Blog: European Competitiveness – Undramatic Drama?

With the European Union’s competitiveness not at its best, the need to boost innovation-driven economic growth is back on the agenda. In the meantime, the need for a dramatically new approach compared to the past seems to be becoming increasingly clear. Genuine innovation-led growth is not about quantitative growth, but about qualitative growth that reconciles societal needs with the limits of our planet. This new approach could be the origin of the way competitiveness is perceived and understood in the future, and the EU should be no exception.

Some 12 years ago, the powerful yet startling phrase that shocked the European public and the world – “will defend the euro whatever it takes” – left the lips of Mario Draghi, then European Central Bank President, who was known as Super Mario after this unprecedented and courageous move. In September 2024, Draghi also presented a report that sought to expose the decline in European competitiveness with unvarnished honesty. Draghi’s re-emergence indicates that economic integration has once again reached a ‘whatever it takes‘ moment.

The central message of the report is that the European Union’s innovation and productivity performance is falling far short of expectations and is slowly being overtaken by its competitors. Barely a month after the publication of the report, French President Emmanuel Macron said that the pessimistic tone of the study is absolutely right, that the European Union as a whole is at great risk, that we are at a very important moment, because the growth models of the Member States have been showing signs of fizzling out and beginning to collapse.

Competitive downturn: undramatic drama

The European Union is in an atmosphere of competitiveness agony. The countries that serve as the EU’s driving force are on a deteriorating competitiveness trajectory. For example, the 2024 edition of the IMD Competitiveness Yearbook, which ranks 64 countries, shows that from 2020 to 2024, Germany has fallen from 17th to 24th place, Finland, a leading innovator, from 13th to 15th, and the Netherlands from 4th to 9th. France has moved up one place (from 32nd to 31st), while Italy, the third largest economy in the European Union, has moved up two places (from 44th to 42nd). The United States (US), on the other hand, has remained largely at the bottom of the TOP10 (9th and 10th respectively between 2020 and 2023, and slipped to 12th in 2024, while still maintaining a gold medal position in the 64-country ranking).

There is a growing range of indicators showing the loss of social and especially economic space and the weakening innovation dynamism of the European continent. Europe is losing the technological battle against its main competitors, one of the manifestations of which is the deteriorating total factor productivity index. Of the world’s 10 largest companies, not a single European is to be found, and, in fact, of the 500 largest companies in the world since 1975, 26 were born in the US, while only 3 were based in Europe. Even in the pre-COVID-19 peace years, Europe invested only a tiny fraction of its total investment in AI research (38% of venture capital investment in the US, compared to 48% in China in 2017). Europe has a much smaller share of active innovators compared to the US. Europe’s largest companies are in many respects outperformed by large US companies. For example, if we look at the enlarged group of countries that make up the European Union plus Norway, Switzerland and the United Kingdom, compared to large companies in these countries, US competitors spend almost twice as much on R&D, have one and a half times the investment rate and 2.5 times the market capitalisation.

Nothing new under the sun

Despite the fact that the proposals to boost European competitiveness have been known for years, meaning that there is in principle no obstacle to improving it, the EU’s competitiveness is deteriorating spectacularly. We are therefore dealing with a Chekhovian paradox – remember that in his play, the three sisters were going to Moscow, which was no obstacle, but they stayed.

The challenge has been known for decades: European countries can only succeed if they pool their technological and innovation potential and align it towards common strategic goals. This was said in 1987. In essence, the task remains the same today, especially in the light of the failure of the Lisbon Strategy’s objective of making the EU the world’s most competitive knowledge economy by 2010. The Innovation Union Competitiveness Report 2013 also highlighted that, while global competition is intensifying, Europe needs a greater strategic focus. In the first half of the 2010s, a series of papers were produced that set out policy recommendations for EU policy makers to help the European economy move towards an innovation-led economic growth model. For example, the INNO-Grips project between 2010 and 2013 aimed to provide policy advice on how to develop innovation policies at different stages of the business cycle, how to promote fast-growing innovative small and medium-sized enterprises, how to boost service innovation, how to understand and boost disruptive innovation, how to stimulate a specific innovation climate in the public sector, etc. And of course, a tremendous amount of energy and resources have been invested in the Framework Programmes to bring the innovation-based growth model to life, but the challenge outlined above remains, and the EU’s competitiveness has been further weakened despite the Europe 2020 strategy’s priority of growth based on innovation, sustainability and a more inclusive society. The 2018 European Innovation Scoreboard report also showed a capacity to innovate that fell far short of potential and expectations. While the 2022 edition already mentioned China, which is fast catching up, the 2024 report shows that China has already overtaken Japan in terms of innovation performance and has caught up with the EU.

If one compares the various policy recommendations on this subject over the past decade and a half, it is easy to get a feeling of déjà vu. Clarification of the entrepreneurial framework, dismantling over-regulation, revitalising R&D and innovation investment capacities, systemising research cooperation, empowering SMEs, developing human capital, etc. are the general recommendations that have been put forward time to time, with, of course, a variety of additional methods (innovation vouchers, R&D tax credits, various training programmes, innovation laboratories, clusters, etc.). It is no coincidence that the Draghi report, or the recent comprehensive analysis by the Friedrich-Ebert-Stiftung and the Vienna Institute for International Economic Studies (wiiw), come to similar conclusions. In other words, it is not that the professional commitment of the academic community has not been disciplined enough in recent times; rather, it is that the national and supranational political spheres have simply been reluctant to take up and implement the various programmes and advice in a meaningful way. The main victim of these processes has been European competitiveness.

The following quote is an apt description of the current situation: ‘The perspectives and future policy agendas in Western Europe must be dramatically different from those of the past two decades or more in order to address the changed circumstances. Without new political agendas, the future of Europe’s political economy is highly doubtful, as the quantity and quality of the emerging tensions are likely to be too much for the existing structures to bear. The scale of the internal and external challenges facing those seeking new agendas calls on decision-makers to bring all their political and intellectual resources and knowledge to bear to ensure that we can expect even modest success.” The piquancy of the matter is that this was formulated in 1985 by Carl F. Pinkele, a renowned polyhistor from Ohio Wesleyan University, who published a volume entitled Europe at the Crossroads in collaboration with Stefan A. Musto, an economist-sociologist who was also deeply involved in the issues of European integration, and a professor at the Technical University of Berlin (see Pinkele – Musto, 1985:xx).

And indeed, the multiplying crisis phenomena of our time (polycrisis) (e.g. runaway inflation, demographic challenges, health crises, the historic rise in public debt, the migration crisis, climate change, etc. ) calls for a dramatically new approach, a more radical restructuring of the established institutional architecture and process complex, otherwise not only the European Union but also modern civilisation will be steered towards a serious and irreversible developmental impasse. All this calls for more innovation, which requires an understanding of the true nature of innovation.

Innovation-led growth: can innovation be learned?

What is “innovation”? Since prehistoric times, there have always been innovations, developments, discoveries, combinations, inventions, which nobody measured, nobody categorised, but were applied when something proved useful. Perhaps Francis Bacon was the first (16th century) to systematically address the need for and importance of innovations, especially technical innovations. The world history of innovation was analysed in Lewis Mumford’s influential The Myth of the Machine (1967), which is significant for its account of the interactions and long-term consequences of individual innovations, including unintended and unpredictable side effects.

In the literature, more emphasis has been placed on innovations that enhance economic growth and productivity, whereas nowadays, in addition to these quantitative results of innovation, qualitative innovations have become very much valued. So the big question is how do we measure innovation, how do we measure its quantitative and qualitative impact? Economists like to analyse everything by measuring, as if the famous quote by Lord Kelvin (‘If you cannot measure, your knowledge is negligible’), which is still inscribed on the wall of the University of Chicago, were ringing in their ears. The profession tends to associate good innovation performance with a country with a high number of patent applications. Here we simply recall that many patented innovations have subsequently proved to be irrelevant or even extremely harmful. Just think of Thomas Midgley’s Freon, which led to hundreds of patents of one kind or another, but which depleted the Earth’s ozone layer. But then there were the never-patented innovations that changed our lives dramatically, such as the famous life-saving technique, the Heimlich manoeuvre, Tim Berners Lee’s Internet, Willem Kolff’s first artificial kidney (dialyser), Nils Bohlin’s three-point safety belt, or Jonas Edward Salk’s polio vaccine that protected millions of children. That is why the part of the Draghi report that says that the EU is still strong in patenting (p. 230) is not in itself very telling. The significance and existence of cultural and social innovations also seem to be put in brackets by the profession (e.g. Counterpoint, which allowed music to be united, or human rights enshrined in the constitution were hugely important innovations). If we add to this the fact that tackling climate change actually requires us to fundamentally reorganise our capitalist system based on the imposition of quantitative growth, i.e. to move towards qualitative growth/development, it is clear that instead of innovation-based growth, it would be better to use innovation-based development along a lower growth path. To this end, it must be made clear that the view that modern society can solve problems through new technological innovations (the technological merry-go-round) is wrong, because they have always led to new types of problems, the ability to solve them under existing structures and processes is more questionable than ever.

Concluding remarks

This leads us to a completely different ontological framework, if you like, to the dramatically new approach mentioned above, in which the brigade of policy and academic work would not be the analysis of GDP-based competitiveness concepts, but the constant search for innovations that could democratically bring our social and economic needs into line with the limits and possibilities of our planet. All socio-economic actors need to recognise that the way our current socio-economic system operates, which is coded for over-consumption and over-production, simply does not allow for sustainable development, because any greening can only be achieved through further depletion of natural (critical) resources, while the pursuit of economic growth remains a ‘policy virtue’. What is needed is a realisation that in advanced economies we need to give up our standard of living, i.e. move to a level of growth based on innovations that ensure lower environmental impact and greater social equity, and that support primarily qualitative development, in a planned and democratic way.

If the EU’s story is not to be a competitiveness drama, but a reversible “drama without drama” along the Chekhovian line, we need to prioritise transdisciplinary research, which can better help to free modern society from its technological quixotic cycle. Then Chekhov may indeed be right: “Man becomes better when he is shown what he really is.”