Communication from the Commission - Raising productivity growth: key messages from the European Competitiveness Report 2007 {SEC(2007)1444}
Date: 2007-10-31
Institutions: European Commission
Subjects: European industrial area, activity report, competitiveness, coordination of EMU policies, economic growth, processing industry, productivity, trade policy

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 31.10.2007 
COM(2007) 666 final 

COMMUNICATION FROM THE COMMISSION 

Raising productivity growth: key messages from the European Competitiveness Report 
2007 

{SEC(2007)1444} 

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COMMUNICATION FROM THE COMMISSION 

Raising productivity growth: key messages from the European Competitiveness Report 
2007 

1. 

INTRODUCTION 

This Communication presents the main messages from the European Competitiveness Report 
20071. Its focus is on productivity, which is the key driver of competitiveness and welfare in 
the long term. 

The  Competitiveness  Report  was  redesigned  in  2006  to  contribute  to  a  solid  analytical 
underpinning  of  the  microeconomic  pillar  of  Lisbon  strategy,  while  continuing  to  explore 
more specific aspects of the competitiveness of the European industry. 

This  year,  after  a  review  of  recent  developments  concerning  growth,  productivity  and 
employment, both at the level of the EU and in the main economic sectors, the Report reviews 
microeconomic  reforms  under  the  Growth  and  Jobs  agenda  from  the  point  of  view  of  their 
potential  to  raise  productivity  and  focuses,  more  particularly,  on  skills  as  a  competitiveness 
factor. The Report assesses the relative strengths and weaknesses of European industries and 
concludes with a long term vision of European manufacturing so as to put the emerging trends 
and challenges in perspective and to check whether existing policies are consistent with them. 
The analysis in this report is underpinned by improved data availability – longer time series 
and  the  publication  of  the  first  EU  KLEMS2  datasets  –,  which  allows  new  insights  to  be 
drawn. 

2. 

OVERALL COMPETITIVENESS PERFORMANCE 

A widespread improvement of the European economy 

The  strength  of  the  economic  recovery  in  Europe  is  larger  than  was  expected  last  year:  the 
EU’s  real  Gross  Domestic  Product  (GDP)  grew  by  3.0%  in  2006  -  the  highest  growth  rate 
since the year 2000. This improvement was supported by an acceleration in both productivity 
and  employment  growth.  The  enhanced  productivity  growth  is  underpinned  by  stronger 
growth in total factor productivity (TFP) (see box). 

This improvement is widespread; nearly all the new Member States and Member States with 
relatively low GDP per capita and productivity levels are catching up in terms of economic 
and productivity growth. The pick-up is visible across the different sectors of the economy. 
Particularly,  the  role  of  services  sectors  in  EU  GDP  growth  is  substantial,  also  given  their 
large weight in the total economy. All manufacturing sectors, with the exception of tobacco, 

1 
2 

Commission Staff Working Paper SEC (2007), European Competitiveness Report 2007. 
The EU KLEMS Growth and Productivity Accounts database research project aims to create a database 
on  measures  of  economic  growth,  productivity,  employment  creation,  capital  formation  and 
technological change at the industry level for all European Union member states from 1970 onwards. 

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grew substantially faster in 2006 than in the previous five years, thus contributing to the up-
turn in overall EU growth. 

The EU-US productivity gap has started to diminish… 

Data on the developments in the European economy in comparison to the US, which is taken 
as a benchmark of frontier productivity performance, confirm that the labour productivity gap 
vis-à-vis  the  US  shrank  in  2006,  after  widening  continuously  over  the  last  decade.  This  is 
significant, not least since more recent data, available only for manufacturing3, confirm that 
this development continued in the first half of 2007. 

In  assessing  this  encouraging  development,  one  should,  however,  not  lose  sight  of  the  fact 
that  labour  productivity  levels  in  the  US  remain  some  39%  higher  than  in  the  EU  when 
expressed  as  GDP  per  person  employed  and  26%  (2005)  higher  in  terms  of  GDP  per  hour 
worked. Analysis shows that this is mainly caused by differences in total factor productivity 
(see  box),  and  secondarily,  in  the  quality  of  human  capital4.  Moreover,  a  large  share  of  the 
catching-up seems due to cyclical factors, including a deceleration in US productivity growth 
in 2006. 

Sector  level  data  give  some  additional  insights  into  the  comparison  of  productivity 
developments  between  the  EU  and  US.  For  instance,  they  confirm  that  the  lower  labour 
productivity  growth  in  the  EU  economy  in  the  last  decade  is  mainly  due  to  the  poorer 
aggregated performance of the individual EU sectors and not to the sectoral composition of 
the economy (industry mix), which, actually, is slightly favourable for the EU. In particular, 
the  EU-US  growth  differential  reflects  poor  services  sector  performance  in  the  EU, 
particularly in retailing, distribution, and financial and business services. 

Box:  The role of Total Factor Productivity 

Total factor productivity is the main source of the productivity gap between the EU and the 
US.  It  is  the  part  of  productivity  growth  generated  by  intangible  factors  such  as  technical 
progress or organisational innovation instead of increased use of inputs, such as capital. This 
makes  total  factor  productivity  the  most  comprehensive  measure  of  the  efficiency  of  an 
economy. 

At  sector  level,  an  analysis  of  structural  relationships  among  the  different  performance 
indicators  suggests  that  total  factor  productivity  growth  is  the  key  driver  of  sectoral 
performance,  whether  this  is  expressed  in  terms  of  growth  of  value  added,  labour 
productivity, international trade, foreign direct investment or employment growth. 

Among  the  policies  most  relevant  to  total  factor  productivity  growth  are  those  designed  to 
foster technological progress, innovation and increased investment in R&D, the use of ICT, 
competition and product market reform. These policies are at the heart of the microeconomic 
pillar  of  the  Lisbon  strategy,  suggesting  that  the  ongoing  reform  process  can  contribute 
significantly to boosting total factor productivity and economic growth. 

…with some indications that also factors other than the favourable cycle may contribute 

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Manufacturing and the whole economy display very similar, and synchronous, patterns of productivity 
growth even if the productivity growth rates of the former are generally higher. 
However, the EU uses more capital per worker which reduces the labour productivity gap with the US. 

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While  the  reasons  underpinning  the  widening  of  the  EU-US  productivity  gap  over  the  last 
decade were structural, it is still too early to say whether the recent narrowing of the gap is the 
product of purely cyclical developments or the first manifestation of a new pattern. 

Analysis by the Commission services5 indicates that, while the upturn is essentially cyclical in 
nature,  it  is  possible  that  there  is  also  a  structural  component  linked  with  past  structural 
reforms  enacted  by  the  EU  Member  States,  especially  in  the  labour  market.  Sectoral 
productivity  gains,  such  as  in  network  industries,  and  the  increase  in  the  skill  levels  of  the 
work  force  would  also  support  such  a  view.  Such  a  structural  improvement  in  productivity 
can be expected to become visible in the future as the effects of recent reforms – particularly 
those generated through the renewed Lisbon strategy – start feeding through more strongly. 

3. 

DRIVERS OF COMPETITIVENESS 

Productivity and the microeconomic pillar of the Lisbon agenda 

Raising the long–term economic growth potential by increasing productivity growth is one of 
the fundamental objectives of the renewed Lisbon strategy and an important response to the 
challenges of globalisation, ageing, the rapid pace of technological progress and the need to 
combat climate change. The microeconomic policy pillar of the Lisbon strategy covers many 
of the policy areas most relevant to enhancing productivity, such as: 

–  Increased investment in R&D can significantly increase productivity growth, especially if 
the elements of the knowledge triangle, R&D, innovation and education and training, are 
well integrated, including as concerns the provision of scientific personnel. 

–  ICT  investment  brings  high  returns  in  terms  of  productivity  gains  when  accompanied  by 

appropriate organisational changes and investments in skills. 

–  Increased  competition  in  open  markets  with  an  adequate  regulatory  framework  tends  to 
have  positive  effects  on  productivity  and  employment  by  improving  allocative  (static) 
efficiency, productive efficiency (work organisation), and dynamic efficiency (innovative 
products  and  processes).  However,  the  effect  of  competition  on  innovation  is  more 
ambiguous,  depending  as  it  does  on  market  structures  and  on  the  distance  of  market 
participants  to  the  technological  frontier.  Competition  is  of  particular  importance  for  the 
countries and industries close to the technological frontier for maintaining their edge. 

–  Stimulating  entrepreneurship  by  easing  the  start  and  growth  of  companies  as  well  as 
enhancing conditions for SMEs to use the potential of the Single Market allows new ideas 
to  be  transformed  into  value-added  products  and  services  and  these  to  be  traded 
internationally, with an important positive effect on productivity. 

–  Significant  increases  of  output  and  consumption  can  also  be  achieved  by  reducing 
unnecessary regulatory costs such as overly heavy administrative burdens, thereby freeing 
resources for more productive uses. The benefits will be felt particularly by SMEs, where 
such overheads represent a higher proportion of their total costs. 

5 

See  EU  Economy  Review  2007  and  related  Communication  "Moving  Europe's  productivity  frontier", 
forthcoming. 

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–  Reducing  corporate  tax  barriers  and  related  compliance  costs  and  facilitating  the 
restructuring of group companies foster the functioning of the Single Market. Adopting a 
Common Consolidated Corporate Tax Base would also positively impact on the EU GDP. 

Accelerated  adaptation  requirements  call  for  mechanisms  facilitating  transition  between 
different jobs. More generally, EU cohesion policy plays in this context an important role, by 
contributing  to  a  better  functioning  of  the  internal  market  and  supporting  productivity  and 
competitiveness  improvements  in  the  countries  and  regions  whose  development  is  lagging 
behind or are affected by industrial restructuring. 

An  assessment  of  recent  reforms  by  the  Member  States  in  product  and  services  markets  as 
well  as  with  regard  to  better  regulation  and  SME  policy  reveals  that,  in  general,  notable 
progress has been made with reforms in these areas, although more still remains to be done. 
This progress is not yet fully reflected in the data measuring economic performance. 

Coordination matters 

The governance of national reform policies in the EU is an important element of the Growth 
and  Jobs  Strategy.  There  are  several  reasons  why  the  coordination  of  Member  States’ 
economic reforms may bring additional benefits. While countries can learn from each other, 
joint  efforts  and  coordination  can  stimulate  the  drive  to  reform  and  overcome  national 
resistance against reforms. Most importantly, coordinated implementation may create benefits 
which would be absent, had the reforms been pursued unilaterally. 

The  empirical  analysis  of  international  spillovers  from  national  reforms  presented  in  the 
Report  confirms  that  coordinated  action  produces,  in  many  cases,  benefits  which  are 
substantially  superior  to  those  derived  from  acting  alone.  For  instance,  roughly  half  of  the 
potential increase of GDP generated by Member States' achievement of their R&D intensity 
targets would result from cross-border knowledge spillovers. 

Additional  benefits  accrue  from  complementarities  between  policies.  As  an  example, 
increasing skills and R&D raises real wages, which in turn should increase participation rates. 
Also, the reduction of administrative burdens, through lower mark-ups, has strong synergies 
with the employment target by helping to reduce equilibrium unemployment. 

Trade openness and productivity go together 

Increasing trade openness (trade volumes compared to GDP) and Foreign Direct Investment 
(FDI) stocks illustrate the acceleration of globalisation. While in general global market shares 
have  been  redistributed  in  favour  of  the  emerging  economies,  the  EU27  has  been  relatively 
successful  in  maintaining  its  position.  Between  1996  and  2005  the  share  of  EU  27  in  total 
World exports decreased from 23.3 to 22.0%, the US share decreased from 19.1 to 15.2% and 
Japan's from 13.7 to 10.5%.6 7 

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Excluding intra-EU trade. "World" refers to an aggregate of countries which accounts for 86% of total 
world  exports  (in  order  to  assure  comparability  of  the  shares  across  time  by  keeping  the  reporting 
countries stable). 
These  results,  taken  in  isolation,  are  prone  to  over-interpretation,  i.e.  losses  of  export  market  share 
could lead to the conclusion of a competitiveness decline where other factors (such as higher growth or 
consumption) might be in play. 

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Trade performance of the EU in services was encouraging: the EU-158 more than doubled its 
export  growth  in  services  between  1996  and  2005,  whereas  its  imports  grew  less  fast.  As  a 
result, over a nine year period the EU-15 almost quadrupled its services trade balance. In the 
same period the United States services trade balance diminished by 26% to 50bn€ (the EU-25 
balance in 2005 was 56.9bn€). In contrast, Japan reported a services trade deficit of 30bn € in 
2003. 

Too  often,  globalisation  is  associated  with  job  losses  in  sectors  that  lose  out.  The  resulting 
social  costs  and  anxiety  are  real  and  call  for  appropriate  policy  response.  However,  they 
should not lead to overlooking the strongly positive effects that openness and integration into 
world markets have on a country’s economic performance. The Report illustrates the positive 
relationship  between  aggregate  productivity  and  globalisation,  using  trade  openness  as  a 
proxy,  and  summarises  the  empirical  findings  on  the  relationship  between  productivity  and 
globalisation. 

The  causality  links  are  not  always  straightforward.  More  intense  import  competition  spurs 
productivity  which  leads  to  improved  competitiveness  and  higher  exports.  This,  in  turn, 
brings  further  efficiency  gains.  Empirical  work  presented  in  the  Report  underlines  the 
robustness  of  the  relationship.  This  illustrates  the  power  of  the  mechanisms  in  play: 
specialisation, scale effects, elimination of less efficient firms and a greater ability to absorb 
technological  advances  and  new  ideas  developed  in  the  rest  of  the  world.  Taken  together, 
these factors suggest that openness to trade can play an important role in raising productivity 
growth.  For  instance,  empirical  analysis  indicates  that,  on  average,  a  1%  increase  in  the 
openness  of  the  economy,  as  measured  by  the  ratio of imports to value added, results in an 
increase of 0.6% in labour productivity in the following year. These results suggest that both 
increased  intra-EU  trade  as  a  result  of  improving  the  Single  Market  and  ambitious  external 
policies – such as concluding the Doha Development Agenda, the new generation of bilateral 
free trade agreements, rebalancing the trade relationship with China, removing barriers to EU 
exports  and  a  stepped-up  market  access  strategy  –  hold  out  the  potential  of  significantly 
contributing to productivity growth in the EU. It should be underlined, however, that the full 
benefits of openness only accrue to economies that can easily redeploy factors of production 
between  firms  as  well  as  from  declining  to  growing  industries.  These  are  also  crucial 
preconditions for managing the difficult adjustment that will be necessary in specific sectors 
and  regions  that  have  a  significant  impact  on  the  public  acceptability  of  globalisation. 
Furthermore,  in  order  to  seize  the  advantages  of  openness,  the  protection  of  intellectual 
property rights on an international level is crucial. 

Skills upgrading as a competitiveness factor 

Skills  contribute  directly  to  international  competitiveness  and  productivity  since  a  better 
educated  workforce  augments  the  efficiency  of  labour  and  raises  the  absorptive  capacity  of 
firms  to  more  easily  integrate  new  technologies  and  ideas.  For  example,  empirical  research 
indicates  that  raising  the  average  duration  of  schooling  by  one  year  would  increase 
productivity  by  8  to  10%  in  the  long  run9.  Skills  upgrading  is  under  way  in  all  economic 
sectors, even in low-skill ones. Empirical analyses reveal that sectors employing a larger share 
of high or medium skilled workers exhibit higher productivity growth while a high share of 

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EU -27 or EU-25 services trade data are not available since 1996. 
Canton, E. (2007), Social returns to education: Macro-evidence, De Economist (forthcoming December 
2007) 

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low  skilled  workers  in  a  sector  exerts  a  negative  influence  on  productivity  growth. 
Furthermore, skills matter for the speed of convergence towards the technology frontier. As 
might  be  expected,  convergence  is  faster  in  high  skill  intensive  industries.  Finally,  a  higher 
share of high and medium skilled workers spurs growth of exports. 

At the level of individual industries, the analysis demonstrates that the skill upgrading process 
within  industries  contributes  more  to  the  increasing  demand  for  highly  skilled  workers  than 
shifts of employment between sectors or industries. Nonetheless, there is also a general shift 
of  employment  away  from  low-skill  intensive  industries  towards  medium-  and  high-skill 
intensive industries, and this shift occurs across all groups of EU countries. 

Against  this  background,  skill  gaps  can  be  seen,  firstly,  as  an  adjustment  problem,  arising 
after  an  increase  in  demand  for  (or  a  decrease  in  the  supply  of)  a  certain  skill.  In  such  a 
situation the government’s role could be to smooth the transition process whereas there seems 
to be limited scope for strong sector specific policies. Secondly, where skill gaps are due to 
the legacy of the past, policies should focus on measures to help the economy to reach a better 
mix of skills. But addressing the skill mismatch is not just a task for the government. Many 
more  European  enterprises  will  have  to  address  the  skill  mismatch  in  their  corporate 
strategies. 

The efforts within the growth and jobs strategy to foster the accumulation of human capital, 
such as through a reduction in the number of early school leavers and the encouragement of 
academic  enrolment  in  mathematics,  science  and  technology,  should  support  the  increasing 
demand  for  skills  connected  to  skill-biased  technical  change.  Higher  employment  rates, 
notably of women, will also help to reduce the skill gap. Whereas education policies mainly 
remain  a  national  competence,  the  education  of  top  researchers  in  the  EU  will  benefit  from 
EU-wide  initiatives  such  as  the  development  of  the  European  Institute  of  Technology  and 
increased mobility of researchers. 

4. 

COMPETITIVENESS OF EUROPEAN INDUSTRIES 

The state of play 

Overall,  the  competitive  performance  of  European  industries,  where  SMEs  play  a 
considerable role, is strong. However, this masks a highly variable performance at the level of 
individual  industries,  both  across  countries  and  between  sectors.  For  the  period  since  1995, 
the  EU  exhibits  low  performance  in  terms  of  the  growth  of  value  added,  labour  and  total 
factor  productivity,  while  appearing  quite  healthy  in  terms  of  trade  performance.  Foreign 
direct  investments  expand  rapidly  in  each  direction,  with  outward  foreign  direct  investment 
growing more strongly. 

Assessing the relative strengths and weaknesses by sector, the sectors of mining and, among 
manufacturing industries, the production of leather & footwear, clothing, textiles, nuclear fuel 
and tobacco are those presenting a decline not only in employment but also in value added. 
Conversely, apart from water transport, all the industries with the highest rates of value added 
growth in the European Union – communication equipment, office machinery and computers, 
as well as telecommunications and computer related services – relate to the new information 
and communication technologies. 

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Compared  to  the  US,  the  biggest  gap  in  sectoral  performance  can  be  found  in  the 
manufacturing  of  office  machinery  and  computers,  wholesale  and  retail  trade,  air  transport, 
and the financial services. The latter three services sectors all appear to be rather sensitive to 
economies  of  scale  and  are  likely  to  benefit  from  the  larger  integrated  markets  in  the  US. 
Conversely,  the  EU  shows  pockets  of  higher  growth  in  selected  areas  of  high-tech 
manufacturing, particularly pharmaceuticals, and the network industries. 

Higher service content in European manufacturing 

Taking the long view10 indicates that Europe, whilst still being among the richest regions on a 
GDP  per  capita  basis,  will  be  overtaken  by  some  of  the  emerging  economies  in  terms  of 
overall  economic  size.  This  is  due  both  to  demographic  factors  and  the  relatively  strong 
growth  in  productivity  as  the  emerging  economies  catch  up.  By  2050  Asia  will  most  likely 
have become the most important market and pole of growth. 

The  analysis  shows  that  over  the  next  decades,  manufacturing  is  set  to  continue  to  play  a 
major role in the EU economy, contributing directly to welfare and productivity growth and 
generating significant demand for research and high skilled services which spills over to the 
rest of the economy11. At the same time, it is expected that manufacturing, defined in a narrow 
sense, will directly employ less people than today and will represent a relatively smaller part 
of the whole economy. 

The trends on employment and relative size must not be confused with stagnation or decline. 
To a certain extent, they reflect the effect of differences in productivity growth. Additionally, 
these  trends  are  of  a  statistical  nature,  i.e.  the  fragmentation  of  the  value  chain  results  in 
activities  previously  classified  as  manufacturing  shifting  to  the  services  sector.  The 
manufacturing  industry  with  its  related  service  sectors  will  remain  a  key  pillar  of  the  EU 
economy  in  the  21st  century,  not  only  because  of  its  continued  economic  weight  but  also 
because it is an integral part of the innovation system of a modern economy. 

The  analysis  suggests  that  the  most  successful  of  these  firms  will  act  as  leaders  of  global 
value networks, providing planning, marketing and R&D services and integrating components 
from  outside  sources.  Thus,  the  service  content  of  manufacturing  and  also  of  the  whole 
package  sold  with  the  final  product  is  likely  to  increase  further.  This  creates  new  revenue 
opportunities  and  valuable  long  lasting  relationships  with  customers;  however,  it  also 
increases  the  potential  for  outsourcing.  Hence  the  existing  statistical  classifications  of 
activities in manufacturing and services, respectively, will become increasingly less relevant 
and new types of analysis of company and market developments will become necessary. 

It  is  not  clear  to  which  extent  the  emerging  technologies  (electromechanical  microsystems, 
advanced materials, bio and nanotechnologies) will realise their perceived potential, although 
it  must  be  underlined  that  their  potential  is  very  significant  and  could  make  a  major 
contribution  to  productivity  growth  and  innovation  over  the  next  decades.  It  is,  however, 
likely  that  managing  knowledge  will  become  more  important  and  the  successful  business 
models of the future will be those that perform better in this respect. Intellectual capital and 
intangibles  are  likely  to  become  ever  more  important.  This  will  probably  lead  to  more 

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On the basis of a literature review of foresight and futures studies, the backbone of which is three recent 
EU-wide foresight projects on the future of manufacturing in Europe FutMan, ManVis and Manufuture. 
One Euro of manufacturing goods sold requires between 22 (Netherlands) and 36 cents (Germany) of 
inputs from market services (2000 input-output data). 

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complex organisational approaches, with a high degree of collaboration and networking with 
suppliers, customers, competitors and an increased use of external sources of knowledge, such 
as research institutions and universities. 

These developments will put increased emphasis on the possession of skills. In particular, soft 
skills such as team working, learning, sharing and communicating, providing a service as well 
as a good and the ability to think in an interdisciplinary way will become crucial, especially 
for SMEs wanting to participate in the global networks. These skills may become necessary 
even for serving local markets. 

Dynamic specialisation, i.e. when given competitive strengths not only persist but tend to be 
reinforced,  suggests  that  Europe  will  maintain  strong  positions  in  many  medium-high  and 
high technology sectors (chemicals, including pharmaceuticals, mechanical engineering, cars, 
aerospace,  embedded  electronics).  This  will  necessitate 
to 
continuously  expand  the  technological  frontier  in  these  industries  so  as  to  keep  competitive 
edge.  High  quality  products  in  traditional  sectors  may  also  be  strongholds,  where 
technological innovation together with design and marketing play an important role. 

important  R&D  efforts 

Much  will  also  depend  on  the  ability  of  European  firms  to  capitalise  on  the  opportunities 
represented by global challenges, such as ageing and climate change. Since Europe will need 
to address these challenges early on, there is a real opportunity for establishing lead market 
positions  in  products  such  as  those  linked  to  health  care,  convenience,  leisure  and 
entertainment and environmental technologies. 

The horizontal policy framework matters for manufacturing 

By taking a more quantitative, model based approach, it is possible to evaluate the impact of 
policies that aim at improving the general framework conditions for competitiveness and their 
relative importance in such a long term perspective. The results of such an approach depend 
strongly  on  the  specifications  and  assumptions  of  the  model;  however,  they  give  useful 
indications  on  the  direction  and  order  of  magnitude  of  the  outcomes  generated  by  policy 
changes.  The  key  determinant  of  longer-term  growth  and  productivity  is  the  degree  of 
openness  of  the  EU  and  world  economy.  Nevertheless,  other  structural  policy  reforms  can 
have important effects. 

The policies considered are upgrading skills, better regulation and less administrative burdens 
for  firms,  R&D  and  innovation,  a  more  competitive  Single  Market  and  environmental 
policies, in the form of improved energy efficiency. Their individual impact on GDP by 2025 
is in the range of 0.5-0.6 % (skills12) to3.0-3.5% (R&D), with the other structural policies in-
between. Their cumulative impact amounts to around 8% to 9%. 

Amongst the policies considered, R&D and innovation policies and strengthening the internal 
market  have  the  strongest  and  most  positive  impact  on  manufacturing.  Improving  the 
horizontal  policy  framework  will  help  slow  down  the  trend  decrease  in  the  relative  size  of 
manufacturing  in  Europe.  The  model-based  results  confirm  that  with  a  favourable  external 

12 

The  policy  modelled  is  the  achievement  of  the  targets  adopted  in  2004  for  2010  (10%  maximum  of 
early school leavers, at least 85% of 22 years olds with upper secondary education, 20% reduction of 15 
years olds with low reading literacy achieving , at least 12.5% participation in Lifelong Learning and 
15%  increase  of  S&T  graduates).  Their  economic  effect  will  increase  very  gradually  only,  as 
successive, better educated cohorts enter the work force. 

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environment  some  manufacturing  sectors  such  as  chemicals,  rubber  and  plastics,  combined 
machinery  and  equipment  could  approximately  maintain  their  present  shares  in  the  EU 
economy.  In  terms  of  the  EU  share  in  world  production,  in  the  absence  of  improved 
framework  conditions,  there  is  no  sector  where  the  EU  maintains  its  relative  importance  by 
2025. In the presence of the above-mentioned policies, sectors such as transport equipment, 
wood  and  other  manufacturing,  energy  carriers,  research  and  development  services, 
chemicals,  rubber  and  plastics,  transport  services  and  other  business  services  maintain  or 
almost  maintain  their  share  in  global  production.  This  analysis  confirms  that  the  economic 
reforms are especially important for sectors exposed to trade, such as manufacturing. 

5. 

SYNTHESIS 

The key conclusion of this Report is to underline the central role that productivity plays as a 
source for growth over the long term. The disappointing productivity performance of the EU 
over the recent past as well as the recent recovery is explained to a large extent by total factor 
productivity developments. This has clear policy implications, i.e. the importance of research 
and  innovation  as  well  as  training  and  education  policies  and  of  economic  reforms  that 
enhance the general business environment and facilitate structural change and re-allocation of 
resources.  Coordinated  action  in  these  areas  produces,  in  most  cases,  superior  benefits  to 
acting alone. A major driver for increased economic efficiency is competition, either through 
trade openness, a reinforced Single Market, especially in services, continuous liberalisation of 
network industries or product market reform. 

The future holds out the promise that the European manufacturing industry will continue to 
play  a  major  global  role  in  a  context  where  the  crucial  assets  will  be  knowledge  and  skills. 
The implementation of the policies and reforms referred to above will be central in realising 
this perspective. 

EN 

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   EN