Recent Changes in Europe's Competitive Landscape How the Sources of Demand and Supply Are Shaping Up *1
This paper revisits the issue of Europe's growth slowdown, taking into account the latest experiences from the recession and the debt crisis since 2008. From a supply side perspective, using a growth accounting approach, there are virtually no signs of even the beginnings of a reversal in the slowing growth trend, which is primarily driven by a weak productivity performance in most European countries. Recently, low productivity growth has broadened from the services sector to the goods
... the goods producing sector for most European economies as well. However, the manufacturing sectors have begun to recover from the recession, and the most troubled economies even show signs of improved cost competitiveness. But the manufacturing sector on itself is too small to force an economy-wide reversal in productivity. From a demand perspective, using a global value chain-type analysis, it turns out that activities contributing directly or indirectly to production for the global market, account for roughly a quarter of jobs as well as a quarter of labor productivity growth in Europe. Manufacturing accounts for a significant share of this, but in many European countries market services have increased their contribution to global value chains, both in terms of job creation as well as productivity. Projecting growth out to 2025, using growth accounting projections, productivity remains the critical factor for Europe's future growth performance. At the aggregate level demographics will contribute negatively to growth and investment seems maxed out given its historical performance. At the sector level, higher productivity in services for both the domestic and foreign sectors are key to an economy-wide growth revival. Large differences between individual European countries have emerged. The paper identifies three groups of European economies emerging, including (1) the Germany-led supply chain block (including Austria and much of Central and Eastern Europe), (2) a Mediterranean/France block which is more inwardly focused and strongly dependent of the dynamics of domestic demand, and (3) a Nordic/Benelux/UK/Ireland block with competitive export sectors which include services.