How can Europe regain its former competitive glory? | Video

World Finance speaks to Damian Chalmers from the London School of Economics about what Europe can do to improve its global competitiveness

February 14, 2014

Despite a huge and educated population, and massive wealth, the European Union has been stifled by rigid labour laws and crippling tax systems. Damian Chalmers from the London School of Economics discusses what challenges lie ahead for the continent, the lessons that can be learned from Germany, and whether economists have focused too much on failure rather than success.

World Finance: Well Damian, let’s start with the situation on the ground. How competitive is Europe compared to the rest of the world?

[T]here’s a danger on focusing on what Europe doesn’t do well, rather than what it does do well

Damian Chalmers: You have to bear in mind that as a proportion of world trade, the EU still does very well. If we look at something like the World Economic Forum, and its views of competitiveness – a liberal measure if ever there was one! – one finds European states very well represented in the top 10. Particularly north European states.

So there’s a danger on focusing on what Europe doesn’t do well, rather than what it does do well.

World Finance: What are the major challenges it now faces?

Damian Chalmers: One of the things is that many of Europe’s traditional sources of competitive advantage have eroded. That other companies from non-European states, for example, are used to applying European standards now. It’s something that used to give us a first-mover advantage – that’s rapidly disappearing. Europe perhaps had cheaper access to finance than many other parts of the world. I think the differential there is also disappearing.

World Finance: Onto Germany now, and it’s a country that’s often criticised others for accumulating too much debt. But it’s now under investigation by the EU Commission to see if its huge trade surplus can threaten the rest of the block. Do you think this could be the case?

Damian Chalmers: Well it is under investigation by the EU Commission. There’s this argument that the surplus now exceeds what Germany is allowed to have for the purposes of the macroeconomic imbalance procedure.

It’s seen as a problem within the EU because there is so much intra-EU trade. And if some of the newer states in southern Europe are to, if you like, grow their way or export their way out of the current economic predicament, then one of the biggest markets would be Germany.

It’s seen as a problem within the EU because there is so much intra-EU trade

That said, this internal surplus vis-a-vis other Euro-area states can’t be seen in isolation. It is surely a good thing for the EU that one has an engine of growth and an engine of competitiveness in Germany, which is exporting not just to other EU states, but around the world.

World Finance: Germany is the strongest economy in the EU, so what can other countries learn from it?

Damian Chalmers: I think one has to be very careful about this. Certainly since the beginning of the Euro-area crisis, Germany has tried to suggest the model which has served it well should exist for the rest of Europe. Now, it’s not clear to me how easy it would be for others either to fit into this model, or whether the costs of fitting into this model would just be too severe.

Germany is a capital-intensive economy with strong resources in terms of its educational and skills base. This is just not there in certain other Euro-area states.

World Finance: How does the gap in competitiveness between the north and the south impact the overall picture?

Damian Chalmers: I don’t know is the answer to that. If one was looking at somewhere like the US, one probably wouldn’t be talking about it in quite the same terms, as saying “Does the gap in competitiveness between this state and that state affect the US competitiveness?” But of course there is a difference. The US is a single state, it’s a federal state, and the EU is not. And that means the EU is more politically turbulent, it means that different parts of the EU have to account for this relative gap of competitiveness, while the centre of course will put ever greater controls, as happened in the US, to check the less competitive parts of the EU, if you like, up their game. So what is likely to happen is increasing political centralisation, I would guess.

World Finance: Are there any policies that have been implemented that you’ve really thought, you know, “Oh no!” and is there anything that you would have done differently?

I do wonder whether we fight yesterday’s wars

Damian Chalmers: I do wonder whether we fight yesterday’s wars. So this commitment to constitutionally entrench structural balances, or modest structural deficits. I wonder if in a few years’ time we’ll be looking at that as the next great mistake. It is introducing an inflexibility into the system that is perhaps not a great thing, and I think we might also look at the controls that are currently put on the European Central Bank as the controls of a past era.

World Finance: Well what single piece of advice would you give business leaders in the EU if you could make changes?

Damian Chalmers: I think one of the big challenges for business leaders – and they could tell you this across the EU at the moment – is getting access to capital on competitive terms. And that to my mind is probably a bigger challenge than some of the other restrictions that more attention is paid to, such as labour laws and tax laws.

World Finance: Damian, thank you

Damian Chalmers: It was a pleasure.