EN  EN  EN 
EN  EN  1 EUROPEAN COMMISSION 
Brussels, 28.10.2010 
SEC(2010) 1276 final 
VOLUME I  
COMMISSION STAFF WORKING DOCUMENT 
European Competitiveness Report 2010  
 
Accompanying document to the 
 
COMMUNICATION FROM THE CO MMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE AND THE COMMI TTEE OF THE REGIONS 
 
An integrated Industrial Polic y for the Globalisation Era 
Putting Competitiveness and Sustainability at Front Stage 
  
{COM(2010) 614} 
{SEC(2010) 1272} 
EN  EN  2COMMISSION STAFF WORKING DOCUMENT 
European Competitiveness Report 2010 
Table of Contents 
 
EXECUTIVE SUMMARY .............................................................................................................. 3  
1. Introduction ................................................................................................................ ........ 3 
2. Overall competitiven ess performance................................................................................ 3 
3. Trade in intermediate products and EU manufacturing supply chains .............................. 4 
4. Foreign corporate R&D and innova tion in the European Union ....................................... 6 
5. European competitiveness in key enabling technologies................................................... 9 
6. Innovation and competitiveness of the creative industr ies in the EU .............................. 11 
7. Conclusions ................................................................................................................. ..... 13 
INTRODUCTION ........................................................................................................................ 15  
1. GROWING IMBALANCES AND EUROPEAN INDUSTRY ...................................................... 17  
1.1 The crisis as a major adjustment ................................................................................. 17 
1.1.1 A big recession..................................................................................................... 17 1.1.2 Sudden drop and slow recovery in the labour market.......................................... 18 
1.2 The years before the crisis........................................................................................... 20 
1.2.1 Aggregate trends and the crisis ............................................................................ 20 1.2.2 Industrial trends.................................................................................................... 23 1.2.3 R&D in EU industries .......................................................................................... 24 
1.3 Growing imbalances and external competitiveness .................................................... 26 
1.3.1 Soaring asset prices .............................................................................................. 26 1.3.2 Growing distortions and external competitiveness .............................................. 31 1.3.3 Rising unit labour costs, cause or consequence?.................................................. 33 
1.3.4 World market shares............................................................................................. 36 1.3.5 Summarizing ........................................................................................................ 41 
1.4 The impact of the boom on industry and competitiveness.......................................... 41 
1.4.1 Has the housing bubble crowded out  productive investment?............................. 41 
1.4.2 Employment growth in construc tion and real estate services .............................. 45 
1.4.3 The allocation of productive investment.............................................................. 50 1.4.4 Summarizing ........................................................................................................ 51 
1.5. The impact of the crisis on industry........................................................................... 51 
1.5.1 Output................................................................................................................... 53 
1.5.2 Employ ment ......................................................................................................... 55 
1.6 Conclusions ................................................................................................................ . 57 
 
EN  EN  3EXECUTIVE SUMMARY  
1. Introduction 
The European Union and the world economy went through a deep financial and economic 
crisis in 2008 and 2009. The first signs of recovery were visi ble in 2009 and were confirmed 
in the first half of 2010. These developments and the quickly e volving world market situation 
are a compelling call for the importa nce of remaining competitive. 
This year’s edition of the annual European  Competitiveness Report looks first at the 
implications of the economic downturn for productivity — the key factor for competitiveness in the long run — and at some of the main future determinants of EU competitiveness on 
world markets: in the changing pattern of  trade in intermedia te products and EU 
manufacturing supply chains; foreign corpor ate R&D and innovation activities in the EU; 
European competitiveness in key enabling t echnologies; and innovation and competitiveness 
in the creative industries. 
2. Overall competitiveness performance  
With the exception of the 2001 slowdown, the pe riod 1995-2006 has been one of remarkable 
stability for industrialised countries. In the EU in  particular, it has been a period of sustained 
growth, increasing participation in employment and increasing income per capita. In the US 
and some European countries, however, this  stability was hiding the accumulation of 
significant imbalances that ultimately led to a do wnturn of a severity unseen since the early 
1970s’ oil shocks. In the EU, with  the only exception of Poland, a ll Member States saw a drop 
in their production in 2009: from around 3 per ce nt in Belgium or Fran ce to double digit drops 
for Ireland and the Baltic republics. Even if some  individual countries had experienced similar 
recessions in the recent past, this recession is unusual for its combination of a large drop in 
economic activity and its scope: synchronized gl obal downturn with all advanced economies 
in nose-dive.  
Beyond the issue of recovery, it is legitimate to ask what could be the impact of the crisis on 
economic performance in the medium to long term. The European Competitiveness Report 2009 examined the potential impact  of the recession on competitiveness. All in all, the 
conclusion was that the recession need not have a negative impact on the rate of technical 
change in the years to come; for a recession includes two types of mechanisms: those that 
impinge negatively on economic efficiency, but also  those that improve our ability to increase 
productivity in the future. Furthermore, unders tanding those mechanisms makes it possible to 
design economic policies to tone down the nega tive effects and amplify the positive ones in 
order to speed recovery and boost future growth.  The first chapter of the present edition of th e Report examines the pot ential impact of the 
boom years 2000-07 on competitiveness. The above-mentioned accumulation of large imbalances has the pote ntial to distort significantly th e allocation of re sources among and 
within our economies.   Seen in retrospective, the boom period 2000-07 was also a period of  growing imbalances, 
notably in the housing sector in the US but also in Eur ope: some Member States saw 
investment in dwellings increase by the order of magnitude of severa l percentage points of 
EN  EN  4GDP. For a decade or more, in some countries, particularly in the UK, Denmark, Ireland and 
Spain, the prices of dw ellings increased over their fundamental valu e. The distortion did not 
affect all countries, but in those affected it was not a minor one. In countries like Spain, for 
instance, at the height of the boom (around 2005-06) housing prices were increasing by 15 % 
annually. For years millions of agents in th e private sector, notably households, made 
consumption-saving decisions counting on house prices increasing in a way that ex-post 
appeared not to be sustainable. Indeed, in count ries affected, the fast growth of housing prices 
led households to overinvest in housing and to  overstate their wealth, pulling down their 
saving rate. If houses constituted an attractive inve stment for locals, so they did for foreigners 
as well, directly or indirectly. 
The period 2000-06 witnessed as well a substantia l change in the lend ing/borrowing position 
of many European countries. In  those with a housing bubble, the demand for credit fuelled 
capital inflows. When the boom came to an  end, the magnitude of the adjustment was 
proportional to the magnitude of the accumulated distortions. Once the value of houses dropped ― or was believed to drop in the future ― a large portion of perceived wealth 
vanished leading to a major adjustment of consumption and saving patterns. Consumption 
dropped and saving increased to recompose the latter. Hence, countri es affected by bubbles 
found themselves in a classica l demand-side recession caused by the consumption-saving 
adjustments performed by households. Other c ountries, not necessarily affected by these 
imbalances, were affected through a drop in external demand. 
The European Competitiveness Report 2009 examined the potential impact of the recession 
itself on competitiveness. The European Competitiveness Report 2010 examines the potential impact of the boom years; in particular, whet her these growing imbalances had an impact on 
competitiveness via the distortion of prices , wages or the allocation of investment. 
For instance, during the boom some  countries experienced large in creases in unit labour costs, 
a measure of the nominal cost of labour. However,  it does not seem that the evolution of unit 
labour costs has had a significant effect beyond comi ng along with th e corresponding 
increases in the general level of prices. In principle raising the nominal cost of labour may affect the competitive position of domestic firms in international markets. However, when the international market shares are compared to th e evolution of unit labou r costs, there is no 
obvious relation. Part of the explanation to this apparent paradox may lie in  the fact that wage 
inflation takes place mostly in non-tradable sector s, notably services and,  in particular, in the 
construction sector.  
In short, if the boom years have  affected competitiv eness, that is, the ability to increase 
productivity in the forthcoming years, the eviden ce remains elusive. Nevertheless, this is not 
to say that exiting the crisis may not be a slow adjustment process in some EU countries. For 
instance, it is possible that a part of those la rge capital inflows has not been used productively 
in some of the so-called deficit countries, ther efore hampering the ability of these countries to 
generate income in the future while at the same time increasing the interest burden on these economies. 
3. Trade in intermediate products and EU manufacturing supply chains 
A large and growing number of products, especial ly in the high-tech ar ea, consist of many 
different components that are manufactured in  various parts of the world. Manufacturing 
production processes also require many kinds of se rvices from different parts of the world if 
firms are to develop, produce and market their products.  
EN  EN  5However, this multi-country nature of produc ts is no longer typica l only for complex high-
tech goods. Components and services are purchas ed abroad for many products. This is the 
case for direct  inputs when firms purchase both do mestically and foreign produced 
intermediate inputs, but also in an indirect  way: components imported from a particular 
country might already include i nputs from other countries, which are then used indirectly in 
the final product. 
A prominent feature of the globalisation of t oday’s economy is the increasing adjustment and 
adaptation of production structures to more inte rnational sourcing structures and cross-border 
production networks. Firms distribute their produc tion activities and develop supply chains in 
different geographical locations according to the comparative advantages of the locations. So 
these developments can be said to have le d to increased trade in intermediate goods.  
Important shifts in the composition of EU -27 intermediate trade have taken place 
during the last decade 
Trade in intermediates accounts fo r the largest part of overall tr ade, with an average share of 
about 50% of both imports and ex ports. There are, however, big differences across countries. 
This share has increased little over the last decade or so and, has been driven mostly by 
industry specialisation. The shift towards more knowledge-intensive sector s in the EU has led 
to an increasing role of imported intermediates.  
Large shifts have taken place in  the geographical structure of trade in intermediates for the 
EU-27 countries. BRICs (Brazil, Russia, India and China) have become more important for 
EU exports and imports. They increased their share in EU-27 imports by 5 percentage points 
during the last decade. Gains of market shares  can in general be related to relative price 
changes or increased product quality. Product quali ty upgrading also explains part of the EU-
121 market share increa se within the EU. 
A large part of trade in  intermediates consists of two-way trade, i.e. most countries are both 
exporters and importers of intermediates, which blurs the common perception of certain 
countries being predominantly outsourcing or target countries. Smaller emerging economies, 
including most of EU-12, are more  specialised in trade in intermediates as compared to larger 
ones, both in imports and exports. This raises  the more general ques tion whether trade in 
intermediates might help countri es to integrate into  the world economy and how this shapes 
patterns of specialisation in both production and trade.  
Increasing sourcing of inputs, trade of intermediates and inter-industry linkages 
The growing trade in intermediates means that  inter-industry linkages across borders have 
increased over time. For instance, when demand for cars increases in a particular country, 
more intermediate goods have to be importe d than was the case a few years ago. Between 
1995 and 2005 imports of intermediate goods increas ed in all manufacturing industries and in 
almost all EU countries. During the same period of time, the share of imported intermediates 
in total intermediates has also grown indicatin g an increasing role of imported intermediates 
in final products. There are, however, some distinct industry differences in the use of 
imported intermediates. High-technology indus tries import more intermediate goods than 
other industries: imported inte rmediates accounted for 55% of total inputs in high-technology 
manufacturing industries in 2005. On the other hand, foreign tr ade plays a smaller role in 
service industries than in manufacturing. Among service industr ies, the largest share of 
imported intermediate goods in 2005 (26%) was in transport services.  
                                                 
1  EU-12 are the 12 countries which joined the European Union in 2004 and 2007. 
EN  EN  6Detailed information from a leading European  mobile phone producer on supply chains shows 
that Europe captures 55% of a particular phone ’s total value added. The phone was assembled 
both in Europe and China. When it was assembled and sold in Europe, the European share accounted for 68%. But even when it was assembled in China and sold on the US market, Europe still captured as much as 51% of the va lue. This shows that the final assembly, though 
important, represents only a fraction of the ove rall value added of a high-tech product like a 
mobile phone. The value is largely detached from the physical flows of goods within the 
supply chain. The major parts of the value are attributed to design, R&D, brand, marketing 
and distribution, and management of these activities. 
The financial crisis hit intermed iate trade relatively harder and disrupted supply chains 
There is a risk that the economic crisis of  2008-2009, characterised by trade flows collapsing 
by more than the drop in GDP growth rates, might  have changed sourcing patterns and firms’ 
supply chains. Trade in intermediates, and especi ally in parts and components, was hit harder 
by the crisis than other type s of goods. Trading volumes of parts and components slumped by 
some 38% percent compared to pre-crisis levels. As a result, the relative importance of parts 
and components in EU-27 trade declined both in EU-27 trade ove rall and in almost all sectors 
in which vertical supply chains play a major ro le. These vertical supply chains are important 
especially for the industries producing electrica l machinery, mechanical equipment and motor 
vehicles. 
The automotive industry has one of the highest sh ares of parts and components trade. During 
the recent recession its exports and imports registered the biggest falls, of some 45% 
compared to before the crisis. Such disruptions  to international supp ly chains might have 
resulted from changes in the sourcing strategies  of multinational corporations, such as shifting 
to domestic suppliers. Inventory adjustments have also contributed to the decline. An upturn in 
EU-27 trade can be expected if the marked decline in parts and components trade is primarily 
driven by the inventory cycle, as  empty stocks have to be replen ished. However, the recovery may 
be delayed if there is a reversal of the trend towards ever more complex international vertical 
supply chains.  
Globalisation and localisation of the value chain 
Trade in intermediates constitutes only one of many business activities in the value chain. As 
the mobile phone example shows, large parts are attributed to more knowledge-intensive 
activities, like management, design and R&D. These are especially important for high-tech 
industries, which tend to locate them close to the firm's hea dquarters, where it is easier to 
control and manage them. So EU firms’ R&D and innovation activities are still predominantly 
domestic, though they are becoming increasingly internationalised as adapting products to 
foreign markets necessitates the presence of product development close to those markets. 
Firms also seek to ensure acce ss to scientific and technological capabilities, human capital 
and other resources, which is another motive for the foreign location of R&D activities. 
Localisation decisions are not based on local preferences but on strategic considerations 
concerning the provision of  strategic resources. 
4. Foreign corporate R&D and innovation in the European Union 
Corporate research, developmen t and innovation (R&D&I) activitie s were long seen as one of 
the few business areas still re latively insulated from offs horing and globalisation. This 
perception has lately been chan ging rapidly. Over the last thirty years, globalisation has 
changed international trade and foreign direct investment flow s considerably, reshaping and 
EN  EN  7transforming R&D&I processes and the knowledge a nd skills that enable firms to compete in 
domestic and international markets. As a result, a growing number of firm s, in particular large 
multinational enterprises, started locating R& D&I activities outside their home countries. 
Firms decide to (re-)locate R&D&I activitie s abroad by weighing a number of important 
considerations against each other. Potential be nefits include local de velopment and design of 
new products and services to capture new mark ets and growth opportunities; gaining access to 
new sources of scientific and technological capabilities, skills and talent; and reducing 
R&D&I capacity bottlenecks. Potential co sts include foregone benefits of R&D&I 
centralisation, including economie s of scale and scope, the need  for more coordination and 
complexities in the transfer of knowledge, given its often "tacit", cumulative, localised and context-related nature.  
The European Union has been an important play er in this emerging internationalisation of 
R&D&I, as documented by a number of datase ts (patents, R&D expenditure of foreign 
affiliates and various surveys). The analysis points to some important differences across 
countries, sectors, technologies and firms, as well as to some  of the likely effects of the 
increasing and uneven degree of internationali sation on productivity and employment in the 
European Union. 
EU performance in the emerging internationalisation of R&D&I 
In a global perspective, the EU is still in a po sition of strength, but the global competition to 
attract R&D&I flows is set to continue rising. R&D&I internationalisation is predominantly a 
matter for the triad US, EU and Japan, with smaller roles for countries like Canada, Switzerland, Korea and Israel. The bilateral fl ows between the EU and the US clearly take 
prominence on a global scale. For instance, from 2001 to 2007, US multinational firms significantly increased their R&D expenditure in the EU, still the main location for their R&D 
(the EU single market attracted more than 60
 % of all US overseas R&D expenditure in this 
period). The EU, however, is facing growing global competition in this field, from both 
developed and emerging economies. R&D expenditure  of US subsidiaries in the BRICs is still 
relatively low (altogether repr esenting about one tenth of th e value for the EU-27 in 2007), 
but is growing fast. 
The considerable increase in R&D&I cross-bor der links is evident at extra-EU and in 
particular intra-EU levels, as  further documented by the locations of patent applicants and 
inventors. For instance, some 17  % of all European Patent Office patents resulting from 
inventions made in the EU were foreign-owned (9  % by non-EU and 8  % by EU-based 
organisations); in 1990, only 10  % of such patents had foreign owners (6  % non-EU and 4  % 
EU-based organisations). Moreover, the last two decades have seen an increase in the number 
of both domestic and foreign-owned patents resul ting from inventions made in the EU, which 
suggests that the internationa lisation of R&D&I did not s queeze out domestically owned 
patenting. 
Altogether, the various sources of evidence conf irm the rise of R&D&I cross-border links and 
flows, indicating at the same time a possibl e slowdown in recent years and showing that 
domestic activities still account for the bulk of  R&D&I, particularly in  the large countries. 
Uneven levels and trends across EU count ries, sectors, technologies and firms 
Cross-border R&D&I links between  the EU-15 countries tend to be relatively strong, but are 
often limited to the large and medium-sized R&D- intensive Member States. In contrast, links 
EN  EN  8between the EU-12 and the EU-15 countries, and in particular within the EU-12, tend to be 
rare. 
Medium-sized or small Member States tend to  have a higher degree of internationalisation 
and in some cases relatively higher R&D&I infl ows than large countries . Patent data suggest 
that strong country links in terms of R&D&I often appear to be explained by a common 
language, geographical proximity or  a long history of economic integration. Key examples are 
the links between the Nordic countries, and th e links between a large country and a smaller 
neighbour, such as Germany and Austria, UK a nd Ireland, or France and Belgium. There are 
at least five countries in the EU (Austria , Czech Republic, Hungar y, Ireland, and Slovakia) 
where foreign-owned firms currently account for more than 50  % of total R&D expenditure in 
manufacturing. 
Services tend to be less internationalised than  manufacturing, but their share of total overseas 
R&D expenditure is rising. Al so, different sectors and tec hnologies present different 
internationalisation levels and dynamics. Fo r instance, a high and increasing level of 
internationalisation is generally found in tec hnology-intensive sectors, such as information 
technologies, telecommunications and pharmaceu ticals (characterised by high R&D intensity 
and fast rates of technological change). A high, but more or less stable internationalisation 
level is found, for instance, in  the food industry, possibly reflec ting the presence of a number 
of large multinational enterprises and a high degree of product variation and innovation in 
response to differing consumer tastes.  
Internationalisation is mainly pursued by a sm all number of large, R&D-intensive firms. 
Typically, firms move R&D&I to high-in come countries to access knowledge, while 
relocation to low-income countries is  driven by the quest for new markets . 
EU firms are increasing th eir R&D&I outside the EU 
EU firms are increasingly seizi ng opportunities to start or ex pand R&D&I abroad (extra-EU), 
particularly in the US. The outward intern ationalisation of EU firms has increased 
considerably over the last two decades and is  catching up with the top levels of R&D&I 
internationalisation that US firm s overall still tend to hold. Fo r instance, between the periods 
1991-1995 and 2001-2005, the share of all EU pate nt applications (i n the OECD triadic 
database) resulting from inventions made outside the EU increased from 4% to 11  %. It is 
worth comparing the outward internationalis ation dynamics among the triad (US, EU and 
Japan): the EU more or less  caught up with the US (11  % share of patent applications from 
inventions made abroad in the peri od 2001-2005), leaving Japan well behind (3  % in the same 
period).  
Patent data and R&D expenditure surveys both i ndicate that the US is by far the preferred 
location for overseas R&D&I of EU-27 — as a whole and across countries, sectors and 
technologies. R&D-intensive European fi rms, sectors and t echnologies (such as 
pharmaceuticals, cosmetics or semiconductors) tend to have a somewhat higher level of outward internationalisation. 
Foreign-owned firms innovate differently in the EU than domestically owned 
companies ...  
Foreign-owned firms tend to have lower innovati on input intensities than  domestically owned 
companies, but achieve similar innovation outputs . This suggests that the innovation efforts of 
foreign-owned firms are based to a consid erable degree on knowle dge and technologies 
received from the group or parent company. Ma ny of the differences between foreign-owned 
EN  EN  9and domestically owned firms can be explained by related firm characteristics, e.g. foreign-
owned firms are larger, have higher absorpti ve capacities, or operate more often in 
technology-intensive sectors. 
Cooperation with domestic partners, in particul ar domestic research or ganisations (including 
universities), is common among foreign-owned firms, a sign of their embeddedness in the 
host countries’ innovation systems and of potential spillover eff ects. Foreign-owned firms can 
act as agents of internationa l technology diffusion and as links  between organisations in the 
host country and foreign sources of knowledge. 
…but both groups of firms contribute to pr oductivity growth and employment creation 
Foreign-owned firms have significantly highe r productivity levels (m easured by sales per 
employee) than domestically owned companies. Th ey also show higher le vels of productivity 
growth, though differences in relation to domes tically owned firms are considerably smaller 
and less significant here. Productivity growth of foreign-owned companies is mainly related 
to output growth of old produc ts and the effects of product innovati on, but not process 
innovation. There are no major differences be tween foreign-owned firms, domestic group 
enterprises and domestic unaffiliated firms in the way innovation affects productivity levels. 
Foreign-owned companies also differ from do mestically owned firms in the way they 
transform new technologies into employment growth. General productivity increases as a 
result of job cuts are on average compensate d by the employment-crea ting effects of higher 
sales from old products and pr oduct innovation in the foreign-ow ned firms. Together, these 
effects result in net employment gr owth in foreign-owned companies. 
5. European competitiveness in  key enabling technologies 
Because they can generate new growth, spur  innovation, increase productivity, help tackle 
environmental and climate challenges, and gi ve rise to new appl ications, key enabling 
technologies are attracting grow ing interest, and the importan ce of staying competitive in 
these technologies cannot be overstated. 
Trends in six key enabling technologi es (KETs) — nanotechnology, micro and 
nanoelectronics (including semiconductors),  industrial biotechnology, photonics, advanced 
materials, and advanced manufacturing techno logies — are reviewed from a variety of 
perspectives: (i) state of development, (ii) exis ting and future applications, (iii) current market 
volume and future potential, and (iv) Europ ean competitiveness in comparison with North 
America, East Asia and the rest of the world. 
There is considerable uncertainty about how fa st the markets for applications of the six 
technologies — nanotechnology in particular  — will grow in the medium term. A 
contributing factor to the uncertainty is that there are no agreed definitions of key enabling 
technologies. A broad definition is likely to lead  to a more optimistic assessment of potential 
market volume than a more narrowly defined technology. With this in mind it is hardly 
surprising that the potential market for ke y enabling technology applications in 2015 (as 
reflected in the literature) covers a very wide range. 
Most applications of key enab ling technologies are still at a conceptual or pre-competitive 
stage, and it is not possible to use market da ta to assess how competitive Europe is compared 
with the rest of the world. Instead, patent data  analysis and a number of  case studies are used 
to analyse Europe’s competitiveness in these areas. 
EN  EN  10Strong European position in advanced ma nufacturing technologies and industrial 
biotechnology 
The overall conclusion is that European pr oducers of KETs are well placed in all six 
technologies, representing between  a quarter and half of all pa tent applications analysed. 
Europe is the world leader in advanced manufact uring technologies and shares the lead with 
North America in industrial biotechnology. In photonics, nanotechnology and micro and 
nanoelectronics, Europe contribut es less to total output than North America and East Asia. 
Europe is in principle holding its position in all six technologies. In recent decades it has 
neither lost nor gained ground, despite increasi ng competition from East Asia, which in the 
past decade has made great strides in most  of the technologies. At the same time the 
contribution of North America to global technology output has gradually diminished. 
Germany is the main producer of key enablin g technology patents in the EU, followed by 
France and the United Kingdom. 
Importance of skills, venture capital and of maintaining a manufacturing base  
Maintaining a strong European manufacturing base  in each key enabling technology is critical 
if the EU is to benefit fully from productivity  and innovation effects.  Direct interaction 
between research and development, manufacture and application in user  industries is needed 
if new fields of application ar e to emerge and good facilities for new technologies are to be 
developed. 
KET research is often at the cutting edge  of technology. Comple x technologies and new 
technological challenges have to be addressed. In such a context progr ess depends on bringing 
together different scientific di sciplines and fields of technol ogy in a joint endeavour. More 
coordination is needed betw een research and industry, go ing beyond any coordination by 
market mechanisms. Providing incentives for ne tworking and clustering can help to achieve 
this. In some areas global netw orks of the leading organisati ons from research and industry 
are ideal; elsewhere regional netw orks (clusters) can spur technology development. Clusters 
can be particularly helpful in linking research and commercial applications. Best practices for 
facilitating the flow of know how, ideas and personnel between industry and research 
institutions should be circulated between and within Member States. 
With Europe facing a likely shortage of sk illed labour, promoting higher education and 
training in KETs will be essential. Strengthe ning cross-disciplinary education is a main 
challenge in that context. Higher education instit utions need to offer curricula that are better 
geared to meeting the specific demands of KE Ts. Students need to be made aware of the 
career opportunities offered by cr oss-disciplinary studies. Edu cation and training may be 
complemented by immigration policies to a ddress the shortage of skilled personnel. 
Venture capital markets are important for commerc ialising research results in KETs through 
spin-offs and other types of start-ups. To wo rk, venture capital need s a supportive regulatory 
environment, and public programmes may need to step in to address any failures by European 
private venture capital markets to provide sufficient funds for start-up and early-stage 
financing. 
The role of regulation 
In some KETs there is a particular focus on he alth, environment and sa fety issues. Cases in 
point are nanotechnology, industr ial biotechnology and advanced  materials. Procedures, 
standards and implementation tools (e.g. test me thods and guidance documents) are needed to 
EN  EN  11deal with health, safety and environmental issues and to provide incentives for further 
technological advances and i nnovative dynamics. Legislation ha s to be flexible enough to 
adjust to technological pr ogress within each KET. 
Industrial standardisatio n, intellectual property rights, a nd enabling and promoting spin-offs 
are of critical importance to th e transfer of technol ogy. All in all, an integrated, coherent 
policy approach is required if K ETs are to increase productivity and wealth. This should bring 
in regional, national and international leve ls and the various policy domains, including 
research, innovation, education, competition, in dustry, taxation, health and environment. 
6. Innovation and competitiveness of the creative industries in the EU 
The creative industries have larg e growth potential. A survey in  the EU Member States in 
early 2010 found that more than 97  % of respondents thought the creative industries were 
‘important’ or ‘very important’ in supporti ng innovative activities, encouraging economic 
growth and creating new jobs. Cr eative industries are at the cro ssroads between arts, business 
and technology. They range from information se rvices, such as publishing or software, to 
professional services like arch itecture, advertising or design2. Creative industries are among 
the fastest growing sectors in the EU, creating new jobs, playing key ro les in global value 
chains, and spurring innovation.  
Creative industries are increasingly a source of growth in the EU 
Creative industries account for 3.3  % of total EU GDP and 3  % of employment, and are 
among the most dynamic sectors in the EU. Though employment growth was uneven across 
subsectors, overall employment in the crea tive industries increased by an average of 3.5  % a 
year in 2000-2007, compared to 1.0  % a year for the EU economy as a whole. Software 
consulting accounted for more than half of crea tive industries’ employme nt growth in the EU-
27 in 2000–2007. Indeed, the employment growth ra te for software cons ultancy in the EU-27 
was about 5.2  % per year on average in 2000-2007. With in software publishing, the video 
games industry is one of the fastest growing indu stries worldwide. The Baltic states and other 
new Member States have the highest annual employment growth rates in the creative 
industries. Among the EU-15 countries, Portug al and Ireland report a higher than average 
increase. The fast growth of the creative industr ies in the EU is partly due to catching up in 
the less developed EU countries. Demand factor s and a strong entrepreneurial culture are 
further job creation factors.  Creative industries are dominated by micro-firms (95  % have 
fewer than ten employees) co-existing with very  large corporations. Th ey typically include 
large shares of self-employed a nd highly skilled professionals.  
The increasing importance of skills and creativit y in the EU job market is clearer when one 
looks at professions that are ‘cre ative’ in essence, re gardless of whether they belong to the 
‘creative industries’ proper or to more tradit ional activities. Occupations considered as 
‘creative’ include for example professions such as mathem aticians or engineers, along with 
writers, creative and performing artists and artistic  or entertainment professions. What they all 
have in common is that they  produce intangible assets such as ideas, knowledge and 
information that increase firms’ value added.  In the EU-15, creative occupations grew at 
around 3  % per year on average between 2002 and 2008, with the highest gr owth for artistic, 
                                                 
2  The concept of creative industries is  very close to another concept of crea tive and cultural industries used in 
the ‘Green paper — Unlocking the potential of cultural and creative industries’: 
http://ec.europa.eu/culture/our-policy-development/doc2577_en.htm. 
EN  EN  12entertainment occupations (5.7  %), followed by social scien ce and related professionals 
(5.0  %), and architects, engineers and computing professionals (each 3.2  %). Creative 
occupations are growing within and outside the cr eative industries, indicati ng that creativity is 
spreading to other sectors. Similar trends can  be observed for the ne w Member States (though 
fewer data are available here). 
New empirical evidence is given on how the cr eative industries streng then regional growth. 
Recent findings at the regional level for ten EU countries show that the creative industries had 
a positive and significant effect  on the growth rate of loca l GDP per capita in 2002-2007. 
However, in terms of the related but different concept of ‘creative occupations’, there is no 
consensus on the impact of the crea tive workforce on regional growth.  
Though there are not many tradable  creative services, the EU’s position on the global markets 
is bolstered by the most tradable parts of the creative sectors. Europe is one of the world's 
leading exporters of creative industries products. There was an  increase in the revealed 
comparative advantage of the EU in publishing, music records, audiovisuals (film), and most 
notably in the new media (digital records)  — with strong growth in video games.  
Creative industries stand out because of their propensity for innovation 
Some creative industries are among the most potentia lly innovative of all EU  sectors. Firms in 
software consultancy and supply are the most  innovative of the se rvice industries. The 
architecture and advertising indus tries have a higher than usual share of firms introducing new 
or significantly improved services.  
Creative industries are not only innovators themse lves but have also been  an important driver 
for innovation. As far as supply chain relationshi ps are concerned, they account for increasing 
inputs in the development of other sectors.  A creative industry like industrial design 
contributes substantially to th e production process and produc t design innovations of several 
manufacturing industries, such as chemi cals and pharmaceuticals, minerals, glass and 
ceramics, motor vehicles and tobacco. Conversel y, some creative industries are major users of 
new technologies, playing a key role in steppi ng up the spread of technological innovations. 
Outside the ICT sector itself, publishing and software firms were  among the earliest users of 
the internet and e-business practices.  
Reinforcing the growth and innovation potentia l of creative industries: action needed! 
Creative industries tend to be small-scale orga nisations, which makes them natural candidates 
for small-business policies. They tend to be  more prone to rationing of funding, and many 
sub-markets of the creative indus tries urge the author ities to provide for a level playing-field 
of competition. Certain creative sectors may jus tify consideration for targeted approaches 
because of their public utility  aspect. They do a lot to generate innovation and build 
knowledge. Under-investment must therefore be avoided. Appropriate ed ucation and training 
are also essential to provide the sect or with the skills it needs to grow.  
More coordination, networking and sharing of best  practices will enable all creative industries 
and occupations to optimise their growth prospe cts and contribute to the economy as a whole. 
EU policies can help in the di ssemination of best practice. 
Ultimately, the impact of the creative industries is not only economic and thus calls for more 
than national or local action. While the welfare e ffects are difficult to quantify, it is clear that 
some of the creative industries facilitate structural adjustment  in declining regions. They can 
EN  EN  13boost social cohesion and get the less well-off more involved in cultural activities. Where 
concerted and coordinated action would increase  the economic and social impact of creative 
industries, the EU can play a role. EU prerogati ve areas such as intell ectual property rights or 
the single market for services are the bedr ock of creative industries. A recent Amsterdam 
declaration on the ‘European Creative I ndustries Alliance’ and a Green Paper3 on cultural and 
creative industries are some recen t initiatives on competitiveness and innovation in this sector. 
7. Conclusions 
The present edition of the European Compe titiveness Report 2010 examines the potential 
impact of the boom years on competitiveness. The accumulation of large imbalances has the 
potential to distort significantly the allocati on of resources in our economies. However, a 
glance at the evidence s hows that exports performance does not seem to have been severely 
affected by these developments. As for produc tivity growth, construction and real estate 
activities have attracte d much investment in countries a ffected by housing bubbles; there is no 
obvious impact on aggregate prod uctivity so far but these dist orted investments have the 
potential to hamper the ability of affected c ountries to generate income in the future to 
compensate the interest burden. 
 
Nonetheless, the financial and economic crisis hit international trade in intermediate goods 
(especially parts and components) quite ha rd, accounting for something like 50% of all 
international trade. It also di srupted some of the established international supply chains (e.g. 
in the automotive industry) and resulted in some changes to multinational corporations' 
sourcing strategies, such as shifting to domestic  suppliers. If confirmed, this may have longer-
term consequences — by at least temporarily restricting the internationalisation of certain companies’ activities, and pe rhaps by delaying the recove ry in some industries.  
 
EU firms’ R&D and innovation ac tivities, especially  in high-tech indus tries, are still 
predominantly domestic, but are becoming increasi ngly internationalised, as the need to adapt 
products to foreign markets br ings product development closer to local markets. Firms' 
location decisions are also increas ingly based on the provision of strategic resources, such as 
ensuring access to scientific and technological capabilities and to human capital. A detailed 
analysis of a specific high-tech product) shows th at the value captured has little to do with the 
physical flows of goods within the supply chain: major parts of the value are attributed to 
design, R&D, brand, marketing, di stribution and management. This  shows how important it is 
to keep a strong grip on these activities. 
Maintaining and developing a position of ma ximum strength for the EU and the Member 
States in the inward and outward cross-border  flows of R&D&I is cr ucial to keep the EU 
economies competitive and dynamic in the medium and long term. Inward foreign research, development and innovation offer great potential for the transfer and diffusion of knowledge 
and innovation across all business sectors. They can compleme nt EU homegrown activities 
and help to catch up R&D&I in certain sector s and technologies; they can help achieving a 
critical mass and agglomeration of these capaciti es in certain areas an d countries; and they 
may help to smooth and sustain a steady R&D&I effort in times of crisis. Key policies and measures for maintaining and attracting new R&D&I ) include: enhancing the quality of 
Science and Technology (S&T) bases and the mobility of researchers and S&T personnel; 
widening the scope and tightening up the enfo rcement of Intellectual Property Rights, 
including the competitiveness and efficiency of the patenting system; promoting R&D&I 
                                                
 
3  ‘Green paper — Unlocking the potential of cultural and creative industries’: http://ec.europa.eu/culture/our-
policy-development/doc2577_en.htm. 
EN  EN  14partnerships and consortiums — open to foreig n (intra and extra-EU) business and research 
organisations — fostering competition and c ooperation, integration and spillovers into EU 
innovation systems; promoting an international regulatory dialogue and a level playing-field 
in public R&D&I support measures; and adopti ng proactive standards and public procurement 
policies with a view to developing a dynamic single market for research, development and innovation in the EU. There may well be consider able benefits for firms, the EU’s innovation 
systems and the economy as a whole from outward  R&D&I flows by EU firms, in particular 
SMEs. Potential benefits include opening up and seizing opportunities in new and fast 
growing markets, adapting innovative products to  local requirements and preferences, and 
gaining access to foreign sources of knowledge which are of strategic importance for certain 
businesses. 
The European producers of key enabling tec hnologies seem to be well placed in the 
international arena, and Europe is in principle in a strong position in all six identified KETs. 
KET research is often at the technological frontier. However, more coordination between 
research and industry is needed, over and above the coordinating effect of market 
mechanisms. Incentives for networking and clusteri ng can be helpful. Best practices should be 
disseminated between and within the Member St ates. Promoting higher education and training 
will be essential to secure a supply of skille d personnel. In addition, venture capital markets 
are needed to commercialise the results of  KETs, and they in turn need a supportive 
regulatory environment. Public programmes may be needed to  provide additional funds for 
start-up and early-stage financing. 
 
Creative industries have great potential for reinforcing economic growth and creating new 
jobs. They have long been among the fastest grow ing sectors in the EU; they play a key role 
in global value chains, and they spur innovati on. Moreover, creative occupations are growing 
within and outside the creative industries, i.e. creative profe ssions are spreading to other 
sectors. The EU is one of the world's leading exporters of creative industries’ products. Their 
importance, however, is not purely economic — they  can facilitate struct ural adjustment in 
declining regions and do a lot to enhance social cohesion and inclusion. EU policies can 
therefore play a role in strengthening intell ectual property rights a nd the single market for 
services. The creative industries must be brought into the scope  of SME policies; they need 
access to proper financing facili ties and creative companies need  to be helped to grow. 
 
EN  EN  15INTRODUCTION  
This is the thirteenth edition of the Commi ssion’s European Competitiveness Report since the 
1994 Industry Council Resolution, which calle d on the Commission to report annually. 
Competitiveness is taken here to mean a sustained rise in the standard of living of a nation or region and as low a level of i nvoluntary unemployment as possibl e. For an industrial sector, 
the main competitiveness criterion is maintaining and improving its position in the global market. 
As in previous years, the Report approaches the issues using insights from economic theory 
and empirical research, and its ambition is to contribute to polic y-making by drawing 
attention to trends and developments and by discussing policy options. Its main subjects 
continue to be related to productivity, th is being the most reliable indicator for 
competitiveness over the longer te rm, and other microeconomic issues underpinning the EU’s 
future economic developments, in particular its Europe 2020 strategy. 
Chapter 1 presents a snapshot of recent economic developments in a period of financial and 
economic crisis and the beginning of rec overy. In addition, the boom period 2000-07 is 
explored in order to analyse its likel y impact on European competitiveness.  
Chapter 2 analyses trade in intermediate produ cts and EU manufacturing supply chains with a 
view to shedding light on the relative importance of trade in intermediates in overall EU-27 trade and in individual countries . The questions addressed in this  chapter include: what is the 
share of these products in overall trade in exports and imports, what are the changes over 
time, and what factors are driving these change s and the geographical st ructure of trade in 
intermediate goods? There is also a case study fr om the high-tech area, which addresses the 
issue of who 'captures' the value of the producti on process. Finally it ex amines the extent to 
which trade in intermediaries has been a ffected by the economic crisis (including a 
comparison with other product categories) and ho w the crisis has affect ed EU manufacturing 
supply chains. 
The issue of foreign corporate research and development and its impact on innovation in the 
European Union is addressed in chapter 3. Th e aim is to study why firms internationalise 
R&D and innovation; analyse R&D&I activities of  foreign-owned firms in the EU by sector, 
country and technology; and examine the activitie s of EU firms outside the European Union. 
The chapter also investigates whether — and how — foreign-owned and domestically owned 
firms differ in their innovation behaviour and how they transform innova tion into productivity 
and employment growth. 
Chapter 4 on key enabling techno logies (KETs) discusses their role in increasing wealth by 
boosting innovation and raising prod uctivity, and the performance of  Europe (firms as well as 
public institutions) in producing new technology compared to the main competing regions 
(North America and East Asia). The analysis looks at the industrial sectors and fields of 
application that are most affected by differe nt KETs, what their likely medium-term growth 
potential is, and which factors are likely to drive technolog ical and commercial success. 
The main objective of chapter 5 is to give  a comprehensive picture of the innovation 
performance and competitiveness of the creative industries, along with their relative size and 
economic performance in the EU-27 countries. It  explores what drives creative industries 
growth and their impact in the wider economy in  different forms: direct contribution to the 
economy (employment and some output measures ); spillovers into the wider economy; the 
EN  EN  16direct, but less quantifiable, c ontributions of the creative indus tries to innovation; and their 
role in improving the quality of life. The sc ope and opportunities for policy intervention are 
then explored. 
EN  EN  171. G ROWING IMBALANCES AND EUROPEAN INDUSTRY  
1.1 The crisis as a major adjustment 
With the exception of the 2001 slowdown, the period 1995-2006 was one of remarkable 
stability for the industrialised countries. In the EU in particular, it was a period of sustained 
growth, more people in employment, and hi gher income per capita. In some countries, 
though, stability concealed the accumulation of significant disequilibria that in 2008 brought 
on a global recession of a se verity unseen since the Oil Shocks in the 1970s. 
1.1.1 A big recession 
Individual countries had experienced similar rece ssions in the recent past  but this recession is 
unusual for its combination of a big drop in economic activity and its global nature: most 
countries in the world were touched in one way or another. In the EU, with the sole exception 
of Poland, all Member States saw their produ ction fall: from around 3% in Belgium and 
France to double-digit drops for Ireland and the Baltic republics.  Latvia suffered the biggest 
contraction: 26% drop in GDP comp ared with its peak value in 2007. 
 
Figure 1.1. The magnitude of the cont raction: real GDP current (bars) 
and maximum (dots) drop with respect to peak* 
-30-25-20-15-10-505
BE
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
ATPL
PT
SI
SK
FI
SE
UK
EU
EAUS
JP% change
 
*Seasonally adjusted data; the last data are for 2010Q01 when available; otherwise 2009Q04 data are 
used.  
Source : Eurostat, Quarterly National Accounts. 
 
While most countries emerged from the trough in 2010, none of them, again with the 
exception of Poland, recovered to the level of real GDP they had in 2007. The varied picture 
showed in Figure 1.1 reflects differing patterns during the boom period 2000-07. As will be discussed below, several Member States were affected by large speculative bubbles and were 
EN  EN  18afterwards hit hard by the ensuing readjust ment; countries not suffering from these asset 
pricing distortions were quickly affected by contagion — through international trade and 
through problems in the international supply chain;  this is particularly  true of many of the 
new Member States. 
1.1.2 Sudden drop and slow recovery in the labour market 
With a few exceptions, in the boom year s, i.e. the period from 2000 to 2007, the 
unemployment rate fell in most European coun tries. For some, however, the crisis reversed 
the situation within a few quarters, and they now have significantly higher unemployment rates. The experience of previ ous recessions is that employmen t takes something like two to 
four times the length of the recession to return to its earlier level
4. So with this rule of thumb, 
employment is expected to remain below its peak level for one to four years in the EU. 
 
Figure 1.2. Breakdown of unemployment in 2009 
02468101214161820
EU-27
BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MA
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
US
JP% civilian labour forceIncrease in 2009
Lowest value
 
The lower value indicates the lowest rate of unemployment (civilian labour force) in 2007 or 2008; the 
stacked bar is the rise over this initial low value up to 2009. 
Source : AMECO database, European Commission.  
 
Needless to say, the experience across Member  States is quite uneven, and depends on 
institutional arrangements that vary considerably across the EU . Not surprisingly, the scale of 
job cuts and the increase in unemployment was particularly sizeable in the countries hardest hit (e.g. the Baltic republics, Ireland and Spain). Given the magnitude of the recession, other 
countries, notably Germany, expe rienced only modest losses in employment. The unevenness 
of performance reflects the natu re of the recession as well as labour market institutions. For 
instance, when employers regard demand shocks as temporary, they tend to smooth their labour responses
5; this appears to be th e case with Germany, which was affected primarily by 
the collapse in global trade. In contrast, large labour changes and reorganisations are the best 
response to permanent demand shocks that involve large sectoral restructur ing; this appears to 
                                                 
4  See the discussion in section 1.2 in European Competitiveness Report 2009 or European Commission 
(2009a). 
5  Section 1.4 in European Competitiveness Report 2009. 
EN  EN  19be the case in, say, Spain and Ireland, both of which had major problems with a housing 
bubble.   In the midst of such a crisis, and over and ab ove the issue of recovery, it is reasonable to 
wonder about the impact on economic perfor mance in the medium to long term. The 
European Competitiveness Report 2009 examined  the potential impact of the recession on 
long-term productivity growth; all in all, the conc lusion was that the recession need not have a 
negative impact on the rate of te chnical change in the years to come; for a recession includes 
two types of mechanisms: those that impinge  negatively on economic efficiency, but also 
those that improve our ability to increase  productivity in the future. Furthermore, 
understanding those mechanisms make it possibl e to design economic policies to tone down 
the negative and amplify the positive effects
6 in order to avoid a slow recovery followed by an 
era of sluggish growth7.  
Figure 1.3. GDP, employment and producti vity growth rates in the EU-27 
-6-5-4-3-2-10123456
2000Q1
2000Q2
2000Q32000Q4
2001Q1
2001Q2
2001Q32001Q4
2002Q1
2002Q2
2002Q3
2002Q42003Q1
2003Q2
2003Q3
2003Q42004Q1
2004Q2
2004Q3
2004Q4
2005Q1
2005Q2
2005Q3
2005Q4
2006Q1
2006Q2
2006Q32006Q4
2007Q1
2007Q2
2007Q3
2007Q4
2008Q1
2008Q2
2008Q3
2008Q42009Q1
2009Q2
2009Q3
2009Q42010Q1year-to-year % growth rateGDP Employment Productivity
 
Source : Eurostat. 
 
The present edition of the European Competitiv eness Report examines the potential impact of 
the boom years on competitiveness. The aboveme ntioned accumulation of serious imbalances 
has a potential to significantly distort the way resources are us ed in our economies, and hence 
on productivity growth in the years to come.  
                                                
 
6  For instance, the Product Market Review 2009 (European Commission (2009b )) examines the negative 
impact of the crisis on R&D (section 4. 1) and, accordingly, discusses policy m easures that attempt to tone down 
the potentially negative impact (section 4.2).  
7  European Commission (2009a) discusses the possible impact of the crisis on potential output and a scenario 
with lower permanent growth rates is not ruled out. 
EN  EN  20Box 1.1. Competitiveness and external competitiveness 
Competitiveness refers to the overall economic performance of a nation measured in 
terms of its ability to provide  its citizens with growing liv ing standards on a sustainable 
basis and broad access to jobs for those willing to work. In short, competitiveness refers 
to the institutional and po licy arrangements that creat e the conditions under which 
productivity can grow sustaina bly (productivity growth is the only source of sustained 
income growth, in turn the bac kbone of growing living standards). 
 
When applied to international trade, however, competitiveness, or external 
competitiveness, may convey a different more specific meaning. Unless otherwise 
stated, in this chapte r external competitiveness refers to the ability to  export goods and 
services in order to afford imports, and hence it will be summarized by world market 
shares (the share of e xports in total exports). 
 
1.2 The years before the crisis 
The period preceding the crisis was characterised by remarkable stability: steady income 
growth, low inflation, an d growing employment. 
1.2.1 Aggregate trends and the crisis 
Table 1.1 sets out average annual growth ra tes for the five-year intervals 1996-2000 and 
2001-2005, and for the years 2006, 2007, 2008 and 2009. As mentioned, the unprecedented 
fall in GDP per capita in 2009 was somewhat une ven, but all EU countries were affected, 
reflecting the severity and dire  consequences of the economic and financial crisis. The GDP 
per capita fall was particularly sizeable in some  of the EU-12 countries (particularly in the 
Baltic republics, ranging from -13.6  % in Estonia to -17.5  % in Latvia and Lithuania, but also 
in Hungary, Romania and Slovenia, at -6  % to -9  %), thus wiping out part  of their previous 
performance and catching-up achievements within the EU. Some of the EU-15 countries were 
also severely hit, such as Ireland and Finland (with a GDP per capita fall of 8  % and 7.3  % 
respectively. 
EN  EN  21Table 1.1. Real GDP per capita growth and GDP level in PPS 
 
    
Annual growth rate of GDP per capita1) 
  
          
  1996-20002) 2001-20052) 2006 2007 2008 2009 2009 GDP per 
capita 
(in pps; EU-
27=100)3) 
BE 2.64 1.14 2.10 2.18 1.04 -3.58 114.9 
BG -0.21 6.66 6.59 6.17 6.01 -5.40 41.2 
CZ 1.60 3.82 6.47 5.55 1.41 -5.46 80.5 
DK 2.44 0.95 3.00 1.22 -1.78 -4.72 117.4 DE 1.88 0.53 3.29 2.59 1.43 -4.88 116.2 
EE 7.19 8.32 10.18 7.39 -3.47 -13.62 62.0 
IE 8.44 3.64 2.76 3.50 -4.91 -7.96 131.1 EL 2.91 3.72 4.10 4.06 1.61 -1.54 94.8 
ES 3.65 1.73 2.44 1.70 -0.73 -4.92 103.3 
FR 2.36 0.93 1.53 1.72 -0.14 -2.65 107.4 IT 1.87 0.31 1.46 0.82 -1.80 -5.20 101.7 
CY 2.49 1.42 2.15 2.93 2.65 -1.67 98.3 
LV 6.34 8.86 12.85 10.55 -4.13 -17.57 48.6 LT 5.20 8.32 8.49 10.44 3.30 -17.54 53.2 
LU 4.70 2.37 3.92 4.83 -1.73 -4.85 268.0 
HU 4.25 4.49 4.13 1.12 0.82 -6.38 63.0 MT 3.88 0.33 2.65 3.10 1.61 -2.97 77.6 
NL 3.43 0.82 3.24 3.38 1.61 -4.93 129.9 
AT 2.82 1.04 2.85 3.13 1.70 -4.03 123.6 PL 5.42 3.13 6.31 6.83 5.00 1.21 60.8 
PT 3.68 0.25 1.03 1.64 -0.17 -3.07 78.3 
RO -1.00 6.50 8.07 6.55 6.45 -7.79 45.3 SI 4.35 3.57 5.44 6.22 2.39 -7.04 86.1 
SK 3.25 4.97 8.42 10.31 6.14 -5.90 71.6 
FI 4.54 2.24 4.50 3.76 0.58 -7.27 110.5 SE 3.23 2.19 3.66 1.81 -0.92 -5.05 120.4 
UK 3.13 2.03 2.26 1.91 -0.06 -5.21 116.4 
EU-15 2.57 1.12 2.43 2.03 -0.02 -4.56 110.6 EU-27 2.70 1.43 2.77 2.39 0.32 -4.46 100.0 
US 
 3.15 1.45 1.72 1.15 -0.50 -3.34 147.3 
  
1) GDP per capita is measured in 2000 prices; 2) Geometric Average; 3) PPS st ands for Purchasing Power 
Standards. 
 
Source : AMECO database, European Commission. 
 
 Table 1.1 shows that in 2009 employment contracted less in the EU-27 (-2
 %) than in the US 
(-3.5  %), reflecting the lower respon siveness of EU labour market s. The crisis also has the 
potential to affect labour supply in the short and medium term, by changing either the total 
population (e.g. via reduction of immigration flow s) or the participation rates. On one hand, 
recessions tend to discourage labour entry (e .g. young people may decide to stay longer in 
full-time education) and encourage exit (early retirement for older workers). On the other 
hand, households affected by significant income  reductions may delay retirement decisions, 
and formerly inactive household members may seek  to enter the labour force, particularly 
when labour markets are flexible and the recove ry starts to generate  new job opportunities. 
The participation rate in the EU-27 has i ndeed fallen from 65.9% in 2008 to 64.6% in 2009 
EN  EN  22(roughly the level attain ed in 2006 and 2007). The particip ation of young workers (15-24) 
appears to have accentuated its declining trend in 20098.  
 
Table 1.2. Annual growth rate of employment1) 
 
  1996-2000 2001-2005 2006 2007 2008 2009 
BE 1.22 0.71 1.19 1.63 1.88 -0.84 
BG -0.26 1.53 3.34 2.82 3.27 -2.03 
CZ -0.82 0.21 1.94 2.66 1.55 -2.03 
DK 1.02 0.05 1.99 2.69 0.83 -2.61 
DE 0.81 -0.16 0.62 1.66 1.40 -0.30 
EE -2.03 1.10 5.38 0.75 0.17 -8.98 
IE 5.72 2.91 4.30 3.56 -0.82 -7.79 
EL 0.55 1.35 2.03 1.36 0.11 -0.91 
ES 3.88 3.26 3.92 3.02 -0.61 -6.63 FR 1.40 0.64 0.98 1.35 0.53 -1.77 
IT 0.98 1.25 1.96 1.24 0.32 -1.13 
CY 1.24 3.08 1.76 3.25 2.63 -0.35 LV -0.54 1.66 4.70 3.58 0.74 -11.86 
LT -1.12 0.86 1.83 2.78 -0.48 -8.25 
LU 4.13 3.13 3.64 4.42 4.71 1.09 HU 1.26 0.23 0.73 -0.10 -1.19 -2.99 
MT 0.75 0.83 1.31 3.18 2.42 -0.61 
NL 2.55 0.33 1.70 2.60 1.44 -0.11 
AT 0.92 0.68 1.40 1.80 1.76 -1.47 
PL -0.37 -0.61 3.21 4.43 3.78 -0.70 PT 2.11 0.28 0.51 -0.03 0.44 -2.29 RO -1.89 -1.35 0.69 0.36 0.28 -3.28 
SI -0.29 0.36 1.50 2.98 2.87 -2.59 
SK -0.79 0.58 2.29 2.12 2.94 -2.04 FI 2.27 0.86 1.76 2.21 1.61 -2.87 
SE 0.82 0.22 1.69 2.16 0.91 -2.22 
UK 1.26 0.93 0.87 0.68 0.73 -1.97 
EU-15 1.47 0.86 1.49 1.60 0.70 -1.92 
EU-27 1.01 0.65 1.63 1.78 0.95 -2.03 
US 1.78 0.68 1.87 1.10 -0.44 -3.53 
  
1) Employment in persons; all domestic indust ries (National accounts); 2) Geometric Average. 
 
Source : AMECO database, European Commission. 
 
Labour productivity in the EU-27 appears to be  recovering faster than  GDP (see Figure 1.3) 
due to the adjustment lags of employment.  Table 1.3 shows a substantial variation in 
measured labour productivity across countries, re flecting the patchy natu re and the magnitude 
of economic shocks, flexibility and response in labour and market adjustments, the stage in 
the business cycle, the strengt h of the recovery, etc.  
      
                                                
 
8  For details, see chapter 3 ‘Youth and Segmentation in EU labour markets’ in Employment in Europe 2010 
(forthcoming). 
EN  EN  23Table 1.3. Annual growth rate of real labour productivity(1) 
 
 
1996-20002) 2001-20052) 2006  2007  2008  2009  
 
BE 2.17 0.65 1.29  1.52 -1.09 -0.97 
BG 1.68 3.68 3.17  2.78  2.69 -2.94 CZ 1.94 4.47 5.03  4.04  0.51 -0.06 
DK 1.08 1.18 0.81 -0.38 -2.31 -0.85 
DE 2.01 1.30 2.86  0.69 -0.04 -2.27 
EE  N/A 6.50 4.82  6.53 -2.26  3.04 
IE 5.15 3.08 1.44  3.19 -0.17  1.45 
EL 2.86 3.06 -0.53  4.64  1.88 -0.13 
ES 0.25 0.75 0.84  1.69  0.82  4.92 
FR 2.13 1.44 2.72 -0.14 -0.24 -0.87 
IT 0.89 0.11 0.29  0.21 -0.94 -1.66 
CY 2.08 0.96 1.46  1.47 0.92  1.26 
LV  N/A 6.95 7.96  7.53 -1.21 -2.22 
LT 4.29 6.59 6.77  5.70  1.61 -10.90 
LU 2.61 1.34 2.29  1.44 -4.23 -1.57 
HU 2.53 3.21 3.81  1.34  1.88 -3.98 
MT  N/A 0.85 3.95 -0.44 -0.79 -1.41 NL 1.75 1.58 1.58  1.56  0.87 -3.50 AT 1.79 1.16 2.56  2.24  0.31 -2.38 
PL 6.17 3.75 2.94  2.28  1.57  5.75 
PT 3.41 0.93 1.40  2.78 -0.40 -0.96 
RO  N/A 8.95 6.20  5.43  6.45   N/A 
SI  N/A N/A 6.03  4.54 -1.20 -5.53 
SK 4.93 4.87 6.84  8.26  2.56  0.77 
FI 2.81 2.08 3.45  2.13 -0.34 -1.02 
SE 2.48 2.80 2.88 -0.59 -1.69 -1.70 
UK 2.52 1.99 2.27  1.75  1.03 -1.95 EU-15 1.77 1.23 1.80  1.09  0.07 -0.96 
EU-27  N/A N/A 1.77  1.09  0.01   N/A 
US 2.38 2.49 0.82  1.46  1.36   N/A 
  
1) GDP at 2000 prices over total hours worked; 2) Geometric Average. 
 
Source : AMECO database, European Commission. 
 
1.2.2 Industrial trends 
At the sectoral level, the years preceding the cris is confirmed historical trends like the faster 
productivity growth of manufact ures compared with services (see Table 1.4), notably in high-
tech sectors like chemicals and pharmaceuticals. Th is is also true for 'Electrical and optical 
equipment, including ICT manufacturing', as  well as the associat ed service industry 
'Transport, storage and communication', wh ich includes ICT services. The highest 
productivity and value added growth rate was in  a different high-tech sector: Electrical and 
optical equipment. Within services, value adde d growth was higher for 'Transport, storage and 
communication' and 'Financial intermediation'; th e latter was an exception in the sense that it 
is the only services sector with  higher productivity growth than the average of manufactures. 
Labour-intensive services like 'Construction and real estate' disp lay negative productivity 
growth due to relatively higher employment growth, probably associated with the boom 
described in section 1.3 below.   
EN  EN  24 
Table 1.4. Sectoral labour productivity in  the EU-27; annual average % change 1995-
2008 
 
NACE - 31 
sector 
classification Sector Labour 
productivityValue 
added Employment
A Agriculture 3,2 1,0 -2,2 
B Fishing 0,0 -1,7 -1,7 
C Mining and quarrying 1,1 -1,7 -2,8 D Manufacturing 2,6 2,1 -0,6 
DA Food products, beverages and tobacco 0,4 0,4 0,0 
DB Textiles and textiles products 1,4 -1,8 -3,2 DC Leather and leather products -0,8 -3,9 -3,1 
DD Wood and wood products 1,6 0,6 -1,0 
DE Pulp, paper paper products; publishing and 
printing 1,9 1,0 -0,9 
DF Coke, refined petroleum products and nuclear 
fuel 2,8 -0,1 -2,9 
DG Chemicals, chemical products and man-made 
fibres 4,1 3,3 -0,8 
DH Rubber and plastic products 1,5 2,3 0,8 DI Other non-metallic mineral products 2,1 1,2 -1,0 
DJ Basic metals and fabricated metal products 2,3 2,1 -0,2 
DK Machinery and equipment n.e.c. 3,0 2,2 -0,8 
DL Electrical and optical equipment 6,3 5,9 -0,3 
DM Transport equipment 1,8 2,7 0,9 
DN Manufacturing n.e.c. 0,3 0,9 0,6 
E Electricity, gas and water supply 2,3 1,5 -0,8 
F Construction -0,4 1,1 1,5 
G Wholesale and retail trade; repair of m otor 
vehicles 1,3 2,6 1,3 
H Hotels and restaurants -0,4 2,1 2,4 
I Transport, storage and communication 3,0 3,8 0,8 
J Financial intermediation 2,9 3,4 0,5 K Real estate, renting and business activities -1,0 3,4 4,4 
L Public administration and defence 0,5 1,0 0,5 
M Education 0,0 0,9 1,0 N Health and soc ial work 0,5 2,2 1,7 
O Other community, social, personal service 
activities -0,1 2,1 2,3 
TOTAL   1,3 2,4 1,0 
  
Source:  Eurostat. 
1.2.3 R&D in EU industries 
Before the crisis the US spent significantly more on R&D that the EU, both in absolute terms 
and as a percentage of GDP; the widest gap is  in business enterprise R&D expenditure. The 
distribution of total manufacturing R&D expenditure shows a relatively similar pattern between the EU-14 and the US
9,10. However, when looking at the relative effort, R&D 
expenditure as a percentage of value added (see Figure 1.4), it transpires that US businesses 
                                                 
9  EU-14 stands for the EU-15 minus Luxembourg. No data for the EU-27 was available at this level of 
disaggregation. 
10  The lion’s share goes to  C23T25 Chemical, rubber, plastics and fuel products, which accounts for roughly 
27 % of total manufacturing R&D expenditure on either side of the Atlantic. In the EU-14 C34 Motor vehicles 
sector stands out, accounting for 20  % of total manufacturing R&D, contrasting with only 10  % in the US. 
EN  EN  25make a significantly higher effort than their EU counterparts, particularly in sectors 
considered to be high-tec hnology. For instance, C33 Me dical precision and optical 
instruments devotes close to half of its value added to R&D in the US, compared with barely 
12 % in the EU. In short, the EU does not invest enough in R&D, neither in absolute nor in 
relative terms, and a look at the sectoral di stribution of R&D intens ity in manufacturing 
clearly shows that it is the hi gh-tech sectors that underperform  compared to their American 
counterparts11. 
 
Figure 1.4 – Sectoral R&D intensity 
0 5 10 15 20 25 30 35 40 45 50  C15T37 MANUFACTURING    C15T16 Food products,
beverages and tobacco    C17T19 Textiles, textile products,
leather and footwear    C20 Wood and products of wood
and cork    C21T22 Pulp, paper, paper
products, printing and publishing    C23T25 Chemical, rubber,
plastics and fuel products    C26 Other non-metallic mineral
products      C27 Basic metals      C28 Fabricated metal produc ts,
except machinery and equipment      C29 Machinery and equipment,
n.e.c.        C30 Office, accounting and
c omputing machinery        C31 Electrical machinery and
apparatus, n.e.c.        C32 Radio, television and
communication equipment        C33 Medical, precision and
optical instruments      C34 Motor vehicles, trailers and
semi-trailers      C35 Other transport equipment    C36T37 Manufacturing n.e.c. and
recycling
% of value addedEU-14
US
 
Notes: Sector classification is IS IC Rev.3.1; R&D expenditure is ANBERD, i.e. it includes R&D activities 
carried out in the business enterprise sector, regardless of the origin of funding; data for EU-14 is 2005, for 
the US 2006; the EU-14 is the EU-15 minus Luxembourg; no data for EU-12 countries is available at this 
level of disaggregation. 
Source:  OECD STAN indicators, ed.2009. 
                                                 
11  Even if it can be argued whether these R&D expenditures are cost efficien t, or what is the sense of seeking 
causality between R&D and performance,  these differences undoubtedly reflect a thriving and innovative market 
economy in the US compared to the EU. 
EN  EN  261.3 Growing imbalances and external competitiveness 
This period of relative stability, with the exception of the slowdow n in 2001, came to an 
abrupt end in 2007 when signs of unrest in the US subprime  mortgage market and of a 
slowdown started to become apparent. 
1.3.1 Soaring asset prices 
Seen in retrospect, the 2000-07 period can be s een as an incubation period; it was the boom 
years, notably in the housing sector in the US, but also in Europe: some Member States saw 
investment in dwellings ― that is, housing excluding non-re sidential and civil engineering ― 
increase by several points of GDP (see Box 1.2) . In line with previous major recessions 
combined with a banking crisis, ‘[t]he cris is was preceded by a long period of rapid credit 
growth, low risk premiums, abundant availability  of liquidity, strong le veraging, soaring asset 
prices and the development of bubbl es in the real estate sector’12. 
 The present chapter examines the potential imp act of the boom years on competitiveness. The 
accumulation of large distortions has the potentia l to significantly distort the way resources 
are allocated in European economies. The fo llowing sections examine this possibility. 
 
Figure 1.5 - The rise in investment in dwellings 
02468101214
1995
1996
19971998
1999
2000
2001
2002
2003
20042005
2006
2007
2008
2009Percentage of GDPBelgium
Germany
Spain
France
United Kingdom
Ireland
United States
 
Note: Investment in dwellings does not comprise non-residential construction and civil engineering. 
Source : AMECO database, European Commission.  
 
 
                                                 
12  From the introduction to European Commission (2009c); see chapters 1 ‘Root causes of the crisis’ and 2 ‘The 
crisis from a historical perspective’. See also Euro pean Commission (2010b), ‘Surve illance of Intra-Euro-Area 
Competitiveness and Imbalances’. 
EN  EN  27Box 1.2. Accumulated distortions 
 
For a decade or more in some countries, notably the UK, Denmark, Ireland and Spain, 
house prices increased over their fundamental  value. Prices went up because economic 
players expected them to increase in a spec ulative spiral that made investment in 
dwellings attractive to households compared to ot her forms of investment. The 
distortion did not affect all countries, but  where it did it was not a minor one. In 
countries like Spain, for instance, at th e height of the boom period, around 2005-06, 
house prices increased by 15% a year13.  
 
This means that for years millions of hous eholds and firms made consumption-saving 
decisions counting on trends in  the price of houses that subsequently proved to be 
unsustainable. Households invest most of th eir savings in property.  Large and sustained 
increases in the price of houses led them to overinvest in housing and to overstate their 
wealth, pulling down their savings rate. If houses  constituted an attractive investment for 
locals, the same was true for foreigners, di rectly or indirectly. In 2000-06, on average, 
countries with a large housing boom also e xperienced a substantial change in their 
lending/borrowing position. In some cases it was a dramatic change; Spain for instance 
was a net lender by the end of the 1990s and was borrowing almost 10% of its GDP 
annually in 2007. To see this  graphically, the housing bubbl e can be linked to the 
increase in investment in dwellings, measur ed in percentage points of GDP, during the 
boom period: Figure 1.6 relates the housing bubble during 2000-06 to the change in the 
net lending/borrowing position in the same period. In regard of this figure, it looks like 
countries like Germany and Austria became le nders to countries like Spain, Ireland and 
Estonia14. 
 
These flows of capital further fuelled the behaviour of households, misguided by the 
trend in housing prices. The rising consump tion rate financed by these incoming flows 
of capital induced a deterioration of the comm ercial balance with the rest of the world 
(see Figure 1.7 and Figure 1.8). 
 
When the boom came to an end, accumulated distortions gave way to the corresponding 
adjustment process. Once the value of houses drop ― or is thought to be going to drop 
in the future ― a large portion of perceived wea lth vanishes, leading to a major 
adjustment of consumption and saving. C onsumption drops and saving increases to 
rebuild net wealth. Moreover, if liabilities ar e substantial with respect to assets, the 
saving rate will grow further in an effort to deleverage. In th e countries most affected by 
the housing bubble the increase in the sa vings rate in 2007-09 range from three 
percentage points of disposable  income in the UK to eleven points in Spain. That these 
increases are related to the previous intensity in investment in dwellings is illustrated in 
Figure 1.915. 
 
Likewise, the countries that accumulated a si zeable deterioration of  net exports during 
the boom years (Figure 1.7) were  those that suffered most from the subsequent collapse 
                                                 
13  For Spain and Ireland see, for instance, Ahearne et al  (2008) or Díaz and Raya (2009). For an overview of 
EU countries see Setzer, van den Noord and Wolff (2010). 
14 This is further clarified by the examination of the Bank of International Settlements consolidated bank 
statistics; see pages 18 to 21 in the BIS Quarterly Review, June 2010. 
15  For a description of the mechanics and magnitude of the adjustment in the US, see Robert A. Solow (2009), 
‘How to Understand the Disaster’, New York Review of Books, 56(8). Retrieved 20 May 2010 from 
http://www.nybooks.com/articles/22655. 
EN  EN  28of private consumption at the outbreak of  the crisis (see Figure 1.9 and Figure 1.10). 
 
Figure 1.6. Investment in dwellings and net lending/borrowing 
BECZ
DKDE
EEIEEL
ESFRIT CY
LVLTLUHUMA
NLATPL
PT
ROSI
FISE
UK
USJP
-18-16-14-12-10-8-6-4-20246810
-2 -1 0 1 2 3 4 5 6
Increase in % points of GDP in investment in dwellings from 2000 to 2006.Change in net lending (+) / borrowing (-) in 2000-06 (% GDP)
 
Source : AMECO database, European Commission.  
 
 
 
Figure 1.7. Changes in net exports 2000-06 
BECZ
DKDE
EEIEEL
ESFRIT
CY
LVLTLU
HUMA
NLAT
PL PT
ROSV
FISE
UK
-15-10-5051015
- 2 - 1 0123 4567
Ri se i n i nvest m ent  i n dwel l i ngs 2000-2006 (i n %  poi nt s of  GDP)Change in net exports 2000-07 (% points of GDP)
 
Source : AMECO database, European Commission.  
 
 
 
 
 
 
EN  EN  29Figure 1.8. Changes in saving rates and net exports 2000-06 
UKSE
FISKSI
ROPT PLAT
NLMA
HULU
LT
LVCYIT
FR
ESEL
IE
EEDE
DKCZ
BE
-15.00-10.00-5.000.005.0010.0015.00
-10.00 -8.00 -6.00 -4.00 -2.00 0.00 2.00 4.00 6.00Change in private saving 2000-07 (% points of GNDI)Change of net exports 2000-07 (in % points of GDP)
 
Source : AMECO database, European Commission.  
 
 
 
Figure 1.9. The rise in the private saving rate 2007-09 
UK
SEFI
SKSVRO
PTPL
AT
NL
MAHU
LULTLV
CY
ITFRES
EL
IEEE
DEDK
CZBE
-6-1491419
- 3 - 2 - 1 0123456
Rise in investment in dwellings 2000-2006 (in % points of GDP)Change in private saving rate 2007-09
 
Source : AMECO database, European Commission.  
 
 
 
 
 
 
EN  EN  30Figure 1.10. The fall in private consumption 2007-09 
UKSE
FISV
ROPTPL
AT
NLMA
HULU
LTCYITFR
ESEL
IE
EEDE
DKCZ
BE
-23-18-13-8-32
- 2 - 10123456Rise in investment in dwellings 2000-2006 (in % points of GDP)max. % change in real private consumption 2007-09
 
Source : AMECO database, European Commission.  
 
 
EN  EN  31 
Table 1.5. A summary view of the bubble 
 
    
Boom period 
  
Crisis 
 
 Country 
  
Increase in % points of GDP in 
investment in dwellings from  
2000 to 2006. 
 
Change in net lending 2000-06 
 
Change in private saving 2000-07 (% 
GNDI) 
 
Change of net exports from 2000 to 2007 
in % points of GDP 
 
Change in private saving 2007-09 (% 
GNDI) 
 
% fall in private consumption from 2007-
08 to 2009 
 
% fall in GDP from 2008 to 2009 
Belgium BE 0,92 -0,76 0,93 0,92 1,15 -1,64 -2,01 
Czech Republic CZ -0,39 3,07 -1,51 7,99 1,65 -0,20 -1,68 
Denmark DK 1,89 1,55 -1,32 -3,60 3,85 -4,84 -4,47 
Germany DE -1,39 7,93 4,76 6,72 -1,13 0,23 -3,55 
Estonia EE 4,17 -10,20 -5,50 -7,71 7,67 -22,30 -14,58 
Ireland IE 5,66 -4,69 1,89 -3,25 3,44 -7,86 -10,05 
Greece EL 1,86 -0,90 0,23 2,41 4,28 -1,79 -0,69 
Spain ES 3,23 -5,20 -4,80 -3,65 11,13 -5,41 -3,43 
France FR 1,22 -3,01 -0,57 -2,77 1,07 0,82 -1,44 
Italy IT 0,76 -1,99 -1,40 -1,17 0,17 -2,50 -3,00 
Cyprus CY 3,27 -1,88 -9,16 -7,10 6,31 -3,01 -1,75 Latvia LV 0,92 -16,96 -5,82 -13,12 17,29 -26,62 -18,62 
Lithuania LT 0,77 -3,00 0,96 -7,07 7,95 -16,99 -16,94 
Luxembourg LU -0,37 -0,69 0,75 12,47 -4,19 -0,56 -4,05 
Hungar y HU 0,24 0,52 -1,20 5,25 2,82 -7,98 -1,69 
Malta MA 1,84 5,79 -0,78 8,69 -5,66 1,16 0,26 
Netherlands NL 0,43 2,60 1,18 3,10 -1,81 -2,51 -4,31 Austria AT -0,79 3,61 1,28 4,11 0,89 0,36 -1,77 
Poland PL -0,25 3,25 -2,10 3,55 3,19 2,25 5,42 
Portugal PT -1,93 -0,23 -3,63 3,37 2,65 -0,79 -1,54 Romania RO 0,82 -6,73 -2,53 -8,59 9,79 -10,54 -4,54 
Slovenia SI 0,28 0,38 -0,09 1,76 -0,02 -1,41 -6,04 
Slovakia SK -2,12 -5,08 -0,82 1,44 -2,44 -0,67 -5,79 Finland FI 0,77 -2,97 0,16 -3,94 -1,52 -2,12 -7,17 
Sweden SE 1,43 3,48 4,92 1,48 -1,29 -1,07 -3,09 
United Kingdom UK 1,22 -0,77 3,44 -1,37 3,00 -3,22 -3,63 
United States US 1,17 -3,20 0,26 -1,23 4,57 -0,85 -1,28 
Japan JP -0,45 1,44 -0,46 0,22 -0,15 -1,67 -6,12 
  
Source:  AMECO database, European Commission. 
 
1.3.2 Growing distortions and external competitiveness 
Growing imbalances during the boom period could have had an impact on factors that will 
condition productivity growth, and hence would affect the performance of some Member 
States beyond their recovery from the recession  (see Box 1.3). For inst ance, the real estate 
EN  EN  32boom could have detracted reso urces from productive sectors damaging productivity growth; 
or nominal wage inflation could erode the inte rnational competitiveness of domestic firms, 
notably in countries within the Euro area.  In particular, much attention ha s been paid to the large change s in the trade balance of many 
countries illustrated in Figure 1.7. The excess of imports over exports is often associated with 
a loss of external competitiveness. As the story goes, so-called surplus countries like 
Germany were able to compete more effectively in interna tional markets (e.g. by keeping 
wages low) and then invested abroad the surp lus of its trade balance, thus financing the 
commercial deficit of other less well performing  countries, the deficit countries like Spain. 
This view, however, cannot explain some of th e key facts discussed in  Box 1.2. In particular, 
it does not explain why the 'surplus' countries ty pically saw their saving rate soar during the 
boom period while deficit count ries experienced the opposite, as illustrated in Figure 1.8
16.  
 The remainder of this section argues that the deterioration of the trade balance is only reflecting capital flows ― in turn reflecting differences in asset prices across countries ― and 
that external competitiveness, as measured by exports performance, was neither playing an 
important role in this deterioration nor being substantially affected by these developments. In 
other words, as we shall discuss below, in the EU trade deficits were related to significant 
capital flows within Member States while extern al competitiveness seemed to be more related 
to developments in productivity.  
                                                
 
16  Box 1.5 below examines in detail the cases of Germany and Spain. Both before and during the crisis, these 
countries constitute two polar cases as far as the experience the last decade is concerned. 
EN  EN  33Box 1.3. Imbalances do not (necessarily) reflect distortions 
 
If two trading countries, for whatever institutio nal reasons, have two different saving rates, 
they will always have a commercial deficit and surplus respectively: because the saving 
country will permanently finan ce a level of imports higher th an exports in the consuming 
country. This type of equilibrium is sometim es said to entail an  ‘imbalance’ in the 
literature17. However, as long as pric es correctly reflect prefer ences and technology, it 
does not need to reflect any fundamental pr oblem. A typical case would be fast catching-
up developing countries that constitute  attractive investment opportunities. 
 
In contrast, when some pri ces are sending the wrong signal, similar ‘imbalances’ may be 
reflecting true distortions that , accumulated, may lead to an adjustment process that can 
take the form of a recession like the current one . The flows of capital referred to in section 
1.3.1 reflected the overpricing of certain asse ts in certain countries. Correcting this 
deviation of prices from the fundamental va lue of the assets was the first stage in 
readjusting the consumption-saving behaviour of households and was the ultimate cause of 
the downturn. 
 
In other words, an ‘imbalance’ may or ma y not signal an underl ying problem depending 
on whether it reflects some mi spricing. That is most likely the reason why even ex post  
there is no consensus on whether the so-called ‘g lobal imbalances’ are at the origin of the 
crisis; see Suominen (2010)  and references therein. 
1.3.3 Rising unit labour costs, cause or consequence? 
The boom years witnessed a major increase in unit labour costs (ULC) in certain countries, 
generally the so-called deficit c ountries. It has been suggested  that large in creases in ULC 
could explain, if not the crisis, at least its depth and duration.  
 However, the development of ULC does not s eem to have had a significant effect beyond 
being associated with correspond ing increases in the general le vel of prices. As discussed 
below, if there is a relation between ULC and export performance, it is weak and of second 
order of magnitude compared with the deteri oration of the trade balance (and hence the 
former cannot be the cau se of the latter). 
                                                
 
17  In European Commission documentation an imbalance on ly occurs when there is a market or policy failure. 
Hence, housing bubbles like those examined in this chapter would be indeed classified as an imbalance. 
EN  EN  34Figure 1.11. Rising unit labour costs, inflat ion and the share of labour in income 
EU-27
EU-15BEBG
CZ
DKDEEE
IEEL
ES
FRITCYLV
LTLUHU
MANL
ATPLPTSVSK
FISE UKUS
JP
90100110120130140150160
80 100 120 140 160 180
Nominal Unit Labor Costs in 2007 (2000 = 100)Harmonized Consumer Price Index in 2007 (2000 = 100)JPUSUK
SEFI
SKSIPT
PLATNLMA
HU
LULTLV
CYIT
FR
ESELIEEE
DEDKCZ
BEEU-15
EU-27
7580859095100105110
80 100 120 140 160 180
Nominal Unit Labor Costs in 2007 (2000 = 100)Real unit labor costs (2000 = 100)
 
( a )        ( b )  
Source : AMECO database, European Commission.  
 
A bubble economy may affect the development of  wages because the inflows of capital will 
not be entirely directed to the demand for foreign goods. As these flows increase demand for 
domestic goods beyond productivity, domestic pr ices will rise, thereby applying upward 
pressure on nominal wages and increasing ULC. Bu t this is a nominal effect, not necessarily 
affecting real wages in net terms18. 
 Figure 1.11(a) can thus be seen  as not only reflecting a logi cal relation between nominal 
wages and prices, but also suggesting that real  wages did not deviate from productivity that 
much during the boom period. This is can be seen from the absence of any link between 
nominal unit labour costs and the share of 'com pensation of labour' in national income, i.e. 
real unit labour costs, in Figure 1.11(b). Change s in the general level of prices have brought 
down real wages and left labour's share of inco me at its slightly declining level of recent 
years.  To test this conjecture one can  compare the increase in nominal  wages over the general level 
of prices with the increase in  productivity. This is  done in Figure 1.12 wh ere it can be seen 
that, with some exceptions, wherever nominal wa ges increased over the ge neral level of prices 
during the boom years, it was because producti vity was increasing by a similar magnitude. 
That real wages have not grown beyond produc tivity in most European economies is 
confirmed by the general downw ard trend of the share of wa ges in national income 2000-07: 
for the EU-27 as a whole prices (HICP) grew  by 18%, ULC by 14% and the share of labour in 
income fell by 5% (see again Figure 1.11(b))
19. 
                                                 
18  Even inside a monetary union, this nominal effect is  not necessarily translated in to a real effect; it will 
depend on the extent to which these wage distortions are concentrated in non-tradables or tradables sectors; see 
box 1.4 below. 
19  Manipulating the definition of ULC, one can prove that the gap between the growth rates of ULC and the 
general level of prices is approximately the percentage change in the share of wages in income. 
EN  EN  35Figure 1.12. Real wages and productivity: changes 2000-07 
 
-6-149141924
BE
DK
DE
IE
EL
ES
FR
IT
LU
NL
AT
PT
FI
SEUK% growthI ncrease in nominal wages over inflation Increase in productivity
 
050100150200
BG
CZEE
CY
LV
LT
HU
MA
PL
RO
SI
SK% growthIncrease in nominal wages over inflation Increase in productivity
 
Source : AMECO database, European Commission.  
 
It is not surprising, then, that the rise in unit labour costs bears no relation to the changes in 
unemployment rates during this period (Figure 1.13) . In short, labour market institutions do 
not seem to have played any great role in th e boom period beyond their ab ility or in ability to 
track productivity without causing inflation (mos tly in non-tradables sectors, see Box 1.4). 
EN  EN  36Figure 1.13. Rising unit labour costs and unemployment 
BE
BGCZDKDE
EEIE
ELESFR
ITCY
LV
LTLU
HU
MANLAT
PLPT
RO
SI
SKFISE
UK
-13-11-9-7-5-3-1135
90 100 110 120 130 140 150 160 170 180 190 200 210 220 230 240 250 260 270 280Nominal Unit Labor Costs in 2007 (2000 = 100)Change in unemployment rate 2000-07
 
Source : AMECO database, European Commission.  
1.3.4 World market shares 
The emphasis on nominal labour costs is genera lly justified by the ope n character of our 
economies. However, exports’ performance, as  measured by world market shares, does not 
seem to be affected by changing labour costs e ither — even if there is a good reason for this 
to be the case in theory, at least within the Euro area. 
EN  EN  37Figure 1.14. Rising unit labour costs and changing world market shares 
UKSK
SI
SEPTPL
NL
MALV
LULT
IT
IEHU
FRFIES
ELEE
DKDECZ
CY
BEAT
050100150200250
100 110 120 130 140 150 160 170 180
Nominal Unit Labor Costs 2007 (2000 = 100)Share of exports 2007; index 2000=100
 
Source : AMECO database, European Commission. 
 
In principle, increasing the nominal cost of labour may affect the competitive position of 
domestic firms in international ma rkets. This is partic ularly true in countries in a monetary 
union where there is no national currency, and hence no possibility of depreciation or 
devaluation. However, Figure 1.14 compares the changes in nominal unit labour costs in the 
boom period with changes in world market shares as measured by the share of exports in total 
world exports; the only obvious fact that arises fr om this chart is the la rge expansion in EU-12 
Member States in this post-enlargement peri od. Focusing on intra-EU trade and distinguishing 
between euro area and non-euro area countries  does not reveal any obvious pattern either. 
EN  EN  38Figure 1.15. Rising unit labour costs and intr a-EU trade for Euro and non-Euro area 
6080100120140160180200220
95 105 115 125 135 145 155 165 175 185 195
Nominal Unit Labor Costs 2007 (2000 = 100)% change in intra-EU exports' share 2000-07Non-Euro area Euro area
 
Source : AMECO database, European Commission.  
 
One possible explanation for the lack of any re lation between ULC and export shares is that 
trading sectors face competitive pressures that prevent nomina l wages growing much faster 
than productivity or, alternatively, limit the abi lity of firms to pass the increasing cost of 
labour through to higher pri ces. There is some evidence for this (see Box 1.4). 
EN  EN  39Box 1.4. Unit labour costs in tradables and non-tradables 
 
Most economic activity in large countries is  domestic. The aggreg ate evolution of ULC 
may reflect wage developments in sectors not e xposed to trade. A case in point is that of 
Spain, an economy displaying one of the larg est housing bubbles as well as one of the 
largest increases in ULC. In the boom times the general level of prices rose by 24%, 8 
points above euro area inflati on. Nevertheless, the deflator of  exports rose by 15%, a point 
below the euro area level. This is no excep tion: the long-term behaviour of ULC differs 
between tradables and non-tradables as illust rated in Figure 1.16 for the EU as a whole. 
 
This differing behaviour may stem from two different forces. On the one hand, industry, 
typically producing tradables, is more expos ed to international competition than are 
services. On the other, the faster productiv ity growth in manufact uring compared with 
services may also explain a large share of this differing behaviour. 
 
Figure 1.16. Sectoral unit labour costs in the EU-27; index 1995=100 
90100110120130140150160
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Industry Wholesale and retail trade Financial intermediation and business services
 
Source : European Union Industrial Structure 2011, forthcoming. 
 
 
 The share of exports in world e xports for most European countri es has been roughly constant 
or decreasing since 2000. This general decreas ing trend is most likely due to a compound 
effect resulting from the fast incr ease of the level of trade during this period, in turn due to the 
rise of emerging economies.  
EN  EN  40Figure 1.17. Share of exports in world exports 2000-07 
012345678910
AT
BE
DE
DK
EL
ES
FI
FR
IE
IT
LUNL
PT
SE
UK% world ex
ports2000 2007
0.00.20.40.60.81.01.2
BG
CY
CZ
EE
HU
LT
LV
MA
PL
RO
SI
SK% world exports2000 2007
 
Source : AMECO database, European Commission.  
 
Figure 1.18. Contribution to changes in the share of exports 
in world exports 2000-07 by extra- and intra-EU trade 
-30-20-100102030
AT BE DE DK EL ES FI FR IE IT LU NL PT SE UK% change in the shareExtra-EU Intra-EU
-80-4004080120160
BG CY CZ EE HU LT LV MA PL RO SK SV% change in the shareExtra-EU Intra-EU
 
Source : AMECO database, European Commission, and own calculations. 
 
The focus, however, should be on Figure 1.19. It is in regard of this figur e that it is clear that 
countries with a housing bubble ― inside the euro area like Sp ain or outside it like Denmark 
― retained their market share reasonably we ll. Germany increased its export share by 10% 
but the contribution of intra- and extra-EU trade is roughly the same; France lost ground in 
both intra- and extra-EU market s, and by the same magnitude as  the UK, which is not in the 
euro area. This is evidence against the hypothesi s that countries like Spain or France, with 
relatively high unit labour  costs, have lost market shares  to countries lik e Germany, with 
lower unit labour costs, because of  a deterioration of ‘cost-competitiveness’ in the euro area. 
EN  EN  411.3.5 Summarizing 
In short, net exports only reflect capital fl ows caused by mispriced assets, not losses of 
external competitiveness. In fact, there is no clear relation between the real estate bubble and the performance of exports during the boom pe riod. In other words, th e growing imbalances 
of the boom period do not seem to have had a ve ry clear impact on external competitiveness; 
if any, through growing nominal labour costs, and of second or der of magnitude compared 
with the accumulated imbalances and the ensuing contraction
20. 
 What about productivity growth ? If large capital inflows duri ng the boom period are not used 
productively to eventually gene rate resources to pay back the external debt, they are 
hampering the ability of countries to generate income in the future while at the same time 
increasing the interest burden on these economies.  This is the possibility explored in the next section. 
1.4 The impact of the boom on industry and competitiveness 
From the discussion in the previous section, th e boom period does not seem to have had any 
obvious impact on external competitiveness as m easured by the ability to maintain exports 
shares. True, the boom period has affected nom inal wages and prices  but there is no 
systematic impact on exports. Count ries like France with moderate  increases in ULC or even 
reductions in real effective exchange rates (REER)
21 have lost substantial international market 
shares (see again Figure 1.19) while others, like Spain, with  large increases in ULC and 
REER, have more or less kept their market shares.  Nevertheless, this lack of imp act on exports (external competi tiveness) does not  rule out the 
possibility that these developments may have di storted the way resources are allocated within 
countries and across sectors hampering pr oductivity growth in the years to come 
(competitiveness as productivity growth). 
1.4.1 Has the housing bubble crowded out productive investment? 
The most obvious distortion one would expect  is not apparent: it does not seem that 
investment in dwellings crowded out productive investment at the aggr egate level (productive 
investment here is gross fixed capital form ation excluding dwellings but including non-
residential construction and civ il engineering). In other word s, countries that increased 
considerably their investment in dwellings , also increased thei r productive investment. 
 
                                                
 
20  At this point it may be worth recalling that this chapter examines the impact of growing imbalances in 
competitiveness and external competitiveness. To conclude that the evolution of the ability to export does not 
seem to bear a clear relationship with these imbalances is  not to say that they are not fundamental to understand 
the crisis and the recovery. First, countries more affected  by these distortions tended afterwards to be more hit 
hard by the recession, as illustrated in figure 1.10. Second, the accumula tion of imbalances yielded in many 
cases a leveraged household and corporate sector ―this is a promise of a slow reco very in countries affected by 
the bubble (see Kocherlakota (2010) an d McKinsey Global Institute (2010)). 
21   The real effective exchange rate (REER) is anothe r common indicator of external competitiveness; see graph 
I.1 in European Commission (2010a). 
EN  EN  42Figure 1.19. Changes in productive investment  and investment in dwellings in 2000-06 
JPUSUK
SE FISK
SIRO
PT
PLAT
NL
MAHU
LULTLV
CY ITFRES
ELIEEE
DEDKCZ
BE
-4-202468
- 4 - 2 02468
Change in investment in dwellings (in % points GDP)Change in productive investment (in % points GDP)
 
Source : AMECO database, European Commission.  
 
If there is any distortion, it is that countries  engaged in heavy borrowing have also increased 
their productive investment. It is a small eff ect, though; from Figure 1.20 it is clear that the 
largest changes in productive investment in 2000-06 occurred in new Member States, which 
were also the target of substantial foreign direct investment. 
 
Figure 1.20. Changes in lending/borrowing po sition and productive  investment in 2000-
06 
JPUSUK
SE FISK
SIRO
PT
PLAT
NL
MAHU
LULTLV
CYITFRES
ELIEEE
DEDKCZ
BE
-4-202468
-20 -15 -10 -5 0 5 10
Change in net lending (+) / borrowing (-) in 2000-06 (% GDP)Change in productive investment (in % points GDP)
 
Source : AMECO database, European Commission.  
 
 
EN  EN  43Box 1.5. Two polar cases 
 
The cases of Spain and Germany illustrate tw o contrasting experiences in the boom period. 
Examining the different paths followed by thes e two economies may help us to understand 
the imbalances and the different behavi our during the subsequent adjustment. 
 
One major argument is that unit labour co sts are not growing e nough in Germany. Figure 
1.21 shows for 2000-07 nominal compensation pe r employee and productivity defined as 
real value added per person in empl oyment in the respective sector. 
 
A glance at these charts reveals two significan t differences. First, unit labour costs, the 
ratio of these indexes, are increasing in all sectors in the Spanish economy and decreasing 
in most German sectors. Second, productivity is up in most German sectors, often on a 
significant scale, while for Spanish sectors pr oductivity is either falling or growing only 
modestly. In the light of the discussion about  the role of aggregate unit labour costs and 
export performance in the prev ious section, the second fact is more likely to be the 
relevant one, and the one expl aining the roughly 10% increase in market share of German 
exports in 2000-07. 
 
This interpretation is further strengthen ed by Table 1.6. As mentioned above, the two 
countries differ markedly in their experience ov er recent years. In particular, unit labour 
costs increased significantly in Spain during the boom period. However, these differences 
are not reflected in the distribut ion of exports between the EU and the rest of the world. If 
any, between 2000 and 2007 Spain displays a sli ght bias towards low-tech exports. For 
Germany there is no obvious trend;  this is consistent with  
Figure 1.18 above, where the increase in the worl d market shares of Germany is shown to 
be due as much to intra-EU trade as to extra-EU trade. 
EN  EN  44Figure 1.21. Nominal wages and pr oductivity in 2007; index 2000=100 
ES - Spain
406080100120140160
TOTAL INDUSTRIES
    Mining and quarrying
     Food products, beverages and tobacco
     Textiles, textile products, leather and
footwear
     Wood and products of wood and cork
     Pulp, paper, paper products, printing
and publishing
     Coke, refined petroleum products and
nuclear fuel
     Chemicals and chemical products
     Rubber and plastics products
     Other non-metallic mineral products
     Basic metals and fabricated metal
products
     Machinery, nec
   Electrical and optical equipment
     Transport equipment
     Manufacturing nec; recycling
    ConstructionCompensation per employee Productivity
 
DE - Germany
406080100120140160
TOTAL INDUSTRIES
    Mining and quarrying
     Food products, beverages and tobacco
     Textiles, textile products, leather and
footwear
     Wood and products of wood and cork
     Pulp, paper, paper products, printing
and publishing
     Coke, refined petroleum products and
nuclear fuel
     Chemicals and chemical products
     Rubber and plastics products
     Other non-metallic mineral products
     Basic metals and fabricated metal
products
     Machinery, nec
   Electrical and optical equipment
     Transport equipment
     Manufacturing nec; recycling
    ConstructionCompensation per employee Productivity
 
Source : EU KLEMS research database and own calculations. 
 
         
EN  EN  45Table 1.6. Export characteristics — a co mparison between Germany and Spain 
 
   
Germany 
 Spain 
 
  Share of 
exports over 
total exports Share of 
exports to the 
EU over total 
exports Share of 
exports over 
total exports Share of 
exports to the 
EU over total 
exports 
 
  2000 2007 2000 2007 2000 2007 2000 2007 
CTOTAL: GRAND TOTAL 100,0 100,0 63,2 63,3 100,0 100,0 72,4 70,0 
C01T05: AGRICULTURE 
FORESTRY AND FISHING 0,9 0,7 65,9 75,1 6,0 5,4 90,7 90,0 
C10T14: MINING AND 
QUARRYING 0,2 0,2 80,5 79,1 0,5 0,5 51,8 46,4 
C15T37: TOTAL 
MANUFACTURING 96,0 91,2 63,3 62,1 91,6 91,4 72,2 70,1 
C15T16: + Food beverages and 
tobacco 4,0 3,9 80,9 81,4 8,1 8,6 71,9 74,9 
C17T19: + Textiles leather and 
footwear 3,8 2,7 74,6 72,9 6,4 5,5 67,4 66,4 
C20: + Wood and cork 0,6 0,7 70,7 72,4 0,7 0,7 73,2 72,3 
C21T22: + Pulp paper printing 
and publishing 3,2 2,8 72,9 73,2 3,1 2,5 69,7 74,8 
C23T25: + Chemical rubber 
plastics and fuel 17,1 18,3 59,0 62,7 16,2 19,9 62,7 58,3 
C26: + Non-metallic products 1,4 1,2 64,2 63,1 3,3 2,9 60,1 64,8 
C27T28: + Basic metals and 
fabricated metal products 7,9 9,0 68,8 67,5 7,8 9,9 69,4 75,2 
C29T33: + Machinery and 
equipment 33,0 30,2 60,0 53,5 16,3 14,4 68,9 64,1 
C34T35: + Transport 
equipment 23,2 21,2 62,6 63,3 27,5 25,3 84,0 80,1 
C36T37: + Manufacturing n.e.c 
and recycling 1,9 1,8 66,2 71,2 2,3 1,7 65,9 68,5 
HITECH: HIGH 
TECHNOLOGY 
MANUFACTURES 19,1 17,3 60,8 61,1 9,3 9,5 70,8 68,8 
MHTECH: MEDIUM-HIGH 
TECHNOLOGY 
MANUFACTURES 48,0 46,7 59,8 57,3 42,9 41,4 79,1 74,7 
MLTECH: MEDIUM-LOW 
TECHNOLOGY 
MANUFACTURES 14,1 15,9 67,4 66,4 18,8 21,6 60,0 60,3 
LOTECH: LOW 
TECHNOLOGY 
MANUFACTURES 13,4 11,9 74,7 75,5 20,6 19,0 69,5 71,8 
ICTMAN: ICT 
MANUFACTURES 11,3 8,9 66,7 60,7 6,0 4,0 76,0 78,0 
  
 Source:  OECD STAN Bilateral Trade and own calculations. 
1.4.2 Employment growth in constr uction and real estate services 
In 2000-2007 employment in the EU-27 increased by more than 6  %, from 211 million to 224 
million. The employment rate improved by more  than 3 percentage points in 2000-2007 (see 
Table 1.7.). Some of the countri es with low or average employ ment at the beginning of the 
EN  EN  46decade managed to increase their rates close to  the Lisbon target (e .g. Estonia, Ireland, and 
Latvia).  
Table 1.7. Employment rates 
 
2000 2007
EU27 62,2 65,4 3,2
Belgium 60,5 62,0 1,5
Bulgaria 50,4 61,7 11,3
Czech Republic 65,0 66,1 1,1
Denmark 76,3 77,1 0,8
Germany 65,6 69,4 3,8
Estonia 60,4 69,4 9,0
Ireland 65,2 69,1 3,9Greece 56,5 61,4 4,9Spain 56,3 65,6 9,3
France 62,1 64,3 2,2
Italy 53,7 58,7 5,0Cyprus 65,7 71,0 5,3Latvia 57,5 68,3 10,8
Lithuania 59,1 64,9 5,8
Luxembourg 62,7 64,2 1,5Hungary 56,3 57,3 1,0
Malta 54,2 54,6 0,4
Netherlands 72,9 76,0 3,1Austria 68,5 71,4 2,9Poland 55,0 57,0 2,0
Portugal 68,4 67,8 -0,6
Romania 63,0 58,8 -4,2Slovenia 62,8 67,8 5,0Slovakia 56,8 60,7 3,9
Finland 67,2 70,3 3,1
Sweden 73,0 74,2 1,2United Kingdom 71,2 71,5 0,3
United States 74,1 71,8 -2,3
Japan 68,9 70,7 1,8Employment rates, %Growth in 
employment rates 
2000-07, 
percentage points
 
 
Source : Eurostat, LFS series. 
 
In this context, countries affected by the housing boom showed different patterns regarding 
manufacturing. In Spain, for example, empl oyment in manufacturing increased (3.5  %), 
especially in manufacturing of  food, chemicals, rubber products, mineral and metal products, 
machinery and transport equipments — taking into account branches with larger relative weights. At the same time in Ireland, the nu mber of people employed in manufacturing fell by 
8
 %, with decreases virtually across the board. 
 As expected, the role of construction  in employment changed c onsiderably during 2000-2007 
(at the EU level by 17
 %, which is more than 2 million people in absolute terms). A 
significant drop can be observed only in Germa ny, Austria and Portugal, while the role of 
construction gained in importance in almost a ll the other countries, es pecially in Ireland, 
EN  EN  47Spain and in the Baltic  republics (see Table 1.8.)22. Generally, this can be explained on the 
one hand by rising demand for housing requiring huge numbers of construction workers, and 
by huge infrastructural development works (motor ways, roads, railways etc.) on the other. 
The share of construction in total employment exceeded 13% in Ireland and Spain (see Figure 
1.23.). This could have caused tensions in the labor market but the role of immigrant workers became important: they helped to alleviate capacity constraints in  the sector and at the same 
time contributed to the increasing demand for housing
23. 
 
Figure 1.22. Employment in constr uction over total employment 
4567891011121314
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007% of total employmentEU27
Ireland
Spain
Latvia
Lithuania
Estonia
 
Source : Eurostat, National Accounts. 
 
Another activity related to th e housing boom is the banking sector . The role of the financial 
sector in employment increased, especially in the c ountries affected by the housing boom and 
where the role of external financial sources be came more important in those years. Significant 
increases occurred in most new member states (Baltic republics, Bulg aria, Romania, Poland) 
and in Ireland24. Finally, the growing importance of hous ing investment was reflected in the 
growing number of employees in the real esta te sector (almost half a million people — a 24  % 
increase at the EU level). Real estate, renti ng and business activities t ogether registered an 
increase of 5.8 million employees (26  %), with 'other business activities' (NACE 74) playing 
the most significant role.  
 
                                                 
22  Bover and Jimeno (2007) examined the relationship between house prices and labour demand in the 
construction sector. They found substantial cross-country differences in the time se ries correlation of house 
prices and sectoral composition of employment. Countries with more building possibilities, like Spain, 
experienced a high sectoral allocation of employment an d displayed larger elasticities of labour demand in the 
construction with respect to house prices than countr ies that were not affected by the housing boom.  
23   See Aherne et al (2008). 
24  More widely available and lower-cost housing financin g contributed to the rapid growth of mortgage debt in 
several countries (IMF, 2008). For instance in Ireland, residential mortgage lending grew annually by 25% on 
average in the period 2000-2006 (Mal zubris, 2008). In Estonia credit infl ows progressively accelerated: gross 
debt liabilities increased on average by 32% annually in  2005-2007 and by 20% in 2000-2004 (Lamine, 2008).  
EN  EN  48Table 1.8. Employment changes between 2000 and 2007  
NACE Manufacturing Construction Wholesale and 
retail trade Hotels and 
restaurants Financial 
intermediation Real estate, 
renting and 
business 
activities 
  in 1000 in % in 1000 in % in 1000 in % in 1000 in % in 1000 in % in 1000 in % 
EU27 -1873,0 -4,8 2428,6 16,7 2403,3 7,7 1582,3 18,3 188,7 3,2 5807,2 26,4 
EU15 -2229,7 -7,5 1608,8 13,4 1518,9 6,0 1387,2 18,0 110,1 2,2 5141,8 26,0 
Belgium -69,2 -10,5 13,0 5,3 29,1 5,0 1,9 1,3 -6,3 -4,3 156,0 26,1 
Bulgaria 69,1 10,5 99,7 75,6 146,4 38,1 42,9 41,9 13,5 36,9 83,9 71,2 
Czech 
Republic 60,6 4,4 28,6 6,6 34,8 4,8 15,2 8,7 2,7 3,1 140,1 32,9 
Denmark -51 -11,4 26,0 15,6 30,0 6,9 15 18,1 8 10,1 96,0 34,4 
Germany  -566 -7,0 -560,0 -20,2 -149,0 -2,5 210 13,0 -78 -6,1 1097,0 24,2 
Estonia 3,9 3,0 35,2 89,8 9,1 11,0 3,1 15,0 2 24,7 10,5 26,0 
Ireland -27,3 -9,1 112,3 65,5 63,0 26,1 18,8 17,2 23,4 33,9 54,7 38,0 
Greece 17,2 3,5 85,2 28,4 186,0 23,1 38,3 14,4 8,8 8,2 92,2 45,8 
Spain 104,4 3,5 876,9 48,1 610,6 24,1 430,4 41,9 42,9 11,8 755,0 59,1 
France -413,7 -11,3 288,2 19,7 202,2 6,4 111 12,8 63,2 8,7 566,2 16,3 
Italy 64,6 1,3 397,1 25,6 230,0 6,7 274,2 28,4 46,1 7,8 702,0 29,8 
Cyprus 0,6 1,6 12,1 46,2 14,2 25,1 4,6 13,0 1,2 7,2 8,9 56,0 
Latvia 7,8 4,9 70,5 127,0 50,2 32,4 13 60,5 3,8 23,2 29,5 49,0 
Lithuania 12,8 5,1 86,1 103,6 60,8 30,4 5,4 20,5 7,8 53,8 32,2 74,5 
Luxembourg  2,1 6,3 11,1 42,9 5,6 14,7 2,7 21,3 8,8 29,8 13,9 33,9 
Hungary -56,2 -5,7 64,4 24,5 46,4 8,5 18,2 13,7 -0,3 -0,4 78,0 38,2 
Malta -5 -14,1 3,2 36,0 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 
Netherlands -109,3 -10,5 -4,0 -0,8 57,9 4,2 22,7 7,6 0,4 0,1 229,5 16,8 
Austria 4,3 0,7 -14,3 -5,0 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 
Poland 349,1 12,5 170,0 19,7 162,6 7,7 75,6 35,2 73,1 25,4 139,3 17,1 
Portugal -129,8 -13,0 -52,9 -9,0 113,7 14 ,6 n.a. n.a. n.a. n.a. n.a. n.a. 
Romania 36,2 1,9 275,2 71,2 252,2 28,4 7,4 6,1 10,6 12,1 88,9 45,8 
Slovenia -18,3 -7,1 13,7 20,5 7,0 6,3 2,9 9,6 3 15,1 41,3 60,7 
Slovakia 10,6 2,1 34,7 25,9 126,6 45 ,4 10,4 21,2 -3,6 -9,4 69,9 51,0 
Finland -19,6 -4,3 28,8 18,5 31,7 10,9 4,8 6,5 -0,4 -1,0 74,2 35,0 
Sweden -64,7 -8,2 56,1 25,6 26,7 5, 1 14,2 12,0 -1,9 -2,0 113,8 23,0 
United Kingdom -1019 -24,3 364 19,5 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 
  
Notes: manufacturing and construction from NACE 6 others from NACE 31 data when data for 2007 not available 2006 used instead. 
 
Source:  Eurostat, National Accounts, and own calculations. 
EN  EN  49 
Figure 1.23. Changes in value added and produc tivity in the EU-25* in the boom period 
2000-07 
-30 -20 -10 0 10 20 30 40 50 60  PRIVATE HOUSEHOLDS WITH EMPLOYED PERSONS  OTHER COMMUNITY, SOCIAL AND PERSONAL
SERVICES  HEALTH AND SOCIAL WORK  EDUCATION  PUBLIC ADMIN AND DEFENCE COMMUNITY SOCIAL AND PERSONAL SERVICES   Renting of m&eq and other business activities   Real estate activities  REAL ESTATE, RENTING AND BUSINESS ACTIVITIES  FINANCIAL INTERMEDIATIONFINANCE, REAL ESTATE AND BUSINESS SERVICES  POST AND TELECOMMUNICATIONS  TRANSPORT AND STORAGE TRANSPORT AND STORAGE AND COMMUNICATION HOTELS AND RESTAURANTS WHOLESALE AND RETAIL TRADE CONSTRUCTION ELECTRICITY, GAS AND WATER SUPPLY  MANUFACTURING NEC; RECYCLING  TRANSPORT EQUIPMENT  ELECTRICAL AND OPTICAL EQUIPMENT  MACHINERY, NEC  BASIC METALS AND FABRICATED METAL  OTHER NON-METALLIC MINERAL   Rubber and plastics   Chemicals and chemical products   Coke, refined petroleum and nuclear fuel  CHEMICAL, RUBBER, PLASTICS AND FUEL  PULP, PAPER, PAPER , PRINTING AND PUBLISHING  WOOD AND OF WOOD AND CORK  TEXTILES, TEXTILE , LEATHER AND FOOTWEAR  FOOD , BEVERAGES AND TOBACCO TOTAL MANUFACTURING MINING AND QUARRYING AGRICULTURE, HUNTING, FORESTRY AND FISHINGTOTAL INDUSTRIESProductivity Value added
 
*EU-25 refers to Member States as of 1st of  May 2004 
Source : EU KLEMS research database and own calculations.  
 
Inspection of productivity changes at the sectoral level does not  reveal a very clear pattern. 
Again, it is difficult to disentangle an eventual  impact of the boom years from secular trends. 
Breaking down productivity change s by broad sectors shows, not su rprisingly, that  it is in 
EN  EN  50industry where the largest increases in producti vity, 10%, are recorded (which eventually 
could explain the behaviour of export shares , Figure 1.17). The only clear impact of the 
hosing boom is in the construction and real  estate sectors: pr oductivity was down in 
construction by more than 5%, mainly because of  the flow of workers (particularly migrant 
workers) reflected in Figure 1.22.  
1.4.3 The allocation of productive investment 
In section 1.4.1 we argued that aggregate pr oductive investment wa s not crowded-out by 
investment in dwellings. Another kind of dist ortion, however, would be that part of this 
productive investment was disp roportionately direct ed to housing-related sectors to the 
detriment of other productive sectors. Th ere is some evidence in this direction. 
 In countries affected by the housing boom (e .g. Estonia, Spain, Ireland, United Kingdom) the 
relative weight of manufacturing investment sh rank considerably  during this period. In these 
economies real investments were typically reallocated to the non-tradable sectors
25, especially 
to construction and real estate26. These figure come, however, with  a caveat: it is difficult to 
disentangle this drop and the incr easing role of market services  against manufacturing in the 
European economy (a long-term structural trend)27. Figure 1.25 depicts the evolution of 
investment by type of assets in the EU-27. Taking into account the asset type distribution of 
GFCF, the role of housing and other construction investment increased si gnificantly in the EU 
during the review period. At the same time the share of metal products and machinery 
dropped considerably. This points par tly to less investment  in tradable sectors,  but it is also in 
line with a GVA share and employment loss in ma nufacturing and the increasing role of 
services in general.   
                                                
 
25  Brixiova et al. (2009). 
26  In Estonia, for instance, the shares  of the construction and the real estate sectors in total fixed investment 
exceeded the weight of the sectors in  total value added, while in manuf acturing the investment share fell 
increasingly below the share in total va lue added in 2005-2007 (Lamine, 2008). 
27  European Commission (2004). 
EN  EN  51Figure 1.24. GFCF in the EU-27 by asset types; % of GDP 
1,5% 1,6% 1,6% 1,6% 1,6% 1,6% 1,7% 1,7%5,7% 5,7% 5,6% 5,7% 5,7% 5,8% 6,0% 6,2%5,0% 4,9% 4,9% 5,1% 5,2% 5,4%5,7%5,7%2,0% 1,9% 1,9% 1,9% 1,9%1,9%2,0%2,1%6,4%6,1%5,6% 5,2% 5,2%5,3%5,3%5,6%
0%5%10%15%20%25%
2000 2001 2002 2003 2004 2005 2006 2007Other products Other construction Construction housing
Transport Metal products and machinery Agricultural products
Source : Eurostat, National Accounts, and own calculations. 
1.4.4 Summarizing 
In short, if the boom years have affected futu re productivity growth, th e effect does not seem 
to be obvious. Appart from the growth in empl oyment in housing-relate d sectors, there is no 
obvious deviation from secular trends: decrea sing weight of manufacturing in employment 
and value added caused by faster pr oductivity growth rela tive to services. If any, there is some 
evidence that productive investment has been di sproportionately directed  to construction and 
real estate activities. It is not clear, however, whether the ma gnitude of this distortion is 
enough to provoque a productivity sl owdown in the coming years. 
1.5. The impact of the crisis on industry 
Both by international standards and in compar ison with other parts of the EU economy, the 
EU manufacturing and constructi on industries were very severely hit by the global recession. 
Output dropped in all sector s but one, and jobs were lost on a massive scale. 
EN  EN  52 
Table 1.9. The crisis and European industry 
 
      % change in 2009Q04 relative to 2008Q01 * 
NACE Rev.2 Highest drop 
in output 
relative to 
2008q01 Output Employment Hours Productivity 
** 
c Manufacturing -19,03 -18,10 -10,63 -10,01 -8,77 
c10 Food products -2,87 -2,87 -3,55 -2,04 0,06 
c11 Beverages -7,40 -6,62 -10,17 -8,18 2,74 c12 Tobacco products -12,28 -12,28 -9,30 -3,21 -5,74 c13 Textiles -24,23 -23,40 -18,56 -17,39 -7,78 
c14 Wearing apparel -16,12 -16,12 -20,80 -17,63 1,52 
c15 Leather and related products -19,25 -18,41 -15,88 -13,05 -6,42 c16 Wood and of products of wood and cork -21,47 -21,47 -17,82 -16,09 -5,27 c17 Paper and paper products -14,93 -11,93 -7,50 -9,03 -4,60 
c18 Printing and reproduction of recorded 
media -12,03 -12,03 -8,85 -6,07 -4,73 
c19 Coke and refined petroleum products -10,05 -10,05 -5,01 -9,70 1,50 
c20 Chemicals and chemical products -19,54 -12,17 -7,13 -5,21 -10,88 
c21 Basic pharmaceutical products -0,29 4,65 -4,48 -3,25 8,27 c22 Rubber and plastic products -21,54 -16,44 -8,56 -9,02 -10,41 
c23 Other non-metallic mineral products -28,03 -28,03 -18,15 -14,53 -13,19 
c24 Basic metals -35,57 -28,32 -12,54 -16,32 -17,70 c25 Fabricated metal products -27,11 -26,85 -11,00 -10,89 -18,14 
c26 Computer, electronic and optical products -22,23 -21,98 -12,20 -11,89 -11,73 
c27 Electrical equipment -24,88 -22,50 -10,67 -11,95 -14,02 c28 Machinery and equipment n.e.c. -30,26 -30,18 -7,94 -11,31 -21,41 
c29 Motor vehicles, trailers and semi-trailers -39,24 -28,22 -11,91 -15,57 -19,94 
c30 Other transport equipment -13,64 -13,64 -7,87 -7,75 -5,07 
c31 Furniture -22,46 -22,29 -15,18 -15,09 -8,68 
c32 Other manufacturing -7,35 -6,54 -4,76 -4,31 -2,90 c33 Repair and installation of machinery -6,82 -6,82 -2,89 2,90 -9,31 
  
* When 2009Q04 not available 2009Q03 used instead, notably for hours and productivity. 
** Productivity is measured as output per hour; rates of change approximate rates of change of value added per hour. 
 
Source:  Eurostat, Short-term Business Statistics. 
EN  EN  53 
The effects of the crisis were not identical across sectors, th ough: some manufacturing sectors 
fared better than manufacturing as a whole, othe rs considerably worse. Examples of sectors 
outperforming other manufacturing sectors during the crisis include food products and basic 
pharmaceutical products and pharm aceutical preparations. At th e other end of the scale, 
sectors such as motor vehicles, trailers and se mitrailers, machinery and equipment, textiles, 
wearing apparel, leather and leather-related products suffere d the greatest job losses and 
output reductions. The constructio n industry, being highly cyclical , also falls in the latter 
category.  Whereas manufacturing industry as  a whole started to recover by mid-2010, some of the worst 
affected manufacturing sectors we re still shrinking and may not yet have reached their lowest 
level and the start of recovery. A similar sc enario might await th e construction industry.  
1.5.1 Output 
Across the manufacturing industry as  a whole, output fell by almost 15
 % from its cyclical 
peak in the first quarter of 2008 to the fi rst quarter of 2010. By mid-2009 output had dropped 
by even more, but it then started to recover and this general recove ry has continued in 2010. 
The volume of output is now some 7  % higher than at the lowe st point in 2009, and around a 
quarter of the total drop from the 2008 p eak to the 2009 nadir has been recovered. 
 However, as Figure 1.25 shows, the overall recovery is not reflected in all manufacturing 
sectors. In some sectors (not ably furniture, coke and refi ned petroleum products, tobacco 
products, and beverages) output is still diminish ing and may not yet have reached its lowest 
level. In other sectors the drop in output was far greater than the average manufacturing 
output loss (motor vehicles, trailers and semitrailers –39.5
 %; basic metals –35.8  %; 
machinery and equipment –30.5  %), and although output has since started to recover it still 
has some way to go to make up the average of nearly –15  % across all manufacturing sectors, 
as reflected in Figure 1.25.  The figure also shows the remarkable resilience of the pharmaceutical sector (basic pharmaceutical products and pharm aceutical preparations), wher e output now stands at a 
higher level than in 2008. The recession initially caused output  to drop slightly in the 
pharmaceutical sector too, but it quickly returned  to positive growth and has since bucked the 
trend of negative growth in other sectors. The food sector has also b een able to keep up 
production remarkably well in spite of initial output reductions and despite having had to shed more than 3
 % of its workforce (see the next section). 
  
EN  EN  54Figure 1.25. Construction and manufacturi ng sector output in 2010Q1; index 
2008Q1=100 
 65 70 75 80 85 90 95 100 105 110Machinery and equipment Non-metallic mineral productsMetal productsMotor vehiclesFurnitureBasic metalsWood productsTextilesElectrical equipmentLeather and related productsConstructionComputers, electronic and optical productsManufacturing: all sectorsRubber and plastic productsWearing apparelCoke and petroleum productsRecorded mediaChemicals and chemical productsPaper productsTobacco productsBeveragesOther transport equipmentOther manufacturingFood productsPharmaceutical products and preparations
 
Source : Monthly note on economic recovery in manufacturing, construction, and selected service industries, 
June 2010, DG Enterprise and Industry, European Commission. 
 
Output in the construction industry fell by 16.2  % from the first quarter of 2008 to the first 
quarter of 2010, and may have fallen further si nce. As in some manufacturing sectors, the 
construction industry may yet have to reach it lo west output level of this cyclical downturn 
before returning to positive growth.  Taking into account change of production and em ployment in terms of  end-use categories 
(intermediate goods, capital goods, consumer durab les, consumer non-durables and energy) 
the following can be observed.   Intermediate goods (accounting for the largest weight of  total) suffered most during the crisis, 
indicating significantly less demand for goods us ed in manufacturing production. Production 
of capital goods showed the larg est drop as compared to th e period before the recession, 
representing very weak investme nt activity in the business sector. These two categories, given 
their large shares in total, had the most significant effect on the production index of total industry. Households responded to the changed circ umstances quite rapidly, as reflected in the 
sharp contraction for durable goods. Non-durab le consumer goods recorded only a maximum 
drop of 5
 % compared with the pre-crisis peak. 
EN  EN  55Figure 1.26. Production index change of end-use categories in the EU-27 
80859095100105110115120125
2007Q1
2007Q2
2007Q3
2007Q42008Q1
2008Q2
2008Q3
2008Q4
2009Q1
2009Q22009Q3
2009Q4
2010Q12005=100, %Capital goods
Durable consumer goods
Intermediate goods
Non-durable consumer goods
Energy 
 
Source : Eurostat, Short-term Business Statistics. 
 
Looking at individual EU countries' performan ce in industries, the largest GDP contraction 
and decline in industrial output occurred in sm all open economies like Estonia or Slovakia, 
but their impact on EU industria l output as a whole was not si gnificant, because of their 
relatively small weights. In contrast, Germany, re presenting the highest share in EU industrial 
output, contributed considerably to the fall in EU industrial pe rformance. Italy, representing 
the fourth largest weight in industrial value added, showed the second largest impact on the 
overall EU industrial production index28. 
1.5.2 Employment 
Employment in the manufacturing industry, which accounts for around 16  % of total EU 
employment, fell by 11.8  % from its peak in the first quar ter of 2008 to the first quarter of 
2010. Though it fell short of the 15  % reduction in output over the same period, the fall 
nonetheless meant that more than four million j obs were lost in manufacturing, representing 
nearly two-thirds of al l job losses in the EU from the firs t quarter 2008 to the first quarter of 
2010. No other part of the EU economy has suffered job losses on a similar scale.  Employment diminished in all manufacturing se ctors from the first quarter 2008 to the first 
quarter of 2010; in two sectors,  textiles and wearing apparel, job losses were in excess of 
20
 %. The manufacture of leather and related products also suffe red similar cuts in numbers. 
This is the reason for the diminished shares of  overall employment for these three sectors in 
Figure 1.27. It is worth noting that  while the job losses in the text iles and leather sectors were 
proportionate to the output reductions in those sectors from 2008 to 2010, the wearing apparel 
sector employed 22.5  % fewer people in the first quarter of 2010 than the same quarter of 
2008 but the remaining workforce produced more than 85  % of the 2008 sector output, 
reflecting higher la bour productivity. 
                                                 
28   European Commission (2010c) 
EN  EN  56Several manufacturing sectors report ed job losses of less than 5  % during the period: food 
products (–3.1  %), basic pharmaceutical products a nd pharmaceutical preparations (–4.0  %) as 
well as coke and refined petroleum products (–4.9  %). This explains why the relative shares of 
these three sectors in overall employment increased between 2008 an d 2010, as depicted in 
Figure 1.27.  Employment in the construction i ndustry, which represents around 6
 % of total EU 
employment, fell by 13.9  % from the first quarter of 2008 to the first quarter of 2010, or by 
more than two million jobs. As a consequence the share in overall employment of manufacturing and construction diminished from 30.5% to 30.1
 %. 
 
Figure 1.27. Industry sectors and construction, relative shares of employment 
30,5%
8,1%
8,7%
7,6%
4,7%
3,8%4,1% 3,6%3,6%3,6%3,3%2,6%2,9%2,4%2,6%1,9%1,5%1,2%1,3%1,0%0,4%0,3%0,3%0,1%
30,1%
8,9%
8,6%
7,8%
4,8%
3,9%3,8% 3,7%3,7%3,4%3,0%2,8%2,7%2,4%2,3%2,0%1,5%1,3%1,2%1,0%0,4%0,4%0,3%0,1%Construction
Food products
Metal products
Machinery, equipment
Motor vehicles
Recorded media
Furniture
Rubber/plastic products
Electrical equipment
Non-metallic mineral products
Wearing apparel
Chemical products
Wood products
Basic metals
Textiles
Transport equipment
Paper products
Pharmaceutical products
Leather products
Beverages
Other manufacturing
Coke, petroleum
Computers, electronics
Tobacco products
Employment in first quarter 2008 (55 million) and first quarter 2010 (48.5 million). 
Source : Monthly note on economic recovery in manufacturing, construction, and selected service 
industries, June 2010, DG Enterprise and Industry, European Commission. 
 
As regards end-use categories, however, the largest drops were registered in capital and 
intermediate goods in te rms of production, while job losses were more significant in other 
categories (durables and non-durables). Compar ing the two figures (Figure 1.26 and 1.28), it 
can be seen that while enterprises responded to the changed circumstances very fast by 
reducing production, job lo sses were more gradual and more protracted.  
 
EN  EN  57Figure 1.28. Labour input index change of end-use categories in the EU27 
80859095100105110
2007Q1
2007Q22007Q32007Q4
2008Q1
2008Q2
2008Q3
2008Q42009Q1
2009Q2
2009Q32009Q4
2010Q12005=100, % Capital goods
Durable consumer goods
Intermediate goods
Non-durable consumer goods
Energy
 
Source: Eurostat,  Short-term Business Statistics.  
 
1.6 Conclusions 
The European Union is in the midst of a cons iderable downturn. The recession originated in a 
major readjustment of consumption and savi ng behaviour of households after a boom period 
in which considerable distortions were accumulated — in other words, a classic demand-side recession.  A close inspection of the boom years 2000-07 shows that if these growing distortions had any 
impact on competitiveness, it was probably only modest and mostly associated with distortions in the allocation of labour across s ectors within countries affected by a speculative 
bubble. External competitiveness does not seem to have been a ffected by these developments; 
large increases in unit labour costs in some Me mber States have not been reflected in the 
share of exports in world trade, not even within the euro area. One explanation for this apparent paradox may be the different setti ng of nominal wages in the tradable and non-
tradable sectors. In turn, these differences may also explain the growth in employment of 
some domestic sectors in bubble economies, notab ly the construction s ector. Those countries 
that are more severely affect ed by the crisis a nd likely to undergo a longer readjustment 
process, especially as far as employment is  concerned, because of the construction sector 
workers who will have to be redeployed to other sectors. Other countries which suffered collateral damage through trade and integrati on in the global supply chain will probably 
recover faster. 
EN  EN  58 
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EN  EN  59 
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