Europe’s “Austerity Versus Stimulus” Debate Hides A Deeper Competitiveness Problem Much of Europe is no longer competitive Germany and the Scandinavian countries will survive. Southern Europe is in terminal decline

By Paolo von Schirach

May 30, 2013

WASHINGTON – The current debate in Europe is about “too much austerity” supposedly undermining growth. Severe spending cuts and tax hikes deemed necessary to repair public finances have gone too far and too deep, loud critics argue. And the EU now seems to agree. In fact, Brussels just announced that the struggling Southern European members of the EU will be given extra time to repair their balance sheets. So, less austerity and a bit more spending should do it?

Less austerity is no remedy

Not a chance. These adjustments are all about politics, and not about sound economics or prudent fiscal policies. There are constant anti-austerity demonstrations and even riots in Southern Europe. Less austerity will hopefully diminish the political pressure. Still, short term politics aside, the undeniable reality, without fear of exaggeration, is that these countries –Greece, Portugal, Cyprus, Spain, Italy and possibly France– are in “terminal decline”.  A bit more spending here and there is the functional equivalent of palliative care administered to terminal cancer patients. It makes their condition more endurable; but it is no “cure”.

Innovation is the only way out

And what would be “the cure”? The only cure is to recreate the economic foundations for global competitiveness. In other words, either these countries develop valuable sectors that are truly competitive in the global market place or their decline will just continue and get worse. And the data does not support any hopeful forecast.

Southern Europe: Minimal to no R&D spending

Case in point, the FT provided an interesting survey of global competitiveness in which it cited total amounts of R&D spending and the number of patent applications in a number of key countries. The US, while it lost considerable ground in recent years,  is still by far number one, with R&D spending at $ 424 bln. China is number 2, ($ 220 bln). Japan number 3, ($162 bln). Germany is a  distant number 4, ($ 91 bln);  and the UK is an outclassed  number 5, ($42 bln). Keeping in mind that Germany and the UK are Europe’s star performers, you can imagine the others. Italy, the Eurozone third largest economy, spends $ 24 billion a year in R&D. Brazil, still an emerging market, spends $ 39 bln.

And low R&D spending has consequences. Europe has very few innovation driven companies. And the few that are mentioned in the FT story (SKF, Bosh, Siemens, among others) are all located in the North. Indeed, all the examples of well performing, competitive global companies cited in the article are in Germany, Belgium, Sweden and the UK. Not one single example of a world class company in Italy or Spain, let alone Greece. Not even one. You get the picture.

No innovation amounts to economic decline

Again, the ability and willingness to make large investments in innovation is a good predictor of future competitiveness, and therefore of higher shared prosperity. Minimal R&D spending over time translates into stagnant economies. And this by itself would be bad enough. Add to stagnation the unsustainably high costs of politically driven free services, welfare, and pensions ,coupled with inefficient government services plus corruption and a bad picture becomes quite frankly hopeless.

Going forward, politicians can lessen austerity. In fact, they can do away with austerity altogether. They can make people feel a bit better in the near term. But these systemic deficiencies will not go away. Sad but true.


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