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Board Europe - March/April 2008
ECB, Banque de France, Conference Board Debate Factors of Wealth Creation in Europe and Beyond
European businesses are disadvantaged by the lack of a single market for services, limited flexibility in labour markets, and insufficient progress toward removing structural barriers that raise the costs of restructuring, according to a panel of leading European economists, business leaders and central bankers. Recent good economic times in Europe are the result of global cyclical trends, not structural change, and will likely subside as global growth moderates.
This was the message that came out of a two-day meeting in Frankfurt sponsored by The Conference Board, the European Central Bank and the Banque de France. The conference, held on 16&17 January 2008, brought together top corporate executives, academics and central bankers to discuss the economic and financial factors that will drive productivity growth and the creation of wealth in Europe over the coming years.
Participants said the co-hosted meeting shows that ECB President Jean-Claude Trichet wants to develop closer ties with the European business community. "The notion of having a business voice that expresses what the business challenges are, in the business environment, is rare," says Gail Fosler, President and Chief Economist of The Conference Board. "European companies may, as individual firms, enjoy productivity advantages which erode because of the European institutional environment. If you take away the structural impediments, European productivity performance might be better than productivity in the U.S., where the structural environment is a net contributor to overall economic performance. These institutional qualities are a competitive phenomenon made all the more extreme by emerging market competitors. We need to begin to define the business case."
Need for structural reforms
From the business side, the case is clear: major structural reforms are essential if Europe is to maintain strong productivity growth — the primary driver of future wealth creation. Productivity is not just about efficiency. Indeed, the drive for constant restructuring is driven by the need for products and processes to remain innovative. The limited ability to keep that process at pace motivates firms to move resources out of Europe.
Most of the participants at the conference, representing both business and institutions, agreed that productivity growth in the near and medium-term would come primarily from the services sector, and that the European Union would need to create a true single market for services, just as it has for goods. Banking and telecommunications were among the sectors cited as examples of this need toward a more unified market for services. Europe is not capturing the scale economies promised by the single market.
The ECB president echoed this sentiment, that Europe remains "very segmented", with broad differences in taxation and other barriers. He also called for greater flexibility and mobility in the labour market, arguing that this was one of the critical factors to future value creation in Europe today.
"Structural reforms in the labour market and the achievement of a single market are absolutely of the essence," Trichet said. "It will not be easy, but the opportunity cost of not delivering the structural reforms we are calling for is very, very important."
Several of the experts cited the aging of Europe's working population is a clear sign that measures must be taken soon. "We are going to face a huge shortage of highly skilled labour," warned Bart van Ark, Executive Director of Economic Research for The Conference Board, adding that to get around this problem, "companies will need to embrace innovation and technological change, to turn innovation into processes, products and services that can be sold profitably."
There was broad agreement that innovation was key to unlocking future productivity potential, particularly in Information and Communication Technologies (ICT). Both the U.S. and Europe have witnessed strong productivity growth in the telecom and IT sectors in recent years, but many of the experts said they now expect future gains in productivity to be found not so much in the ICT sector itself, but in ICT-using businesses.
Role at home and abroad
While the US and Europe ponder the prospects of slower productivity growth rates, the rest of the developing world is not standing still. "Half of economic growth is coming from the emerging world," Fosler said, adding that globalisation is driving "competitive dynamics in business practices, organisational practices, technology, management practices, and approaches to innovation. US and European companies have been the leaders, but we are now no longer alone in the competitive world."
The challenge, said Gerard R. Vittecoq, Group President of Caterpillar, is that emerging markets are "low cost but not low productivity, not low quality, not low skill. These are people who want to work. They see enormous opportunity. They have a winner spirit."
"It's not about European companies moving out of Europe," said Hans Wijers, Chairman of the Board of Management of Akzo Nobel. "There are still enormous amounts of money in maintaining your base in home markets. Yes, build capacity in new markets, but you need to keep your base. It's like using the accelerator and the brake at the same time — you accelerate in some markets, apply the brake in others. That's what it means to be in business today."
