Europe in the global economy: Surprising external strength amid domestic weakness

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

The EU has maintained its share in global exports over the past decade, whereas other mature economies have seen theirs decline considerably, most notably the US and Japan, says Daniel Gros.

Daniel Gros is director for the Centre for European Policy Studies and a member of the World Economic Forum’s Global Agenda Council on Europe.

"Double-dip recession in the eurozone, record unemployment, particularly among young people – there is certainly no shortage of bad news about the European economy.

Worse, the recent spate of disappointing data is not something new. Overall, the economic performance of the EU since the start of this century has been weak.

Productivity growth – already low over the past 10 years – seems to be falling further. Growth in GDP per capita has, until recently, been comparable to that of the US only because more people were put to work. At the same time, the working age population of the EU is set to decline.

All these weaknesses apply more acutely to the eurozone area, thus restricting the ability of countries to service their high public debts. And with growth remaining robust in emerging economies, the relative decline of the EU’s weight in the global economy seems set to accelerate.

So where is future growth going to come from? The answer is higher productivity, but there is no sign of this happening. The EU’s 2020 growth strategy is in tatters and there is little prospect that productivity growth will return any time soon.

However, if one looks at the performance of the EU in global trade, a different picture emerges.

The EU has maintained its share in global exports over the past decade, whereas other mature economies have seen theirs decline considerably, most notably the US and Japan.

The EU exports almost three times as much to the fast-growing BRICs than the US does. In fact, the EU has increased its exports much more than the US over the last decade, and this holds true whether one looks at exports of goods, services or manufacturing. The performance of the EU is particularly striking in the latter, where exports have increased by about 150%, compared to about 50% for the US.

But it is services that could emerge as Europe’s hidden champion. It is widely assumed that Europe is not competitive in this market – numerous studies have shown that services are the sector in which productivity performance in the EU has been weakest and that the continent has been comparatively slow in adopting information technologies.

In reality Europe’s exports of services are performing well. Here, too, the EU has outperformed the US, whose exports have increased by 100% over the last decade, compared to Europe’s 150%. In 2011 extra-EU exports of services amounted to over €570 billion, 40% higher than those of the US.

That the EU is competitive in services can also be seen from the fact that it is continuously recording a surplus, which rose to about €100 billion in 2011. This strong trading position is astonishing, since services constitute the sector in which productivity growth in the EU has been most disappointing (both in absolute terms and relative to the US).

In addition, not only do services account for over 70% of European GDP, they also constitute a central input in global value-added chains as well. Recent WTO/OECD research suggests that over one half of the domestic value added in EU exports (of both goods and services) derive from services. Reinvigorating the services sector will thus be critical to improving European global competitiveness.

The data shows that Europe has a solid economy, but its policy-makers must somehow use the encouraging trade performance to improve the productivity of the domestic economy, and in particular the service sector. This combination of weakness at home but strength abroad provides a challenge for both government and business leaders.

Could Europe’s strength on the global marketplace be leveraged to achieve higher productivity at home? What strategy should the EU adopt in terms of its trade policy and foreign direct investment? Should large globally active enterprises look at Europe as an exporting platform, rather than a dynamic market?

The trade data also carries a message for political leaders in the rest of the world. They should look beyond the bad news about low growth and consider instead how their trade relations with the EU have developed, not just over the last months, but over the longer term. They might find that it is too early to write off the EU as a major global player."

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