Stark warning for Europe’s industry

Date: 27/06/1996

By Fiona McHugh

EUROPE's economic sun will continue to set unless urgent steps are taken to create an industry-friendly environment, warns a European Commission report due to be published before the summer break.

In a draft communication on European industrial competitiveness, the Commission paints a decidedly gloomy picture of a business sector running out of steam.

Next to Japanese and US firms, it says, EU companies compare unfavourably.

“On all the main indicators of business performance - profitability, market share and productivity - European industry has seen its position deteriorate relative to the US and Japan over the last ten years,” concludes the draft report.

It puts the iron, steel, clothing, and mechanical engineering industries at the bottom of the manufacturing class, while the plastics, pharmaceutical, rubber, chemical and food sectors are praised for good performances.

In a move likely to stir controversy among industry and union representatives alike, the report draws an empirical link between high redundancy costs and low employment rates.

“For every increase of one month in termination costs, the employment rate falls by nearly 2&percent;,” it states.

The Commission places most of the responsibility for Europe's competitiveness - or lack thereof - squarely on industry's shoulders, chastising EU firms for not embracing “best practice”.

But it acknowledges that governments are also at fault.

The Commission wheels out the usual suspects, blaming market rigidity, anti-competitive behaviour, and the high cost of labour, energy, transport and telecoms for the sluggish performance of European firms.

However, the report's emphasis is decidedly on the desirability of completing the single market, rather than on the need to restructure labour markets - the main focus of Jacques Delors' White Paper on Growth, Competitiveness and Employment.

With EU firms' production costs well in excess of those run up by rivals in the US and Japan, speedy liberalisation of the transport, energy and telecommunications sectors is a must, according to the Commission.

A three-minute call, for example, costs 50&percent; more in the EU's non-liberalised countries than it does in open ones, the report points out.

Western European labour is on average four times more expensive than it is in Eastern Europe, and air flights cost between 60&percent; and 79&percent; more than they do in the US.

Taxation is excessively high, causing huge unemployment, and enormous fiscal deficits are eating up investment money.

On the bright side, the Commission estimates that the liberalisation of the energy sector, due to begin next year, should reduce business costs by 8&percent; and save the Union something in the region of 5.8 billion ecu a year.

Its comprehensive study of the current state of play in Europe has been warmly welcomed by industry representatives, but some cast doubt on the Commission's ability to translate recommendations into action.

The fruit of over a year's work, the communication is decidedly long on diagnosis and short on remedial measures, they say.

“It is extremely positive that the Commission has put all of the major obstacles to a competitive European industry into a coherent policy paper,” says Geneviève De Bauw of Dow Europe. “Let us hope they can follow it up with concrete measures.”

But industry concedes that even if the report does nothing more than inject a sense of urgency into the slow pace of liberalisation, it will have done well.

The draft report drawn up by DGIII (industry) has now been circulated to other Commission departments and may be amended to take account of their comments before going to the full Commission for approval.