1 Europe needs a new business model

Europe’s growth model of exporting more of the same products to the rest of the world is coming under pressure due to increasing competition from emerging and transition countries while the market for the products that Europe is good at exporting is growing more slowly than in the past. At the same time, Europe was not able to build an advantage in disruptive technology fields that promise lower global competition and higher market growth.

Developed countries lose their unique position on global markets

For many years the European Union’s growth model has been to find new markets for the products and services it is able to produce cheaper and better than most other countries. This model is under pressure. The number of under-exploited markets is shrinking, while new competitors emerge quickly, challenging the comparative advantage of the EU even in higher value added goods and services. To secure growth and jobs in Europe, one promising strategy is to develop emerging sectors with high value added. But in which sectors can Europe grow, and what economic policies would work?

Economic complexity

As emerging and transition countries moved up the value chain. There has been a notable convergence in the complexity of products exported by western and eastern countries. The Economic Complexity Indicator (ECI) developed by Harvard’s Center for International Development (CID 2017) ranks how diversified and complex countries’ export baskets are based on their diversity (how many different products each country can produce) and the ubiquity of those products (the number of countries able to make those products1). For almost all of the more than 100 ranked countries the indicator is between -2.5 and +2.5. In 2014, the ECI score for the United States was 1.36 and 1.10 for China. For EU countries2 it ranges from 0.22 for Greece and 1.92 for Germany. The most striking observation is the rapid increase in the complexity of Chinese exports. While ranked below Bulgaria in 2000, China had surpassed Denmark and Belgium by 2014. Over the same period, the US and major EU economies gradually lost some of their advantage as new players – including from central and eastern Europe – started to export products that were previously only exported by the most-developed countries. This signals that incumbent exporters face increasing competitive pressure.

Year USA China Germany France Spain UK Poland Hungary
1995 2.05 0.21 2.65 1.94 1.4 2.05 0.8 0.99
2014 1.1 1.1 1.92 1.29 0.82 1.48 0.93 1.5
Change 1995 - 2014 -0.95 0.89 -0.73 -0.65 -0.58 -0.57 0.13 0.51

Table 1.1: Source: CID (2017)

Emerging economies move up the value chain – sometimes outcompeting incumbents

Figure 1.1: Country share in total exports of road vehicles and electric machinery, Note: road vehicles corresponds to commodity codes S2-78 and S3-732, electric machinery corresponds to S1-72, trade value in current USD, Source: UN Comtrade (United Nations Statistics Division 2017).

This can be illustrated for electric machinery exports. In 2000 they accounted for 20% of US and 15% of German exports. With China strongly increasing its specialisation in exporting electric machinery, the share of machinery exports in German and US exports fell significantly. In the future, the same fate might await the global vehicles market, as China already today produces 25 million vehicles – mainly for its domestic market. This could have dramatic consequences, given the importance of the vehicles industry for countries like Germany – where vehicles are responsible for one fifth of the exports.

The champions of the last technology cycle are not hosted in Europe

Figure 1.2: 50 largest non-financial companies by market valuation, Source: Forbes (2017), web search for year of incorporation.

In the 19th and early 20th centuries Europe hosted most of the world leaders in the disruptive technologies of that time, such as manufacturers of railways and trains, chemicals, pharmaceuticals, electrical appliances and cars. In 2016, there were only seven EU companies among the 50 largest non-financial companies in the world, and the average year of their incorporation was 1913 (compared to 1943 in the US and 1964 in the rest of the world). The five largest companies in the world are all US companies, and four of them are IT companies formed after 1975.

  1. Consequently, the ECI is a relative indicator. That is, it might go down even if the country does not change its export basket, as soon as other countries start to also export some of those products

  2. The rankings do not cover Cyprus, Luxembourg and Malta.