these being the most important sectors. The trade balance showed a clear surplus for manufacturing, mainly due to transport equipment, other machinery and electrical and optical equipment while, in particular, chemicals showed a clear deficit. Conversely, the countries in Western and Northern Europe recorded quotas of competitiveness above the average; nevertheless, the European Union international competitiveness shows signs of weakness. “Europe needs to give itself a new model for growth that is founded on the industrial sector,” said Antonio Tajani, European commissioner for industry and entrepreneurship. To that end, the Commission launched the Communication entitled “An integrated industrial policy for the globalisation era” aimed at reviving industry within the Union by improving the business environment, especially for small and medium-sized enterprises. Moreover, the European Commission Antonio Tajani has expressed his intention of visiting every capital of EU-27 countries in the attempt to promote the strategy launched at the end of October.
by Elena Ilie
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