On the EU-US Development Divide: Europe Missing the Train?

Written by | Monday, January 20th, 2014
Arif Budiman

During a two-day conference organized by the think-tank Open Europe, Britain’s Chancellor George Osborne described Europe’s labour market as inflexible and rigid. At the same time, he also pointed out the fact that it is becoming increasing uncompetitive and falling behind both American as well as emerging labour markets such as China or India. The unemployment rate in the European Union continuously hovers around 12 percent with prospects of improvement only in 2015 when it should fall down to the “stunning” 11.8 percent if we were to believe current forecasts. Brussels’ agenda with respect to its plan to turn the EU into the most competitive economy by 2020 is not really trustworthy anymore although the Commission likes to claim that the EU’s GDP is that of the United States. Yes, it is – but one should also note that the EU has more than 500 million inhabitants compared to the United States’ 317 million.
The issue really is a huge abyss between what the US does and what the EU fails to do. While Washington is already safely behind the crisis on a steady path towards growth, the block of 28 countries has only now escaped the negative growth rates and everyone seems to agree that the block’s recovery is on wobbly legs. Hence, there must be a deep structural problem that could at least partially explain why the developments of the world’s two major economic blocks – as they like to call themselves – differ considerably.
Economists agree that innovation is certainly one of the key issues. While America successfully ‘brain-drains’ by attracting scientists and researchers from around the world in order to keep its competitive edge, Europe is almost non-existent on the world’s R&D map, especially in bio-medical sciences. In 2011, Washington spent about 2.7 percent of its budget on R&D being followed by China and Japan. The European Union as a whole spent only 2 percent of its budget discounting the fact that the size of the block has been changing. Yet, Brussels’ R&D spending target of 3 percent of GDP that was outlined already in the Lisbon strategy and was to be reached by 2010 has so far not materialized. The target is naturally believed to be attained by 2020 as part of the “grand competitiveness quest” but given current austerity cuts it seems to be unlikely.
The constrained budget on innovation is, however, surely not the only decisive factor why the EU is on the losing side in the competitiveness race with the US and to some extent also with the rest of the world. America, just like the majority of Anglo-Saxon countries, seemed to have understood the true nature of migrant absorption. While Washington welcomes high-skilled people from around the global enabling them to become Americans relatively easily, it often takes two or three generations until one can truly become a German, French, Swedish or Italian. It is a sad truth that many continental Europeans still tend to define citizenship “by blood”, which significantly weakens the perceptions of new-comers to their societies no matter how skilled and gifted they are. Obtaining an EU passport is therefore also rather difficult.
Moreover, in the United States, most of the competitiveness edge is kept by start-ups and dot-coms, which makes a truly innovative firm rather young. In Europe, this does not seem to be the case. No matter how hard Brussels tries, small and medium sized firms are not as strong as one would wish and basically no one can read in news about successful European companies that wowed the world with some brilliant new ideas. Perhaps also the traditional European educational system is not supportive enough of young scientists and prospective entrepreneurs who come up with new ideas although it is increasingly obvious that future economic growth will ever more depend on them.
Last but not the least, the relative rigidity of its labour market is yet another reason behind the lacklustre speed of Europe’s economic recovery. Chancellor Osborne put it right – the EU’s labour market is indeed rigid and highly inflexible, which makes it uncompetitive. It comes hard for many Europeans to believe that their labour market, so often envied by others for its extensive protection and social security, is in fact getting totally inefficient in the context of the global economy. But here we come on a very thin political ice: Europe’s labour market, which clearly seems overprotected, knows basically nothing else than full time jobs.
The fact is that there are very few opportunities of part time jobs, flexi time jobs, home-office jobs or diverse types of work contract. Exactly these are the options that could not only help households to maintain the level of their income during significant life events such as rearing children, but they could also boost female labour supply, thus improving the families’ social security in times of economic recessions. But the European Union does not seem to go in the direction of liberalization. Meanwhile, its member states increase minimum wage limits in the hope that they will save the day. They won’t.

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