When it comes to competitiveness, Europe is a story of contrasts, with four distinct groups: a very competitive north-west, including Switzerland; a relatively competitive south-west, led by France; a rising north-east region, led by Poland, Czech Republic and the Baltic countries, which rank on par with or higher than several Western European economies on several aspects of competitiveness; and the south-eastern region—in particular, the Balkan countries—which lags behind the other groups.
Real GDP growth was up for the majority of European countries in 2017, with current growth forecasts for the subset of euro area countries above 2% for 2018. While this looks like a continuation of the recovery, the situation remains fragile, as uncertainty over international cooperation and trade is dampening 2018’s growth outlook. As a result of both trade tensions with the United States and rising energy prices, the European Central Bank has recently downgraded growth forecasts for the euro area for 2018 from 2.3% in May to 2.0% (vs growth of 2.4% in 2017).4
The consequences of the 2007-2010 financial crisis still linger in the form of broken trust between a large part of the European electorate and the continent’s political elites—and more concretely in the form of continued overleveraged government balance sheets. Added fragility comes from continuing shifts in political alignment and ideology, with the appearance of a growing voter base for populist parties across Europe. In addition, Brexit remains unresolved. However, a recent positive milestone is Greece’s successful exit from the IMF loan programmes.
While recent political shifts do give much reason for concern, the continent still has basic competitiveness factors firmly in place: Europe’s public health indicators are strong across the board, including Spain at the global frontier. Education and skills outcomes are also solid. Finland tops this category globally, although these outcomes differ across the region as a whole.
Technology-related headlines coming out of Europe in the past year have mostly been related to efforts by the competition authorities to come to terms with new forms of market power exerted by platform companies and about the lack of local “unicorns”. The greatest disparities across the continent lie in national innovation ecosystems, with countries in Eastern Europe and the Balkans lacking basic innovation infrastructure while countries such as Germany define the global frontier on innovation ecosystems (Germany tops the innovation rankings in this year’s GCI). This divide extends to factors as varied as a country’s diversity of interaction (including cluster development, workforce diversity, patent applications and multistakeholder collaboration), research outcomes and commercialization opportunities. The distribution of outcomes on technology readiness is also relatively dispersed, and Europe is undeniably behind the global leader Korea. On a positive note, European economies on average fare relatively well on technology adoption.
On other factors of competitiveness, Europe is relatively far behind the global frontier when it comes to product market competition (where Singapore tops the global ranking) as well as business dynamism, where the United States ranks highest. The size of its market on the other hand represents a strong competitiveness advantage for Europe, especially in an age where economies of scale and network efficiencies are becoming ever more important.
Germany emerges as the strongest European performer in this year’s competitiveness rankings and the third-strongest globally (overall score: 82.8). The country stands out in particular for its innovation ecosystem. It ranks first globally on the Innovation capability pillar (87.5). This result is driven by a strong performance on patents (5th, 100) and research publications (3rd, 100), by top-ranked research institutions (4th, 100), and by a very high degree of buyer sophistication (66.1, 5th), leading to firms constantly being challenged by their customers to innovate.
Innovators benefit from a vibrant business sector to bring innovations to market (81.6, 2nd). Germany’s strong overall competitiveness performance is further explained by very solid fundamentals, such as a stable macroeconomic environment and a healthy, well-educated and highly-skilled population.
However, the country lags behind when it comes to ICT adoption, ranking only 31st globally with a score of 69.3. The gap is particularly marked on mobile broadband subscriptions (53rd) and on the provision of the latest ICT infrastructure in particular in terms of fiber connectivity to the home (66th).
Switzerland ranks 4th (score of 82.6) globally and second in Europe, behind Germany. It features in the top 5 of seven pillars. Switzerland is one of the world’s ‘super innovators’ (82.1, 3rd, behind Germany and the United States). The country is home to large multinationals that are often leaders in their sector, as well as a dense network of SMEs with a reputation for quality and innovation. In addition to research excellence, intense collaboration between the academic and business worlds yields innovative products with commercial applications. An array of factors supports the innovation process, including a conducive institutional framework (77.1, 5th), top-notch transport and utility infrastructure (3rd), a sophisticated and stable financial system (89.4, 4th), and a well-functioning labour market (80.4, 2nd). In this last category, Switzerland ranks first for the soundness of its active labour market policies and the quality of industrial relations, and second for flexibility. Switzerland’s performance is adversely affected, however, by its poor showing in the trade openness category (60.5, 76th and worst among advanced economies), owing to the complexity of its tariff regime, for which it ranks last among the 140 economies studied. In terms of ICT adoption, Switzerland lags far behind the best (77.0, 15 points behind global leader Republic of Korea).
The Netherlands is the third-most competitive European economy and the sixth-best globally (82.4). The Netherlands performs particularly well on institutions (77.9, 4th), especially when it comes to checks and balances (including judicial independence, freedom of the press and government openness), protection of property rights, and ethics and transparency.
Its economy is particularly strong on openness, which manifests itself in many dimensions. The country’s open innovation environment is marked by forgiving cultural attitudes towards entrepreneurial failure, a great willingness to delegate authority, entrepreneurs who are willing to embrace disruptive ideas, and fast-growing innovative companies (71.5, 6th). In the Netherlands, businesses are as easy to set up as they are to unravel.
Capitalizing on its high population density, the Netherlands is very well-connected internally through high-quality roads, railroads and waterways, as well as externally through digital technologies and physical infrastructure such as seaports and airports (92.4, 4th on the Infrastructure pillar). All of these factors support highly competitive product markets. A final contributing factor to the country’s openness comes in terms of the mindset fostered among students. The quality of education offered is very high (84.5, 6th) and, evidently, encourages critical thinking, where the Netherlands ranks 7th globally (70.9).
The United Kingdom is the fourth-most competitive economy in Europe and eighth-strongest globally (82.0). The performance is largely explained by its traditional strengths: very well-functioning markets (78.8, 4th), a top innovation ecosystem (79.2, 7th) and vibrant business dynamism (79.0, 7th). Notably, the country’s performance is equally strong across product, labour and financial markets. Independent of other effects of Brexit, the event will, by definition, weaken the United Kingdom’s markets component as integration with the EU is rolled back. Other factors will need to compensate. While the UK has a strong innovation ecosystem and a vibrant business sector, it currently looks less prepared than some of its peers to leverage ongoing rapid technological change. ICT adoption is also the weakest pillar compared to the other eleven drivers, with the UK ranking only 28th globally (71.1). It also lags in terms of its provision of fiber to the home (75th), mobile broadband subscriptions (40th) as well as the digital skills of the population (65.5, 32nd).
Sweden ranks ninth globally in this year’s index and fourth within Europe (81.7). Its performance is even across the twelve drivers of competitiveness, with high scores and high rankings across all 12 pillars. Among its high-performing European peers, Sweden seems best prepared to leverage the opportunities brought by the accelerating technological change. The country ranks extremely high on ICT adoption (85.2, 5th), scoring highly both on levels of internet use (89.7, 14th) as well as the quality of its connectivity: 12th on mobile broadband connections, 13th on fixed broadband connection and 5th for fiber connectivity to the home. Remarkably, it ranks top globally in terms of the digital skills of its population (80.6). These high levels of tech readiness—combined with a strong performance on human capital, including education and skills (84.2, 7th) and public health (96.5, 17th)—provide a very good basis to capitalize on Sweden’s strong innovation capacity (79.8, 5th).
Denmark, one of the smallest markets in Europe, ranks tenth globally (80.6). It stands out in the region for its very well-functioning labour markets (5th, 78.0), which form the basis of a strong social contract. A pioneer of flexicurity, the country manages to reconcile an effective market economy with strong worker protection and a welfare state, notably through active labor market policies (71.4, 7th). The country provides high levels of stability both for its citizens and the business sector. It scores high on the strength of its institutions (10th, 75.9), its infrastructure (86.3, 14th) as well as it’s the stability of its macroeconomic environment (joint 1st with multiple economies). According to the perception of Denmark’s business executives, the country also has one of the highest levels of social capital in the world (64.3, 4th). Further, the labour force is extremely well educated (84.9, 5th), with the educational system scoring high on the quality of vocational as well as graduate education. Digital skills among the population are strong, and both the level and quality of connectivity are high, placing the country among the top 10 tech-ready economies globally (82.3, 8th).
Denmark’s business sector is one of the most dynamic in the world, thanks to very little red tape (the administrative burden of setting up and closing down a business is minimal) and a business culture marked by trust and collaboration as well as a willingness to embrace new ideas. Furthermore, its innovation outcomes in terms of the number of patents and trademarks are remarkable given the small size of the country.
France secures a place among the top twenty economies globally (78.0, 17th), having recently taken on an ambitious reform program that encompassed overhauling labour laws, reforming public services (most notably the national railway operator) and making the country more attractive as a destination for high-tech investment.
As a host to world-class research institutions (3rd), the country performs very well on innovation capability (76.1, 11th), and ranks among the top countries in the world in terms of the number and quality of its research publications (5th). There is scope to boost this performance further by adapting the system to the digital age. This would entail focusing on ‘soft’ innovation factors, such as encouraging critical thinking in students (44.9, 48th), embracing disruptive ideas (46.7, 45th) and developing its entrepreneurial culture. In fact, France ranks a low 84th (46.2) on the GCI in terms of its tolerance for entrepreneurial failure. Currently, France’s performance on the Interaction and diversity sub-pillar is also weaker than its peers.
In order to leverage this innovation strength, further bottlenecks need to be addressed in the area of market functioning. While labour market rigidities are being addressed, there is still a long way to go as the economy currently ranks 53rd on this dimension (61.5). Furthermore, product market functioning can be improved by reducing non-tariff barriers (53.2, 90th) and reducing services trade restrictiveness (73.6, 55th). The country’s regulatory burden is perceived to be very high by the business sector, with France ranking 107th on this indicator (31.8). The country’s performance on ICT adoption is mixed (71.1, 29th), with a high level of fixed broadband subscriptions, yet lagging on mobile broadband and fiber to the home.
Italy ranks 31st overall and 17th in Europe. The country’s GDP is growing at 1.5%, the fastest rate since the 2008’s financial crisis. Yet Italy remains the advanced economy that is growing the least. To improve its prosperity, Italy should indeed prioritize its competitiveness and growth agenda, building on its strength and addressing its weaknesses. Among Italy’s strengths, the GCI highlights excellent health conditions (99.2, 6th), large market size (79.1, 12th), a top-tier innovation capability (65.8, 22nd), and good infrastructure (83.0, 21st). To further maximize its innovation potential Italy could further expand its ICT adoption (60.3), while the private sector should be more open to new business models and disruptive ideas (36.6) and assume a more positive risk-taking attitude (49.6). On the other hand, the improvement of Italy’s competitiveness depends primarily on the modernization of its financial system (64.3, 49th) and public-sector administration (38.8, 107th). Low performance in these pillars translates, respectively, into insufficient resources to finance innovative investments and a high degree of red-tape that stifles business activity. In addition, macroeconomic stability (85.0, 58th) will, no doubt, be a key area of focus for policy-makers going forward. Although public finance appears to be under control, overall, high public debt and uncertainties on the future management of fiscal policy may further increase the cost of access to capital for the public sector and for private companies.
Turkey ranks 61st on the overall GCI 4.0, with relative strengths on infrastructure (72.6), public health (82.6) and the innovation ecosystem (50.6). Grappling with near double-digit inflation and negative debt dynamics, Turkey’s macroeconomic woes are compounded by trade sanctions established by the United States, which has triggered even higher inflation and a currency crisis. Turkey is ranked 116th on the Macroeconomic stability pillar, with a score of 67.4.
While its innovation performance is good, with strong research institutions (34.7, 19th) and a good publication record, ideas generated by Turkey’s research community face many bottlenecks further down the value chain in terms of barriers to entrepreneurship and market functioning. Starting a business is relatively costly (93.6, 87th) and the business sector is cautious to embrace disruptive ideas (41.0, 74th). Further, the labour market is hindered by rigidities in terms of worker-employer relations (47.9, 113th), contracting (ranking 121st, with a score of 46.3 on the Redundancy costs indicator) and meritocracy (50.5, 116th). In particular, women’s participation in the labour market is very low. For every 100 men, only 39 women are represented in the labour market.