12 European Competitiveness Report 2014
| Committee's assessment
| Politically important |
| Committee's decision | Cleared from scrutiny
|
| Document details | Commission Staff Working document on the European Competitiveness Report 2014
|
| Legal base | —
|
| Department | Business, Innovation and Skills
|
| Document numbers | (a) (36630), 13141/14 + ADDs 1-3, SWD(14) 277
(b) (36631), 13142/14 + ADDs 1-7, SWD(14) 278
|
Summary and Committee's conclusions
12.1 Each year, the Commission reports on various aspects of
competitiveness within the EU, and its report for 2014 comprises
two Staff Working Documents — addressing ways of helping
firms to grow, and reindustrialising Europe. The Government has
said that the documents have no direct policy implications for
the UK, and that it is generally content. Consequently, whilst
we think it right to draw them to the attention of the House,
we do not think they raise any issues requiring further consideration,
and we are therefore clearing them.
Full details of
the documents: (a)
Commission Staff Working Document: European Competitiveness
Report 2014 Helping Firms Grow: (36630); 13141/14
+ ADDs 1-3, SWD(14) 277; (b) Commission Staff Working Document:
Reindustrialising Europe Member States' Competitiveness Report
2014: (36631), 13142/14 + ADDs 1-7, SWD(14) 278.
Background
12.2 Each year, the Commission reports on various
aspects of competitiveness within the EU, and its report for 2014
comprises the following two Staff Working Documents.
The current documents
Document (a) — Helping firms grow
12.3 The Commission says that, as the EU emerges
from the longest and deepest recession in its history, it is important
to build on its existing manufacturing strengths, but it cautions
that many challenges lie ahead, with the European economy being
far from reaching targets for manufacturing added value, research
expenditure, gross fixed capital formation, and investment in
machinery and equipment. It identifies the growth of firms as
being of particular importance, and it highlights the role of
factors such as access to finance; the internationalisation of
small and medium sized enterprises (SMEs); the efficiency of public
administration; the growth of firms, innovation and the business
cycle; and energy costs and efficiency.
Access to finance
12.4 The Commission says that access to external
financing is essential if enterprises are to invest, innovate
and grow, and it notes the significant fall in the proportion
of successful bank loan applications since 2008. At the same time,
it says that the difficulties experienced by small and young firms
cannot be linked entirely to risk, indicating that the market
for bank credit is not functioning efficiently, and it suggests
that this is most probably because of information asymmetries
on the part of both the banks and potential borrowers. It goes
on to note that, as a consequence, young firms are driven to accept
unsuitable shorter-term credit arrangements, and it suggests that
this can be addressed by lenders standardising financial information
on SMEs (for example, through the establishment of centralised
credit rating agencies), whilst policy measures should be introduced
to improve the market knowledge of small and young borrowers and
to provide training in the preparation of loan proposals. Finally,
it says that, whilst current policy focuses on supporting existing
exporters, specific support measures may be needed to enable SMEs
to export, possibly in the form of export credits and insurance.
Internationalisation of SMEs
12.5 The Commission comments that, as SMEs comprise
99% of all firms and 60% of EU output, they are central to efforts
to improve long-term competitiveness, particularly in international
markets where historically they have underperformed. It also says
that, because of the lower levels of capital investment and associated
risk, they tend to enter foreign markets primarily as exporters,
with foreign direct investment being less common, though franchising
and licensing are important entry modes in the retail, accommodation
and restaurant sectors.
12.6 The Commission also says that not all SMEs have
the same opportunities to internationalise their production, and
that the factors influencing their decisions can be divided into
internal and firm-specific factors (such as size, labour productivity,
skill intensity, innovation activity and foreign ownership) and
external factors (such as market characteristics, tariff regulations,
political risk, linguistic and cultural factors, and geographical
distance). It also points out that there are higher SME export
participation rates in manufacturing and in software and business
services; that these can be adversely affected by administrative
burdens; that participation generally increases with the size
and age of firm; and that it is positively linked to levels of
innovation, research and skill intensity.
Efficiency of public administration
12.7 The Commission says it is widely accepted in
the EU that efficient public administration is a key driver of
competitiveness, but comments that, whilst this can be adduced
empirically, assessing it via microeconomic means is much more
challenging. However, it suggests that there are a number of general
indicators, such as an independent judiciary and freedom from
corruption, which are conducive to higher rates of growth, and
that there is evidence that public service provision which relies
more on fees than on taxation may be associated with higher efficiency.
Impact of innovation
12.8 The Commission says there is clear evidence
that, although the impact of process and organisational innovation
is limited, product innovation has a positive and large effect
on employment growth in all phases of the business cycle in both
the manufacturing and service sectors, particularly during boom
periods (although it can also help to preserve employment during
a recession). It adds that firm size, sector and ownership structure
are important determinants of the impact of product innovation,
with it having a much more profound effect on high technology
and knowledge-intensive sectors, and in large and foreign-owned
firms. It concludes that these findings underline the importance
of innovation support as a policy priority, and supports the view
that investment in research and development could be a candidate
for smart fiscal consolidation.
Energy
12.9 The Commission observes that electricity and
gas prices have grown more in the EU than in many other economies,
that the share of energy costs has been generally increasing over
time, and that these are a fundamental determinant of competitiveness
in energy-intensive sectors (though it also points out that there
has been a strong convergence in, and reduction of, energy intensity
across major economies). It notes that prices for industrial end-users
of gas and electricity vary considerably, reflecting in the case
of natural gas the regional fragmentation of wholesale markets;
that, due to the recent shale gas "revolution", gas
prices in the United States tend to be much lower, and are largely
independent of the oil markets; that, due to taxation and exemptions,
electricity prices in the EU differ not only between wholesale
and retail, but also between sectors and Member States; but that
energy costs have decreased in some Member States, due to an expansion
in renewable energy production. Finally, the report examines the
link between energy prices, energy efficiency and industrial competitiveness,
noting that increasing electricity costs have a negative impact
on export competitiveness, and that, since energy savings have
not in the main been large enough to compensate fully for price
increases, energy represents a growing share of total production
costs, requiring caution when adopting policies which could lead
to a further increase in such prices.
(B) REINDUSTRIALISING EUROPE
12.10 The Commission says that this document has
been prepared in the light of Article 173 of the Treaty, which
requires the EU and Member States to ensure that the conditions
necessary for the competitiveness of the Union's industry exist.
Also, it complements the European Semester process by reviewing
and comparing the industrial performance of the Member States
and the EU as a whole, based on indicators relating to investment
and access to finance; innovation and skills; energy, raw materials
and sustainability; and access to markets, infrastructure and
services.
12.11 It says that the European economy has been
slowly recovering, but that additional investment is needed across
all sectors to ensure that industry can continue to compete with
that in other regions of the world. It notes that the share of
gross value added invested by non-financial corporations is now
15% lower than at the outset of the financial crisis, and that,
whilst investment in intangible assets has returned to previous
levels, in equipment it continues to suffer in most Member States:
it also says that to achieve forecast growth, additional private
credit of €225 billion will be needed in the period 2014-16.
It goes on to note that financing conditions vary significantly
across the euro area, and that the internal market for bank credit
remains fragmented, with most Member States having adopted measures
to strengthen loan guarantee systems, and many facilitating both
access to and transfer of financial information. At the same time,
it observes that access to alternative financing sources has improved
in many Member States, with efforts having been made to improve
access to the corporate bond and alternative funding markets,
and to facilitate the listing of SMEs. It also says that in June
2014 the European Central Bank took a series of monetary policy
measures.
12.12 The Commission says that, thanks to the quality
and innovative status of many of their goods and services, European
firms have largely maintained their competitiveness in international
terms, with exports outside the EU having recovered well. It also
points out that the single market provides growth and innovation
opportunities for European firms, particularly SMEs, but that,
over the next decade, some 90% of new global demand will be generated
outside Europe, making the internationalisation of firms indispensable
to national and European policy strategies. It adds that firms
need strategies which combine product, service and process innovation,
and that policy should therefore remove barriers to innovation,
particularly by SMEs.
12.13 The Commission goes on to point out that many
firms invest considerable amounts in research and innovation,
but have not been able to commercialise these fully, and it says
that systems for fostering innovation should be improved in a
balanced way which addresses all the necessary inputs. It also
notes that, despite competitive wages, those with the right talents
cannot be recruited in many Member States because of factors such
as unattractive working conditions, poor recruitment policies
and lack of labour mobility; that most governments give financial
incentives for employer-provided training, particularly where
skill shortages are common; that, even in countries which are
performing well, there are ways to improve the matching of skills
with changing workplace requirements; and that the EU itself has
proposed a number of measures to facilitate cross-border mobility,
match qualifications to the skills base, manage industrial change
at regional level, and improve the availability of inter-disciplinary
skills.
12.14 The Commission notes that gas and electricity
markets are being gradually opened up to competition, with electricity
generation being decarbonised, but with a considerable variation
in prices between Member States (which, in some cases, poses a
challenge to parts of industry, requiring a targeted adaptation
strategy). It adds that Europe has made progress in improving
its energy efficiency, and that the proposal for an integrated
climate and energy strategy for 2020-30 seeks to ensure regulatory
certainty and a coordinated approach among Member States, with
the aim being to decouple economic growth from resource use and
its environmental impacts, and by building on long-term strategies
addressing climate change, energy, transport, and broader resource
challenges.
12.15 The Commission also observes that the high
price volatility of non-energy raw materials has led to a greater
focus on promoting technologies which increase investment in the
EU's natural assets, including their extraction and processing;
that, although business services are important inputs for companies,
their development has been hampered; and that progress in improving
EU infrastructure has been mixed.
12.16 In the case of public administration, which
the Commission sees as an important driver of competitiveness,
it says that the key features are the costs and uncertainty which
firms face, and that good governance, and strategic, budgetary,
regulatory and implementation capacities are crucial to cope with
future challenges. It suggests that business-friendly design includes
more streamlined and simpler procedures, especially for starting
a company, applying for licences, paying taxes, participating
in public procurement, exporting goods and services, and settling
legal disputes, thus freeing up businesses to spend more time
on core activities. However, it says that, despite the reforms
undertaken, inefficient public administration and ineffective
judicial systems remain major obstacles in several Member States,
with additional efforts still being required.
12.17 The Commission concludes by summarising Member
States' progress towards greater competitiveness, based on three
indicators of output (labour productivity, exports and innovation).
In doing so, it identifies four categories — those with
strong and improving competitiveness in all three dimensions;
those with strong but declining competitiveness; those with modest
but improving competitiveness; and those with modest and declining
competitiveness.
12.18 The UK — together with Austria, Belgium,
Finland, France, Italy, Luxembourg and Sweden— is in the
second of these categories, and, in common with every other Member
State, is the subject of a more detailed individual competitiveness
analysis, assessing access to finance and investment, innovation
and skills, energy, raw materials and sustainability, access to
markets, infrastructure and services, and public administration
and the business environment.
The Government's view
12.19 In his Explanatory Memorandum of 12 February
2015, Minister of State for Business, Enterprise and Energy (Matthew
Hancock) says the report has no direct policy implications for
the UK, and that the Government is generally content with its
findings. However, in commenting on the UK's classification as
a Member State with strong but declining competitiveness, he points
out that the report has a narrow focus on manufacturing, with
the UK ranking strongly where a broader perspective is adopted;
that the UK is the main destination for foreign direct investment,
with an increase in business start-ups since the recession, providing
strong evidence of the benefits of its business environment; and
that export performance is currently suffering from a number of
short-term factors such as the strong pound.
Previous Committee Reports
None.
|
