EU overtakes U.S. in competitiveness

The European Union is overtaking the United States in terms of economic competitiveness, the European Commission said in a report Monday.

Productivity, a key driver of competitiveness, grew strongly for the 27-nation EU with 1.5 percent last year, higher than the 1.4 percent in the United States, according to the European Competitiveness Report of the European Commission.

The EU in 2006 had its best economic performance since 2000 with Gross Domestic Product (GDP) growth of three percent, supported by acceleration in both productivity and employment growth.

With productivity, measured by the increase of GDP per employee, on an upward trend, employment growth accelerated for the EU by 1.6 percent, while the average annual increase for the period 2000 until 2005 was 0.5 percent.

"Recent developments in the EU in comparison with the U.S., confirm that the trend of ever increasing economic growth and productivity gap, which could be observed over the last decade, has come at a halt," the commission said.

The growth rates show a widespread improvement, across countries and economic sectors.

Overall, European industries, services and manufacturing sectors held to their positions on the global market better than their U.S. or Japanese counterparts.

"These are very encouraging results, which tell us that that the reforms under the revised Lisbon strategy for growth and jobs are starting to bear fruit," said commission vice president Gunter Verheugen,responsible for enterprise and industry policy.

The report said microeconomic reforms contribute most to productivity growth in Europe, namely investment in information and communication technologies (ICT), competition, stimulating entrepreneurship, better regulation, trade openness and skill upgrading.

Apart from water transport, all industries with the highest rates of value added growth in the EU related to the new ICT, which were communication equipment, office machinery and computers, as well as telecommunications and computer related services.

Investment in ICT brought high returns in terms of productivity when accompanied by appropriate organizational changes and investment in skills, the commission said.

Competition was another major engine of economic efficiency, either through trade openness, a reinforced EU single market or product market reform.

The commission estimated the removal of remaining internal market barriers would bring a 2.2-percent increase in the total GDP of the previous 25-member EU and the creation of 2.75 million additional jobs, equivalent to a 1.4-percent increase in total employment.

The report showed higher growth in selected areas of high-tech manufacturing, particularly pharmaceuticals, and the network industries, such as the sectors of electricity, gas and water supply, water transport, and telecommunications.

However, the biggest productivity gap compared to the U.S. industry could be found in the manufacturing of office machinery and computers, wholesale and retail trade, air transport, and the financial services.

The report said the main source of the gap between EU member states and the U.S. is total factor productivity, which is productivity growth generated by intangible factors such as technical progress or organizational innovation.

In the context of an aging population, growth of labor and total factor productivity was likely to remain a major concern of European policies in coming years, the commission said.

The report called for increased investment in research and development in ICT, education and training, stimulating entrepreneurship by easing the start and growth of companies as well as enhancing the framework conditions for small and medium-sized enterprises, and reinforcing better regulation practices and cutting red tape.

"I am still concerned about the spending on research and development, particularly in the private sector. There is a clear need to step it up," Verheugen said.