The innovation gap between northern European countries and their southern and eastern counterparts risks deepening political and economic divisions between member states, the EU executive’s most senior civil servant has warned.

Secretary-General of the European Commission Catherine Day was speaking at the launch of the Europe 2020 Competitiveness Report in Brussels. The report rates member states on their potential level of productivity.

It found that countries such as Finland, Sweden, Germany, France and the United Kingdom performed much better than others such as Romania, Bulgaria, Greece, Italy and Croatia.

“I think it’s very clear that the post-crisis world will not be the same as the pre-crisis world,” Day said, “We are more divided than before.”

“[We need] to try to bridge the gap between the core and the periphery, between the triple A countries and those that are emerging from [bailout] programs and so on.”

The World Economic Forum report, published every two years, said, “A persistent knowledge divide between ‘innovation rich’ and ‘innovation poor’ economies prevails. Important national and regional disparities exist in providing an enabling enterprise and innovative environment in Europe, with northern and north western Europe performing strongly compared with a lagging southern European and Central and Eastern Europe.

“Such a divide is problematic for the region as a whole and not just for those EU member states that are less innovative.”

The report said the competitiveness divide could only be addressed by different strategies taking national and regional characteristics into account. Day said the gap would be one of the most pressing issues for the new leaders of the European institution once they take office.  

She referred to an old World Bank report that once described the EU as a “wonderful convergence machine,” meaning membership tended to bring living standards up across the board.

Day said, “The machine is not broken but it certainly needs firing up and we need to be aware that getting convergence going again is politically important as well as economically important [...] that will, I think, be very high on the minds of the political leadership that is coming to office over the coming months.

Finland top, Romania bottom

Finland beat Sweden into second place, improving its 2012 competitiveness ranking by one. The Netherlands, Denmark, Germany, Austria, United Kingdom, Luxembourg, Belgium and France finish the top ten member states. Ireland, Estonia and Spain were 11-13 on the list. Spain and Ireland jumped two and one place, while Estonia dropped one position.

Romania was the least competitive member state, propping up Bulgaria, Greece and Hungary. Croatia, the Slovak Republic, Poland, Italy, Cyprus and Latvia were the rest of the bottom ten member states.

The report also ranked countries on their record in building business friendly environments, implementing a digital agenda, encouraging investment in innovation and skills and training. The “Smart” ranking highlights the widest divide between Europe’s most and least competitive economies.

Each country was given a score out of seven. Finland scored 5.78, Romania 3.51. The United States scored 5.38. Finland, Sweden, the Netherlands, Germany and the UK were the five highest scoring countries.  Romania, Bulgaria, the Slovak Republic, Greece and Croatia were the five lowest.

Caroline Galvan, economist at the World Economic Forum, said, “[Long-term competitiveness] can only be achieved by addressing the persistent gap that exists within the EU-28 through the creation of an environment that allows smart, dynamic, innovative growth and the creation of high quality jobs."

The EU as a whole continues to underperform in comparison to the United States and other advanced economies in building a knowledge driven economy, the report said.

“The EU is increasingly falling behind globally in building the digital infrastructure and innovative capacity that would allow its economies to unlock new sources of growth,” the report said.

It has less competitive markets, more regulatory requirements and fewer sources of finance.  Since the crisis banks have been reluctant to lend to European businesses.

Day said, “The fact is that in parts of Union access to finance is still very difficult […] in general in Europe we are too bank dependent." Banks’ excessive risk aversion was a problem for new businesses looking for finance, she added.

The report praised the “bold monetary policies” such as the restructuring and reforms of banking systems and reduction of public spending that helped the EU begin the recovery from the crisis.

But modest growth and high unemployment meant that complacency was not an option, the report added. Bringing down unemployment was likely to be the major issue facing the next Commission, Day said.

Commission communication

The European Commission today (10 June) highlighted the importance of investing in research to spur the economic recovery. With current research and innovation spending across the public and private sector worth just over 2% of GDP, the EU remains well behind international competitors like the United States, Japan and South Korea, the Commission said. Spending should be increased to 3% of GDP, it added.

Increasing research and innovation investments was a proven driver of growth, it said before calling on member states to prioritise such investment as public authorities regain the margins to pay for it.

In a communication, the Commission said research and innovation should be underpinned by a stable budget that targeted resources to make the most of them. Programmes could be improved by less administration and more competitive funding. The quality of public institutions should also be improved, including by setting up new partnerships with industry.

Máire Geoghegan-Quinn, European Commissioner for Research, Innovation and Science, said: "Fostering innovation is widely accepted as the key to competitiveness and better quality of life, especially in Europe where we cannot compete on costs.

“This is a wake-up call to governments and businesses across the EU. Either we get it right now or we pay the price for years to come."