TABLE OF CONTENTS

1..... Introduction.. 3

2..... State of the Industry - 2013. 5

2.1. Introduction. 5

2.2. Production. 6

2.3. Investment 9

2.4. Access to finance. 10

2.5. Productivity. 13

2.6. Employment 14

2.7. Skills. 15

2.8. Innovation. 16

2.9. Internal market 19

2.10. Exports and FDI 21

2.11. Energy issues. 23

3..... Industrial Policy - Sectoral Issues. 30

3.1. Chemical sector. 30

3.2. Automotive sector. 32

3.3. Machinery (mechanical engineering) 33

3.4. Forest-based industries. 34

3.5. Steel 36

3.6. Non-ferrous metals. 37

3.7. Textiles, fashion and high-end 38

3.8. Defence. 40

3.9. Space. 42

3.10. Agri-food industries. 44

3.11. Pharmaceutical sector. 46

3.12. Bio-Based Products Sector. 48

3.13. Cement.. 50

3.14. Ceramics 50

3.15. Glass...... .50

3.16. Construction. 50

3.17. Tourism.. 50

3.18. Standardisation. 50

4..... Implementation of the 2012 Industrial Policy Communication.. 50

5..... Contribution of EU Policies to Industrial Competitiveness. 50

5.1. Internal market for good and services. 50

5.2. Internal Market - Access to finance. 50

5.3. Regional and urban policy. 50

5.4. Digital agenda. 50

5.5. Employment, labour market and social policies. 50

5.6. Education and culture policy. 50

5.7. Research and innovation policy - horizon 2020. 50

5.8. Competition policy. 50

5.9. Trade policy. 50

5.10. Transport policy. 50

5.11. Environmental policy and resource efficiency. 50

5.12. Climate action. 50

5.13. Justice.... 50

1. Introduction

In 2010, the Commission adopted the Europe 2020 flagship initiative on “An Integrated Industrial Policy for the Globalisation Era” in the context of the Europe 2020 strategy for smart, sustainable and inclusive growth'. Good progress has been made in the implementation of the 70 key actions of this flagship.

In October 2012 the Commission adopted an update of the flagship communication with the title "A Stronger European Industry for growth and Recovery". The underlying theme of the 2012 Communication was the need to accelerate the reforms initiated already in previous industrial policy developments. To this end, the Commission focused on establishing a broad partnership between the EU, its Member States and industry to dramatically step up investments in new technologies. The Commission remains convinced that Europe’s capacity to take up new technologies will determine the speed of the recovery and the strength of the EU economy in the coming decades.

The Commission has been pursuing an integrated industrial policy approach as outlined in the Industrial Policy Communications of 2010 and 2012 and has issued growth-enhancing recommendations to Member States in the context of the European Semester. Full, effective implementation of this policy approach at European and national levels is critical to ensure EU future competitiveness and to increase its growth potential. To be effective, policy actions must be well articulated and consistent from regional efforts to the EU-level. For these reasons, the new communication calls on Member States to recognise the central importance of industry for boosting competitiveness and growth in Europe and calls for a systematic mainstreaming of competitiveness concerns across all policy areas. They are also invited to endorse the objectives of revitalization of the EU economy, the road-map for achieving this aim and the reindustrialisation efforts to raise the contribution of industry to GDP to as much as 20% by 2020.

This staff working document presents firstly the current state of European manufacturing. In particular it illustrates trends and the impact of the crisis on production, investment, productivity, employment, skills and innovation. It also describes the EU performance in the international arena and considers possible benefits from improvements in the internal market regulations. The aim is to take a snapshot of the manufacturing sector's competitiveness, which could provide elements for improving the design and implementation of EU policies.

Chapter three provides a brief overview of current challenges and relevant policy measures in different sectors. As the EU industrial structure is multi-faceted, the various sectors face different conditions, which should be reflected in European, national and regional competitiveness policy. This section therefore provides an overview of the Commission’s policies on Enterprise and Industry in some of the most relevant sectors. The list of sectors presented hereafter is not exhaustive but focuses on relevant policy areas of the 2012 Industrial Policy Communication.[1] In addition, the importance of standardisation in the European Economy is emphasised by looking at the European Standardisation System of tomorrow.

Chapter four presents the state of play of policy implementation in the form of a summary table. The state of play of the six task forces in place for each priority action line, the accompanying measures and other related initiatives are grouped according to the main themes identified in the 2012 Communication: i) technologies and innovation, ii) access to markets, iii) access to finance and iv) human capital and skills.

The final chapter presents a collection of policies currently implemented at EU level; special attention is put in pointing out their contribution to industrial competitiveness. There are numerous pieces of legislation across the different domains of the European framework that may have an impact on industry. The collection illustrated in this chapter is thus not to be considered fully exhaustive.

2. State of the Industry - 2013 2.1. Introduction

This chapter presents the current state of European manufacturing industry. In particular it illustrates trends and the impact of the crisis on production, investment, productivity, employment, skills and innovation. It also describes the EU performance in the international arena and considers possible benefits from improvements in the internal market regulations. The aim is to take a snapshot of the manufacturing sector's competitiveness, which could provide elements for improving the design and implementation of EU policies.

The recovery from the recession has been slow and partial in the EU, with significant differences across Member States and across sectors. The persistently sluggish behaviour of investment in the EU, and in particular the collapse in the construction related sectors are among the key reasons for this unsatisfactory performance. Economic recovery requires investment to pick up , but EU investment has stayed well below long-term values remaining unresponsive to policy actions. It is very difficult to identify when investment will rebound and one can speculate about the reasons for the delay, but input costs and macroeconomic uncertainties have been identified as influencing factors. Difficulties in financing investments seem also to be of relevance in most vulnerable Member States.

A recurrent theme in the policy discussion is whether the decline in bank loans as observed during the economic crisis is driven by reduced demand or by the tightening of supply, or as is more plausible, by both factors simultaneously. Although there is not a clear answer to this question, the Commission identified the countries where those factors behind low aggregate demand and tightening of supply acquire more importance.

Labour productivity growth has been higher in manufacturing than in services, albeit with significant variation across sectors. Manufacturing industries have also outperformed services industries in total factor productivity (TFP) growth, which measures the efficiency by which companies convert inputs into output. Growth in total factor productivity is higher in the manufacturing sector than in the services sector and in the economy as a whole for almost all EU Member States.

The crisis created a sharp fall in employment from 2008 to 2010 but employment in manufacturing was already falling due to two structural drivers. The higher-than-average productivity growth in manufacturing and the falling share of labour intensive manufacturing in favour of more capital-intensive high value added activities are both contributing to a secular fall in industrial employment. Expanding manufacturing industries increasingly need more skilled employees to keep up with technological change and remain competitive and more and more sustainable, on the basis of a circular economy approach. Skills mismatch is an issue with several high-growth sectors struggling to find trained specialists. This is the case in a variety of sectors such as pharmaceuticals, coke and refined petroleum, and computers, electronic and optical equipment.

There has been a steady growth of the body of internal market legislation since the establishment of the internal market in 1992. The available data for the period 1999-2011 show a concomitant increase in the share of trade in goods as a percentage of EU GDP, from around 17% of EU GDP in 1999 to close to 21.5% in 2012. Further steps in simplifying internal market legislation continue to be an avenue for strengthening competitiveness of firms by facilitating scale and productivity gains.

Since the onset of the recession, extra-EU exports have been the main driver of EU growth and industrial activity. In a very depressed economic context, net exports have been the most dynamic component of GDP growth in the EU since 2010 and the only growing component of GDP both in 2012 and 2013. Although EU growth in 2014 and 2015 should become less export-dependent, partly because of a slowing down of emerging economies, the fact remains that growth prospects in other regions of the world, and notably Asia, should continue providing important business opportunities for the EU industry.

Foreign direct investments greatly contribute to growth and employment in the EU, but while Europe still attracts very important FDI flows estimated at USD 230 billion in 2012, the EU is becoming a less attractive destination of FDI. Its share of world FDI declined from 30% in 2008 to 16.8% in 2012. In the same period, the share of China increased from less than 10% to more than 18% and emerging economies are playing an increasingly large role as FDI partners[2].

Energy issues have gained relevance in the discussions on how to maintain and further develop a solid and competitive industrial base in the EU. Evidence over the last decade highlights the uneven developments of energy prices across regions and markets and points to an increase of energy price pressure affecting the EU economy as a whole and energy intensive industry players in particular.

2.2. Production

· EU manufacturing recovery from recession has been slow and partial, while in the US manufacturing has rebounded faster.

· Several Member States, notably in central and Eastern Europe, have seen a quicker recovery in manufacturing than most old Member States.

Manufacturing output fell sharply in 2009 and despite a partial recovery still remains well below its pre-crisis peak. Manufacturing employment also fell sharply after the crisis but has since returned to its long-term gradual declining trend (figure 1).

The US manufacturing sector has recovered more quickly. Japanese manufacturing output on the other hand has been more volatile and has struggled to maintain momentum since 2010 (figure 2). This is partly due to the negative impact of the Great East Japan earthquake and tsunami, but also to the strength of the yen[3], which made Japanese exports more expensive.

Figure 1: EU manufacturing production and employment (2010=100) || Figure 2: Manufacturing production in the EU, Japan and USA (2010=100)

Source: European Competitiveness Report 2013 || Source: European Competitiveness Report 2013 based on data from Eurostat and OECD

There have been significant variations in the performance of Member States’ manufacturing since the peak in 2008. Manufacturing in several Member States has surpassed its pre-crisis peak whereas in others it is still well below that level. In general, manufacturing has rebounded more quickly in those new Member States with a relatively large industrial sector compared to the EU average. Growth in this group of countries, particularly the Baltics, has been partly helped by export demand from outside the EU, including the CIS. Manufacturing output still lags well behind the pre-crisis peak in several Member States where domestic demand has been weak and the size of the manufacturing sector is smaller than the EU average. This is the case of Spain, Greece, and Cyprus (figure 3). The relatively large manufacturing sector in Finland has been negatively affected by structural changes, notably in the electronics industry.

Figure 3: Recovery in manufacturing production since the 2008 peak by Member State to Q1 2013

Source: European Competitiveness Report 2013 based on data from Eurostat

Only a few industrial sectors (e.g. pharmaceuticals and other transport equipment) have recovered their pre-crisis level of production. High-tech (HT) industries have generally been more resilient than those lower down the technology ladder (high-to-medium tech – HMT; low-to-medium tech (LMT); low-tech (LT)). Industries producing consumer staples, such as food and beverages, have fared relatively better than those producing more durable consumer goods such as furniture, clothing and motor vehicles, which are more sensitive to income. Sectors linked closely to the business cycle, such as those producing intermediate goods and capital goods have fared poorly, as well as sectors related to the extraction and manufacturing of raw materials such as mining and quarrying, metal and wood products (figure 4).

Figure 4: Manufacturing recovery by manufacturing sector since the 2008 peak to Q1 2013

Source: European Competitiveness Report 2013 based on data from Eurostat

Figure 5: Share of EU manufacturing production to total VA by member state (2000-2012)

Source: Eurostat

In general, manufacturing sectors have been hit more severely than service industries during the crisis, with the share of manufacturing as a percentage of GDP falling in many Member States, except Germany, Poland, Romania and Latvia. In 2013, EU manufacturing value added is 15.1 % of GDP (annualised value in the second quarter of 2013). The declining share of manufacturing output and employment is part of a long-term trend driven by a shift in domestic demand towards services and a trend for higher productivity growth in the manufacturing sector that lowers relative prices of manufactured goods.

2.3. Investment

· The evolution in gross capital formation is heavily influenced by the collapse in construction related investment; investments in equipment, metal products and machinery have recovered faster during the crisis.

· It is difficult to identify when investment will recover, but access to finance, input cost conditions and weak business confidence have been identified as major factors delaying the recovery.

Gross fixed capital formation as a whole has fallen since 2008 from just over 21 % of GDP to 17.9 % of GDP in 2012. This trend has continued during 2013 with the level of investment falling to 17.5% of GDP (annualised) in the second quarter of 2013. The sharp deterioration of gross capital formation is the reflection of the collapse in construction related investment. Investment in equipment, metal products and machinery recovered faster after the crisis, at least until 2011 (figure 6).

Economic recovery requires investment to pick up and, in particular, investment in construction that has a strategic importance in the EU as it delivers the buildings and infrastructures needed by the rest of the economy[4].

Figure 6: Evolution of the investment components in the euro area (2005 =100) || Figure 7: GDP growth and gross fixed capital formation (EU, current prices in euro)

Source: Ameco database || Source: Ameco database and European Commission economic forecasts

Until now, investment has stayed low since 2009 and seems to be unresponsive to policy actions. There is considerable variance in the official forecasts of the future evolution of investment in the EU. While Commission forecasts in November expected a recovery in gross fixed capital formation of 2.5 % in 2014 for the EU and of 1.9 % for the Euro Area (figure 7), the IMF and the OECD[5] predicted a mere 1.3 % for the euro area. Until now, the expectations of the Commission for a recovery of gross fixed capital formation have been contradicted by actual (lower) figures. It is very difficult to identify when investment will recover but cost conditions and macro uncertainties have been identified as major factors delaying this recovery.

An additional obstacle to investment is the difficult access to finance, both in the form of high financing costs or quantity rationing. In relation to the former, borrowing has been much more expensive in countries facing greater financial and economic difficulties (e.g. Spain, Italy) compared to others (figure 8).

The low rate of investment rates is examined in detail in the Product Market Review[6]. Results showed that in most vulnerable Member States firms' investment rates are lower than what is expected based on fundamentals. Put differently, it could be seen that two firms in the same sector, of similar performance, size and indebtedness, invest significantly differently depending on whether they are based in a vulnerable Member State (e.g. Italy, Spain, and to some extent Portugal) or not.

Figure 8: Interest rates of new loans to non-financial corporations

Note: Annualised agreed rate (AAR) / Narrowly defined effective rate (NDER); Up to and including EUR 1 million Source: ECB

2.4. Access to finance

· Loans to non-financial corporations have not yet recovered from the crisis and lending activity continues to decrease in the euro area.

· The firm's age, size and its growth performance are important explanatory variables of perceived bank lending difficulties.

The availability of external financing has become a serious threat to the survival of significant parts of Europe’s industry. Lending to non-financial corporations has not yet recovered from the crisis and lending activity continues to decrease in the euro area (figure 9).

According to the latest SAFE survey[7], approximately one fourth of the SMEs in the euro area applied for a bank loan. While 65% of these firms had received the full amount they applied for, 12% of them reported that their bank loan application had been rejected. On the other side, 47% of the SMEs did not apply because they could count on sufficient internal funds, the percentage of firms not applying for fear of rejection stayed around 7%; and firms not applying or "other reasons" reached almost 21%. It is worth noting that there is a wide regional disparity, the percentage of SMEs applying for a bank loan was higher in France (30%), Italy (29%) and Spain (27%), whereas it was lowest in Ireland (12%). More than half of the SMEs in Belgium, the Netherlands, Ireland, Germany Austria and Finland reported that they did not applied due to sufficient internal funds. By contrast, these shares were considerably lower in Greece (28%), and Portugal (33%). The situation is also very uneven across firm sizes. Larger European firms have been able to tap into the bonds markets in the past few years while SMEs have had a harder time diversifying their financing sources.

The constrained bank lending in the EU is in contrast to the US, where there was a 30 % fall in lending at the height of the crisis, but a growth of 10 % year-on-year since 2011. At the same time, the rate of non-performing loans in some EU countries is much higher compared to the US (figure 10).

Figure 9 – Year-on-year growth of loans to non-financial corporations || Figure 10 - Non-performing loans as a share of total loans

Source: ECB, US Federal Reserve, Bank of Japan || Source: World Development indicators, October 2013

To estimate the likelihood of rejection after a loan request a synthetic index of financing difficulties was constructed using data from the Survey on access to finance of SMEs[8]. The index was a statistically and economically significant predictor of underinvestment, even controlling for factors affecting both growth and financing constraints (age and size) and controlling expected profitability developments over the next two years. The increase of loan rejection probability for SMEs by 30 percentage points leads to an average underinvestment by any given firm of up to 0.5 percentage points (as a share of total assets). These results show that the bank lending channel seems to be currently difficult in most vulnerable Member States, including in Greece, Spain, Portugal, and to some extent Slovenia. Intermediate cases are France, Czech Republic, Germany, Poland and Belgium, while in Finland the rejection probability of a loan request is well below average.

A recurrent theme in the policy discussion is whether the decline in bank loans as observed during the economic crisis is driven by reduced demand or by a tightening of supply (a so-called credit crunch), or perhaps by both factors simultaneously. In order to answer this question, firms' perceptions on access to bank loans in the EU have been examined using the results from the SAFE survey by the Directorate for Economic Affairs and Finance in the Product Market Review 2013. The report points out that data allow for a distinction between demand-side (e.g. the firms' needs for bank loans) and supply-side (e.g. the banks' willingness to provide loans) indicators (table 1). The SAFE survey allows for cross-country comparisons of the relative importance of supply and demand factors, but not within each country. According to the report, firms in Estonia, Finland and Slovakia report most frequently reductions in the need for bank loans or discouragement to apply for a loan without signalling strong supply reductions (e.g. Luxembourg). A tightening of supply conditions (also without reporting strong demand-side reductions) is perceived by firms in Spain, Portugal and Slovenia. These countries show symptoms of a credit crunch. A third group of countries include the Netherlands, Greece, and Ireland, where firms most often indicate both reduced demand as well as squeezed credit supply[9].

Table 1: Access to loans drivers

Reduced demand || Tightening of supply

Decreased needs of firms for bank loans Top 4: EE, FI, NL, SK || Firms indicating access to finance as the most pressing problem Top 4: ES, EL, IE, SI

Discouraged borrowers Top 4: EL, IE, LU, NL || Decreased availability of bank loans Top 4: EL, IE, PT, SI

Decreased willingness of banks to provide a loan Top 4: ES, EL, PT, SI

Received not all the financing requested Top 4: ES, EL, IE, NL

Source: Product Market Review 2013 using data from SAFE survey

An econometric analysis has been performed using the SAFE survey[10] in the Product Market Review. The analysis looks at the characteristics of the company, e.g. age of the firm, firm size, sector, ownership structure, and determines their importance in explaining perceived access to finance. Country-level data on the general economic conditions and structural and financial indicators on the banking sector have been also included as control variables. Some of the control variables are of a structural nature (firm's characteristics and market structure of the financial sector) and do not change in response to cyclical conditions. Other control variables (notably financial health of the banking sector, growth prospects of firms and macroeconomic conditions) are cyclical.

Conclusions based on results of the econometric analysis highlight that firm characteristics, in particular the firm's age, size and its growth performance are relevant explanatory variables[11]. The phenomenon of the discouraged borrower is indicated as predominantly observed among young, small firms with negative recent growth of their turnover. Cyclical conditions are reported also as drivers of lending difficulties, with firms in countries with higher unemployment rates often reporting financing difficulties. However, the report indicates also that a weak and positive impact of the unemployment rate on the change in the needs for a bank loan, can flag that firms rely more heavily on bank loans in times of economic hardship for their working capital and to finance inventories. The report illustrates also a third group of factors related to the market structure of the banking sector. Among them, the presence of foreign banks is perceived by firms as increasing the banks’ willingness to give credit. Finally, the relationship between firms' perceptions of accessibility of loans and the financial health of the banking sector is examined. In particular the return on equity of the banking sector was examined, which turned out to be a relevant explanatory factor.

2.5. Productivity

· Labour productivity growth in EU manufacturing is lower than in US manufacturing, mainly due to a more dynamic labour market in the US.

· In the EU and the US alike, manufacturing has higher labour productivity growth and higher total factor productivity growth than services.

EU manufacturing has lagged behind US manufacturing in productivity growth. Since 2000, average labour productivity growth (in terms of value added per hour worked) in manufacturing was 3.5 % in US compared to 2.4 % in EU (figure 11). A large part of the difference materialized in the period after the dotcom recession whilst there was also a larger decline in EU manufacturing labour productivity between 2008 and 2010. These differences can be partly linked to a more dynamic labour market in the US that sheds labour more quickly during recessions[12]. Employment and hours worked declined more in the US than in the EU during recessions because labour was made redundant to a higher extent than in the EU.

Figure 11: Manufacturing labour productivity in the EU versus the US (quarterly, year-on-year) || Figure 12: Comparison of total factor productivity (TFP) growth (1995-2007)

Source: European Competitiveness Report 2013 based on data from Eurostat and OECD || Source: European Competitiveness Report 2013 based on EU Klems

In general, labour productivity growth has been higher in manufacturing than in services, although there has been significant variation across sectors. Between 2000 and 2011, labour productivity, measured as value added per employee, grew faster in high-tech manufacturing sectors and the knowledge-intensive ICT sector. Some low-tech and medium low-tech industries such as textiles, rubber and plastics also performed relatively well and above the average for manufacturing sectors. The lowest productivity growth rates were in labour intensive services. Wages have remained relatively stable across sectors. Consequently, changes in labour cost competitiveness, measured in unit labour costs, have been largely driven by changes in productivity. Consequently, those industries with higher productivity gains have gained the most in competitiveness.

Like in labour productivity, manufacturing industries have, in general, outperformed services industries in total factor productivity growth. Total factor productivity (TFP) measures the efficiency by which companies convert inputs into output. Growth in total factor productivity is higher in the manufacturing sector than in the services sector and the economy as a whole, for all EU Member States for which data is available except for Italy, which recorded negative TFP growth over the period in the Italian economy as a whole. Within the EU, the TFP growth differential between the manufacturing sector and the total economy is particularly large in Austria and Germany (figure 12). If the share of manufacturing continues to fall, it may have a negative impact on TFP growth for the whole economy and on long-term growth potential. The decline in investment expenditure may also have a negative impact on TFP growth with manufacturing but also in other sectors of the economy.

2.6. Employment

· EU employment in manufacturing is going down, as it has done for decades, although this trend is partly counterbalanced by employment creation in the inter-linked services sector.

· An important structural reason for the decline is that productivity growth is higher in manufacturing than in the rest of the economy.

Employment in EU manufacturing has been falling for several decades and is now about 20 % lower than at the start of the century (see Section 2, figure 1). The sharp fall in employment from 2008 to 2010 was caused by the crisis. But there are two structural drivers of falling employment in manufacturing: manufacturing’s higher-than-average productivity growth and the falling share of manufacturing sectors in the economy (from more than 20 % of EU GDP in 1995 to just over 15 % in 2012).

However, in parallel, the increasing inter-linkage between manufacturing and services has created new jobs. The importance of business services of manufacturing and service industries in value chains has grown rapidly since the last decade of the last century. Growth of employment in Europe illustrates this, in particular the business service sector (14.6 % of total EU employment in 2011) accounts for about half of the employment growth and the non-market services (23.1 % of EU employment in 2011)[13].

The fall in employment has affected not only manufacturing but also other sectors such as mining and quarrying, agriculture and forestry, public administration, telecommunications, electricity and gas, that are characterised by sustained labour productivity growth. On the other hand, sectors such as construction, trade, education and administration saw increasing employment from 2000 to 2010 (cf. Annex). The only manufacturing sector with higher employment in 2010 than in 2000 was pharmaceuticals, but it represents a very small fraction of total employment in manufacturing. Employment in this sector increased by 15 % from 2000 to 2010, driven in particular by new jobs in Ireland, Denmark and the Czech Republic.

2.7. Skills

· The supply of numeracy and literacy skills differs widely across Member States, from very poor on average to among the highest in the world.

· EU manufacturing increasingly needs better educated employees, particularly in industries such as pharmaceuticals, coke and refined petroleum, and computers, electronic and optical equipment.

The OECD Skills Outlook 2013 revealed considerable differences across Member States concerning adult (16–65 years) skills, notably numeracy and literacy. At the top end, the skills of Finnish adults in literacy and numeracy are very high, second only to Japanese adults. At the opposite end, the literacy and numeracy skills of Spanish and Italian adults are far behind those of adults in other OECD countries: the distance to the next Member State in the ranking, France, is more than ten points in literacy and more than eight points in numeracy. Given their importance to the EU economy and the current state of their economies, that the situation of skills in Spain and Italy is particularly worrying: in reading, more than one in four adults in Italy (27.7 %) and Spain (27.5 %) perform at or below the most basic level, compared with one in twenty Japanese adults (4.9 %) and one in ten Finns (10.6 %); in numeracy, almost one in three adults in Italy (31.7 %) and Spain (30.6 %) perform at or below the most basic level, compared to around one in twelve in Japan (8.2 %) and one in eight in Finland (12.8 %) and the Czech Republic (12.8 %).

Figure 13: Mean literacy and mean numeracy proficiency scores in selected Member States

Source: OECD Skills Outlook 2013 (UK data do not include Scotland and Wales; Cypriot data refer to the area under the effective control of the Government of the Republic of Cyprus)

It is also remarkable that the mean literacy score exceeds the OECD average only in the Czech Republic, Estonia, Netherlands, Slovakia, Finland and Sweden, whereas in several other Member States (Denmark, Germany, Austria and others) the average literacy score falls short of the OECD average (figure 13).

At the same time, EU manufacturing industries need highly skilled employees in order to compete. In 2011, the pharmaceuticals sector was the sector with the highest share of highly skilled employees, followed by coke and refined petroleum. The manufacturing sector with the lowest share of high skills and the sector with the highest share of low skills was leather and footwear (figure 14).

Figure 14: Composition of EU labour force by sector (%), 2011

Source: European Competitiveness Report 2013

Skills shortages and mismatches may occur in the future in some of the most dynamic sectors if growing demand for increasingly skilled employees cannot be matched. On the other hand, low skill and high labour intensive service activities may be the only opportunity for the unskilled labour force migrating from shrinking labour intensive manufacturing industries. This fact would call for further liberalisation of the services sector particularly pertinent, in particular insofar as low-skilled activities are concerned (e.g. retail trade, road and freight transport, etc.).

2.8. Innovation

· Public R&D spending in the EU grew in the early years of the crisis, however, recent data point to a potential reversal of this trend.

· The innovation divide between the Member States is widening. The leading innovators are becoming even stronger while moderate and modest innovators fail to catch up.

· In pharmaceuticals, computer/electronic/optical products, chemicals and beverages, rapid innovation cycles mean that two-thirds or more of all companies report innovative activities. But these firms are facing greater difficulties in accessing to credit.

Public R&D spending in the EU grew throughout the crisis as governments strived to keep up their R&D investments and thus incentivise businesses to do likewise. However, recent data point to a potential reversal of this trend. Public R&D budgets decreased in 2011 for the first time since the beginning of the crisis, with more pronounced effects in the Member States suffering most from sovereign debt crisis. There are also signs of increasing disparities in the performance of Member States. The less innovative countries might no longer be catching-up with the most innovative countries, as illustrated by the Innovation Union Scoreboard.

In parallel, the EU is lagging behind its Europe 2020 target of spending 3% of GDP on research & development (R&D).

Business R&D expenditure in the EU is far below that of our main competitors: the EU businesses spent 1.29% of GDP on R&D in 2011, less than South Korea (2.8% in 2010), Japan (2.49% in 2010), the US (1.83%), and China (1.39%). These differences are in part due to different sectoral compositions across countries and regions.

However, during the 2008-2013 period the EU has increased its innovation performance (figure 15), according to the Summary Innovation Index of the Innovation Union Scoreboard, at an annual average rate of 1.6% and has closed almost half of the innovation gap towards the US and Japan. The EU has a strong lead over China and other BRICS countries, although China and South Korea are growing faster than the EU. Notwithstanding the EU improvement in innovation performance, the same index points to a widening in the innovation divide between the Member States, with the leading innovating Member States becoming even stronger while moderate and modest innovators fail to catch up. Estonia is the innovation growth leader (7.1%), albeit from a low starting point, while the five Member States with the least performance change (less than 1%) are Cyprus and Greece (with negative values), Poland, Bulgaria, and Sweden.

Figure 15: Growth in innovation performance 2008-2012 || Figure 16 – Funding ratios to basic and applied research in 2010

Source: Innovation Union Scoreboard 2013 Note: Average performance, going from 0 to 1, is measured using a composite indicator building on data for 24 indicators in 2010-2011. Growth in innovation corresponds to yearly growth. || Source: Key Science and Engineering Indicators, National Science Board, 2010 Digest, NSF, OECD "Research and Development Statistics “, DG ENTR analysis

International comparison of funding ratios related to basic research, applied research and R&D show that 19% of EU funding focused on applied developments, against 54 % in China, 48% in the US and 44% in Korea (figure 16). Reasons for this commercialisation gap range from difficulties in accessing finance over excessive red tape to inadequate intellectual property rights regimes.

Figure 17: Share of innovating EU firms by sector in 2010 (%)

Source: European Competitiveness Report 2013 using CIS data

Innovation patterns differ across different sectors of the EU economy. In manufacturing sectors such as pharmaceuticals, tobacco, computer/electronic/optical products, chemicals and beverages, rapid innovation cycles mean that two-thirds or more of all companies report having undertaken product or process innovation in the previous year, while most companies in the clothing, leather and footwear sectors are not involved in innovation on a regular basis (figure 17). On average, across all sectors, manufacturing firms are considerably more innovative than firms in services, and they engage relatively more in product innovation than firms in the services sector.

An important aspect to mention is that[14] that access to finance can be more difficult in the case of innovative firms due to the inherent uncertainty of innovative projects, the difficulties innovators face in appropriating their benefits, and asymmetric information permeating the relationships between lenders, borrowers and equity investors. These difficulties may imply that innovation is delayed inhibiting the process of creative destruction in which young innovative firms replace inefficient firms.

2.9. Internal market

· Overall benefits from further simplification of the internal market regulatory framework could reach 12% of compliance costs.

· Empirical analysis highlighted potential positive impacts on labour productivity and value added, leading to improvements in employment.

Since the establishment of the internal market in 1992 there has been a steady growth of the body of internal market legislation, and the existing evidence suggests that this has been accompanied by a sizeable increase of exchanges between Member States. Other factors and processes that have also played an important role are the introduction of the Euro currency, the EU enlargement, the emergence of broader globalisation processes, improvements in transport infrastructure, the reduction of transport costs, and development of e-commerce. Nevertheless, administrative obstacles and an incomplete enforcement of internal market rules leave the potential of the internal market only partially exploited. Additional improvements of the internal market rules, including the removal of administrative obstacles and further enforcement of the internal market legislation would allow the internal market to express its full potential as an engine of growth.

Available data for the period 1999-2011 show a clear increase in the general level of total trade as a share of EU GDP. However, factors other than internal market legislation might have contributed to this performance. Over the 20 years since the internal market’s launch in 1992, intra-EU trade in goods has grown as a share of GDP from around 17% of EU GDP in 1999 to 21.5% in 2012. Furthermore, input from stakeholders and the analysis of the role of specific pieces of legislation affecting specific sectors also provides supportive evidence of the positive effect of the internal market on trade[15].

Intra-EU trade growth rates in three broad categories of manufactured goods - machinery and transport equipment, manufactured goods classified by material and other manufactured goods[16] – have exceeded the growth rate of the total manufacturing value added in the EU between 2000 and 2012 (figure 18). Whilst there are differences between different sectors, most of them have experienced an increase in the level of intra-EU trade, particularly during the first half of the 2000s. Only “Office machine and automatic data processing” has shown a fall in the level of intra-EU trade since 1999 and this coincided with the economic and financial crisis of 2008.

In most sectors, there has been a reduction in the share of intra-EU trade in the total level of world trade. This reflects the globalisation of markets, the increasing presence of non-European manufacturers in the EU market and the delocalisation of segments of the value chain outside the EU.

Figure 18: Intra-EU trade in selected sectors (2000=100) and GVA growth in the EU

Source: Eurostat

Although an Action Programme for Reducing Administrative burdens in the EU has been launched by the Commission in 2010s, additional steps[17] in simplifying internal market legislation appear necessary for strengthening competitiveness of firms through higher productivity.

A recent study commissioned by DG ENTR to CESS[18] looked at the benefits deriving from simplification of the internal market regulatory framework, based on empirical analysis (cases studies) in eight sectors[19]. The assessment of the benefits of simplification, based on assumptions on the potential costs saving for firms, showed that the highest savings (20% total cost reduction) could be attained through greater coordination in timing and updating of directives and regulations. E-labelling and a wider provision of compliance information electronically would allow a 3% cost reduction through lower printing and labour costs and more efficient access to specific regulatory compliance information. Cost savings of eliminating inconsistencies across EU harmonisation rules on CE marking across all relevant directives and regulations, and saving of eliminating inconsistencies in requirements for the demand of compliance were estimated in 0.2% of total costs. At the same time, the study underlined the need that any simplification must be strongly evidence-based and supported by extensive industry consultation in order to take into account potential downside risks and unintended effects.

The basic assumptions of the study are that any cost reduction from simplification would be translated into savings of firms’ operational costs via improved labour productivity, which is then passed into lower prices of products. As a consequence, external competitiveness would improve boosting exports. Ultimately, this dynamic would have a positive impact on Gross Domestic Product, and thus on (increased) employment.

The broader benefits to the economy from simplification have been estimated using a macro-sectoral and a world input-output model[20], comparing medium term economic developments with and without simplification of the internal market regulation. The assessment has been made for a sample of firms in the metallurgical sector[21]. The current internal market compliance cost was estimated in €430 million for the EU, with a potential labour cost reduction of €50 million following internal market simplification, this implying an increase in value added of €10 million euros (0.001%). The assessed impact of this cost reduction on macroeconomic variables (final demand categories, excluding government consumption, exports, imports and GDP) at EU level is low. The GDP increase caused by the improvement in labour productivity is estimated in €63 million (0.0004%), employment would remain mainly unaffected (a small job loss is expected in metallurgical industry), while in other sectors the number of jobs created would increase. Results should be treated with considerable caution, not only because they are based on cost reductions in one sector only, but also because the model used to produce the figures was based on a Netherlands national model extrapolated to the EU with the inherent inaccuracies this could entail.

2.10. Exports and FDI

· Exports, mostly to the rest of the world, have been the main driver of industrial activity, while aggregate internal demand has remained subdued.

· A few sectors and Member States account for a large share of the very significant trade surplus of the EU in manufactured products.

· On FDI, while the EU remains the main global recipient, its share has been significantly reduced these last few years. Emerging economies play an increasingly large role as FDI partners.

Since the beginning of the crisis, extra-EU exports have been the main driver of EU growth and of industrial activity. In a very depressed economic context, net exports have been the most dynamic component of EU GDP growth since 2010 and in fact the only positive one both in 2012 and this year[22]. Although EU growth in 2014 and 2015 should become less export-dependent, also in view of a slowing down of emerging economies, the fact remains that growth prospects in other regions of the world, and notably Asia, should remain more dynamic in the foreseeable future therefore providing important business opportunities for the EU industry.

While before the great recession of 2008-2009, intra-EU and extra-EU trade were evolving broadly in parallel, since then a gap has become apparent with extra-EU trade growing at a much steeper pace than intra-EU-trade.

When looking only at manufactured products (figure 19), intra-EU trade recovered well in chemicals and food although in machinery and transport equipment the pre-crisis levels have not yet been reached. Overall, manufactured products represent more than 80 % of exports in goods and generate a massive trade surplus for the EU (€365 billion in 2012 compared to €125 billion in 2006, nearly a threefold increase), an essential counterweight to the trade deficit in energy and raw materials. This trend appears to continue in 2013, as in the period from January to July, the EU has achieved a trade surplus in manufactured products of €233 billion, compared to €200 billion in the same period of 2012).

A few sectors account for a sizeable share of the large trade surplus. These include road vehicles[23] (an approx. €120 billion surplus in 2012), industrial machinery and equipment (€70 billion), pharmaceutical products (€57 billion), aircrafts (€28 billion), beverages (€20 billion) and paper (€14 billion). Conversely, large trade deficits are sustained by the EU in a minority of industrial products such as clothing (€ 47 billion.), office machines (€ 48 billion), telecommunications equipment (€ 40 billion) or non-ferrous metals (€ 11 billion).

Figure 19: Intra-EU exports (million EUR) for selected manufactured products’ categories – 1999-2012

Source: EUROSTAT

The EU industry remains the dominant actor in a wide range of manufacturing sectors. Excluding intra-EU trade, the EU share of world markets in 2011 was as high as 49.4% for beverages and 43.3% for pharmaceuticals and remarkable results were registered for sectors as diverse as printing (41.1%), machinery (30.7%), motor vehicles (27%) or rubber and plastics (17.9%). China has become the dominating force only in a limited number of sectors (textile, clothing, footwear, computers) while other emerging economies still maintain a rather marginal role (with some exceptions, like that of Russia in refined petroleum or India in the “other manufacturing” category) (table 2).

A very large share of the overall EU trade surplus recorded in 2012 is based on the performance of a few Member States, notably Germany but also Italy, especially in machinery, or Ireland, especially in organic chemicals.

Foreign direct investments greatly contribute to growth and employment in the EU. While Europe still attracts very important FDI flows, estimated at USD 230 billion in 2012, the share of the world total is decreasing steeply, from more than 30% in 2008 to 16.8% in 2012; in the same period the share of China increased from less than 10% to more than 18%[24] .

While the United States and Switzerland remain the main FDI partners both for inward and for outward stocks, some emerging economies play an increasingly large role, such as Russia, Brazil and China (table 3).

Table 2: Share of EU and main trade partners in world markets by sectors in 2011

Source: DG ENTR calculations using COMTRADE data

Table 3: Main FDI partners with the EU (stocks)

|| Inward || Outward

|| 2004 || 2011 || 2004 || 2011

United States || 15.87% || 13.28% || 14.18 || 11.92%

Switzerland || 4.63% || 4.62% || 4.75 || 5.17%

Japan || 1.69% || 1.42% || 1.47 || 0.72%

Canada || 1.31% || 1.36% || 1.46 || 1.86%

Russia || 0.11% || 0.53% || 0.40 || 1.40%

South Africa || 0.09% || 0.08% || 0.72 || 0.67%

Brazil || 0.07% || 0.77% || 1.36 || 2.00%

China (excl. HK) || 0.04% || 0.15% || 0.41 || 0.85%

Hong Kong || 0.27% || 0.63% || 1.67 || 1.04%

Singapore || 0.35% || 0.67% || 0.81 || 1.03%

Australia || 0.56% || 0.34% || 1.00 || 1.05%

Source: Eurostat, DG ENTR calculations

2.11. Energy issues

· Widening gaps in electricity and gas prices compared to main competitors worldwide have been observed and are expected to stay in the medium-to-long term – in particular following the so-called shale gas “revolution” in the US.

· Uneven developments of energy prices across regions and markets have determined huge energy costs differential across regions and countries.

Implementing the adopted 2050 climate and energy roadmaps as well as the intermediate 2030 climate and energy framework - currently under definition – will require a deep transformation of the energy systems as well as of the entire economy of the EU. Increased investment in adequate infrastructure and technologies will be necessary, including infrastructure resilient to the impact of disasters. The total investment needed to transition to a secure, competitive low carbon energy in the EU by 2050 is predicted at about 1.5% of GDP on an annual basis. By 2020, is it estimated that about one trillion euros of investment is needed in the EU to "ensure security of supply, diversification of sources, cleaner energies and competitive prices within an integrated energy market" [25]. But investment in the EU has slowed down with the crisis.

Implementing solutions to climate, energy and environmental challenges must be compatible with keeping the EU an attractive place for investment, but also with maintaining or even increasing EU competitiveness. By and large, energy inputs and energy policies play a critical role in reversing this trend. As a key production input, energy is a core driver of productivity growth, along with other measurable inputs such as of capital, labour, material and service inputs. The inputs that matter vary according to the industries, segments or sub-segments of the global value chain. The price and the availability of energy inputs are critical for activities such as manufacturing, distribution or logistics, while low-cost labour and qualifications of the labour force determine the competitiveness of most services activities.

The issue of energy prices and costs is unquestionably crucial for maintaining and developing a solid and competitive industrial base in the EU. Energy costs are obviously particularly important for Energy Intensive Industries (EIIs) that, in addition, are often exposed to international competition and have a strategic positioning alongside the economic value chain (figure 20).

In the context of a fast-changing global energy system, relative positions of countries and regions are shifting, redefining the foundations of today and tomorrow’s international competitiveness. Evidence over the last decade is clear about the uneven developments of energy prices across regions and markets and, in particular, about the comparative disadvantages the EU economy and industry players are confronted with (figure 21).[26]

Striking price differences are certainly more evident with regard to two fundamental energy inputs, that is, electricity and gas, for both of them widening gaps compared to most of EU direct competitors worldwide have been observed and are expected to stay in the medium-to-long term – in particular following the so-called shale gas “revolution” in the US (figure 22).

Macroeconomic evidence on the recent trends associated to energy prices in the EU as well as with regard to the high variability of conditions in different EU Member States, is further supported by an analysis conducted by the Commission. The main purpose is to assess the evolution and composition of energy prices and costs, by individual industry sectors and by plant, based on real-life cases. Cases are not meant to be exhaustive but they can give important insights about the variability of operating conditions across the EU. Case studies have been carried out for bricks and roof tiles, wall and floor tiles, ammonia, chlorine, ethylene, aluminium, steel.

Figure 20: Share of energy in total production cost worldwide, 2011 || Figure 21: Weighted average industrial energy prices (including tax) by economy

Source: IEA 2013 || Source: IEA 2013

Results from these studies suggest the trend already visible at macro level of a significant increase between 2010 and 2012 in the level of gas and electricity prices paid, on average, by industry operators in each sector or sub-sector assessed. Moreover, there are highly differentiated price dynamics by region leading to widening differentials across Europe in prices paid by operators of the same sector or sub-sector.

Figure 22: Ratio of industrial energy prices relative to the United States

Source: World Energy Outlook 2013

According to the study, gas prices are indeed dominated by the cost of the energy component which, based on the sector and regions assessed, varies between 80% and 97% of the final price. The registered increase in gas prices mainly derives from increased commodity price and indexation of gas to oil price.

As for the electricity price, for which the energy component compared to other parts of the world remains roughly stable and more or less similar between EU Member States, the main driver of the evolution of electricity prices is the increase, in recent years of network fees, taxes and levies, including support schemes for renewable energies. While progress in the functioning of the internal market for electricity has had a positive effect in the convergence of wholesale electricity prices across Europe, national policies, taxes, levies and network distribution costs have more than offset the impact of the internal market. These costs may cumulatively represent, depending on the sector and region observed, between 30% and 45% of the overall electricity price.

Electricity and gas prices paid by EU operators are much higher than prices faced by competitors in many third countries or plants belonging to the same company established abroad, in particular the US and Russia[27]. Over the last few years, these spreads have been increasing. This has been observed for all the sectors and subsectors for which evidence was collected both on average (i.e. steel, aluminium) and at plant level (i.e. bricks and roof tiles, wall and floor tiles).

Information available from some case studies, in particular for aluminium, suggests that producers benefiting from long-term contracts have been able to limit the impact of increasing energy prices over the last years compared to EU producers buying on the wholesale market.

Energy efficiency is rightly considered as the most effective way to respond to increasing energy prices. The EU manufacturing sector still enjoys an ample advantage in terms of energy intensity[28] compared to their US counterparts, not only in absolute levels (more than 3 times lower) but also in terms of trends. Between 2001 and 2011 the EU industry went from an energy intensity of 150 to 121 ktoe/Bn€, a decline of 19%; over the same period the US industry went from 440 to 400 ktoe/Bn€, a decline of 9%. The situation is similar with regards to EIIs where the gap is less pronounced but it has been growing over the past decade. For instance the EU chemicals and paper sectors have about half the energy intensity of their US competitors while the non-metallic minerals and the basic metals sectors are about one third less energy intensive than their US counterparts[29]. Case studies may not provide conclusive evidence on average efficiency trends across sectors or on the link with energy price evolution, but they provide some useful insights by comparing prices paid by the least and most efficient plants in some sectors and subsectors. For example, a sharp increase in the energy input costs may not always be followed (or anticipated) by technical improvements and further reduction in consumption. This holds especially true over a short time period as the one assessed and in cases where efficiency levels are already high as it is the case for many EU industrial operators and in times of reduced or negative profitability margins. Moreover, it seems logical to think that investment decisions with regard to energy efficiency, when involving either expensive solutions ‘at the margin’ or large-scale replacement projects directly compete with somehow easier options of relocation.

The Commission has studied the interactions of energy prices and energy intensity in determining the different overall energy costs of manufacturing companies in a global comparison. Using the World Input-Output Database (WIOD), the concept of Real Unit Energy Costs (RUEC) has been developed. Similarly to Unit Labour Costs, the RUEC indicator measures the amount of money spent on energy sources to obtain 1 unit of value added[30]. The levels and trends of RUECs for the manufacturing sector are presented below in Figure 23[31].

In 2011, the EU presents a level of RUEC which is much below that of China, Russia and India. It is above that of Japan and essentially the same as the US. In terms of trend it is to note that all countries have experienced a slow increase in RUEC over the years with the partial exception of India after 2002. The comparison of the EU with the US is particularly important: so far, the persistent energy price gap in favour of the US has not led to diverging RUEC levels. This is an indication that energy intensity improvements may have helped the EU industry to offset the price disadvantage.

Figure 23: Real Unit Energy Costs – Manufacturing Sector, selected countries.

Source: Commission calculation on WIOD figures.

Finally, the estimation of the impact of CO2 indirect costs has been carried out in parallel to the assessment of the evolution in electricity prices. In this respect, the main result shown by case studies is the high variability of impacts across sectors, regions and plants. This is mainly due to highly differentiated sectoral electricity intensities as well as highly varied regional CO2 emission factors for electricity production. The choice of instruments used at Member State level in the pursuit of different policy objectives seems to play also an important part in these differences. It can be noted that, as the price of CO2 allowances has remained low over the last years, it cannot be considered as one of the key drivers for the upward trend observed in electricity prices. However this might change in the future as a result of the recovery of economic activity levels in the medium term and the investments which will be required for renewing and decarbonising the EU energy system. CO2 allowance price may therefore become an additional significant driver in the future.[32]

ANNEX

Distribution of EU employment across sectors (%), 2000 and 2010

Source: Eurostat’s labour force survey (data unavailable for Bulgaria and the UK)

Employment changes by sector and Member State (%), 2000–2010

Source: Own calculations based on Eurostat’s labour force survey (data unavailable for BG, HR, PL, RO and UK)

3. Industrial Policy - Sectoral Issues

EU industrial policy focuses mainly on framework conditions and horizontal issues. It seeks to provide enterprises and other actors with the environment and resources needed to make the most of their creative capacity.

Nevertheless, Europe’s industrial structure is multi-faceted and many sectors face particular conditions and challenges, which must be reflected in an efficient competitiveness policy, at EU as well as national and regional level. An overview of EU industrial policy would not be complete without a brief account of particular sectoral conditions. This section therefore provides an overview of some of the sectors most relevant for the Commission’s policies on Enterprise and Industry. For each sector, a brief and non-exhaustive overview of the situation is presented below focusing on current challenges and of relevant policy measures.[33]

3.1. Chemical sector 3.1.1. Overview

The European chemical sector is an essential industry as it is involved in different stages of multiple value added chains and also supplies final consumers. The chemical industry represents 1.1% of EU GDP and offers 1.2 million jobs. The EU chemical industry is a mature and rather stable industry, which recovered relatively well from the economic crisis of 2008/2009. The production level in 2012 was still nonetheless 9 % below the 2008 peak and EU chemicals production decreased by 1.4 % during the first seven months of 2013 compared with the same period in 2012[34]. European chemicals represent 20% of the global market, compared to 29.8% in 2001. During the same time China’s share increased from 8.2% to 26.8%.

The confidence indicator (CCI) has stabilized for the chemical sector showing improvements in August 2013 in comparison with July 2013. Capacity utilization in the EU chemicals industry increased from 77.9 % in first quarter 2013 to 78.1 % in the second quarter. Given the diversity of the different subsectors of this industry, it is difficult to draw general conclusions applicable to all of them. Nevertheless, thanks to the positive evolution of the external markets and a certain recovery of some Member States, reasonable expectations are being created.

The EU chemical trade surplus in 2012 was € 49.5 billion, 76% of which resulted from the Specialty and Consumer Chemicals subsectors. The most important trade partners outside the EU are the rest of Europe (non-EU), followed by the NAFTA region (North American Free Trade Agreement market) and Asia (excluding China and Japan) accounting for about 85% of total trade flows with countries outside the EU.

For 2013, the EU chemicals trade surplus reached €25.4 billion during the first six months – a €1.2 billion improvement on the same period last year. EU chemical prices in July 2013 were 0.4 per cent higher than in July 2012. January-June sales were 4.1 per cent lower compared with the first six months of the previous year.

Despite the overall increasing trade surplus of the chemical industry and the historically strong trading position of the chemical industry as a whole, the trade position of intensive energy chemicals subsectors such as petrochemicals, basic inorganic products and polymers has weakened in recent years.

3.1.2. Challenges

Sectoral reports suggest that the main challenges for the chemicals industry in the short and medium term are:[35]

High energy costs Access to raw material Innovation and structural change Legal and regulatory complexity 3.1.3. Policies The cumulative impact of different strands of EU and national regulations should not create insurmountable competitiveness disadvantages for EU firms operating in this sector and exposed to open global competition. Better access to all forms of feedstock for chemical production at competitive prices is a challenge to be addressed as a matter of priority. This includes the application of the “cascading use principle” with regard to the biomass as raw material in different legislative acts, the review of current incentives for biofuels, the use and development of sustainability criteria, assessment approaches for different types of biomass and bio based products, and supply issues related to tariffs and trade agreements, especially those related to ethanol. Innovation is key for the future competitiveness of the sector. The chemical sector will play an essential role in Public-Private Partnerships such as SPIRE (energy efficiency) and BBI (bio based products). Of particular importance for the sector are also cluster policies and initiatives (e.g. SILC II for demonstration projects) as well as the further implementation of smart specialization strategies in the regions that facilitate infrastructure investments in the chemical sector, such as bio-refineries, the reuse of CO2 as chemical feedstock and import terminals for gas. A stable and predictable regulatory environment for the chemical sector is another key requirement for future competitiveness. In relation to the chemicals sector, REACH has been reviewed and a cumulative cost assessment study is to start in 2014. The study will take into account different framework conditions in which the sub-sectors operate, identify relevant policies and regulation for each subsector, quantify them and conclude how supportive or hampering the policy/regulatory environment is. It will collect relevant qualitative (opportunity costs of disinvestment, low innovation, cross-sectorial linkages etc.) and quantitative information (costs generated by the compliance with existing EU legislation, its implementation and application) in cooperation with the industry community, following as widely as possible a value chain approach. The study will identify costs and also consider benefits and highlight possibilities to decrease unnecessary costs and strengthen the sector's competitive position. In the same vein, in 2014 a regulatory fitness check will be conducted on the most relevant chemicals legislation not covered by REACH as well as related aspects of legislation applied to downstream industries. 3.2. Automotive sector 3.2.1. Overview

The automotive industry is of strategic importance to the European economy. The sector, that represents around 12 million direct and indirect jobs, is going through a difficult situation in the EU but continues to generate almost one third of the EU trade surplus. While the results in sales and production of light and commercial vehicles in 2012 have not been positive, sector analysts estimate that the ailing European car market has finally bottomed out at the end of 2013. It is expected that growth will follow a recovery trajectory, with an average annual growth rate of 3.1% by 2019 driven primarily by a high replacement demand. Six months into 2013 the total car production decreased by 5.5% on a year-to-year basis.

3.2.2. Challenges

Production overcapacity continues to weigh heavily on the balance sheet of European car manufacturers and is momentarily concentrated in peripheral Western Europe. Despite the announced structural measures by European OEMs and suppliers, industry analysts predict that these are not sufficient and the manufacturers with a particular European exposure will continue to be most at risk from global industry pressures in the absence of further market rationalisation. Production levels in 2014 are forecasted to grow by 3.7% compared with 2013. In the long run, analysts predict a rate of growth of 2.8% on average, but the growth rates will not recover its 2011 level before 2015 (2007 levels will not be re-established till 2017) while the localization of production capacity in Eastern Europe (Turkey, Russia), Asia, North America and North Africa continues.

3.2.3. Policies

Continuous investment efforts in research, development and innovation ensure future competitiveness in this sector. Considering that Europe’s competitors on the global markets have set up massive R&D support programmes for green vehicle development, Europe cannot have limited ambitions nor reduce the efficiency of action in this field. The new Multiannual Financial Framework for the 2014-2020 reserves a quite large budget allocation for transport research, i.e. some €5.8bn or 8.23% of the total Horizon 2020 envelope. This, alongside with the COSME, programme and the EIB support are the main sources of financing for SMEs at European level. In addition, other sources of financing might be available at national level.

Dealing with industrial adjustment and investment in human capital remains a major issue. The industry, employees and public authorities should all make more progress in this sense as this is vital for the future competitiveness of the EU automotive industry. As suggested in the accompanying communication, promoting an anticipative approach in restructuring and the diffusion of good practices can contribute to anticipate and facilitate industrial adjustment and restructuring. The European Automobile Skills Council offers an appropriate framework for that purpose. The Commission also launched an inter-service task force Ford Genk in April 2013.

Liberalisation of trade remains of strategic importance for the sustainable growth of the EU automobile industry as the sector continues exporting an ever-increasing portfolio of high-quality and high-technology vehicles to third markets. With this aim, the EU is currently negotiating a range of ambitious free trade agreements (FTAs) with key partners. Yet ensuring an open global market place remains a challenge. For example, regarding the implementation of the FTA with Korea in force since 2011, the Commission has noted a number of regulatory measures that create new Non-Tariff Barriers for EU industry.

In addition to Trans-Atlantic Trade and Investment Partnership negotiations with the US and the Free Trade Agreement negotiations with Japan, there is an ongoing bilateral regulatory cooperation with Russia and China with a view to contributing to a high level of regulatory approximation and therefore helping EU companies to export. The Commission is also continuing efforts to modernise 1958 UNECE agreement to accommodate the needs of the emerging economies.

The Commission is streamlining existing rules and conducting competitiveness proofing of new major future initiatives to reduce administrative burden and provide certainty which will in turn lead to more investment in the sector.

3.3. Machinery (mechanical engineering) 3.3.1. Overview

After a negative start of the year, there are signs of the beginning of a turnaround since the end of the third quarter of 2013. However, it is expected that the production of the European engineering industry has contracted by around 1.7% on average in real terms during 2013.

Order stocks are now better than in the first quarter of 2013, but, for many companies, they are still below normal levels. Nevertheless a positive trend is now building up judging by some business cycle indicators for this industry. For example, the business climate index indicator has risen to around 100, indicating a more optimistic perspective for 2014. Moreover, consumer confidence is on the rise in most countries, suggesting a positive impetus for machinery sectors producing consumer goods.

Financial problems are limiting companies’ investment. With production capacity utilisation in EU manufacturing industry at a low level, demand for mechanical and industrial machinery has been below normal during the past year. Only a few export-oriented countries have shown stronger demand. Nevertheless, this has not proved enough to compensate for the contraction in fixed capital formation in the EU.

However, a number of factors point to an improvement in the EU investment cycle in the coming year. The machinery and equipment industry is, as a result, expected to grow by 3% in 2014. With few businesses willing to invest in new capacity for the moment, demand in the EU will therefore come mainly from investments on the replacement of equipment.

3.3.2. Challenges

Main challenges for the sector are:

Ensuring regulatory predictability and stability. Strengthening market surveillance. It appears than in most Member States, the focus tends to be on the surveillance of consumer goods while industrial goods are not given sufficient importance. Mobilising more funding for R&D for nanosciences, nanotechnologies, materials and new production technologies (NMP) programmes. Transaction costs of the 7th RTD Framework Programme implementation need to be reduced for SMEs. Combating protectionism and opening up markets through EU trade policy. Developing lifelong learning for education of skilled young workers in the engineering sector. Promoting measures to improve market access for SMEs. Facilitating access to finance. 3.3.3. Policies

The vast majority of the challenges mentioned above were addressed in the October 2012 Industrial Policy Communication following a consultation with industry stakeholders in follow-up to the 2012 study on the Competitiveness of the Mechanical Engineering industry. A conference on the engineering industries will also be organised during the second half of 2014.

3.4. Forest-based industries 3.4.1. Overview

The EU Forest-based Industries (F-BI) include woodworking, furniture, pulp & paper manufacturing and converting and printing industries. They represent in total about 7% of EU manufacturing GDP and nearly 3.5 million jobs. They all use common raw material – wood, which is a natural, renewable, reusable and recyclable raw material, creating an opportunity for the F-BI to become a key actor in the bio-based economy.

The F-BI was severely hit by the recent crises, which have led to a significant reduction in number of jobs and turnover estimated to have fallen by 19% and 13% respectively in the period 2007-2011 and they have still not recovered pre-crisis levels in 2013.

3.4.2. Challenges

The EU F-BI competitiveness is also negatively impacted by the following challenges:

· increasing competition from countries having low production costs, combined with a decline in demand for F-BI products as a result of structural changes and slowdown in construction sector

· availability of raw materials at affordable prices mainly due to the growing demand for wood from often subsidised bio-energy sector and increasing exports of secondary raw materials outside the EU.

· protectionist measures in international markets creating market distortions, both for import of input materials and export of final products.

· increasing energy prices and gas prices difference compared to North America and pressure to reduce greenhouse gases, in particular impacting energy-intensive industries of F-BI (pulp & paper and wood panels producers).

· the need of a coherent and predictable regulatory framework providing an enabling conditions for investment decisions and creation of growth and jobs in the EU.

· structural problems of ageing workforce combined with difficulties to attract young workers and securing access to finance for research and innovation, in particular to SMEs, which often lack financial capacity.

3.4.3. Policies

In September 2013, the Commission adopted a Communication “A new Forest Strategy: for forests and the forest-based sector”[36], accompanied by the Staff Working Document “A Blueprint for the EU forest-based industries”[37]. This Blueprint seeks to address the challenges faced by these industries with the objective of helping to improve their global competitiveness.

Sustainable supply of wood and wood fibre materials, including the need for increased sustainable mobilisation and promoting the cascading use of wood principle, are objectives also supported in the European Innovation Partnership on Raw Materials. While the Bio-based Industries Public-Private Partnership and EU strategy for the construction sector will provide opportunities to stimulate demand and market growth for F-BI products.

3.5. Steel 3.5.1. Overview

Europe is the second largest steel producer in the world and it has a strategic importance for several major European industries such as terrestrial and naval transport, construction, machinery, energy and defence.

The EU steel industry is an important employer with 350 000 direct jobs and several millions of workers in related industries.

The EU’s share in global steel production halved during the last ten years with China now producing almost 50% of global steel production.[38] While the EU is a successful world leader in many forms of high quality steel, the competitive situation for higher volume lower quality steel is more challenging.

3.5.2. Challenges

Domestic demand is not expected to recover in the short term and the global share of European companies is shrinking. The European steel industry is suffering from the loss of competitiveness as a combined result of a series of factors:

· the demand for steel has dropped substantially due the financial and economic crisis,

· the operational costs are high compared to many competitors that face lower energy costs,

· there is a fierce competition from third countries operating in different domestic environments.

The outlook for employment in the steel sector is of serious concern since more than 65 000 jobs have been lost in Europe during the past few years due to capacity reduction or plant closures.

3.5.3. Policies

In June 2013, an action plan[39] for the European Steel Industry was presented to help this sector confront today’s challenges and lay the foundations for future competitiveness by fostering innovation, creating growth and jobs in the sector.

In parallel, the Commission finished the cumulative cost assessment on the steel sector, one of the measures of the proposed action plan. The results of this cumulative cost assessment were published on the date of adoption the action plan.

The Commission has formally created a High-Level expert Group on steel to continue the dialogue among major stakeholders and follow the implementation of the action plan in this strategic industrial sector.

3.6. Non-ferrous metals 3.6.1. Overview

The main non-ferrous metals (NFM) included in this sector are aluminium, copper, nickel, zinc, lead, tin, silver, gold and platinum.

The EU NFM industry accounts for one fifth of the world’s refined metal production and at least one third of the world’s output of semi-manufactured metal products. It contributes 2% to EU GDP and directly employs 450 000 people.

EU energy-intensive sectors such as aluminium are increasingly under strong competitive pressures, mainly due to high-energy prices. In 2013, the EU imported more aluminium than it produced domestically.

3.6.2. Challenges

The global NFM industry is open and highly competitive. Whilst prices for NFM are set globally in international commodity exchanges, cost factors other than raw material inputs are usually determined locally, making them important determinants of competitiveness, especially for upstream segments. Challenges include the following:

· High energy prices and ensuring global competitiveness. The drivers of competitiveness of the NFM industry are conditioned by i capital, resource and energy-intensity of the sector. The latter makes the it very sensitive to high-energy prices (especially electricity prices) for primary production. In order to ensure investment predictability the sector needs long-term price predictability.

· Access to raw materials. The EU NFM industry is highly dependent on imported raw materials (especially primary) due to the lack of appropriate ores in the EU. EU access is further restricted by export restrictions, tariffs and taxes in place in important raw material producing countries like China and Russia, which creates an unequal international playing field. At the same time, the EU is exporting significant amounts of valuable scrap to third countries.

3.6.3. Policies

Actions that have been or are being implemented include:

· In 2008 the Commission launched the Raw Materials Initiative, an integrated strategy aimed at responding to different challenges related to access to non-energy and non-agricultural raw materials. Since then the Commission has focussed its actions on increased international cooperation (Pillar 1), the fostering of sustainable supply from European sources (Pillar 2) and reducing the EU's consumption of primary raw materials (Pillar 3)[40].

· In 2012 the Commission launched a European Innovation Partnership (EIP) on Raw Materials[41], with the following objectives: to extract more efficiently and safely, to re-use and recycle more, to find alternatives/substitutes for critical raw materials and to be more resource efficient by decoupling resource use from economic growth. In September 2013, the EIP's high-level steering group adopted the Strategic Implementation Plan[42], which includes 10 concrete targets.

· In November 2013 the Commission published a study that focused on the Cumulative Cost Assessment of EU regulation on the aluminium industry. Findings of the study include that regulatory costs related to climate and energy policies are estimated to be between 16% and 40% of the industry's profitability. These regulatory costs reduce profitability and the attractiveness of the EU as a production area for this industry.

· An appropriate framework that could allow for long-term energy supply contracts in a framework of strict and full respect of competition and internal market rules could enhance efficiency in this sector by limiting the impact of high-energy prices. This could take the form of a guidance letter on long-term electricity supply contracts provided that a request for such letter is made and the respective conditions for issuing a guidance letter are met.

3.7. Textiles, fashion and high-end industries 3.7.1. Overview

The European fashion industry value chain employs over 5 million persons, which is equivalent to 3.7% of the total non-financial business economy (2009), representing nearly 3% of the EU GDP. With 70% of world market share, high-end industry adds further to this important contribution; its annual turnover amounts to € 400 billion, with employment reaching 1 million.[43]

European high-end products amount to 10% of all EU exports. 62 % of all goods manufactured by European high-end brands are sold outside Europe, with the value of European exports by the high-end industries estimated at € 260 billion.

The fashion industries still face a deficit in extra EU trade; however in 2011 and 2012, they increased exports to third countries, in particular to China, Russia, India and Brazil and thus improved the trade balance.

The EU has become one of the world leaders in non-clothing applications of textiles. The technical textiles sub-sector is strongly linked to other sectors such as cars and the transport industry, medical applications, protective clothing and construction, and therefore dependent on the performances of these sectors. Technical textiles are intensive in R&D and innovation. That is why a Technology Platform was set-up notably to meet the requirements of FP7. Higher value added new fibres also constitute drivers of export.

3.7.2. Challenges

Due to various pressures for change as a result of trade liberalisation and increasing external competition, consumer developments, technological advances, changes in production costs, and environmental issues, the EU fashion industry is characterised by permanent restructuring and modernisation. The crisis has accentuated the process of restructuring towards the high value added range of the market and niche products. As to the high-end industries, they showed stable growth over the past decade, with remarkable years in 2010 and 2011 with yearly growth of over 10 %. Current challenges include:

· Benefiting from a smart legislative and regulatory framework to develop creative and high-end products manufactured in the EU;

· Competing on price level with the emerging economies has become difficult, if not impossible. The industry has to continue its move towards innovative, high-added value products.

· Continuing globalisation of value chains implies further delocalisation outside the EU and further exposure of the value chain to reputational risks. Putting an emphasis on technological progress, creativity and innovation can reverse this trend.

· Attracting young talents with adequate skills is difficult. There is a risk of losing traditional skills and know-how and this would have an impact on the long-term competitiveness of these industries.

· The sector has to fully benefit from market liberalisation, notably via Free Trade Agreements and by exploring opportunities created by the demographic expansion and increase of revenues in third countries such as Brazil, China, India, Indonesia, Japan and the USA.

· SMEs in the fashion sector are suffering from longer financial cycles vs. production cycles.

· Counterfeiting and other IPR violations undermine the creative efforts of European fashion and high-end companies.

· Lack of legal certainty and consequently decreasing consumers trust online shopping.

On 3 December 2013, industry associations endorsed an Action Plan for the fashion and high-end industries presented by the Commission along these lines in London.

3.7.3. Policies

The 2012 Communication ‘Promoting cultural and creative sectors for growth and jobs in the EU’[44] was the Commission’s first recognition of the economic, social and cultural significance of these specific industries. The Communication is accompanied by two Staff Working Documents, one on fashion and the other on high-end industries[45], which assess the current situation and prospects for the fashion and high-end industries and setting out policy options to strengthen their competitiveness, in particular in the following areas:

- International trade: the current demand drop in the internal market and the growth opportunities outside the EU, are driving the trade agenda of the fashion industry to more offensive positions as exports are considered as an engine for growth. Trade policy, including preferential trade agreements, is used to access international markets, which has become a key priority for the industry especially in emerging economies. Creating and maintaining a level-playing field in international trade is crucial. Trade policy will continue contributing to open international markets addressing both tariffs and non-tariff barriers that have proliferated, in particular in emerging economies. Preferential Agreements are useful. Rules of origin within preferential trade agreements need to be negotiated cautiously because they impact directly on specific processes where competitive advantages exist in Europe.

- Adequate skills both more sophisticated ones (researchers, ICT technicians, product developers, global marketing, etc.) as well as traditional skills and crafts are needed.

- As the sector takes a quality shift moving up towards more sophisticated production activities, the need for finance becomes increasingly important. The banking system could be better used to finance innovation in the textiles sector (especially for SMEs). The current EIB Group scheme to increase lending for SMEs is useful but limited.

- This globalized sector also could benefit from the reinforcement of Intellectual Property Rights protection (both awareness raising and enforcement action and duty of care for Online Service Providers), to protect EU brands, know-how and expertise both in the physical world and online. Whilst already regulated, it is worth mentioning the strategic value of selective distribution for these industries.

3.8. Defence 3.8.1. Overview

With a turnover of 96 billion € in 2012, the European defence industry brings a major contribution to the growth of the wider economy. It provides thousands of highly skilled jobs, as it directly employs about 400 000 people. Moreover, driven by a multiplier effect of between 2.2 and 2.4, it generates up to another 960,000 indirect jobs.[46]

The defence sector consists of three main sub-sectors:

- The aeronautics sector represents around 50% of Europe’s defence, with a turnover of 46.7 billion € in 2010 (43% of this is generated from exports), and employs around 200 000 people.

- In 2010 the land defence sector had a turnover of around 30 billion € and employed 128 700 people. It has the capability for delivering and sustaining key military capabilities in areas such as main battle tanks and armoured fighting vehicles, as well as for sustaining and upgrading platforms.

- The naval sector had a turnover of around 17 billion € in 2010 and employed 83 200 people. The sector provides full services across the entire life cycle of a complex warship from design and construction to integration of systems and support.

3.8.2. Challenges

Member States encounter difficulties to equip their armed forces adequately. Defence budgets are falling, and the cost of modern capabilities is rising. This is aggravated by the persisting fragmentation of European markets which leads to unnecessary duplication of capabilities, organisations and expenditures. It is increasingly unlikely that Member States can bear the cost of defence equipment development in isolation, as new equipment is often technologically complex and expensive. Cooperation and EU-wide competition still remains the exception, with more than 80% of investment in defence equipment being spent nationally, and with relatively high dependency on imports from third countries. The US alone spends seven times more on defence R&D than all 28 EU Member States together.

Furthermore, the EU is at a risk of losing critical technological competences with scarce resources devoted to R&D. Without robust actions to redress the current market situation, the competitiveness of the European Defence Industrial Sector may continue to decline, with an obvious impact on Europe’s strategic autonomy.

3.8.3. Policies

As announced in the Commission Communication “Towards a more competitive and efficient defence and security sector”[47], the Commission’s strategy focuses on action in the following strands:

Further deepen the internal market for defence and security. This means first of all to ensure the full application of the two existing Directives. Based on this acquis, the Commission will also tackle market distortions and contribute to improving security of supply between Member States;

· Strengthen the competitiveness of the European Defence Technological and Industrial Base. To this end, the Commission will develop a defence industrial policy based on two key approaches: – Support for competitiveness – including developing 'hybrid standards' to benefit security and defence markets and examining the ways to develop a European certification system for military airworthiness. – Support for SMEs – including development of a European Strategic Cluster Partnership to provide links with other clusters and support defence-related SMEs in global competition, while recognising the traction and catalyser effect played by large integrators on the whole supply chain.

Exploit civilian military synergies to the maximum extent possible in order to ensure the most efficient use of European tax payers' resources. In particular by:

– concentrating its efforts on possible cross-fertilisation between civil and military research and the dual-use potential of space;

– helping armed forces reduce their energy consumption and thereby contribute to the Union’s 20/20/20 targets.

In addition, the Commission suggests actions which aim at exploring new avenues, driving the strategic debate in Europe forward and preparing the ground for more and deeper European co-operation. In particular by:

– assessing the possibility of EU-owned dual-use capabilities, which may in certain security areas complement national capabilities and become effective and cost-efficient force multipliers;

– considering launching a preparatory action for research related to Common Security and Defence Policy, focusing on those areas where EU defence capabilities are most needed.

3.9. Space 3.9.1. Overview

Space is a key sector for Europe’s economy, and space activities require and generate innovation, scientific, technological and organisational excellence. For this reason, the space sector is an essential pillar of Europe’s strategy to enhance industrial competitiveness, generate growth and create jobs. Both the EU and the Member States are devoting considerable amounts of taxpayers’ money to space activities. It is therefore essential to ensure the most efficient possible use of such investments in order to maximise the benefit that our economies and citizens get out them.

3.9.2. Challenges

Coordination is important and EU Member States have come to the conclusion that most space projects are unaffordable for any single Member State and therefore, it is more efficient to pool resources that ultimately serve to fulfil both national and EU policy objectives. The EU policy measures have to be commensurate to the public budgets at stake and the need to foster an industry capable of delivering on the objectives and competing worldwide.

3.9.3. Policies

As stated in the Communication on EU Space Industrial Policy[48] and the Communication on Defence and Security, six actions are essential for a business-oriented space industrial policy:

A. Technological leadership and non-dependence: Europe’s ability to pursue strategic policy initiatives and provide key services for citizens' benefit requires an independent access to space. This can only be achieved if European industry further develops its technological non-dependence, especially in critical technologies, to ensure its capability to deliver products and services necessary for economic growth and citizens' well-being. R&D efforts, including through the space strand of Horizon 2020, should therefore focus, as a matter of highest priority, on technological non-dependence starting from the low levels of technological readiness up to in orbit demonstration and validation of components and market readiness.

SMEs constitute a crucial element in the value-chain and are often at the innovation forefront. The EU’s role should be to ensure an environment with the right mix between large EU companies able to compete worldwide and agile SMEs delivering on innovation. Horizon 2020 will contribute to that.

B. Maximizing institutional investment: The industry has also often stated the need to have a clearer view of medium to long-term intentions regarding space institutional expenditure as this would help to better organise themselves, keep engineering teams in place. Europe should also avoid duplication of efforts, particularly in space research. Past experience has shown that establishing a long-term planning of space activities based upon good will to exchange information with Member States is not fruitful. Therefore, the Commission will examine the possibility of a EU legislative instrument for compulsory reporting on space activities across the EU.

Particularly in procurement, preparatory work is underway to explore the potential proposal of legislation specific for space procurement if it is concluded that current EU procurement and defence procurement Directives do not sufficiently cater for space specificities.

C. Maintaining and enhancing competitiveness in global markets: International cooperation should serve as a market opener for the promotion of European space technologies and services. At the same time, EU trade negotiations should take into account the specificities of the space sector. The Commission will therefore undertake a sector-specific risk/benefit analyses on relevant issues, such as the strategic export controls and reciprocity in areas, regarding notably public procurement of launchers and satellites. On the basis of this analysis, the Commission will assess the pertinence of developing an international trade strategy and policy vision and ensuring the necessary technical expertise in trade negotiations.

D. Market take-up: The EU space industrial policy supports the worldwide competitiveness of our industry and the market development for space applications and services. This includes not only the development of new capacities within existing industry but also the adoption of coherent set of EU measures, including GNSS Action Plan to foster the development and adoption of satellite navigation applications using EGNOS and Galileo and similar measures to boost the emerging Earth observation market, for creation and stimulation of an environment allowing the market take-up of new satellites technologies and the emergence of new operators with particular focus on small businesses.

E. Sustainability of space activities and space business environment: The sustainability of European space activities is also at stake. This means not only improving environmental aspects of space activities and ensuring non-proliferation of space debris, but also setting the right EU-regulatory framework in areas, such as the regulatory obligations of insurance, registration and authorisation of space activities and services and sanctions. The Commission will explore possible legislative initiatives in these areas to provide a more consistent legal framework favouring the emergence of a European market for space products and services.

F. Exploiting the dual use aspect of space: As stated in the 2013 Communication on Defence and Security, whilst most space technologies, space infrastructures and space services can serve both civilian and defence objectives, in the EU there is no structural link between civil and military space activities. The EU needs therefore to push for increased synergies between civil and military capabilities in space. The Communication has identified areas such as space surveillance and tracking, pooling of military satellite communications demand and development of an EU high-resolution imagery capacity. In this particular context, Horizon 2020 shall support the development of the necessary dual use technologies to prepare the next generation of both civil and military space systems.

3.10. Agri-food industries 3.10.1. Overview

With an annual turnover over EUR 1 trillion and around 4 million employees, the agri-food industry is part of a complex supply chain, which encompasses also agriculture and distributive trade. Taken as a whole, this value chain generates a total value added of € 715 billion per year — almost 6% of the EU Gross Domestic Product. On average, 15% of household expenditure is on food and drink. The sector not only feeds people, it also responds to cultural, health, ethical demands and many other qualities that consumers demand from their food, including convenience.

Moreover, the EU is the world’s biggest exporter and importer of agricultural and food products and accounts for about 19% of total global export flows.

3.10.2. Challenges

The food sector legislation is highly harmonised in the European Union. The sector enjoys significant benefits from the opportunities that the internal market offers. Cross-border trade between the Member States has risen by 72% in value over the last decade (at constant geographic scope), and currently accounts for about 20% of EU food and beverage production. However, businesses still report market fragmentation and diverging implementation of EU law in some specific domains. Further integration of the internal market would open up new opportunities for growth.