Challenges and Priorities for Europe. European Best Performers in Times of Crisis

This document has been prepared for The European House - Ambrosetti Forum “Intelligence on the World, Europe, and

Italy”, Villa d'Este - Cernobbio - September 6, 7 and 8, 2013.

Il presente documento è stato preparato da The European House - Ambrosetti per il Forum di “Lo Scenario di oggi e di

domani per le strategie competitive”, Villa d’Este - Cernobbio - 6, 7 e 8 settembre 2013.

CHALLENGES AND PRIORITIES FOR EUROPE

European Best Performers in Times of Crisis

Inserire titolo del documento

1

Challenges and Priorities for Europe

Index

Introduction

Methodological approach

Performance analysis of the 20 European OECD Countries:

Gross Domestic Product (GDP)

Employment and labour market

Government debt

Export and external openness

Attractiveness

Manufacturing

Innovation

Entrepreneurship

Closing remarks


2


Introduction

In the context of the current financial and economic crisis, The European House – Ambrosetti decided to analyse the economic performance of European countries in the last 10 years in order to comprehend the most resilient countries during the crisis (2008-2012)

The study outlines common features, strategies and political choices that have contributed to achieve positive performances in order to learn from the best cases.

This document captures the trends of the last 10 years with a focus on the financial and economic crisis, outlining possible reasons that explain Countries performances.


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Methodological approach

Out of all the 28 EU Member States the analysis takes into consideration only the 20 European OECD countries in accordance with data availability and comparability.*

The study considers as economic and financial indicators: GDP, employment rate, labour cost, labour productivity, general government gross debt, exports, external openness, foreign direct investments, value added of manufacturing, R&D expenditure, venture capital investments, cost to start a business and tax rates.

* The analysis excludes: Bulgaria, Croatia, Cyprus, Latvia, Lithuania, Luxembourg, Malta and Romania. Luxembourg was not included in the study due to its specific economic structure and dimension.


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The sample: 20 European OECD Countries

Country Code

Austria ATBelgium BECzech Republic CZDenmark DKEstonia EEFinland FIFrance FRGermany DEGreece GRHungary HUIreland IEItaly ITNetherlands NLPoland PLPortugal PTSlovakia SKSlovenia SISpain ESSweden SEUnited Kingdom UK


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The GDP - Highlights

With the exception of Greece, Italy and Portugal, all countries reported positive performances in terms of GDP growth between 2002 and 2012; only 7 countries (Austria, Belgium, France, Germany, Poland, Slovakia and Sweden) maintained the same trend during the crisis period (2008-2012). [Figure 1]

Moreover, the worst performers in the 2002-2012 decade were also the least resilient over the crisis period. [Figure 1]

During the decade, 7 countries had a GDP Compound Annual Growth Rate (CAGR) in line or higher than the US; only 3 countries, Poland, Slovakia and Sweden, outperformed the US during the crisis. [Figure 1]

The countries with the best performances in two periods (with a GDP CAGR higher than the sample’s average) were Austria, Poland, Slovakia and Sweden. [Figure 1]


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The GDP – Figure 1

Source: The European House – Ambrosetti re-elaboration on OECD data, 2013

GDP (2012): $13.518,000 mln.CAGR 2002-2012: 1.64%CAGR 2008-2012: 0.79%

Resilience

The long term


7


GDP and entry into the EU and EZ- Highlights

Entry into the EU or the Eurozone* (EZ) appears to produce positive effects on new member states. While Austria’s performance has improved following entry into the Eurozone, Poland and Slovakia have significantly improved their performance in conjunction with entry into the European Union. [Figure 2]

* Sweden and Poland did not adopt the Euro

0

100

200

300

400

500

600

700

800

Austria

Poland

Slovakia

Sweden

GD

P,

Bil

lio

n $

Figure 2. Data from 2013 to 2018 are IMF projections


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GDP - Highlights

Poland (9.88 out of 10) and Slovakia (8.34 out of 10) show the highest scores under the GDP Index* which combines the country’s performance in the short- and long-term. Sweden and Austria followed closely. [Figure 3]

Portugal, Italy and Greece report the lowest scores. Spain and Ireland – both included in the PIIGS group along with Greece, Italy and Portugal – achieved better scores due to stronger GDP growth during the 2002-2012 decade. [Figure 3]

*The GDP Index is a weighted average of the GDP CAGR during the 2002-2012 and 2008-2012 periods; assigned weights are respectively 25% and 75%. The scores of the index range from 0 to 10


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*The GDP Index is a an overall indicator that combines the GDP CAGR of the 2002-2012 period with the 2008-2012 period.

The GDP Index – Figure 3

COUNTRY GDP INDEX GDP - CAGR 2002-2012

GDP - CAGR 2008-2012

Poland 9.88 4.27% 2.96%Slovakia 8.34 4.50% 1.11%Sweden 7.40 2.23% 1.43%Estonia 6.61 3.45% -0.19%Austria 6.15 1.62% 0.41%Czech Republic 6.12 2.91% -0.40%Germany 6.11 1.19% 0.62%Belgium 5.90 1.35% 0.29%France 5.59 1.04% 0.13%United Kingdom 5.42 1.36% -0.25%Netherlands 5.07 1.15% -0.52%Finland 5.06 1.57% -0.78%Ireland 5.01 1.84% -1.00%Spain 4.47 1.30% -1.28%Denmark 4.40 0.56% -0.91%Hungary 4.24 1.14% -1.44%Slovenia 3.97 1.83% -2.15%Portugal 3.58 -0.06% -1.44%Italy 3.55 -0.07% -1.48%Greece 0.00 -0.13% -5.40%


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Employment - Highlights

Among EU best performers Austria and Sweden showed higher than average employment rates. During the decade (2002-2012), Poland and Slovakia presented a lower than average employment rate. However, Poland’s employment rate is rapidly improving and the gap with the other countries is being reduced. [Figure 4]

Between 2002 and 2012 only 8 countries have shown a reduction in the employment rate. During the crisis only Germany, Poland, Hungary and Austria have shown an increase of this index. [Figure 5]


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Employment – Figure 4

Source: The European House – Ambrosetti re-elaboration on Eurostat data, 2013

EMPLOYMENT RATE 2012

1 Netherlands 75.12 Sweden 73.83 Germany 72.84 Denmark 72.65 Austria 72.56 United Kingdom 70.17 Finland 69.48 Estonia 67.19 Czech Republic 66.510 Slovenia 64.111 France 63.912 Belgium 61.813 Portugal 61.814 Poland 59.715 Slovakia 59.716 Ireland 58.817 Hungary 57.218 Italy 56.819 Spain 55.420 Greece 51.3

COUNTRY

50%

55%

60%

65%

70%

75%

80%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Austria Poland Slovakia Sweden Sample average (20 countries)

EMPLOYMENT RATE


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VARIATION2008-2012

1 Germany 2.72 Poland 0.53 Hungary 0.54 Austria 0.45 Czech Republic -0.16 Sweden -0.57 Belgium -0.68 France -0.99 United Kingdom -1.410 Finland -1.711 Italy -1.912 Netherlands -2.113 Slovakia -2.614 Estonia -2.715 Slovenia -4.516 Denmark -5.317 Portugal -6.418 Ireland -8.819 Spain -8.920 Greece -10.6

COUNTRY

Employment – Figure 5

8

16

Source: The European House – Ambrosetti re-elaboration on Eurostat data, 2013

* Employment rate refers to population aged 15 to 64

VARIATION2002-2012

1 Poland 8.02 Germany 7.43 Estonia 5.44 Austria 4.45 Slovakia 3.26 Belgium 2.17 Italy 1.48 France 1.09 Hungary 1.010 Czech Republic 1.011 Netherlands 0.612 Finland 0.313 Sweden -0.214 Slovenia -0.215 United Kingdom -1.116 Spain -3.217 Denmark -3.818 Ireland -6.319 Greece -6.420 Portugal -7.4

COUNTRY


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Employment - Highlights

Among the best performers in terms of GDP Index, only Poland and Austria have shown a positive variation of the employment rate also during the crisis. [Figures 5, 6, 7, 8]

Considering new job creation per thousand inhabitants the best performing countries in 2012 were Germany, Austria and Belgium. [Figure 9]

New job creation and GDP growth have shown a positive relation. Greece, Ireland, Portugal and Spain report negative performances under all accounts; Poland, Austria and Sweden are the best performers along with Belgium and Germany. [Figure 9]


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GDP and employment – Figure 6

Source: The European House – Ambrosetti re-elaboration on Eurostat and OECD data, 2013


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GDP and employment – Figure 7



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GDP Index and Employment Index – Figure 8


*The Employment Index is a weighted average of the variation in employment rate during the 2002-2012 and 2008-2012 periods; assigned weights are respectively 25% and 75%. The scores of the index range from 0 to 10


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GDP and new job creation – Figure 9



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The labour market - Highlights

In all countries during the 2001-2011 period, the labour cost has increased. Germany and Sweden registered the lowest increase. [Figure10]

Sweden and Poland have registered an increase of labour productivity and aslight increase in labour cost. [Figure10]

Slovakia has registered the biggest increase in labour productivity: it should be noted that the initial level of this indicator was particularly low. [Figure10]


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The labour market – Figure 10


* Latest available data

** Labour productivity is measured as labour productivity per hour

COUNTRYLABOUR COST PER

HOUR IN EURO (2011)

Denmark 37.5Sweden 36.4Belgium 36.3France 33.6Netherlands 31.7Germany 29.6Finland 29.5Austria 29.0Ireland 28.7Italy 27.1Spain 21.2United Kingdom 20.1Greece 16.2Slovenia 14.9Portugal 12.4Czech Republic 10.4Slovakia 8.1Estonia 7.9Poland 7.3Hungary 7.3


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Government debt - Highlights

The countries with the highest government debt growth rate during the 2002-2012 decade are also the ones with a government debt-to-GDP ratio lower than 60% (average ratio of the observed period). [Figure 11]

Despite having one of the highest government debt growth rates, Sweden and Slovakia have maintained a moderate government debt-to-GDP ratio. [Figure 11]

During the decade, Italy and Greece have reported shrinking GDPs and the highest government debt-to-GDP ratios (more than 100%). [Figure 11]

Relating the GDP Index to the government debt-to-GDP ratio it emerges that countries with higher GDP growth rates (Austria, Poland, Slovakia, Sweden) also have agovernment debt-to-GDP ratio below 80%. [Figure 12]


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Government debt – Figure 11

Source: The European House – Ambrosetti re-elaboration on IMF data, 2013


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Government debt – Figure 12

Source: The European House – Ambrosetti re-elaboration on IMF data, 2013


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Exports and external openness - Highlights

The performance of EU countries is quite diversified in terms of exports. 12countries out of 20 reported in 2012 an export-to-GDP ratio lower than 60%.Ireland leads the ranking with a ratio set at 106.6%, followed by Hungary, Estoniaand Slovakia. [Figure 13]

Poland has significantly improved its performance, reporting a positive variation of 8% in the 2001-2012 period. A similar trend is observed in Austria. Germany is the main trade partner of Austria and Poland (31% and 25% of total exports in 2012 towards Germany).

On the other hand, Sweden has presented an export-to-GDP ratio of 40% and an increase in exports that is slightly higher than 3%. [Figure 13]

Poland and Slovakia have also reported an impressive performance in terms of external openness:* the results achieved are by far superior to the EU average. Austria has been in line with the EU average. [Figure 14]

*External Openness is defined as (Export + Import )/GDP. It serves as a proxy for measuring the integration of the economy into the global economy


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Exports – Figure 13

Source: The European House – Ambrosetti re-elaboration on World Bank data, 2013

EXPORTS OF GOOD AND SERVICES (% OF GDP, 2012)


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External openness – Figura 14


EXTERNAL OPENNESS (2002=100)

95

115

135

155

175

195

215

235

255

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Austria

Poland

Slovakia

Sweden

Sample average (20 countries)


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Attractiveness - Highlights

In 2011, Belgium attracted the lion’s share of Foreign Direct Investment (FDI) flows (€103 billion); the United Kingdom, Germany and France followed at some distance. [Figure 15]

Belgium (17.7%), Slovakia (17.1%), Poland (17.0%) and Estonia (16.5%) registered the highest growth rates. Austria and Sweden also report an annual growth rate higher than 12%. [Figure 15]

In terms of stock of FDIs on GDP Belgium and Ireland have registered the best performances. The largest European economies - Germany, United Kingdom, France, Italy and Spain - reported a value of this indicator lower than 55%. [Figure 16]


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Attractiveness – Figure 15

Source: The European House – Ambrosetti re-elaboration on UNCTAD data, 2013

0%

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0

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FDI - FLOW, 2011 ($ millions) FDI - STOCK, CAGR 2001-2011 (%)

$ m

illi

ons


* *


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Attractiveness – Figure 16

Source: The European House – Ambrosetti re-elaboration on UNCTAD data, 2013

FDI STOCK (% OF GDP), 2012


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Manufacturing and Europe

In late 2012 the European Commission launched a strategy aimed at bringing the value added of manufacturing to 20% of GDP in the 27 member countries by 2020 (today this figure is equal to 15.6%).

This means that manufacturing value added should reach 2.550 billion euros, starting from a level of 1.758 billion in 2011: this is approximately the value added created by companies in the manufacturing sector of Germany and Italy.

To reach this objective, assuming that productivity levels remain constant over the next 8 years, the volume of those employed in manufacturing should rise from 32.3 to 46.8 million.

Valerio De Molli (2013), “The 20% rule in manufacturing”, Il Sole 24 Ore


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Manufacturing - Highlights

The manufacturing sector of the 4 best-performing economies represents ahigh portion of GDP (from 16% in Sweden to 24% in Slovakia). [Figure 17]

During the 2000-2010 period, the weight of manufacturing decreased in all countries. Poland showed the smallest reduction while Ireland suffered the greatest decrease. [Figure 17]

Between 2001 and 2011, employment in the manufacturing sector decreased in all countries except in Poland where the annual growth rate has been 0.6%. [Figure 18]


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Manufacturing – Figure 17

Source: The European House – Ambrosetti, Observatory on Europe, Eurostat data 2013


*

*


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Manufacturing – Figure 18

Source: The European House – Ambrosetti, Observatory on Europe and Eurostat data, 2013

-5%

-4%

-3%

-2%

-1%

0%

1%

0%

5%

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Employment in manufacturing/Total employment (2011) Employment in manufacturing, CAGR 2000-2010


* *


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Innovation - Highlights

In 2012, Finland, Sweden and Denmark registered an R&D expenditure on GDP higher than 3%; the sample average instead is equal to 2%. [Figure 19]

The ranking could be split in two: in the upper part are central and northerncountries; in the lower southern and eastern countries. [Figure 19]


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Innovation – Figure 19

Source: The European House – Ambrosetti on Eurostat data, 2013

R&D EXPENDITURE (% OF GDP), 2012


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Entrepreneurship - Highlights

In 2012, Sweden was the best performer country for venture capital investments on GDP (0.64%) and it also reported a low level of cost to start a business (0.5%). [Figures 20, 21]

In 2012, Poland reported a total tax rate lower than the average of analysed countries (43.8% vs. 46.7%). [Figure 22]


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Entrepreneurship – Figure 20

Source: The European House – Ambrosetti re-elaboration on European Commission data, 2013

TOTAL VENTURE CAPITAL INVESTMENT (% OF GDP), 2012


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COST TO START A BUSINESS (% OF GROSS NATIONAL INCOME PER CAPITA), 2012


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TOTAL TAX RATE (% OF COMMERCIAL PROFITS), 2012


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EU Best Performers – Key common issues

The good economic performances of the best performing countries (Austria, Poland, Slovakia and Sweden) have been achieved in different ways.

Austria and Sweden perform very well in terms of employment rate: from 2002 their employment rate is higher than average.

The 4 best performing economies also present a government debt-to-GDP ratio lower than 80%.

Poland and Slovakia show a high level of external openness; Slovakia’s exports account for almost 90% of its GDP.

Germany is the main trade partner of Austria, Poland and Slovakia: these countries have benefited from the stability of the German economy.

The manufacturing sector of Austria, Poland and Slovakia accounts for a high portion of GDP and employment (≈ 20%).

Austria and Sweden have focused their efforts on labour markets and innovation.


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EU Best Performers - An overview

Source: The European House – Ambrosetti, Observatory on Europe, OECD and Eurostat data, 2013

*The table offers a ranking of Germany and the top 4 economies from six different aspects

Germany Austria Poland Slovakia Sweden

Employment rate (2012) 4 5 14 15 2Labour productivity (per person employed, EU-27=100, 2011) 11 3 19 15 5Unemployment rate (2012) 3 1 11 17 9Youth participation (2011) 4 3 14 17 6Labour cost (2012) 12 11 5 7 6

General Government Debt (% GDP, 2012) 13 11 9 5 2Old Age Dependency ratio (2012) 20 13 3 1 17

Inflation rate (%, 2012) 4 8 17 18 1

Manufacturing (% GDP, 2010) 5 7 9 4 12

Employment in manifacturing (2011) 8 11 5 6 12

Foreign Direct Investment (FDI stock/GDP, 2012) 18 14 13 8 5Export (% GDP, 2011) 12 10 14 4 13

External openess (as (Export+Import)/GDP, 2012) 11 9 12 2 13

Venture Capital (% GDP, 2011) 10 8 14 20 1Patents registered (2011) 4 7 20 19 3R&D expenditure (% GDP, 2011) 4 2 19 19 5

Total tax rate (2012) 11 16 9 12 15

Cost to Start a Business (% of GNI per capita, 2012) 13 12 18 9 4ENTREPRENEURSHIP

INNOVATION

LABOUR MARKET

PUBLIC FINANCE

MANUFACTURING

INTERNATIONALIZATION


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Austria - Highlights

The country benefits from excellent infrastructure and has improved innovation capacity thanks to sustained R&D spending.

Thanks to robust domestic demand, low unemployment and wealth of its main partner, which is Germany, the Austrian economy is stable. Favourable business environment allowed FDIs to recover quickly to pre-crisis levels.

Manufacturing is focused on specialised high-quality products and accounts for a significant portion of the GDP.

Austria’s competitiveness would be further enhanced by greater flexibility in the labour market and fine-tuning of its already excellent educational system.


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Poland - Highlights (1/2)

Poland is definitely the most interesting case: indeed the country has been reporting economic growth for over 20 years now.

The reasons of the success may be attributed to: rigorous monetary policy aimed at containing inflation, which reached

a yearly rate of 649% in the ’80s; such discipline allowed it to avoid credit bubbles;

taxation – even though not particularly low – it has never gone out of control; thus, a fiscal bubble has been prevented;

manufacturing which represented one-fifth of GDP by the mid-1990s; external openness and reduction of external debt.


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Poland - Highlights (2/2)

The financial sector is well developed and confidence has been increasing. Banks are assessed as more sound than in the past, although additional consolidation would be necessary.

Government efficiency and regulation remain the most critical aspects in the opinion of the corporate sector.

A significant upgrade of the transport infrastructure is required to boost competitiveness further. Although some progress was made in this area during the European Football Championship in 2012, further efforts are nevertheless required to better connect the various parts of the country.

Innovation is considered a key component for future growth in Poland and the country is utilising €10 billion in Structural Funds from the European Union to stimulate commercially-oriented research, particularly in the private sector.


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Slovakia - Highlights

Several years ago, the relatively young Slovak economy exhibited the fastest economic growth in Europe. However, this trend has gradually waned in international comparisons and economic growth has slowed.

The most significant competitive advantages of Slovakia are:

exports and external openness towards EU countries;

foreign investment stimulated by tax incentives;

manufacturing that produces a substantial proportion of GDP and employs a significant portion of the labour force.

Corruption, bureaucracy, restrictive labour regulations and insufficient infrastructure were identified as the most problematic business factors and the greatest long-standing hurdles in the Slovak business environment.


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Sweden - Highlights

The country has been placing significant emphasis on creating the conditions for innovation-led growth.

The Swedish government introduced tax reductions to tackle employment reduction: in fact, employment rate went from 74.2% in 2007 to 73.8% in 2012.

Efficiency and transparency of public institutions are particularly high and they constitute attractive factors of the Swedish economy.

Combined with a strong focus on education over the years and a forward-looking attitude towards technological change, Sweden has developed an advanced business culture and is one of the world’s leading innovators.

The country shows a stable macroeconomic environment, with a balanced budget and manageable public debt levels. These characteristics actively combine to make Sweden one of the most productive and competitive economies in the world.

Economy & Finance

Challenges and Priorities for Europe. European Best Performers in Times of Crisis