“Europe’s role in the global economy”

> Pascal Lamy’s speeches


Ladies and Gentlemen,
Dear friends,

I want to thank you for your invitation to speak to you today on the subject of industrial renewal in Europe. Europe’s industrial future is crucial to its growth, reforms, innovation and job creation.

There is a strong external dimension of the European industry’s competiveness and today I would like to outline for you four very simple and yet powerful facts on which the industrial future of this continent will hinge.

Fact number one: in 2012, it will be trade which will powerfully offset weak domestic demand that threatens to push the EU economy into recession.

Fact number two: 90% of global economic growth by 2015 is expected to be generated outside Europe, a third of it in China alone.

Fact number three: countries with large industrial sectors export more than those which do not. In central European countries, industry represents more than 30% of GDP and the export to GDP ratio is more than 50%. In France and Spain it is only 30%.

Fact number four: countries which export more import more. Germany itself accounts for 25% of the EU’s imports whereas German GDP is 20% of the EU.
The picture these few figures paint is clear: there cannot be a successful European internal industrial agenda without a coherent and complementary external agenda and vice versa.

In the last decades, we have seen exponential trade growth resulting in a shifting geo-economic balance between the West and the East and between the North and the South. The rapidity of such changes is unprecedented and has impacted traditional production processes and social structures. In many advanced economies, these changes have triggered legitimate questions regarding the benefits and losses due to globalization. 

The important trade growth we observed before the crisis is the outcome of three factors.

First, trade is the conveyor belt between demand and supply and reflects complementarities between countries, whether developed or developing countries. It also underscores differences in the rate of economic growth and the differences in needs among these countries.

Second, trade growth is proof of the progress in trade opening. Multilateral, bilateral and unilateral initiatives have progressively reduced barriers to trade both in goods and in services although much remains to be done.

Third, the decrease in transports costs and the power of new information technologies has generated more opportunity for specialization of production and of trade in tasks. Intermediate products today account for 60% of total trade in manufactures. These tasks are often spread across regions and even continents in global value chains. Specialization happens at the level of the tasks and not necessarily at the level of final products. The distance to foreign markets has been substantially shortened, offering great  opportunities for small and medium-sized enterprises which constitute a big part of the European industrial landscape. Imports nowadays matter as much as exports. In fact, the average world import content of exports has grown from 20% twenty years ago to 40% today.

Global value chains call for revisiting the manner in which we compute trade flows, the manner in which we calculate jobs associated to trade and even the manner in which we calculate bilateral trade balances. Traditionally, we have looked at flows of goods and services across borders. Today, we need to look at the value added in each country. We are working with the OECD and other research institutes to produce new trade data reflecting value added trade and the first evidence of this will be available publicly by mid-December. This breakthrough should help business and policy makers better understand and therefore better focus on what matters at the end of the day — jobs!

Levelling the playing field in a world of value chains also requires that we pay more attention to non-tariff barriers which take the  form of regulations, standards or norms. One such barrier relates to the cost of customs procedures, which on average represent the equivalent to a 10% tariff on imports.

Contrary to public perception in many European quarters, the EU has remained resilient on trade performance in recent decades. Its world market share has remained stable at around 20%, while that of similar economies such as the United States and Japan has decreased. This resilience can be attributed to a comparative advantage in certain critical sectors, such as civil aviation, chemistry or machinery. 

This increase in trade correlates with an increase in employment. In Europe today, more than 30 million jobs, that is more than 10% of its total workforce, depend on sales to the rest of the world. This is an increase of 50% compared to twenty years ago. But it is also clear that the gains flowing from the benefits of trade have not been evenly distributed and that behind overall positive employment figures lie also job destruction in certain sectors and regions. The paradox is that despite a common trade policy for all 27 EU member states, some are doing much better than others in benefiting from external markets.

Take the example of Germany and France. Despite sharing the same trade policy, France has been doing less well than Germany outside Europe. But more importantly, it has also lost market share inside Europe. What are the reasons for such a decline on the European market? In 2008, hourly wages were similar in France and Germany: 26/33 €/h in France and 30/33€/h in Germany. Same for the average number of hours worked per year: around 1,500 in both countries. Social and environmental rules are also similar in France and in the rest of the EU member states which constitute two-thirds of French exports.

The essential explanation is the weakening of the non-price competitiveness. Among other reasons, private sector investment in research and development is too weak. This leads to insufficient product differentiation and less quality on average. The number of French exporting firms is now three times less than in Germany.

If I bring these facts to the table, it is because I believe that a big part of the answer to maintaining the competitiveness of European industry in world markets relates to the need for smart domestic but also European policies. Let me outline a few examples.

First, Europe needs to pay closer attention to education, training, qualifications, skills transfer and innovation.

Second, Europe has an untapped potential to improve productivity through the deepening of the single market on services. We can no longer easily separate industry and services. In a world of global supply chains, the competitiveness of services has become a major component of the competitiveness of industry.

Third, considering the importance of energy prices for the location of industrial firms, energy policies can greatly influence the competitiveness of a region. Hence, the importance of proper management of energy transition in the future.

Fourth, an efficient social security system is an element of competitiveness insofar as it can play the role of a buffer against a temporary crisis affecting employment or insofar as it can help adapt job skills in sectors affected by competition.

In short, the external dimension of the European economy cannot be dissociated from a strong internal dimension. It cannot be dissociated from “more Europe”. And both require a stable environment in which to operate.

Let me conclude in hoping that what we saw in Europe for the last six months, including at this week’s European Council, are the first steps towards exiting the euro crisis and restoring a much needed credibility.

 Thank you for your attention. 

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