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One may think that these lines are from the Mario Draghi report on the European competitiveness published in September 2024. Actually, they are from a book titled The Future of Europe and published almost 20 years ago. When browsing the books on the European integration online or in various libraries, we can come across even older documents trying to shed light on the problems of the European competitiveness. The problems of the business sector and corporations are not new and the report on competitiveness made by the Oeconomus Economic Research Foundation is special for two reasons. First and foremost, it tries to point to less researched but deep-rooted weaknesses of the European economies and integration. Also, it focuses on the main points of the Budapest Declaration adopted on 8 November 2024 which can be seen as an action plan following the Letta report published in April 2024 and the Draghi report published a couple months later.
Introduction
The main problems clustering around the EU can be summarized as follows. The single market is far from seamlessly connecting the member countries and it is very unlikely that market integration can ever overcome the home-bias effect. These issues can be felt in case of services to a large extent.
Private investment is greater in the EU but there is less access to venture capital than in the US. The EU is much dependent on an obsolete way of financing, namely financing by commercial banks. Banks are highly regulated which comes with two diverging effects: the share price performance is poorish but at the same time they can better withstand the financial turbulences. The EU has been spending less on public investment and research and development. As a consequence, there are major differences in the number of patents. To make things even more troublesome, the EU’s patents come with reduced applicability to the markets and business activities. New ideas never become innovations largely because of bureaucratic and regulatory reasons.
There are higher energy costs for companies but renewable energy sources are making a clear progress. Also, we can find good examples for becoming more sustainable and taking steps towards accomplishing the circular economy in the EU. What is causing immediate headaches, it the relatively low level of digitalization as the non-physical capital has been harnessed much less than in the US. Just over 25% of the population has digital skills above a basic level, and only 4.6% of the population aged 15 to 74 working as ICT specialists. The EU seems to be less prepared for the challenges of the 21st century.
The European labour markets have been historically less flexible and the employment rates are lower at the same time, the unemployment rates are higher than in the US. Also, a larger percentage of the working age population is lacking secondary education. Regulations still make the labour markets fragmented across the European countries.
At the moment, the EU is still an important trader of world economy and it has a large but declining share of global exports. Also, the EU maintains a hefty current account surplus. However, there is a worrying sign: when it comes to the goods produced the European countries face a declining degree of economic complexity. What is even more worrisome is the low and further decreasing total factor productivity. On the top of all that, businesses face complex regulations and lengthy processes. This results in smaller-sized companies which are less innovative, less digital and much less prepared for the age of AI and digitalization than the American counterparts.
In this report a number of other issues will be raised and apart from mentioning the symptoms only, with the help of eight problem points we try to draw the attention to the roots of the problem. Later we take a closer look at the points of the Budapest Declaration and at some points we come up with our own recommendations also. We truly hope that those who are in charge and maintain close ties with the decision makers will pay attention.
Competitiveness issues analysed
Problem Point No 1: Single market – There will be always a hidden cap on cross-border trade
In 2023 the single market turned to 30 and at this age it is considered to be one of the main pillars of the prosperity of the European integration. It is true but having a closer look reveals and important issue. Trade in goods has seen a remarkable increase but in case of trade in intra-EU services as a percentage of GDP, the ratio is 30 points lower than the in case of trade in goods (14.7% of GDP and 50% of GDP respectively). (Figure 1)
The chart can be referenced here: https://public.flourish.studio/visualisation/20532820/
The most developed economies are built on services although these are mostly non-tradable and there are insurmountable barriers to the trade with them. It seems to be clear that there are fundamental difficulties attached to the export of services within the EU, as compared with the export of goods. This is particularly worrying when we take into consideration the share of EU GDP that derives from services. In the US, the trade in services accounts for just 6.3% of GDP, with a difference between that and goods somewhat lower than the EU’s (12.7 vs 15.2 percentage points).
Enrico Letta in his spring report of 2024 clearly highlighted that only 25% of large businesses offer cross-border online sales within the EU. In case of the SMEs the ratio is even worse (less than 10 percent). Apart from the regulatory and administrative barriers that restrict the cross-border trade in services, the so-called home-bias effect raises a huge barrier. It can be felt in case of trade in goods as well and it means that domestic consumers are more willing to buy domestic goods and services than foreign goods and services. Based on the fact that very little progress has been made on mitigating the impact of this effect, the Oeconomus things that reaching full-swing integration withing the single market will be difficult to reach. (The is home-bias effect in the US markets as well but the elevated heterogeneity in the EU makes it more visible and insurmountable).
Problem Point No 2: Little access to private capital and investment
At first sight there are no problems in this respect as the EU countries ranked almost two percentage points above the US in 2022 in private investment as a percentage of GDP (19.3% and 17.5% respectively). Many textbooks confirm that investment (or gross fixed capital formation) is key to increasing an economy’s growth potential. Private sector investment measures how much companies and households contribute to the accumulation of capital to improve the level of output of goods and services in the future, which has a positive impact on the income level of the economy. When we take a closer look, we have to point to a number of challenges from the European Union countries.
First of all, not every single country has a good performance. Hungary was at the top in 2022 with 22.8% and Greece at the bottom with 10.1% as a percentage of GDP. The data shows a huge variation between the EU member states. (Figure 2)
The chart can be referenced here: https://public.flourish.studio/visualisation/20532761/
Secondly, in the light of the recent contractionary monetary policy, investment may come to a halt because of the rising cost and tighter availability of credit for financing new projects. In some countries the access to the Next Generation EU funds can serve as an offsetting effect in the coming years. As a consequence, it is unlikely that private investment as a percentage of total GDP will decline in the years ahead if these funds are used. In case of Hungary the opposite can happen as at the level of politics there are tensions.
If private capital and investment are raising less eyebrows, venture capital and investment in venture capital are clearly defined problem points. It counts to be a wisdom that investment in venture capital as a percentage of GDP is historically lower in the EU than in the US. At very early states, access to venture capital is of crucial importance for companies. Namely, they do not have a solid business track report that would enable them to access more traditional sources of financing, such as commercial banks. In 2021 investment in venture capital as a percentage of GDP in the US was over 0.7%. (Figure 3)
The chart can be referenced here: https://public.flourish.studio/visualisation/20532744/
In the EU, Estonia had the highest rate with 0.45 percent but the majority of EU countries could not reach 0.1 percent. In this light one cannot be surprised by the fact the unicorns, companies of a technological or innovative nature that begin as start-ups and end up with valuations in excess of €1 billion, seek financing in the US and simply forget about the EU where they find reduced investment in venture capital. According to Dealroom which is a global data platform for intelligence on startups, innovation, high-growth companies, ecosystems and investment strategies, there were 2,723 unicorns existing in the world and more than half of them had their headquarters in the US. Not the EU but China was second with 348 unicorns followed by the UK with 147 and India with 87. Germany and France represent the EU countries with fifth and eighth places with 64 and 38 unicorns.
Apart from this, it must be mentioned that there are issues with the sources of financing for the private sector as well. Household investment in capital markets has been historically much higher in the US than in the EU. Between 2015 and 2021, EU households held 32% of their financial assets in cash and deposits, compared with 13% for US households, which by contrast kept almost 50% of their savings in shares (equity) and investment funds. This difference in the allocation of households’ financial assets may help to explain, at least in part, why capital markets in the EU are less developed than those in the US, thereby depriving the European private sector of alternative sources of financing.
We can find other examples for the relative underdevelopment of European capital markets. We just have to look at the structure, which is much more fragmented than in the US. Private credit stemming from the banking sector as a percentage of GDP is 30 percentage points higher in the EU than in the US. (Figure 4)
The chart can be referenced here: https://public.flourish.studio/visualisation/20532662/
The negligible volume of market financing as a share of business financing in the EU restricts possibilities of financial diversification for companies and makes it more difficult to absorb macroeconomic shocks. We may think that it triggers the stronger performance of the European Union banks but actually we can detect weak performance of the share prices of them compared with their US counterparts. The lower rate of profitability is a problem also.
Another reason for Europe’s lack of competitiveness is the fragmentation of its capital markets. Despite the fact that European citizens have higher savings than, the US population, this money is still primarily held in bank accounts. Connecting the fragmented financial systems of EU Member States is crucial for European competitiveness, thus improving the Single Market. Unlike US residents, EU locals find it much more difficult to borrow or invest in other countries on the continent. In addition to removing barriers for market unification, harmonization of legislation would be a major development. The creation of a Capital Markets Union would diversify the sources of finance for companies, reduce transaction costs for cross-border investments, make the EU financial system more stable, resilient and competitive, improve the EU’s ability to attract capital, strengthen the global role of the euro and broaden investment opportunities for not just enterprises but also average citizens.
There is yet another reason for the deterioration in European competitiveness and this is clustered around the underdeveloped stock market. France is the only EU member state among the top five countries with the largest share of the aggregate equity market capitalization. There is not a single European country one among the top ten exchanges ranked by the number of listed companies. (Figure 5 & 6)
The chart can be referenced here: https://public.flourish.studio/visualisation/20534577/
The chart can be referenced here: https://public.flourish.studio/visualisation/20534788/
Based on this compilation, it is quite obvious that the week-performing, highly regulated and obsolete financial markets lay wrong foundations for the European business sector and the European citizens cannot be taken by surprise when the see their highly innovative and promising companies relocating to the US. Oeconomus thinks that there is a need for a stronger and more concentrated capital market. In its current for finance is not paving the way for businesses in the EU.
Problem point No 3: The EU is a patent desert
One highly ignored indicator of the decline in European competitiveness is the change in the share of Europe of patents published globally each year. As Figure 7 shows, Europe’s share has fallen by more than two thirds between 1995 and 2020. By contrast, the US share has fallen by only a third, while the other main economic competitor, China, has increased its share of patents published annually from one and a half percent to more than 60 percent.
The chart can be referenced here: https://public.flourish.studio/visualisation/20533249/
The chart can be referenced here: https://public.flourish.studio/visualisation/20531116/
According to the sixth point of the Budapest Declaration (see later) adopted on 8 November this year, the EU leaders committed to raising annual spending on research and development to 3 percent of GDP by the end of the decade. But as Figure 8 below illustrates, with the fulfilment of this criterion, Europe will still be a lagging competitor compared to South Korea, the US or Japan. The Oeconomus firmly believes that there are fundamental problems with the entrepreneurial spirit in the EU member states. This is confirmed by the new Global Entrepreneurship Monitor (GEM) European Regional Report entitled Research Insights for Policymakers. The report claims that early-stage entrepreneurial activity rates in Europe are typically and historically lower than in other global regions, especially North and South America. GEM tracks the ratio of adults that are starting or running a new business (referred to as Total early-stage Entrepreneurial Activity or TEA). On average, TEA levels in European countries are around two thirds of the levels in North America.
Entrepreneurial perceptions in Europe show much less deviation from entrepreneurial activity levels compared to other parts of the world. The EU entrepreneurial perceptions are not translated into comparable entrepreneurial activity levels. More should be done to translate perceptions into activities.
The chart can be referenced here: https://public.flourish.studio/visualisation/20531181/
The Oeconomus urges to change the course of education to make it a better facilitator of business. In its current form corporations are not flooded with business minded, innovative and forward-thinking would-be decision makers. Also, obstacles should be moved from the way of investing, experimenting and patenting.
Problem point No 4: Why the EU is losing ground in international trade?
The EU used to be mentioned as the largest trader of the world. This is no longer the case. The EU’s share of the world export market has fallen by five percentage points in the last 20 years (Figure 9). In addition, the current geopolitical context is exacerbating the decline.
The chart can be referenced here: https://public.flourish.studio/visualisation/20532465/
In the light of increased geopolitical tensions, the EU’s trade policy is to be reconsidered. The situation is even more complex when it comes to the US attitude towards free trade, tariffs and levies. The US had used to be the champion of free trade and multilateralism, under the Trump Administration the country changed course, the Biden administration has continued the trend and the new Trump Administration is likely to continue the course. A new chapter has been opened and the EU seems to be less prepared.
Also, the unquestionable pillars of the EU trade policy are being questioned by the member states recently. Two examples can be mentioned here. The autonomous trade measures adopted with respect to Ukraine, which is benefitting from the suspension of import duties, quotas and trade defence measures. The EU turned to this step as a way of showing its implacable support for Ukraine amid Russia’s unjustified military aggression, but it has started to create tensions among EU farmers, who are protesting, particularly in the eastern part of the EU. Also, the increased tariffs on Chinese-built EVs caused tensions in the bloc as Germany, Hungary, Slovakia voted clearly against the measure and voiced scepticism in general.
There are growing problems with what the EU countries try to export. When we take into consideration Economic Complexity Index, it is quite clear that products stemming from the EU countries have been slowly but steadily losing economic complexity for decades. At the same time, we have seen very pronounced improvements in countries such as South Korea, and China. When browsing the Atlas of Economic Complexity, it turns out that in 1995 the EU countries like Germany, France, Italy, Spain, and the Netherlands had much higher scores than in 2021. It means that these leading exporters are exporting less and less competitive products. Meanwhile the largest competitors at the world stage have made huge efforts and by now the South Korea are competing with Germany, and China is competing with France, and Italy. It must be mentioned also that many overemphasize the importance the EU world exports. (Figure 10.)
The chart can be referenced here: https://public.flourish.studio/visualisation/20530096/
Problem point No 5: European Union means overregulation of the economies
As of today, even the European Commission (EC) is openly concerned about the EU level regulatory burden and no longer talks about the excessive regulation at national level only. One must remember that the European regulations are superimposed on national ones, and in this respect the EU not only supplements but further increase the bureaucratic burden of the member states.
We do not have to go far for example why excessive EU regulation is a key component in the productivity gap with the EU (Anderton et al., 2019). Let us hope that the EC is not only talking about slashing the regulatory burden but clearly understands that overregulation poses a risk to its companies’ competitiveness and in its Green Deal Industrial Plan. Mario Draghi pointed out that since 2019, the EU had passed 13,000 pieces of legislation, compared to some 3,000 in the United States. This may not be a problem in itself but in the meanwhile, Europe’s economy has seen its fortunes gradually decline. The gap between the size of the EU’s economy and that of the U.S. is now 30 percent, from 15 percent in 2002. In the meantime, America has dominated the digital sphere, while Europe only has four of the top 50 largest technology companies. Until the EU was busy with the implementation of the GDPR and ESG rules, the US continued to a more efficient weapons: incentives. Oeconomus thinks that even making an attempt to use more incentives can convince decision makers and regulation, not to mention overregulation, is too bad for the business sector.
Finally, it must be mentioned that the ease of regulatory compliance indicator assesses how companies perceive the ease or difficulty of complying with government regulations and standards. The scores range from 1 to 7, where 1 represents great difficulty and 7 represents extreme ease. The next figure highlights the extreme variation between the various member states. (Figure 11)
The chart can be referenced here: https://public.flourish.studio/visualisation/20532779/
The Oeconomus thinks that instead of copying the American incentive-based model completely, the Europeans should make an experiment with special and tailor-made European incentives. The full-scale liberalization of the economy is simply no longer in line with much regulation.
Problem point No 6: European Union – Graveyard and not cradle for corporations
Previously the study touched upon the problems of the European unicorns and now more light will be shed on the entire corporate sector. First of all, it must be mentioned that there is a strong relationship between the level of productivity and the size of corporations. Larger companies with much market share invest more in research and development, ICT as the ratio of fixed costs and investment, reorganisation is smaller in comparison with SMEs.
For us Europeans, it is disappointing that in the US the percentage of companies with more than 49 employees is double than in the EU. Apart from the adoption of new technologies there are a number of other bottlenecks in case of the corporate growth in the EU. (Over)regulation is causing heavy headaches leading to smaller company sizes. (Figure 12)
The chart can be referenced here: https://public.flourish.studio/visualisation/20532931/
In the US companies with more than 250 employees account for almost 60% of total employment, at the same time they only account for 12% to 37% in the Eurozone. There are financial limits also. Venture capital investments are much smaller in the EU than in the US (See above). The consequences are clear: many innovative companies struggle with financing problems when they grow steadily. As a result, they move to the UK, or the US.
All in all, many European companies die earlier, never reach adulthood, and/or once agile and feels an insatiable desire for growth move to the US to live a meaningful life. The Oeconomus deems the European company landscape uneven, a bit far from fully fertile and punctuated with landmines. It would be great to create a truly fertile land for businesses.
Problem point No 7: There are fundamental problems with productivity
Even the most basis economic textbooks can confirm that productivity is key. It is because without a decent productivity performance, it is very difficult to maintain competitiveness. Companies depend on the efficient use of factors of production and technology when they want to remain in the market over the long run.
The EU member states are not well-prepared in this measure as the EU productivity per hour worked in the last two decades has been substantially lower than in the US. Much of the difference comes from the lower total factor productivity (TFP). (Figure 13 & 14)
The chart can be referenced here: https://public.flourish.studio/visualisation/20542046/
The chart can be referenced here: https://public.flourish.studio/visualisation/20541806/
It is widely-known that an economy’s competitiveness depends more on its general productivity. It is widely-known also that intensity of research and development and the capacity for innovation has a very significant impact on general competitiveness. We have seen improvements in the competitiveness of the EU largely because of the policies that facilitate research and development, diversify the economy and reducing dependency on the manufacturing sector. At the same time, competitiveness in the US has been maintained despite the decline of the industrial sector. This is related to investments in sectors based on innovation and design, not to mention the adoption of cutting-edge technologies. With much diversification and a capacity for adaptation, the US economy is able to maintain its global competitiveness without focusing on one sector only. In the EU there is still much focus on the manufacturing sector, especially the automotive sector.
The automotive industry is one of the few economic sectors in which Europe has managed to maintain its leadership. Although, as Figure 15 below illustrates, non-European countries lead in terms of the number of vehicles produced (thanks to outsourcing). Although the European companies are still the largest in terms of revenue. Six of the top ten car manufacturing companies ranked by revenue are European, just like five of the top 15 car sellers.
In a decade and a half, the cost of battery cells for e-cars has fallen by 90 percent. From 2027, we expect mid-sized EVs to be more affordable than cars with internal combustion engines. The European car industry, which is mainly geared to the latter, needs a subsidy in the next two years for survival. Otherwise, it will not be able to compete with its low-cost producing Chinese rivals. Hungary has put forward a package with eleven measures this summer during its EU presidency, one measure calls for a €4,500 purchase subsidy for EU citizens buying a pure electric car.
The chart can be referenced here: https://public.flourish.studio/visualisation/20534459/
Alongside the automotive industry, the tourism and hospitality sector are the segments in which Europe has managed to maintain its leadership. Despite the opinion of many who say that Europe is a museum already worth visiting. As can be seen from Figure 16, international tourists come to our continent for the most part.
Europe’s advantage is enduring, if we look at the analysis made by Statista (2024), our continent’s global share of international tourist arrivals has only slightly decreased between 2005 and 2023. This is also due to the fact that many regions have not yet recovered from the economic shock caused by the coronavirus epidemic. However, when comparing the 2005 tourism level with the year before the COVID-19 epidemic, Europe’s share has decreased by more than 5 percentage points. Looking at the data of 2019 and 2023, it can be seen that Asia and the Middle East achieved the biggest gains. Because of its unique architectural, historical and cultural heritage, Europe cannot afford to allow foreign tourists to choose other destinations with much less favourable natural conditions but which rely heavily on the entertainment industry.
The chart can be referenced here: https://public.flourish.studio/visualisation/20533206/
The third industry in which Europe has been able to stay at the forefront is the defence industry. As Figure 17 & 18 illustrate, although the share of European countries in the international arms market has slightly declined over two decades, they are still a major supplier. According to a Stockholm International Peace Research Institute, SIPRI) compilation, while eight of the top ten arms exporting countries were European between 1997 and 2001, this has fallen to six countries between 2019 and 2023. France is the global leader in the production of various high-tech combat equipment, Germany in tanks, the UK in aircraft and Italy in missiles, along with warships and aircraft. In addition, Sweden, Turkey, Poland and the Czech Republic also have prominent defence industries, and Hungary has also been developing its manufacturing capacity in the recent years.
The declining US engagement during Donald Trump’s first term as president and the escalation of the Russia-Ukraine war in 2022 have fundamentally changed Europe’s security system. As a result, European leaders have realised that it is essential to develop their countries’ armed forces. Since reforming an army is a time-consuming procedure, military orders will be secured for the next decade. However, the available manufacturing capacity cannot fulfil all of the European orders, so some EU member states rely on suppliers from other regions. The best example is Poland, which relies heavily on the United States and South Korea for equipment. The main problem with this stems from the heavy capital outflow from Europe.
The chart can be referenced here: https://public.flourish.studio/visualisation/20534285/
The chart can be referenced here: https://public.flourish.studio/visualisation/20534265/
Problem point No 8: Funding could be available but the EU cannot use it
The EU has no ability of competing with the US or China in terms of direct industry subsidies. While in 2024 the US federal budget spends nearly 4.5 thousand billion USD, the Chinese annual central budget expenditure reaches 4 thousand billion USD, but the EU level budget expense is only at 190 billion euros (200 billion USD). In comparison, aggregated public spending in all of the EU Member States reached 7.9 thousand billion euros in 2022. The payment category of economic affairs had the second largest share of this (€931 billion). Therefore, the resources to support industry are available in Europe, the main problem is that there is a conflict of interest between member states and the EU leadership over how to use these resources. Around 60-70 percent of EU-level budget revenue comes from member states’ contributions, determined as a proportion of gross national income. This is supplemented by a share of Member States’ customs revenue and VAT taxes, which account for 20-25 percent of total EU revenue. This means that if the EC wishes to use more resources, it can do so only by borrowing or at the expense of member states’ resources, causing a fundamental conflict with the leadership of the member states. However, the EC is not about using more resources, subsidies as the general approach towards subsidies is more like this: they distort the EU market, create unfair competition and therefore damage European industry.
The Hungarian EU Presidency and the Budapest Declaration
In the second part of 2024 Hungary began its six-month rotating presidency of the Council of the European Union. Among the seven priorities (competitiveness, defence and enlargement policy, illegal migration, cohesion policy, agricultural policy, demographics) of the Hungarian presidency, a New European Competitiveness Deal play a crucial role from the very beginning.
Bearing the above-mentioned deep-rooted competitiveness issues in mind and in the current international context of multiple challenges, where Europe is lagging behind its global competitors, it was deemed vital to improve the productivity and thus the competitiveness of the Union and its member states, and to stimulate growth. It seemed to be a common interest to address the effects of the difficult economic circumstances of the recent years, such as high inflation, increased public debt, high energy prices, fragmentation of international supply chains, or lower European productivity and slower economic growth compared to our competitors, and to put the EU economy back on an upward trajectory.
By applying a holistic approach from the very beginning the Hungarian presidency placed a strong emphasis on improving European competitiveness, integrating the above-mentioned objective into all policies. The Hungarian, and also EU aim was/is to contribute to the development of a technology-neutral industrial strategy, a framework for boosting European productivity, an open economy and international economic cooperation, as well as a flexible labour market that creates secure jobs and offers rising wages in Europe, which is a crucial factor to growth and competitiveness. The adoption of a New European Competitiveness Deal was a key priority of the Hungarian presidency in order to restore economic development and create the conditions for sustainable growth, deepen the internal market, focus on supporting small and medium-sized enterprises, promote the green and digital transition in partnership with European economic stakeholders and citizens, international cooperation, and ensure the stability and sustainability of jobs. (When it came to this priority, the Hungarian presidency built on the Letta and Draghi reports published earlier.)
Before the end of the Hungarian presidency, on the 8 November 2024 the EU member states unanimously adopted the Budapest Declaration which is an action plan largely focusing on closing the innovation and productivity gap with global competitors and within the EU.
The points of the declaration are mentioned are as follows:
Point 1: Intensify efforts to ensure a fully functioning Single Market and unlock its full potential as a key driver for innovation, investment, convergence, growth, connectivity and economic resilience.
Even if we take into consideration the previously mentioned home bias effect, the better functioning and seamless Single Market can create a much larger marketplace for businesses and lots of opportunities for those who look for a job or try to invest in other member states. Mariniello and his coauthors (2015) argue that more unified markets serve as a fertile ground for entrepreneurial activity (including risk-taking, experimentation, exploration of new market niches) and, thus, a potent catalyst of growth. Other scholars confirm the growth premium for the Single Market overall and for its founding members. Broadly in line with the predictions made by a very well-known, scholar Richard Baldwin at the onset of the Single Market project, many find significantly higher real GDP per capita for the overall Single Market area of around 12–22 %. In comparison, smaller EU Member States seem to have benefited somewhat more compared to larger countries. The estimated growth effects underline the case for further deepening and broadening the Single Market where possible. In this respect, and when it comes to the Single Market, the Budapest Declaration is good step taken in the right direction.
Point 2: Take decisive steps towards a Savings and Investments Union by 2026, and making urgent progress on the Capital Markets Union.
The Capital Markets Union (CMU) is an EU-level initiative that was launched in 2014 as a plan envisaged at creating a single market for capital in the EU. The CMU Action Plans of 2015 and 2020 contained a number of measures to deliver on that objective. Despite these efforts, the CMU remains incomplete even today. Sustaining the progress towards the CMU, requires both strong political commitment and high prioritisation like the Budapest Declaration. The Oeconomus thinks that emphasizing integration is key but focusing on the limited dept of the EU capital markets is equally important than the integration alone. As it has been mentioned in our report, the EU’s financial system relies heavily on commercial banks, where deposits are liquid and nominal in value. This creates a mismatch when it comes to financing long-term, illiquid investments typical of capital markets. CMU will soon be rebranded and renamed as a Savings and Investment Union (SIU), the core objective will remain the same: to strengthen EU capital markets to finance innovation, increase productivity and support growth. The SIU project aims to create a genuine single market for financing in the EU, with no internal national borders. Oeconomus think that this project is important as SIU gives incentives to develop truly cross-border venture capital funds. It can lead to the revival of securitisation within a transparent, secure framework, to increase banks’ financing capacity. Also, the Single European supervision guarantees a common legal framework and prevent regulatory fragmentation across the 27 national markets. A European Unified Ledger that is low-risk and accessible throughout the EU, to ensures rapid and secure transaction execution.
Point 3: Ensure industrial renewal and decarbonization, and allow the EU to remain an industrial and technological powerhouse.
Oeconomus thinks that maintaining the industrial and technological profiles and advantages of the EU is key but new areas should be unearthed withing those fields. Business and industrial services with cutting-edge technologies should play a much more important role in the export profile of the integration as more developed continents and countries will be unlikely to compete with the low-cost counterparts in the emerging and developing word. Heavy industry for example is very unlikely to be competitive again but industrial services with much technologies used should play a vital role.
Point 4: Launch a simplification revolution, ensuring a clear, simple and smart regulatory framework for businesses and drastically reducing administrative, regulatory and reporting burdens, in particular for SMEs.
The EU has the nickname: the regulator of the world. Too much and too heavy regulation has the potential to drag on innovation and growth. The link between regulation and the economy has been central in political economy since the 1970s. Regulation can disincentivise firms to upscale, enter a market, innovate, and invest in skill formation. At the same time, the introduction of detailed property rights and more broadly, the establishment of a rule of law can safeguard consumers, incentivise investors, and encourage companies to create new technologies. A certain level of regulation is needed for the economy to grow as it reduces uncertainty incomplete laws can be understood as incomplete social contracts. In this light the Oeconomus thinks that underregulation is equally bad as overregulation. The empirical evidence on the link between regulation and economic growth has been mixed as some work finds a positive relationship between the volume of legislation and economic growth while other papers provide evidence for the negative consequences of regulation, such as higher unemployment and lower income. Even if there is no solid evidence, simplification, transparency and deregulation as key to reach higher levels of competitiveness.
Point 5: Increase defence readiness and capabilities, in particular by strengthening defence technological and industrial base accordingly.
Defence spending affects economic growth in multiple ways. Defence spending generates jobs directly and can improve economic output indirectly through the spillover of technology and human capital to the civilian economy. At the same time, it is to be highlighted that the defence industry contribution to development goes beyond the concept of a causal relationship between military spending and economic growth, being a sector capable of endogenizing certain technologies and productive processes that structure a country’s capacity to guide its development trajectory in new technical-economic paradigms. The Oeconomus deems that much more spending on defence is a geopolitical necessity and at the same time it comes with a lot of spill-over effects in the technology-based.
Point 6: Put Europe at the forefront of research and innovation globally, especially in disruptive technologies, and delivering on the objective of meeting the 3 % GDP expenditure target on R&D by 2030.
In this case Oeconomus is quite sceptical as 3 percent seems to be a huge jump but it may not be enough to compete with the agile and innovation lead competitions. Spending on research and innovation comes with immediate effects but countries spend on R&D because of its longer-term effects. The direction and the step are fine but a bolder move should be accomplished in much less time. In order to gain advantage in technologies and research, the EU must be ahead of the competitors. Following the leaders are not enough and in the longer run it will lead to much more distance from the technology leaders.
Point 7: Pursue the dual objective of strategic energy sovereignty and climate neutrality by 2050.
Increased investment, for example in low-carbon technologies, would potentially boost productivity and economic growth in the long term. The majority of Europeans (56%) believe that climate policies are a source of economic growth, according to the latest climate survey of the European Investment Bank (EIB). By focusing more on energy sovereignty and climate neutrality, the EU countries can build further competitive advantage in exporting smart and green technologies. Let us hope that with better focus the EU continues to perform strongly in these areas. In 2019-2021, the member states accounted for over 25% of global exports in eight solutions: wind, bio-based circular fertilisers, hydropower, heat pumps, heating and cooling networks, prefabricated buildings, grid energy management system (EMS) and steel (H-DRI & electrification). In 2021 the EU had a positive trade balance in 14 solutions and a deficit in 11. The biggest trade surpluses were in wind (EUR 2.6 billion), prefabricated buildings (EUR 1.4 billion), heating and cooling networks (EUR 1.3 billion), and grid EMS (EUR 1 billion). By managing the energy transformation and sovereignty in a smart way the EU can build a massive trade surplus which can compensate the dwindling sales of cars worldwide.
Point 8: Build a more circular and resource-efficient economy and develop an integrated market for secondary materials, especially for critical raw materials.
At the global level, the circular economy enables the disconnection of growth from the economic value of raw materials consumption and energy resources. As a consequence, it generates fewer negative externalities and produces environmental benefits. At the local level, it enables to relocate some production, offers new employment opportunities and improves the trade balance. These are the favourable tendencies the EU countries need. According to the European Parliament, moving towards a more circular economy could increase competitiveness, stimulate innovation, boost economic growth and create jobs (700,000 jobs in the EU alone by 2030). At the same time redesigning materials and products for circular use would also boost innovation across different sectors of the economy. Last but not least, consumers will be provided with more durable and innovative products that will increase the quality of life and save them money in the long term. The Oeconomus welcome the initiative that the EU wants to build a circular and climate-neutral economy by 2050. To achieve that the EU has already introduced during the recent years many new measures to reduce waste and make products more sustainable. New or updated legislation covers eco-design, packaging, greenwashing, the right to repair, waste management and other key areas.
In March 2024, the Council adopted the European critical raw materials act, as demand for rare earths is expected to increase exponentially in the coming years. Critical raw materials (CRMs) are raw materials of high economic importance for the EU, with a high risk of supply disruption due to their concentration of sources and lack of good, affordable substitutes. The act aims to increase and diversify the EU’s critical raw materials supply, strengthen circularity, including recycling, support research and innovation on resource efficiency and the development of substitutes. The new rules will also strengthen Europe’s strategic autonomy. The Oeconomus thinks that these are vital steps and the secondary market of CRMs can further increase the bloc’s resilience.
Point 9: Strengthen the EU’s technological capabilities, accelerating the digital transformation across industries, seizing the opportunities of the data economy while ensuring privacy and security, as well as fostering the development of innovative technologies.
The use of technological innovation in different sectors is expected to directly impact economic growth. Technological innovation has been driving economic growth and development since the industrial revolution. In economics, it is widely accepted that technology is the key driver of economic growth of not only countries but regions and cities. Technological progress allows for the more efficient production of more and better goods and services, which is what prosperity depends on. However, Europe lags behind in innovation. Oeconomus argues that EU innovation policy should support disruptive innovation to break this path dependency, but this needs profound reforms, both in terms of its structure and financing. Currently, Europe’s private-sector investment in research and development is only half that of the US. This is primarily due to a composition effect. Europe’s R&D is concentrated in the mid-tech range, which absorbs more than 50% of private R&D, with the automotive industry accounting for roughly one-third, even though it generates few breakthrough innovations. By contrast, 85% of private R&D in the US is in more R&D-intensive and higher-return (incidentally) areas such as biotech, software, hardware, and AI. That is to be changed with immediate effect. Again, the Oeconomus has to mention the absence of the CMU. Startup companies suffer a lot at the moment. Europe has nothing comparable to the Nasdaq; it lacks America’s dense network of venture capitalists to finance new innovative projects; and, save for a few national exceptions (Sweden, Denmark, and the Netherlands), its institutional investors (pension funds and mutual funds) are less willing to take the risks associated with radical innovation. While European household savings are plentiful, they are mostly channelled to low-risk projects or public securities. When this landscape does not change, it will be more and more difficult to chase the rivals in the world economy.
Point 10: Harness Europe’s talent and investing in skills to foster high-quality jobs throughout the Union.
The EU is unlikely to regain its dominant position in the traditional manufacturing sector and in other to be more competitive in sectors of the new economy (AI, digitalization, business services, gig economy, circular economy, etc.) better and more resilient skills are needed. The term skills economy has been entering the economic textbooks for a while. Under this new paradigm, individual skills rather than traditional job credentials become the most important currency of work. In order to facilitate the changeover to the new economy, new skills are needed. According to the Inter-American Development Bank, average skill levels explain over 55 percent of GDP per capita growth between 1960 and 1995. Based on the estimates, we could expect a slowdown in GDP growth in the coming years but we are actually just seeing a very long-term transformation from “industrial, high-labour businesses” to what we call “post-industrial” companies that tend to need fewer “workers” and more highly-trained employees. The EU countries have to take the lead in this skills development and the Oeconomus hopes that this point of the Budapest Declaration will be taken seriously. Without adequate skills in the new economy, the business sector in the EU will face further decline in the coming decades.
Point 11: Pursue an ambitious, robust, open and sustainable trade policy, with the WTO at its core, which defends and promotes the EU’s interests, economic diversification and resilience.
As the new chapter of international trade may look different from the previous one, the EU has to be more resilient and adaptive. As it was highlighted above that a number of exporters in the EU face problems with their economic complexities. By formulating a new trade policy in the EU, the current problems could be tackled. The World Bank argues that given the growing connectivity between firms through global value chains, trade policy is likely an important determinant of this resilience. Also, trade plays a vital role in economic resilience. Although trade can spread and magnify shocks, it can help countries prepare for, cope with and recover from shocks. Initial conditions, the nature of the shock and policy choices, including the level of diversification, are important in determining what role trade will play. A diversified trade and production structure makes it more likely that trade can play a positive role in coping with shocks. That is why Oeconomus thinks that having a more resilient and adaptive EU trade policy can better help the EU member countries in the midst of the challenges of the 21st century.
Point 12: Deliver a competitive, sustainable and resilient agricultural sector, providing a stable and predictable framework for farmers, strengthening their position in the food supply chain, and ensuring fair competition globally and in the internal market.
The OECD keeps highlighting that agriculture and food systems are highly vulnerable to shocks, including weather shocks and natural disasters. Given the sector’s role in providing food security, nutrition, and livelihoods, agricultural policies need to build resilience through a proactive approach. The role and the importance of the sector is easily confirmed by the following data: in 2020, approximately 4.5 percent of the EU’s total employment, an estimated 9.4 million people, worked within the agriculture, forestry, and fishing sector. The vast majority, or 4.2 percent of total employment, worked in agriculture. It is of crucial important what is going to happen to those who are employed in agriculture. With this point of the Budapest Declaration the EU can take a step closer to the climate-smart agriculture (CSA). CSA is an integrated approach to managing landscapes—cropland, livestock, forests and fisheries – that address the interlinked challenges of food security and climate change. When the objectives are reached agricultural productivity can be increased. It means producing more and higher quality food without putting an additional strain on natural resources, to improve nutrition security and boost incomes. Also, enhanced resilience could be reached. This can lead to reduced vulnerability to droughts, pests, diseases and other climate-related risks and shocks; and improved capacity to adapt and grow in the face of longer-term stresses like increased seasonal variability and more erratic weather patterns. Finally, a more resilient agriculture can reduce the greenhouse gas emissions of the food system, avoid deforestation due to cropland expansion, and increase the carbon sequestration of plants and soils.
Let us hope that the year of 2024 will be regarded as a milestone when two reports and an action plan laid the foundations for future reforms and improvements in competitiveness. The declaration is important also as it is balancing the economic, social, and environmental priorities of the European Union. As of December 2024, the new EC is going to embrace the issue of competitiveness in the next five years. Also, the president of the EC seems to be committed to slash regulation and bureaucratic burden which would be steps highly welcomed by the European business sector.
The Oeconomus thinks that the next five years will be crucial for the European integration. When good steps could be taken in the right direction the EU could first slow down its marginalization in the world economy. Later with much more focus and with quickened steps the integration could compete with the main rivals at the world stage. Two reports and a declaration are definitely good steps taken.
Let us hope that the year of 2024 will be regarded as a milestone when two reports and an action plan laid the foundations for future reforms and improvements in competitiveness. The declaration is important also as it is balancing the economic, social, and environmental priorities of the European Union. As of December 2024, the new EC is going to embrace the issue of competitiveness in the next five years. Also, the president of the EC seems to be committed to slash regulation and bureaucratic burden which would be steps highly welcomed by the European business sector.
The Oeconomus thinks that the next five years will be crucial for the European integration. When good steps could be taken in the right direction the EU could first slow down its marginalization in the world economy. Later with much more focus and with quickened steps the integration could compete with the main rivals at the world stage. Two reports and a declaration are definitely good steps taken.
Conclusions of the report
In the EU, the single market is far from seamlessly connecting the member countries and it is very unlikely that market integration cannot overcome the home-bias effect. These issues can be felt in case of services to a large extent. Private investment is greater in the EU but there is less access to venture capital than in the US. The EU is much dependent on an obsolete way of financing, namely bank financing. Banks are highly regulated which comes with to effects: the share price performance is poorish but at the same time they can better withstand the financial turbulences. The EU has been spending less on public investment and research and development and as a consequence there are major differences in the number of patents and to make things even more troublesome the EU’s patents come with reduced applicability to the markets and business activities.
There are higher energy costs for companies but renewable energy sources are making a clear progress. Also, we can find good examples for becoming more sustainable and taking steps towards accomplishing the circular economy in the EU. What is causing immediate headaches, it the relatively low level of digitalization as the non-physical capital is harnessed less.
The European labour markets have been historically less flexible and the employment rates are lower, unemployment rates are higher. Also, a larger percentage of the working age population is lacking secondary education. Going back to the issue of digitalization, it must be mentioned that just over 25% of the population has digital skills above a basic level, and only 4.6% of the population aged 15 to 74 working as ICT specialists.
At the moment, the EU is still an important trader of world economy and it has a larger but declining share of global exports. Also, the EU maintains a hefty current account surplus. However, there is a worrying sign: when it comes to the goods produced the European countries face a declining degree of economic complexity. What is even more worrisome is the low and further decreasing total factor productivity. On the top of all that, businesses face complex regulations and lengthy processes. This results in smaller-sized companies which are less innovative, less digital and much less prepared for the age of AI and digitalization than the American counterparts.
These were the most important messages of the report made by the Oeconomus Economic Research Foundation. In addition, several key areas were better analysed and a number of recommendations were given. We try to present why the EU prioritised the competitiveness issue during the EU presidency and how the Budapest Declaration could pave the way for a more competitive European Union.
Szabolcs Pásztor is an associate professor at the Department of Economics and International Economics of the University of Public Service (Budapest, Hungary). Previously he worked at the Central Bank of Hungary and as an advisor for the Hungarian Banking Association. He joined the Oeconomus Economic Research Foundation in 2020. He has taught at various universities in Australia, China, Belgium, France, Czechia, Italy, Russia, Turkey, Republic of South Africa, Kenya, Ethiopia and other countries. His main research interests are related to the issues of economic and financial transformation in developing countries.
