Nout Wellink: European competitiveness - where do we stand and where do we
go?
Speech by Dr Nout Wellink, President of the Netherlands Bank and Chairman of the Basel Committee
on Banking Supervision, at the Conference "Towards sustainable European competitiveness: the role
of business" organized in commemoration of INSEAD ́s upcoming 50th anniversary by its Dutch
alumni association, Amsterdam, 8 June 2007.
* * *
Introduction
Let me start with some personal remarks. In the past few weeks, I visited successively Dublin, Tblisi,
Athens and Buenos Aires. And as you probably know, I meet twice a month with my European
colleagues at the ECB in Frankfurt. And as you probably don't know, I will become 65 next year and
thus entitled to public pension benefits (AOW), although my term as president expires only in 2011.
This is how my professional life looks like nowadays in a world marked by globalization, European
integration and aging. However, these three trends are not only relevant for central bankers, they are
relevant for everyone. Today, I will speak about the impact of globalisation, European integration and
aging on European competitiveness.
Globalisation
Globalisation strengthens the interrelationships between national economies. Let me illustrate this by
China's economic development. The rise of China gives an enormous supply shock to the world
economy. Currently, 16% of total world production is made in China, which was only 4% in the
beginning of the 80s. After the European Union and the US, China is now the third largest economy in
the world.
China's economic development is noticeable for every European citizen. For example, electronics and
textiles have become much cheaper due to cheap Chinese production. Inflated prices of raw materials
and oil are a flip side of China's explosive growth. Everyone who regularly refuels his car, can agree
on this. On balance, Chinese economic development has been beneficial for Europe. For instance,
Dutch families have saved on average 300 euros per year due to cheap Chinese imports, according to
a recent estimate by the Netherlands Bureau for Economic Policy Analysis (CPB)1.
China's economic development certainly has an impact on European economies, but there are large
differences across Europe. China has a comparative advantage in producing and exporting cloths,
shoes, toys and consumer electronics. A country like the Netherlands has a comparative advantage in
producing and exporting flowers, dairy products and food. Hence, the Netherlands currently has only
limited competition from China in its export markets. However, a country like Italy, which is specialized
in shoes and clothing, is confronted with severe competition from China. Consequently, Italy will have
to restructure its shoes and clothing industries, something the Netherlands already did by the end of
the 60s.
A key question for the future is whether Europe can sustain global competition with countries like
China. The development of labour productivity is an important determinant of the competitive position.
In this respect, it is worrisome that the growth of European labour productivity has been lagging behind
its main competitors in the past years2, although recently there seems to be a pick-up in trend
productivity growth. Possible explanations for the low productivity growth in Europe are the lack of
technological progress and an unfavourable business environment3. Let me take a closer look at both.
Concerning technological progress, there is evidence that Europe's relative weak productivity growth
can at least partly be explained by its low research-and-development efforts. In the US and Japan,
R&D-expenditures4 in total manufacturing are about 50% higher than in the euro area. A second factor
which might explain our weak productivity growth, is the education of the European population. Over
the last decades we have seen an increase in the level of educational attainment. But to create a
knowledge-based European powerhouse, we need to unlock universities' potential. In a global context
European universities are currently no match for American universities5. More competition between
academic institutions, selective entrance exams and allowing more freedom in funding could spark a
move to high-quality academic research. This is one of the things Europe needs to become "the most
competitive and dynamic knowledge-driven economy" as laid down in the Lisbon agenda.
Concerning the overall business environment, there is evidence that Europe is in a less favourable
position than its main competitors. Surveys among European businessmen suggest that this holds in
particular for the tax system, labour regulations and the administrative burden. The average marginal
tax rate on labour in the euro area is high and hovers around 15 percent points above the rate in the
US6. Labour regulations such as employment protection legislation hinder job-to-job mobility in
Europe. As a result, workers in the EU stay in the same job for more than 10 years on average,
compared to less than 7 years in the US7. Concerning the administrative burden, the average cost of
starting a business with up to 50 employees in the euro area is estimated to be 10 times higher than in
the US, according to the World Bank. That is, if entrepreneurs have not given up starting a business in
the meantime, as it takes on average 27 days to set up a new business in the euro area, compared to
just 5 in the US8. I always had respect for entrepreneurs, but it's getting larger in view of the red tape
they have to cut through.
Some reforms have recently been undertaken, both at the national and the European level. For
example, personal tax wedges have been reduced and employment protection legislation has been
relaxed in some European countries. And I fully support the current EU Commission initiative for
measuring the cost of existing legislation and reducing the administrative burden on companies with
25 percent by 2012. Furthermore, the adoption of the European Services Directive by the European
Parliament in 2006 will contribute to a level playing field in the services sector. This will foster
competition in the services sector, which is needed given the lacking productivity performance.
However, although these reforms are a step in the right direction, more reforms are needed to improve
productivity growth in Europe.
Aging
Europe is aging more than for instance the US and China. Let me give you some figures to illustrate
this. Currently there are on average 23 retirees for every 100 workers in Europe, in 2050 this will be
48. In the same period, this so-called old-age dependency ratio will increase to 34 in the US, and to 39
in China9. Thus, the relative share of workers in the population of Europe will be smaller than in the
US and China in the coming decades. This will threaten Europe's competitive position.
Although all European countries are aging, there are large differences across Europe. For instance,
Italy is aging more rapidly than the Netherlands. Concerning aging in the Netherlands, let me have a
closer look at the two underlying demographic trends. First of all, we have fewer children. Until the mid
60s, Dutch women gave birth to approximately three children during their lives. After having fallen to
1.5 children in the mid 80s, this figure is now projected to be only 1.75 children in the coming decades.
Secondly, we live longer. At the time the public pension scheme (AOW) was introduced (1957), the
average remaining life expectancy at age 65 was less than 15 years. Nowadays, new
AOWbeneficiaries expect to receive AOW-benefits for more than 18 years on average.
From an economic point of view, both demographic trends are basically good news. Having fewer
children reduces the scarcity of finite natural resources, which has a positive effect on individual
welfare. Living longer partly mitigates this effect as individuals use more finite natural resources the
longer they live. However, living longer also increases an individual's potential earning capacity over
their lifetime. Reaping the potential economic gains from living longer requires adjustments, in
particular with respect to education and retirement. Let me take a closer look at both.
Living and working longer requires more attention for education both when young and old. Young
people should be properly educated and the number of school drop outs should be reduced. Older
people need to get additional education during their careers to keep pace with the latest technological
developments. In this respect, it is good to note that this concept of life-long learning is one of the
leading principles of education at INSEAD.
Living and working longer also requires an increase in retirement ages. Until recently, most European
countries never increased their statutory retirement ages despite the increased longevity of their
population. This threatens the sustainability of the pay-as-you-go financed European public pension
schemes. Germany and the UK have recently announced a gradual increase in the statutory pension
age to 67 and 68 respectively. Other European countries should also increase retirement ages in
response to longevity developments if they want to keep a sound public pension scheme.
Given the prospect of dramatically increasing old-age dependency ratios, it is now definitely time to
act. Moreover, gradual adjustments in the pension ages are much easier to deal with than large
increases at once. Doing nothing implies either a dramatic future fall in public pension benefits such as
AOW to avoid tax increases or a dramatic future increase in the tax burden to preserve pension
benefits. The latter would have severe consequences for Europe's competitive position.
European integration
In a globalizing world economy, European integration can help to preserve Europe's competitiveness.
Being the largest economic block in the world, a united Europe is more capable in defending its
economic interests than a divided Europe. This applies for instance to the trade negotiations in the
World Trade Organisation. More importantly, European integration has fostered the competitiveness of
European companies, in particular by the creation of the internal market. This has made European
companies better prepared for global competition. The euro is another important example of how
European integration can foster Europe's competitiveness. Being a strong and stable currency, the
euro is not as subject to exchange rate fluctuations as the individual European currencies used to be
in the past. This reduces the economic uncertainty for European exporters.
A precondition for successful European integration is a proper governance structure to facilitate
smooth decision making. This holds especially after the enlargement of the European Union to 27
Member States. Besides fostering democracy and transparency, the recently rejected European
Constitution was aimed at improving decision making in the European Union. Surveys among the
European public suggest that the resistance against the Constitution does not stem from the proposed
changes itself, but from the process followed, which was considered as proceeding too fast and too
unknown for the public. In this respect, the term "Constitution" might be misleading as it suggests the
creation of a single European State. In my view, the rejection of the draft Constitution in France and
the Netherlands demonstrated the need for a deeper dialogue with the public about European
integration. In this respect, I fully support the recent attempts to draft a shorter and simpler version of
the draft Constitution, maintaining its main components.
Despite the rejection of the draft Constitution, there is no need for pessimism concerning European
integration. In the past, European integration has also halted from time to time before proceeding to
the next landmark. Let me remind you of the crises with the European Monetary System in the early
90s. These crises did not prevent Europe from completing the process of monetary unification by the
creation of the euro. It is as Willy Brandt once said: "The history of the EU is the history of its crises".
Concluding remarks
Let me conclude. Globalisation, European integration and aging do not stop after this conference. The
question is whether Europe is able to deal with it in such a way that its competitiveness is
safeguarded. Although there is certainly a need to adjust as I have just sketched, we shouldn't be too
pessimistic about the ability of Europe to accomplish this. In the past, Europeans proved themselves
to be more than capable of adjusting to new circumstances.