The importance of investment in knowledge, innovation, education and ICT as drivers of growth is also high on the agenda. In several Member States, the significant fall in investment in equipment and machinery partly explains the drop in productivity after the crisis. At the same time, higher investment in intangible assets such as R&D, ICT and training, will be needed to push up growth of total factor productivity and crowd-in investment. Member States need to ensure that capital is as efficiently allocated as possible. In the past, total factor productivity, which includes a number of factors such as innovation and a more efficient allocation of resources, contributed less to growth and productivity in the EU than in the United States. Structural issues affecting product, services, capital and labour markets are responsible for this subdued performance in Europe. Improving the interaction between university research and business development of products and services is crucial to boost competitiveness and growth. In the same vein, the creation of national platforms on digitising industry would help leverage the EU funds committed to this to deliver significant investments that will also strengthen the competitiveness of our economy.

Member States need to step up their efforts to implement the necessary reforms aimed at removing obstacles to investment that were identified in the context of the European Semester. Despite action taken by some Member States, in particular by euro area countries heavily hit by the crisis, progress to address barriers to investment has been overall uneven and more needs to be done. This concerns areas such as insolvency, public procurement, the efficiency and transparency of public administration or sector-specific regulations, as well as the functioning of labour and product markets. In particular, efficient and transparent public administration and effective justice systems are necessary to support economic growth and deliver high quality services for firms and citizens. In some Member States, barriers to investment may also include a high level of taxation and overly complex taxation systems, corruption, weak research and innovation frameworks, as well as difficulties in access to finance, particularly for SMEs. These reforms identified in the country-specific recommendations are necessary to sustain and increase investment levels in Member States, taking into account national specificities.

1.4 Opportunities for EU businesses to benefit from global markets and investment

Exports to the rest of the world have become an increasingly significant source of jobs for Europeans. Thanks to our companies' international competitiveness, more than 30 million jobs are now supported by exports outside the EU — two thirds more than 15 years ago — meaning exports now support almost one in seven jobs in Europe. These jobs are highly skilled and better paid than average. They are spread across all EU Member States,

and are both directly and indirectly linked to exports outside the EU. For example, 200,000 jobs in Poland, 140,000 in Italy, and 130,000 in the United Kingdom are linked to German exports outside the EU. French exports outside the EU support 150,000 jobs in Germany, 50,000 in Spain and 30,000 in Belgium. As a result, the benefits of trade are spread much more widely than is often realised, including considerable benefits for European consumers. Against the backdrop of first signs of trend reversals in global trade, there is a need to uphold openness and to facilitate the further integration of EU companies in global value chains, notably for service providers and SMEs.

The EU is well placed to use trade and investment policy to contribute to this objective and benefit companies, consumers and workers alike. The EU is the world’s largest exporter and importer of goods and services taken together. This scale makes the EU the largest trading partner of about 80 countries and the second most important partner for another 40. The EU should use this strength to benefit both its own citizens and people in other parts of the world, particularly those in the world’s poorest countries.

The ratification of the Paris climate change agreement will create further new opportunities for EU business. The agreement creates policy and investment certainty for EU companies operating in low carbon and low emissions sectors, not only in Europe but in the rest of the world. The EU and its Member States are the biggest contributors of public climate finance to developing countries. Together they provide around a third of public funding available for action to tackle climate change and account for almost half of the pledges in the Green Climate Fund. In the period 2014-2020, at least 20% of the EU budget will be spent on climate-related action. The EU funds the Global Climate Change Alliance, one of the world’s largest climate initiatives. To scale up support for the poorest and most vulnerable, the EU has launched a new phase, with an expected commitment of around EUR 350 million for 2014-2020. This will support least developed countries and small island developing states in adapting to the impacts of climate change. The EU and the Member States last year provided EUR 17.6 billion to help developing countries tackle climate change. This demonstrates the EU’s determination to contribute its fair share of the goal set by developed countries to provide USD 100 billion in annual finance to developing countries from various sources by 2020.

The EU’s attractiveness as an investment destination for both foreign and domestic investors needs to be increased. The EU share of global foreign direct investment flows fell from about 50% before the crisis to 20% in 2014. While foreign direct investment flows are driven by global developments and events largely exogenous to EU, inflows respond to a range of country-specific location factors, firm-specific factors and sector-specific factors that affect the investment climate and that can be directly affected by policy makers in the short and medium term.

2. Pursuing structural reforms

2.1. Creating jobs and enhancing skills

Member States need to invest more in creating supportive conditions for greater labour market participation, more quality jobs and effective training and upskilling.

Well-functioning, flexible, labour markets must be matched with enhanced skills and income support during work transitions, and welfare systems firmly anchored in strong social standards. Those Member States that pursued comprehensive labour market and social protection reforms prior to the crisis have been better able to support employment and preserve fairness during the economic downturn. Such reforms encompass flexible and reliable contractual arrangements that promote labour market transitions and avoid a two-tier labour market, comprehensive lifelong learning strategies, effective active labour market policies, and modern social protection systems. Other Member States have introduced reforms in this direction during the crisis, contributing to the increased job intensity of the current recovery.

In many Member States, the working-age population and the labour force continue to shrink, notably as a result of low birth rates, ageing, emigration and health-related exits from the labour market. Precariousness, segmentation of the labour market and their impact on productivity growth need to be addressed in this context to reduce their negative impact on internal demand and productivity growth. Moreover, equality of opportunities is key for social fairness. Increasing female labour market participation, closing unjustified gender pay gaps, improving the work-life balance of men and women, making further progress in the inclusion of disadvantaged groups and addressing discrimination of persons with a migrant background, are examples of how growth and social fairness go hand in hand. In this light, Member States need to ensure access to quality services and in-kind benefits, such as childcare, housing, healthcare and long-term care, education and training. Quality services and in-kind benefits contribute to increased labour market participation, notably for women, and to social inclusion. Housing policies also deserve attention as they can remove obstacles to geographical mobility at national levels, through targeted allowances or social housing programmes.

A number of Member States will need to put in place adequate structures for dealing with the influx of migrants including refugees beyond the immediate short-term needs. While there are clear economic and fiscal impacts, they are neither unmanageable nor sizeable from a macroeconomic point of view. The strategic challenge lies in a smooth welcome into hosting societies in the short term in a way that also addresses the longer term challenges to labour market and education policies and institutions and social systems. The ability to adjust policies and develop incentives and skills-building that promote labour market integration will have a direct bearing on the long-term sustainability of public finances. For instance, several Member States have developed strategies to facilitate the integration of migrants with previous experience and entrepreneurship abilities. These Member States have provided migrants with support to help them to adapt their skills and experience to local market conditions .

Despite recent progress more action is needed from the Member States to fight youth unemployment. 9 million young people have benefitted from the EU Youth Guarantee so far, a framework to improve school-to-work transitions, invest in young people’s employability and prevent the risk of social exclusion. However, Member States need to pursue the roll-out of the Youth Guarantee and enhance its effectiveness in order to reach out to the young and regions most in need. The Commission will mobilise all its instruments, has proposed additional funding for the Youth Guarantee and will come with a new youth initiative shortly. Moreover, almost four million students have already benefitted from the Erasmus programme. One in three young Erasmus beneficiaries has been offered a job by the companies in which they trained.

Member States need to focus on labour market relevance of skills as forecasts indicate a future shortage of people with vocational and training qualifications. For too many young people, initial vocational education and training remains a second choice and only a minority of workers are offered opportunities for further skills development. Modernising vocational education and training, including by promoting flexible learning pathways, will help people to develop the appropriate transferable skills throughout their lives. This requires close partnerships with the business, higher education and research sectors. The active involvement of social partners can lead to the development of apprenticeships in new areas covering various skills levels, which can be expected to address skills mismatches. At the EU level, the revision of the Blue Card directive aims at harmonising and clarifying the legal framework to attract high skilled third country nationals, while the Skills Guarantee underlines the need to assess specific needs for third country nationals.

Modernising education and training is necessary to equip people with better skills, ranging from basic skills in numeracy and literacy to entrepreneurial and digital skills. Educational attainment indicators kept improving in 2015 and the early school leaving rate has declined in most Member States, reaching 11%. Yet, early school leaving rates are higher for Roma pupils and those with a migrant background, particularly foreign-born pupils. Tertiary education attainment has also been consistently and significantly increasing, standing at 38.7% in 2015, with 17 Member States above the Europe 2020 headline target of 40%. Still, by international standards, too many Europeans acquire only a low level of basic and digital skills. This puts Europe at a competitive disadvantage in a fast-changing global economy. Nurturing skills is essential to drive upward convergence and sustain the European social model, while fostering greater entrepreneurship and innovation capabilities. The New Skills Agenda for Europe puts a particular emphasis on supporting adults who have not reached upper secondary with the opportunity of assessing their skills level, providing them a new training opportunity and validating the skills acquired.

Effective social dialogue is crucial for a well-functioning social market economy. Better performing Member States tend to have a more strongly established social dialogue.

The success of social dialogue is dependent on a number of factors, including the willingness and capacity of different partners to engage and work towards solutions, for example where it concerns wage setting. The engagement of social partners at EU and national level is crucial for striking the right balance when designing and implementing economic and social policies in a comprehensive and forward-looking manner.

Member States should, together with social partners, and in line with national practices, make sure that their wage-setting systems are effective in delivering both job creation and real income increases, and for that adjust better to changes in productivity over time. In a number of Member States, developments in wages do not sufficiently follow productivity developments. This may lead either to an erosion of competitiveness or, in the case of too modest wage developments, to weaker aggregate demand and growth.

This may also discourage productivity gains, research, development and innovation and investment in human capital aimed at improving skills. It may also distort incentives for resource reallocation towards sectors with higher value added and thus hinder further structural change of the EU economies to make them more competitive. It is important to ensure that differences in skills and divergences in economic performance across regions, sectors and companies are into account. When setting minimum wages, Member States and social partners should consider their impact on in-work poverty, job creation and competitiveness.