The EU and economic growth: will Europe 2020 work out?
By Henrik Arvidsson, Ruslana Diadiun

The EU and economic growth: will Europe 2020 work out?

On  the 3rd of  March  2010,  José  Manuel  Barroso,  President  of  the  European  Commission,  presented  the  long-awaited  “EU  2020  Strategy”, the  roadmap  for 2010-2020  which was described as a strategy for greener  growth  and  jobs  in  Europe.

By raising Europe’s employment rate, the EU aims to expand the creation of jobs, particularly for women and young EU citizens. This was meant as a way to increase the human capitalization rate of the EU through investment in skills- and training-related measures. By inclusive growth, the  EU  can  insure  that  the  benefits  of  growth  reach  all  parts  of  the  EU.  According to President Barroso.

The  strategy was said to aim at a 2% GDP growth rate. In June 2010, the  European  Parliament  formally adopted  this  strategy. The strategy consists of  five targets at  EU level: employment, research and development (R&D), climate, education, and the fight against poverty. At the same time, it gives some freedom to member states to set their own national goals, like raising the employment rate of the population aged 20-64 from the current (2010)  69% to 75% in the year 2020. This also included a decision to increase the  investment in Research and Development to 3% of the GDP of the European Union and other measures relating to ensuring that the level of education within the Union is increased. This should be seen in the light of the fact that the EU is one of the largest economies in the world, ranking as number one in 2019 but has for long been plagued by structural problems and a slow growth ratio. Europe’s challenge is not just to foster innovation among its own businesses but to attract foreign investment. Its goal is to provide a solid ground for R&D and as a part of that strategy its goal is to invest 3% of its GDP into research and development. The problem with this initiative is that the growth rates regarding GDP as well as the investment in R&D are low in an international context.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

China in June 2019 reported a growth rate of 6.2 % with a projected 6.3% for the whole year, the lowest in decades with a projected GDP increase of 5.5% in 2024 whilst the European Union in 2018 almost reached the target with a 1.98 % growth. The United States at the same time reported a growth rate of 3,2%. This should put the EU in the same category as the troubled economies of Japan and South Korea.

 

If we compare China and the European Union in a historical perspective, we can in fact see that not since the 1970s has the EU outperformed China. This has to some extent to do with the  policies of the Chinese regime to open up the Chinese economy but also with structural problems within the EU economy as well as the fact that China until the 1960s was a relatively poor country, something that during the last 5 or 6 decades has changed.

The problems don’t end there since Europe 2020 is not just a strategy to foster innovation and create job opportunities but also a broader strategy to deal with climate change and poverty. This showcases the fundamental problems that the EU face - its complex decision-making processes where a wide array of parties and institutions has to weigh in until a decision is made which often results in watered-down decisions and strategies that comes under heavy criticism. Most of all, an increase in regulation doesn’t lead to growth. It might long-term lead to an increase in R&D but if the rest of the world has divergent regulations, the potential for EU businesses to gain from this simultaneous increase in the level of regulation leads to an increase in uncertainty. Nowadays the EU project is also questioned at a political level and with an increasing number of voices asking to either have their country leaving the union or begging for a deeper integration.

The uncertainty regarding the future economy of the EU, its regulatory measures and the looming international recession leaves business sailing a sea of uncertainty.

In general, larger firms try to avoid uncertainty which makes it harder in theory for the EU to attract businesses who want to use the EU as a platform for their innovative business. One problem is that countries like China, Japan and South Korea still has an advantage when it comes to the potential to find well-educated people that fits the need of the firm operating in a high-tech environment. China spends 2,7 % of its GDP on research which puts it at the same level as the target goal of Europe 2020. The difference, however, is the cost advantage of the Chinese firms.

The EU has long been an area where trade unions had a strong influence and many of the EU countries has been ruled by socialist governments whose aim was to strengthen the rights of the worker. The question now, however, is that if the high taxes of the EU and its strong urge for regulation have left Europe trailing in the global race for growth and investment? One of the talking points of the American president Donald Trump is that much of the manufacturing industry of the United States has left the country leaving many Americans unemployed. 

In today’s globalized world, competition from countries such as China, South Korea, Japan and India has caused many jobs to disappear from EU countries. The question is that if these modestly set goals will help advance the economy of the European Union? There has been a long-standing debate between those who view regulation as something that hindering growth and those who believe that regulation sometimes can spur growth and lead to more prosperous societies?

The problem with the later argument is that the ones paying for the regulation is the firm that faces it. This is one of the reasons why firms in unregulated economies often tend to grow large and achieve a dominating position on the world market, take Google, Microsoft and other tech giants, whilst firms stemming from regulated markets such as those of many European countries  often fail to do the same. The unregulated market often provides a greenhouse where the firm can grow and later on internationalize, whilst the regulated market generally fails to do the same. Michael Pettus in 2001 studied firms originating in both regulated and unregulated markets and the results clearly showed that firms originating in countries with a higher degree of regulation did not grow large enough to be successful in the same way as firms originating in market liberal, unregulated markets. For economists this relationship is clear but as often in a society the general understanding among the public and their representative does not correspond with reality.

The question now is that which path the EU wants to walk. One thing is for sure: the current path will by all estimates not make the EU a global leader in innovation.  Perhaps the only way left to walk is that towards the unregulated market? The question now is also that if there is a political will to take this, perhaps necessary step? And perhaps the greatest question of all is what the future EU will look like?


Henrik G.S. Arvidsson is a lecturer and award-winning researcher in business studies at the University of Tartu in Estonia.

Ruslana Diadiun is a managing director of Institute of Innovative Governance in Estonia. Holds a master's degree in Democracy and Governance.