kom (2015) 0550 - Ingen titel

Europaudvalget 2015
KOM (2015) 0550
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EUROPEAN

COMMISSION

Brussels, 28.10.2015

SWD(2015) 203 final

PART 1/3

COMMISSION STAFF WORKING DOCUMENT

Report on Single Market Integration and Competitiveness in the EU and its Member

States

Accompanying the document

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN

PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL

COMMITTEE AND THE COMMITTEE OF THE REGIONS

Upgrading the Single Market: More Opportunities for People and Business

{COM(2015) 550 final}

{SWD(2015) 202 final}

kom (2015) 0550 - Ingen titel kom (2015) 0550 - Ingen titel

This report has been written by the staff of the Directorate-General for Internal Market, Industry,

Entrepreneurship and SMEs, European Commission.

Any comments are welcome to the following e-mail address:

[email protected]

More information on the European Union is available on the internet (http://europa.eu).

Reproduction of the text is authorised provided the source is acknowledged

kom (2015) 0550 - Ingen titel

Foreword

kom (2015) 0550 - Ingen titel

Contents

Executive Summary

Introduction

1 Investment obstacles and policy responses

1.1

1.2

1.3

1.4

Introduction .........................................................................................................................................7

Barriers to investment .......................................................................................................................10

Investment Plan .................................................................................................................................17

Conclusions .......................................................................................................................................19

2 The evolution of EU competitiveness and innovation

2.1

2.2

2.3

2.4

The evolution of sectoral performance ..............................................................................................20

Overall evolution of productivity ......................................................................................................27

Sources of productivity growth .........................................................................................................38

Conclusions .......................................................................................................................................50

3 The evolution of integration, performance and remaining

barriers in the Single Market

3.1

3.2

3.3

The evolution of integration in the Single Market.............................................................................51

Single Market Performance ...............................................................................................................62

Remaining barriers to integration in the Single Market ....................................................................87

4 Financing the real economy

4.1

4.2

4.3

4.4

4.5

Single Market for Financial Services before the crisis: Financial convergence and increased

cross-border capital flows during EMU ............................................................................................98

Significant divergences in economic fundamentals during EMU giving rise to imbalances and

capital misallocation ..........................................................................................................................99

Single Market for Financial Services in the wake of the financial crisis .........................................100

Business financing remains a concern, although of a less pressing nature ......................................104

Conclusions .....................................................................................................................................105

References

107

kom (2015) 0550 - Ingen titel

Executive Summary

The economic performance of the EU has improved

in 2014 relative to the two previous years. While

growth rates remain low and it will take time to

reduce unemployment in some Member States, the

EU is steadily recovering despite political and

international economic uncertainties. The fall in oil

prices is providing an additional boost to the EU

economy which has presented record trade surplus

figures in the first half of 2015.

There are encouraging signs suggesting that the EU

has embarked on the path towards economic

recovery. And yet, economic recovery does not

necessarily ensure a better allocation of resources

which would allow the EU to improve its productivity

growth and higher competitiveness levels in the

longer run. Unfortunately, the recent experiences of

some EU Member States have shown that, even

during periods of growth and capital inflows,

resources can be misallocated, generating important

unbalances that are costly to redress. In other cases,

regulations in labour and product markets can block

the reallocation of resources.

Europe has accumulated a considerable productivity

gap with the USA, especially as regards dynamic

efficiency. According to the Conference Board,

labour productivity in 2014 was 70 % of the US level.

Last year and contrary to previous years, the

difference in productivity growth rates between the

EU and the USA has not widened.

There is growing consensus on the existence of a

slowdown in productivity growth affecting both

advanced and emerging economies.

Differences in

(

)

Cette G., Fernald J. and Mojon B., (2015) "The Pre-Global-

Financial-Crisis

Slowdown

Productivity",

http://ec.europa.eu/economy_finance/events/2015/20151001

_post_crisis_slump/documents/j._fernald.pdf

The Conference Board Productivity Brief 2015, May,

http://www.confeence-board.org

There is an important and growing academic and political

debate about long trends in productivity. While there is

statistical evidence of a decline in productivity growth, this

debate has raised relevant questions regarding the reliability

of official statistics to measure investment and productivity

growth, especially at a time when new technologies are

being introduced. Actual growth and investment might be

underestimated, at least in part, by traditional sectoral

classifications and accounting methods (see for instance

Fernald, J. “Productivity and Potential Output Before,

During and after the Great Recession,” NBER, working

paper n. 20248, 2014). While acknowledging the importance

of this debate and in the absence of more reliable new

labour productivity and total factor productivity

growth rates between Japan, the USA and the EU are

getting narrower as a result of this slowdown. This

opens a window of opportunity that could allow

Europe to accelerate the catching up process in

productivity if economic reforms are implemented.

The first big challenge to restore productivity and

long term growth is to revitalize investment. A

number of barriers have lowered the intensity of

tangible and intangible capital accumulation in the

EU. In 2014, Gross Fixed Capital Formation

recovered by 2 percentage points of GDP, but this is

still below the investment levels needed to cut down

our productivity gap with respect to the USA. A

subdued level of investment over several years has

produced a significant accumulated lag in investment,

especially in Information and Communication

Technologies (ICT).

During the 2000-2014 period, EU investment in ICT

and Intellectual Property products grew faster than

any other form of investment, with annual rates of 3.5

% and 2.8 %, respectively. However, the process of

digitisation of the EU economy started late and the

accumulated levels in these types of investment are

just one third of those in the US.

This report also suggests that conditions are

favourable to improve competitiveness if efforts are

made to introduce reforms at both national and EU

levels. Labour and total factor productivity growth

could be increased in the EU if regulatory barriers to

competitiveness and integration are removed thus

allowing for improvements in the allocation of

resources across firms and sectors in the Single

Market.

The reallocation of resources will have to proceed

along three axes. First, it will require moves of capital

indicators of productivity growth, this report will rely on

standard indicators of productivity.

The impact of this digitisation gap can be measured by the

contribution of ICT to GDP growth. Since 1990 the slow

uptake of ICTs has limited EU growth by nearly 5

percentage points. Considering the ICT investment levels

and the contribution to GDP growth, the EU would have to

invest 335 billion Euros in order to close the accumulated

gap with the US. That would be 5 times the total ICT

investment level of the EU in 2013. The impact of this

digitisation gap can be measured by the contribution of ICT

to GDP growth.

()

(

)

(

)

kom (2015) 0550 - Ingen titel

Executive Summary

and human resources from low to high productivity

firms within sectors in the Member States. This had

been a major source of productivity growth before the

crisis but its contribution has diminished recently.

Cross-sectoral reallocation of resources, on the other

hand, had not been a major source of productivity

growth in the past. New technological developments,

changes in input prices (shale gas in particular) and

the emergence of new business models suggest that

cross-sectoral reallocation of human and capital

resources may take increasing importance in the

future as a source of productivity growth.

Improvements in productivity are possible by more

investment in new digital and clean technologies in

current production activities by the reallocation of

more human, capital and technological resources

towards higher value added activities. Finally, a third

source of productivity growth will come from the

geographic reallocation of resources within the Single

Market and from a better insertion of EU firms in

international value chains. This would also allow to

better exploit backward and forward linkages in

global value chains, e.g. by strengthening the

integration in key sectors such as business services

and logistics.

New technologies and stronger integration in EU and

global value chains will create new business

opportunities but there are regulatory, structural and

behavioural obstacles that may frustrate the

realisation of these opportunities. Structural reforms

are needed at EU and Member State levels to remove

these obstacles.

The review of the situation of the Single Market

shows that a considerable effort is necessary to

introduce structural changes to remove the remaining

barriers hampering the performance of the Single

Market. However, this review also reveals the

potential of the Single Market as a major source of

microeconomic reforms in the EU to deliver growth

and jobs.

Both trade in goods with the whole of the EU and

intra-EU investment of the EU-15 – i.e. Member

States that acceded to the EU before 2004 –, seem to

have stalled for over a decade. The more recent

Member States (EU-13) have displayed a very

dynamic process of integration and reached higher

integration indicators than the EU-15. Integration

proceeds in the services sectors albeit at a relatively

slow rate. According to UNCTAD, global exchanges

in services grew by 4 % while intra-EU exchanges in

services increased by only 2.5 % in 2013.

There are

significant differences across sectors and there is

considerable potential for more exchanges in business

services, especially those provided by services

professions or in the construction area.

The current assessment of the benefits of the Services

Directive makes apparent the need to improve the

implementation and subsequent enforcement of this

Directive that is critical for the overall performance

of the Single Market in the services sectors and for

the EU economy as a whole.

The analysis of efficiency in the allocation of labour

presented in Chapter 3 shows very significant

differences across sectors. While high levels of

efficiency prevail in manufacturing, the situation is

very different in services and construction.

Furthermore, deteriorations in allocative efficiency

can be reported in the construction sector in

particular. This is an indication of the importance of

the introduction of reforms to turn around the

productivity performance of the Union in the coming

years as suggested in Chapter 2.

The regulatory environment has improved but again,

the EU-15 present a slow-down in this improvement

since 2005. It is precisely after that year that more

significant improvements can be found in the

regulatory environment of the EU-13.

A number of important improvements and good

practices can be detected in public procurement

markets. However, Member States are progressing at

very different speeds in the implementation of e-

procurement, the level of publication of public

tenders remains relatively low and the level of

professionalization of buyers remains low. Additional

work is also pending on the introduction of

procurement procedures that can create incentives for

innovation and SME participation in procurement.

Structural, behavioural and regulatory barriers remain

present in the Single Market. Some of them have

particular adverse effects on new dynamic and

exporting "start-ups". Others have a particularly

negative impact on the construction sector, especially

as regards the cross-border circulation of construction

materials, which remains an open building site for the

Single Market. Financing issues are critical for SMEs

and the new measures for the diversification of

(

)

Data for 2014 are more positive with a 7,5 % increase but

for EU-24 (excluding, Croatia, Spain, Italy and Finland).

kom (2015) 0550 - Ingen titel

Executive Summary

financing sources alternative to bank credit will be

critical to enable investments and innovation.

In summary, the Single Market presents both

symptoms of stagnation in the EU-15 in goods

markets but integration is still making progress in the

EU-13. In services and construction sectors,

significant potential remains to be exploited. Over

twenty years of integration have contributed to

improving the allocation of production and resources

in manufacturing markets and the fruits of these

changes have been visible in those markets for

several years now. However, this seems to have been

a stepwise improvement that will not deliver further

new gains unless new barriers are removed. In

services and construction, the potential is there, but

the partial results obtained so far in the

implementation of the Services Directive can be

significantly increased if further barriers to exchanges

in services and establishment are removed.

Therefore, significant static gains in the allocation of

resources are possible but more durable and lasting

gains could be achieved if dynamic efficiency was

improved. A higher competitive tension both in goods

and services markets, more active innovation and a

more favourable potential for the emergence and

growth of start-ups could boost total factor

productivity.

Ensuring practical delivery of reforms

As indicated by the Single Market Strategy, economic

reforms deliver benefits in terms of growth and jobs

but the cost of reforms must be taken into account

when choosing the path to reform in the Member

States and at EU level. In the EU context, three

elements can help us maximise the difference

between benefits and costs.



Complementarities.

minimise

the

regulatory fatigue, reforms at EU and Member

State levels must be complementary. As

Marinello et al (2015)

point out, the potential

of the Single Market to deliver its expected

positive impacts on productivity and growth

faces several limitations related not only to the

remaining barriers, but also to the lack of

complementary policies and the lack of

alignment of Member State policies with

(

)

Marinello, M.; Sapir, A.; Terzio, A. (2015). The long road

towards the European Single Market. Bruegel W. P.

2015/01.

(

)

Single Market objectives. Only feasible,

coordinated and relevant reforms with positive

expected and actual impacts are likely to

succeed in being implemented timely and

successfully by Member States. Reforms at

EU level must facilitate these changes by

increasing the payoffs to reforms and

minimising the joint cost of reforms.



Learning from common experiences. The

process of reforms in the EU is a common

process where Member States can learn from

the experiences of others. Recent Commission

studies and reports have made clear the broad

differences in the costs of implementing

similar EU directives by different Member

States. Member States can learn from each

other's experience to minimise the social and

economic costs of reforms.



Coordination. The economic crisis has made

apparent the close relationship and mutual

dependence between financial, products and

services markets. The relationship between

labour, product and services markets is well

known.

A closer integration of the existing

instruments for economic policy coordination

will surely improve the effectiveness and the

efficiency of economic reform efforts in the

EU.

Blanchard, Olivier. 2004. "The Economic Future of Europe."

Journal of Economic Perspectives, 18(4): 3-26.

kom (2015) 0550 - Ingen titel

Introduction

The economic performance of the EU has improved

in 2014 relative to the two previous years. Growth

rates remain low and it will take time to reduce

unemployment in some Member States, but the EU is

steadily recovering despite political and international

economic uncertainties. The low exchange rate of the

euro and the fall in oil prices are providing an

additional boost to the EU economy and particularly

to the euro area that has presented record trade

surplus figures in the first half of 2015.

Against this background, this report

presents both

recent developments and pre-/post-crisis comparisons

concerning

the

state

integration

and

competitiveness in the EU and its Member States. It

also looks into some long-term trends because the

crisis has brought into the open some major

imbalances of the EU economy that were already

present before 2008:



Integration in capital markets was put to the

test and the seemingly high level of integration

in financial markets could not withstand the

shock of the international financial crisis. This

experience has revealed the importance of

governance issues for the performance of the

Single Market.



Delays in the introduction of EU and national

structural reforms in products, services and

labour markets in some Member States have

added to the cost of the crisis delaying the

recovery. In general, countries that introduced

structural reforms before the crisis have fared

better than the rest. This shows the importance

of structural reforms for the overall

performance of the EU.



Despite the asymmetric shock of the crisis, the

Single Market could not smoothen and

compensate sufficiently the impact of the

crisis on countries with structural current

account imbalances. In addition, intra EU

integration in products seems to have stalled

(

)

This report replaces the Report on European Industrial

Performance of Member States – produced in the past in the

context of Art. 173 TFEU - and the Single Market

Integration Report – previously annexed to the Annual

Growth Survey. It also incorporates information produced

by the Commission in 2014-2015 in the context of

monitoring EU competitiveness (including the EU Structural

Change Report 2015) and financial market integration

(European Financial Integration Report).

well before 2008, especially in the 15 Member

States that integrated the Union before 2004.

Remaining obstacles to integration in services

and construction still hold back the potential

of the Single Market. These are important

developments which require further work into

their causes and possible remedies.



New studies of productivity at firm level call

for important reallocations of resources within

sectors, across sectors and across countries to

boost productivity growth. The need for

important improvements in the functioning of

the Single Market in areas such as mutual

recognition, public procurement and most

importantly, in services is more evident now

than before 2008. Technology developments

will also trigger further resource reallocation.

All this underlines the importance of

flexibility and the elimination of barriers to

resource mobility, giving a new dimension to

the Single Market

and structural reforms.

The report presents an overview of the main issues

that have been identified in the assessment of the

competitiveness and integration performance of the

EU and its Member States. The report consists of the

following chapters: The first three deal with the key

issues of (i) investment, (ii) competitiveness and

innovation and (iii) the integration of EU firms in EU

and international value chains. A fourth chapter looks

into the financing of the real economy.

(

)

This report will not go in depth into many important Single

Market issues because they are discussed in the Staff

Working Document supporting the Single Market Strategy

(SWD(2015) 202).

kom (2015) 0550 - Ingen titel

Investment obstacles and policy responses

1.1

Introduction

According to Commission calculations this deviation

has resulted in an investment shortfall of EUR 230 –

370 billion

while the accumulated investment gap

from 2009 to 2014 exceeds EUR 1.2 trillion. In order

to reverse the trend, the EU has put in place the

Investment Plan which aims to mobilise at least EUR

315 billion in the next three years by supporting

investment in the real economy and creating an

investment-friendly environment.

The financial crisis that hit the world economy at the

end of the previous decade took a heavy toll on

investment in Europe and other major economies like

the US. This negative impact was more prominent in

developed countries. The global average investment

rate fell from its peak pre-crisis level of around 23.5

% in 2007, to less than 22 % in 2009 and 2010.

has since regained some of the loss and is now around

22 %. However, unlike other big economies, the

deviation from the global average investment rate in

the EU continues to widen (see Figure 1.1).

(

)

(

)

Investment rates are given as a percentage of GDP. Source:

World Bank Data.

Total investment in the EU in the second quarter of 2014

was about 15 % below the 2007 figures. The decline in

(

)

investment was even more significant in some MS: Italy (-

25 %), Portugal (-36 %), Spain (-38 %), Ireland (-39 %), and

Greece (-64 %). Source: European Commission,

Communication on the Investment Plan, COM(2014) 903

final.

Annual Growth Survey 2015 COM(2014) 902 final.

Figure 1.1:

Gross fixed capital formation as a percentage of GDP - Deviation from the global

average investment rate

China

India

Japan

USA

Brazil

Russia

35%

Deviation from global investment rate

30%

25%

20%

15%

10%

-5%

-10%

-15%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source:

World Bank Data

Comparison by country, sectors and assets

Almost all countries experienced a fall in investment

from their peak levels, driven particularly by a fall in

private investment.

This drop was more pronounced

in the economies of the euro area periphery than in

core economies and particularly in Greece and

(

)

European Commission (2015),

EU Structural Change 2015

report.

Cyprus where private investment in recent years has

been as little as 11 % of GDP.

At sectoral level, investment in the EU manufacturing

sector was particularly affected in 2008 and it has

since then, and unlike what has happened in the US,

not managed to regain its losses (see Figure 1.2).

Particularly affected sectors include the energy

kom (2015) 0550 - Ingen titel

1.1

Introduction

intensive industries.

On the other hand, computer

and electronics, electrical equipment, motor vehicles

and pharmaceuticals have proven to be more resilient

to the negative effects of the crisis. In services,

investment managed to rebound in most of the sectors

to pre-crisis levels mainly due to the fact that services

are less cyclical than manufacturing (see Figure

1.3).

Figure 1.2:

Evolution of gross fixed capital

formation in manufacturing

sectors, 2001-2013 (Index)

Figure 1.3:

Evolution of gross fixed capital

formation in services, 2001-2012

(total EU, million Euro)

Investment in Services, million Euro

Total

Administrative and support service activities

Real estate

Financial and insurance activities

Information and communication

Transportation and storage

1800000

1600000

1400000

1200000

1000000

800000

600000

400000

200000

Note:

EU-27+ Norway. Data for Romania, Latvia and Malta

missing due to unavailability of data.

Source:

Eurostat

Source:

European Investment Bank; U.S. Bureau of Economic

Analysis; Eurostat; BCG Analysis

(

)

(

)

Investment in Building Materials, Paper & Wood, Metals

and Chemicals dropped during the period 2008-2011

respectively by 15 %, 9 %, 8 % and 3 %. Source: Eurostat.

Investment ratios as a percentage of GVA in several service

sectors increased as well. For instance in legal accounting

activities and architectural and engineering activities

investment ratios increased between 2007 and 2012 by more

than 13%. Source: Eurostat.

Figure 1.4 shows the growth rates of investment by

asset before

and after the financial crisis of 2009.

All assets experienced a profound drop due to the

crisis but investment in ICT proved to be more

resilient to the negative effects of the crisis relative to

investment in other assets.

(

)

An important part of GFCF spending before the crisis was

the (over) investment in construction/dwellings. It created

bubbles (together with irresponsible behaviour of financial

markets participants etc.) and was one of the causes of the

crisis in some MS (SP, IE).

kom (2015) 0550 - Ingen titel

1.1

Introduction

Figure 1.4:

Investment in the total economy

by asset type in the EU-28:

Growth rates

ICT equipment

Construction

Machinery/equipment/weapons

Transport equipment

Other machinery/equipment/weapons

-5

-10

-15

-20

-25

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Source:

Eurostat

more slowly than its main competitors since the onset

of the economic crisis of 2008. Other negative

impacts are identified on employment and on the

medium-term growth potential. According to

European Commission estimates, the investment

shortfall in Europe accounts for the largest proportion

of the fall in GDP during the post crisis period.

Unlike services, the impact of the 2008 crisis in

manufacturing can still be felt in Europe, with

production levels still nearly 10 percentage points

below the peak achieved in the first quarter of 2008

(see Figure 1.5). This can be attributed, like in the

case of investment ratios, to the fact that

manufacturing is more cyclical than services.

Moreover services are less tradable than

manufacturing and therefore the impact of the world

trade decrease following the crisis was more felt in

the output of the manufacturing sector.

Main impacts from low investment rates

The main result from this subdued investment in the

EU is that the European economy is recovering much

Figure 1.5:

120

115

110

105

100

-5

(

)

For services, only statistics for the evolution of output in

''Retail & Trade'' are available but not presented here as they

would not be representative of the whole sector.

Manufacturing output in the EU-28 (2000-2014)

Monthly % change

Manufacturing output

-10

-15

Source:

Eurostat

Adverse effects are also created on the EU

international competitiveness, as companies in

competitor countries like the US, who saw their

productive investment rebound to pre-crisis levels,

are gradually upgrading their equipment, something

that does not happen in Europe. Finally, the decline in

investment resulted in a slowdown in innovation too,

not least because SMEs – as drivers of innovation and

growth – face great financing challenges.

kom (2015) 0550 - Ingen titel

1.2

Barriers to investment

Figure 1.6:

Member States feedback on

barriers to investment

The scope of this chapter is to analyse the most

important reasons for the low investment in the EU

and identify the types of investment that are affected

the most, by giving where possible some examples

from Member States.

This analysis is not exhaustive

and does not focus on the importance of input costs

(like labour or energy costs) or infrastructure.

Drawing on the analysis of several surveys

and a

collection of detailed evidence from Member States

feedback,

it helps single out specific aspects in the

barriers affecting a relevant number of Member States

and sectors that negatively impact investment across

the EU (see Figure 1.6). Empirical analysis

also

corroborates the existence of the following barriers to

investment:

Regulatory

instability,

regulatory

unpredictability, overregulation or bad

regulation

Financing constraints

Single Market barriers.

Source:

Final TF report on the Investment in the EU

1.2.1

Regulatory instability, regulatory

unpredictability, overregulation or

bad regulation

It is important to mention in this context that the

Letter of Intent from President Juncker and First

Vice-President Timmermans to the Presidents of the

European Parliament and the Presidency of the

Council accompanying the President's State of the

Union speech 2015 indicated that the identification of

key obstacles to investment at national level will be a

priority of the 2016 European Semester.

(

)

(

)

(

)

( )

(

)

Examples from Member States are given for illustrative

purposes and are not representative.

The increase in energy costs may lead to the relocation of

investment across sectors or countries and labour market

inflexibilities can also have negative impacts on companies'

investment decisions.

World Bank Doing Business, World Economic Forum

Competitiveness Report, flash Eurobarometer Survey on

European Businesses and Public Administration).

Special Task Force (Member States, Commission, EIB) on

Investment in the EU. Final Task Force Report (Annex 3).

According to a study from IMF (

), financial constraints,

high uncertainty and corporate sector leverage are additional

impediments to investment particularly in stressed

economies, namely Italy, Portugal and Spain. Source: IMF

working paper. Investment in the euro area, why it has been

so weak?

Several surveys point out that regulation in EU

Member States is inefficient, impacting businesses

and their investment decisions. For instance, the

OECD ranks the EU average below the global

average in regulatory efficiency and shows that the

EU has lost significant positioning in the last 8 years

(see Figure 1.7). The World Bank rankings 2015 on

doing business report on how easy it is for a local

entrepreneur to open and run a small to medium-sized

business when complying with the relevant

regulations. Results show that there are noticeable

differences in the performance across Member

States.

The magnitude of the problem for EU

businesses is confirmed by the results of a flash

Eurobarometer survey on European businesses and

public administration.

The uncertainty of the general regulatory framework

from frequent or unforeseen changes of the EU or

national legislation results in a higher risk for

(

)

Three EU Member States are among the top 10 countries

with the most business friendly climate; but more than half

of the Member States are not in the top 30 and eight Member

States are not even in the top 50. Source: World Bank Group

(2015), Doing Business report.

According to this survey, for more than three quarters of

European companies (77 %) the lack of predictability and

stability of legislation in their country is an obstacle to their

company’s activity.

(

)

kom (2015) 0550 - Ingen titel

1.2

Barriers to investment

investors.

As a consequence, companies may defer

investment decisions particularly in sectors with

typically longer term pay back periods. The life cycle

of a long term project typically spans beyond any

government administration or individual regulatory

settlement period. Investors are therefore not only

analysing the project-specific risks, but are also

giving substantial consideration to political risk and

stability of the regulatory framework.

Some investment projects submitted by Member

States for the EU investment plan have also

highlighted

the

importance

regulatory

predictability at EU level.

(

)

(

)

According to Commission estimates, a 10 % reduction in

administrative burdens can over time increase investments

by 0.6 percentage points and GDP by 0.8 percentage points.

For instance Austria has submitted a PPP project (an

environmental friendly Pump Storage Hydro Power Plant

Pfaffenboden in Moll). According to the Austrian

authorities, the investment climate in the European

electricity market is poor and the volatile regulatory

framework conditions increase the risk for this long term

investment. Source: Special Task Force (Member States,

Commission, EIB) on Investment in the EU. Final Task

Force Report (Annex 2), December 2014.

Figure 1.7:

Regulatory efficiency: The EU is below the world wide average in regulatory efficiency

and has lost significant positioning in the last 8 years

Note:

* Value 1-7 in 2014-2015 (1=extremely burdensome; 7=not burdensome at all)

* In 2006-2007, 120 countries in the ranking, while in 2014-2015 144 countries in the ranking

Source:

OECD Global Competitiveness Report; BCG Analysis

Figure 1.8:

Costs associated with EU legislation in three energy intensive industries – Refining,

Metals and Chemicals

Source:

Assessment of cumulative cost impact for the steel and aluminium industry; CEPS; Europia; 2014 Statistics; BCG analysis

kom (2015) 0550 - Ingen titel

1.2

Barriers to investment

Figure 1.9:

Evolution of gross fixed capital formation by manufacturing value chain (2008-2011)

US ('08-'11)

EU ('08-'11)

-5p.p

CAGR (%)

0,04

0,03

-3p.p

-10p.p

-8p.p

-3p.p

+6p.p

+2p.p

0,03

-2p.p

0,02

+1p.p

0p.p

0,01

-0,02

-0,04

-0,06

-0,08

-0,1

-0,12

-0,14

-0,16

-0,15

-0,13

-0,08

-0,09

-0,01

-0,02 -0,02

-0,02

-0,03 -0,03

-0,05

-0,07 -0,07

-0,01

-0,02

Source:

Eurostat; U.S. Bureau of Economic Analysis; BCG analysis

Disproportionate regulatory burden at EU or at

Member State level could increase the cost of doing

business and thus have a negative impact on

investment decisions or dislocate investment.

The

Fitness Check on the Refinery sector

shows that up

to 25 % of the sector's margin decline can be

attributed to the impact of 10 pieces of EU

legislation. In metals, regulatory costs represented on

average 8 % of total production costs over the entire

period (2002-2012) but were in the area of 16 % to 39

% of profits.

In the chemical industry, some EU

restrictions through REACH may contribute in

making operating more costly in the EU than in

competing locations.

Figure 1.8 depicts the costs

associated with EU legislation in these industries

while Figure 1.9 shows that some energy intensive

industries like building materials, paper & wood,

metals and chemicals, experienced a more

pronounced drop in investment during the post 2009

(

)

(

)

European Commission (2015), Regulatory Fitness Check for

the petroleum refining sector, Staff Working Document,

forthcoming.

Earnings before interest, taxes, depreciation and

amortisation (EBITDA). Source: CEPS and Economisti

Associati (2013),

Assessment of cumulative cost impact for

the steel and aluminium industry.

The European Chemical Industry Council.

crisis period than the same industries in the US. Of

course this analysis is one side of the coin as it does

not take into consideration the many benefits

stemming up from EU legislation.

There are sectors like pharmaceuticals, where a

harmonised and agile approval process to reduce

the time to market and an efficient and predictable

IPR framework are critical to attract innovative

investments in the EU.

In the pharmaceutical market

conducting clinical trials entails considerable

investment and growth in the EU. The Clinical Trials

Directive is heavily criticised and also one of the

possible reasons for part of the decrease in the

number of applications for clinical trials in the EU

In the market of veterinary medicinal products, the

total annual administrative burden imposed on

business by the veterinary medicines legislation was

estimated to be around 13 % of the turnover of

(

)

European Commission, Impact assessment report on the

revision of the “Clinical Trials Directive” 2001/20/EC

Accompanying the document:

Proposal for a Regulation of

the European Parliament and of the Council on clinical trials

on medicinal products for human use, and repealing

Directive 2001/20/EC {COM(2012) 369 final}, SWD(2012)

200 final.

(

)

kom (2015) 0550 - Ingen titel

1.2

Barriers to investment

veterinary medicines sector - twice of that estimated

for the human sector. In addition, there is a concern

expressed both by regulators and the pharmaceutical

industry, that the current veterinary pharmaceutical

legislation is not suited to innovation. A reason

behind this is that the current data protection

provisions do not take into account the difficulty

found by the veterinary sector in recovering

investments spent in the development of new

veterinary medicines.

Uncertainties around intellectual property rights

(IPRs) affect investment in innovation.

High costs

and complexity of litigation have a dissuasive impact

on SME's using and enforcing IPRs. This leads to

SME's in the EU under using IPRs as a means to

ensure that they earn sufficient returns on their

investment in innovation. Regulatory uncertainties

and fragmentation across Member States may inhibit

the development and growth of the new business

models like for instance in the area of collaborative

economy. Grey zones in the liability of service

providers, business authorisation and registration

requirements deters market access for platforms and

limits investment opportunities estimated at around

USD 15 billion.

32 33

Regulatory fragmentation across the Single Market

or disproportionate restrictions, hamper the

opportunities to expand business at EU level

especially for companies in the transport sector.

transport, logistic costs are very important and

logistic restrictions can be as much as 10 % of total

logistic costs. Unnecessary load and size limits,

traffic restrictions, local restrictions in ports that

hamper competition and administrative procedures

that drive up costs, reduce freight attractiveness for

firms. In road transport there are logistics related to

regulatory differences or restrictions that impact on

the growth opportunities of companies.

In rail

transport, the lack of interoperability between

systems (lack of full ERTMS deployment) holds back

rail freight growth.

Excessive red tape impedes market entry but can

also affect the prospects of companies', especially

small businesses by limiting their possibilities to

grow domestically and internationally or to export

because transaction costs are increased by

unnecessary administrative procedures.

Particularly

burdensome areas are related to time and cost to start

a business and to acquire licenses.

In several EU

countries like for instance in Slovenia, Spain and

Italy, the time needed for an investor to obtain a

building permit is particularly lengthy while costs are

not negligible.

It has to be noted that the effectiveness of justice

systems and of public administrations is very

important in order to reduce the above mentioned

transaction costs for companies.

The 2015 EU

Justice Scoreboard shows that there are significant

divergences in the effectiveness, i.e the quality, the

independence and the efficiency of the justice

systems in Member States, and some of them

continue to face challenges relating to the functioning

of their justice systems.

The effectiveness of the

public administration is very important too. Despite

the fact that many Member States are planning or

even implementing ambitious reforms aiming at

modernising public administrations and thus

facilitating the general business environment, overall

data shows that government effectiveness has not

improved much across the EU over the past five

years.

In addition, according to feedback received

from Member States,

public administrations in

general are suffering from insufficient administrative

capacities to manage complex projects and lack of

technical skills on evaluating, structuring and

executing projects, especially PPPs or private-sector

delivery models more generally.

(

)

(

)

(

)

(

)

European Commission, Impact Assessment accompanying

the document Proposal for a Regulation of the European

Parliament and of the Council on veterinary medicinal

products {COM(2014) 558 final}, SWD(2014) 274 final.

European Commission, (2015),

A Single Market Strategy for

Europe – Analysis and Evidence,

SWD(2015) 202 final.

PwC (2014),

The sharing economy – sizing the revenue

opportunity.

Maximum weights for 5-axle articulated vehicles differ

across Member States: Some of them (for instance Italy,

Netherlands) have set the limit at 44 tons, while others (like

Poland and Germany) do not allow loads over 40 tons.

(

)

(

)

(

)

(

)

(

)

World Bank Group (2015),

Doing Business 2015

Report.

Slovenia ranks in the 90th place, Spain in the 105th place

and Italy in the 116th place for the time needed to get a

building permit. Source: 2015 World Bank Doing Business

report. In Spain the case of environmental permits is very

important since businesses organisation’s claim that current

delays amount to 30 months on average.

European Commission (2015),

The 2015 EU Justice

Scoreboard,

COM(2015) 116 final.

According to the government effectiveness indicator of the

World Bank which captures the perception of the quality of

public service, its independence from the political process,

the quality of policy formation and the implementation and

credibility of the government commitment to policies, the

ranking of fourteen Member States fell in 2014 compared to

2008.

Special Task Force (Member States, Commission, EIB) on

Investment in the EU. Final Task Force Report (Annex 3),

December 2014.

kom (2015) 0550 - Ingen titel

1.2

Barriers to investment

1.2.2

Financing constraints

Financial flows to non-financial corporations in the

EU are increasing but remain subdued.

Financing

discrepancies among Member States have been

exacerbated, i.e. while certain countries have

historically low financing costs, others - especially in

the euro area periphery - are still struggling with

prohibitively high costs of long term financing, which

is a major hurdle for achieving a well-functioning

Single Market. Across firms' size, there are

Figure 1.10:

significant discrepancies too. SMEs, the backbone of

the EU economy, continue to be disadvantaged

compared to large firms in terms of interest rates and

the overall cost of borrowing, as European banks

have increasingly differentiated the lending rates

between small and large loans, in particular in the

distressed countries of the euro area.

This impacted

particularly small and newly established businesses.

(

)

2014 ECB SAFE data.

Number of non-financial companies (medium-sized companies with a potential to use

stock markets as a source of funding, 2012)

Source:

European Commission (Staff Working Document 2015/13); ECB; Eurostat and FISMA calculations.

One of the main issues in the EU financial market is

that European corporations are in general too

dependent on bank lending and equity markets

remain underdeveloped in comparison to other big

economies.

SME's particularly cannot tap capital

markets due to, among others, their size, scant credit

information and regulatory and other barriers to SME

listing. Only a small minority of them reported

having used (or considered using) alternatives to bank

loans financing instruments, such as equity (16 %) or

debt securities (4 %). Moreover, there are significant

differences between Member states regarding access

to stock markets as a source of funding (Figure 1.10).

Alternative financing mechanisms like venture

capital, private equity and other non-bank channels

play a very limited role especially for EU SMEs.

Private funding for start-ups in the EU is very limited

compared to that of their US peers (see Figure 1.11).

Information asymmetries between lenders and

borrowers and lack of credit information for

potential investors also hinder financing.

Around 25

% of all companies and around 75 % of owner-

managed companies do not have a credit score. This

lack of credit information is due to many factors,

including: lack of clear accounting guidelines to

value intangible assets which affects most start-ups

and innovative businesses in the EU; differences in

national laws that hinder the collection of information

and lack of positive data sharing (e.g. on payment

records) in many Member States; fragmentation on

the provision of financial information to investors

more generally (ex. the financial statements prepared

by companies vary greatly from one Member State to

another); expensive provision of good quality

independent research leading to lack of investment

research and analysis on SMEs

Given the stagnant public spending in ICT R&D,

this gap in private funding limits growth

opportunities for start-ups and affects investment in

innovation too.

Examples of how these financing

constraints affect the growth of innovative companies

can be found in some Member States

. For instance

(

)

European Commission,

Initial reflections on the obstacles to

the development of deep and integrated EU capital markets

Accompanying the document

Green Paper: Building a

Capital Markets Union

{COM(2015) 63 final}, SWD(2015)

13; ECB; Eurostat and FISMA calculations.

Source: Special Task Force (Member States, Commission,

EIB) on Investment in the EU. Final Task Force Report

(Annex 3), December 2014.

(

)

kom (2015) 0550 - Ingen titel

1.2

Barriers to investment

in Cyprus, there is a grant scheme for Entrepreneurial

Innovation-Developing Innovative products and

Services for the international market, supporting 39

innovative companies. Three of them cannot expand

further although they have secured international

patents because in Cyprus there is no venture capital

market and the banks do not give loans to innovative

companies that have only intellectual property as

collateral. Financing constraints also affect long term

investment: more than 75 % of the Member States

pointed out the financing constraints (both in terms of

public and private sources of financing) as barriers to

long term investment

The uncertainty around IPRs mentioned before,

acts as a burden to both bank lending and the

flourishing of equity markets.

The need to ensure

that intellectual property assets are appropriately

valorised so that innovative firms, in particular

SMEs, can raise capital to enhance their economic

performance is a key challenge for job creation and

growth. According to a recent study undertaken for

the European Observatory against IPR infringements

by OHIM, intellectual property reliant industries

account for 26 % of the EU’s employment and 39 %

of EU’s GDP

Figure 1.11:

1.2.3

Single Market barriers

Private funding for start-ups in

the EU and US

37,9

80%

U.S.

7,6

High levels of trade restrictiveness in business

services

can hamper the cross border expansion of

firms or the development of new business models.

Cross border services within the Single Market as a

percentage of total services (6-20 % total) are far

below those in the US (27-32 %). Across Member

States differences are significant too. Figure 1.12

shows that in several EU countries service trade

restrictiveness on business services is high. The flash

Eurobarometer survey on European businesses and

public administration shows that currently only 8 %

of SMEs engage in cross-border activities. As also

noted in the Commission Staff Working Document

''A

Single Market Strategy for Europe – Analysis and

Evidence''

despite a considerable reduction in

authorisation, registration and licencing requirements

following the implementation of the Services

Directive, there are still multiple restrictions in

place:

These are linked inter alia to the obligation of

service providers to obtain authorisations in the

country where they provide services even if they have

already obtained the same or similar authorisations in

their country of establishment, the limited validity of

authorisations (territorial and/or time restrictions),

and the requirement to register with a chamber or

professional association. For retail services, in

addition to the large number of obligations for

authorisations and permits, conditions are often

associated to the size and location of the

establishment.

Moreover,

certain operational

requirements may have significant effects on the

competitiveness of the retail sector or on cross-border

trade and investment.

(

)

(

)

Source:

EC Digital Agenda Scoreboard 2014; Dow Jones

Venture Source; The New York Times; BCG analysis

(

)

(

)

idem.

https://oami.europa.eu/tunnel-

web/secure/webdav/guest/document_library/observatory/doc

uments/IPContributionStudy/executive_summary/executive

%20summary-en.pdf.

(

)

Since 2008, the definition of "business services" used by

Eurostat is based on NACE Rev2. It includes NACE Rev 2

codes: J62, N78, J582,J631, M731, M691, M692, M702,

M712, M732, M7111, M7112.

European Commission, (2015),

A Single Market Strategy for

Europe – Analysis and Evidence,

SWD(2015) 202 final.

According to the 2015 Commission assessment,

authorisation requirements and procedures in civil

engineering, accounting and architecture are in place for one

or more of these professions in 24 out of 28 Member States.

kom (2015) 0550 - Ingen titel

1.2

Barriers to investment

Figure 1.12:

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

Services Trade Restrictiveness for legal, accounting, engineering and architect services

SE UK FI NL DK IE EE LT LV BG SK ES FR SI PL RO HU CZ BE HR EL PT CY IT DE MT AT LU

Note:

The chart shows the overall restrictiveness per country as the sum of the trade restrictiveness indicators for the four professions

mentioned, based on an assessment by the Commission services. For further detail, see: European Commission, (2015), Staff Working

Document,

A Single Market Strategy for Europe – Analysis and Evidence,

SWD(2015) 202 final.

Source:

European Commission, own assessment

Several Member States have restrictions that limit

the possibility for a company to expand cross border

and grow (see Figure 1.13).

For instance in Greece,

significant restrictions exist for investment in sectors

like maritime and air transport

. In the maritime

transport sector, the limitation on foreign equity

participation is set to less than 50 % and cabotage is

not permitted for non-EU registered vessels, with the

exception of cruise ships. In air transport, the air

(

)

The OECD Services Trade Restrictiveness Indices (STRI)

for maritime and air transport are the highest in the country.

Source: OECD.

transport investment regime restricts foreign equity

participation to less than 50 % and effective control

of the airline must be in EU hands. Retail

establishment rules are particularly restrictive in

Denmark and Finland, in particular for the opening of

new large retail outlets. Operational restrictions are

also present in Hungary, with the presence of a food

safety inspection tax, restrictions prohibiting Sunday

and night opening for large shops and a provision

prohibiting selling groceries by companies operating

with a loss in two consecutive years.

Figure 1.13:

Market entry restrictions in several Member States

Transparent and like-to-like competitive environment

restrictions in distribution

100

Foreign ownership and market entry restriction in

distribution

100

Note:

Restrictiveness (Index China 100)

Source:

OECD Service Trade Restrictiveness Index

kom (2015) 0550 - Ingen titel

1.3

Investment Plan

Inefficiencies in public procurement across EU

Member States can also limit cross-border

expansion or growth in the domestic market or even

the development of new business models.

Uncompetitive practices (for instance non transparent

public procurement procedures and fragmentation of

calls) are an obstacle to companies' involvement in

public procurement.

These restrictions prevent

smaller companies to grow as they are more

vulnerable to uncompetitive practices such as

obstacles to involvement with public procurement. A

recent study

indicates that the increased publicity

requirements induce more entry into public

procurement while increasing the likelihood that the

winner would come from outside the region of the

public administration. However transparency of

below threshold procurement varies greatly:

National thresholds for publication range from less

than €10,000 in Portugal to €134,000 in Italy for

goods and services, and there is similar diversity in

works. Finally, there are also divergences as regards

the length of review procedures and costs of

litigation, which may further discourage cross border

participation.

Several barriers in the EU hamper the development

of e-commerce though the establishment of new

businesses or the expansion of existing ones or the

development of new business models.

For instance

(

)

Only a very low proportion of public contracts published at

EU level, (1.6 % or 13.4 % if subsidiaries are taken into

account) are awarded to companies coming from different

Member States.

European Commission, Flash Eurobarometer 417.

Decio Coviello and Mario Mariniello (2014).

Publicity

requirements in public procurement: Evidence from a

regression discontinuity design,

Journal of Public

Economics, 2014, vol. 109, issue C, pages 76-100.

European Commission, (2015),

A Single Market Strategy for

Europe – Analysis and Evidence,

SWD(2015) 202 final.

European Commission (2015),

The 2015 EU Justice

Scoreboard,

COM(2015) 116 final

http://ec.europa.eu/justice/effective-justice/

files/justice_scoreboard_2015_en.pdf.

data localisation requirements force companies to

store data on servers physically located inside a

particular Member State not allowing them to keep

processing facilities outside their territory. Processing

of consumer data is extremely important for several

industries and this situation limits their growth

potential. Indeed it has been estimated that the

negative impact of data localisation requirements on

EU GDP is 0.4 %.

In the area of veterinary

medicinal products some Member States introduced

national controls on online sales of veterinary

medicines (e.g.: United Kingdom, Germany, Ireland),

and others have no controls or forbid it (Austria and

Belgium). This fragmentation reduces the potential

benefits that retailers of veterinary medicines (in

particular SMEs and micro-enterprises) could have

from operating on a larger, EU-wide market and from

developing new services for consumers

Investment in innovation can be hampered by a

non-harmonised Single Market in several sectors.

For instance, digitisation of the health sector is

hampered by several regulatory inefficiencies and

non-harmonised rules linked to security (e.g. varying

rules on secondary use of data), access and update of

data (e.g. lack of harmonisation on patients’ consent

as well as rights to erase and correct data and/or the

lack of harmonisation of professionals having access

to the data), barriers to cross-border transfer of data

and the lack of a common strategy to coordinate

deployment of e-prescriptions.

(

)

ECIPE estimates (2014) – estimates for only 6 countries in

addition to the EU. See: European Commission (2015),

digital Single Market Strategy for Europe – Analysis and

Evidence,

SWD(2015) 202 final; ECIPE (2014),

'The costs

of data localisation: friendly fire on economic recovery'',

and the European Commission workshop ''Facilitating

cross

border data flow in Europe - on data location restrictions''.

BCG analysis.

European Commission, Impact Assessment Accompanying

the document Proposal for a Regulation of the European

Parliament and of the Council on veterinary medicinal

products {COM(2014) 558 final, SWD(2014) 274 final.

(

)

(

)

(

)

(

)

(

)

1.3

Investment Plan

Its main objectives are to reverse the drop in

investment, boost competitiveness in strategic areas

and strengthen the European dimension of EU

knowledge, human capital and physical infrastructure,

and the interconnections that are vital to the EU

Single Market. This is addressed through three

mutually supportive strands.

Implementing the President's political guidelines,

presented to the European Parliament in July 2014,

the Commission proposed an Investment Plan which

aims to mobilise at least EUR 315 billion in the next

three years by supporting investment in the real

economy and creating an investment-friendly

environment. It will help maximising the impact of

public spending and unlocking private investments.

kom (2015) 0550 - Ingen titel

1.3

Investment Plan

The first strand (or financing strand) is about

mobilising finance for investment through the

European Fund for Strategic Investments (EFSI). An

EU guarantee of EUR 16 billion aims at directing

through the multiplier effect more than EUR 315

billion to the real economy.

The fund will focus its

financing on investments in infrastructure and

innovation, as well as finance for small- and medium-

sized Enterprises (SMEs). The second strand is all

about making this finance reach the real economy.

The EU investment project portal (EU IPP) will give

the possibility to project sponsors to submit their

projects to an open and transparent system thus

addressing a major obstacle to investments - the lack

of information - by informing investors about

available existing and potential future projects. The

European Investment Advisory Hub (EIAH) which

will be Europe's gateway to investment support,

draws together existing expertise in technical

assistance, project design and implementation in

Member States, the EIB and the European

Commission to create a single contact point for

project sponsors and investors who need such

assistance in order to improve their project plans

For the first two strands of the Investment Plan to be

successful, improving the investment framework

conditions in the European economies is crucial. As

already mentioned, many obstacles for investment are

linked inter alia to the regulatory framework but also

to deficiencies in the product, services, and capital

markets. The identification and removal of barriers to

investment across EU Member States is the key

objective of this strand. To improve the business

environment and financing conditions, the Investment

Plan will include progress towards a Digital Single

Market, Energy Union and Capital Markets Union.

The Digital Single Market will unlock on line

opportunities by bringing down barriers. The Energy

Union will create a fully integrated internal energy

market by reducing technical and regulatory barriers.

(

)

(

)

The leverage effect of the EUR 21 billion capital (including

an extra 5 billion from the EIB) of the EFSI is that each euro

of capital generates EUR 15 worth of investment.

Since September 2015, the European Investment Advisory

Hub (EIAH) is operational. The Advisory Hub is a

partnership between the Commission and the EIB and

consists of three complementary components: 1) a single

point of entry to a wide range of advisory and technical

assistance programmes and initiatives for public and private

beneficiaries, provided by high-level experts; 2) a

cooperation platform to leverage, exchange and disseminate

expertise among the EIAH partner institutions and beyond;

and 3) an instrument to assess and address new needs by

reinforcing or extending existing advisory services or

creating new ones as demand arises.

The Capital Markets Union (CMU) will create deeper

and more integrated capital markets in the 28

Member States of the EU. The Capital Markets Union

Action Plan launched in September 2015 is based on

four key principles: creating more opportunities for

investors; connecting financing to the real economy;

fostering a stronger and more resilient financial

system; deepening financial integration and

increasing competition. The Action Plan foresees

some key early actions.

In addition, the Single Market Strategy targets at

deepening of the Single Market by removing barriers

to the free movement of goods and services and

enhancing implementation of existing Single Market

rules. The Better Regulation package adopted by the

European Commission earlier this year sets the scene

for better regulation in the coming years by having as

main objectives the better assessment of impacts,

more consultation with stakeholders and better

evaluation.

Further to these initiatives, the Commission has

started working on the identification of country and

sector-specific barriers to investment that will be

addressed in the context of the European Semester.

Moreover, a set of investment barriers in chemicals,

minerals and recycling, has been outlined as a result

of consultations with potential investors. Specific

obstacles concern for example difficulties with long-

term electricity contracts, land-use planning and

sometimes an inappropriate approach to the

implementation of permitting, regulatory barriers for

bio-nutrients, regulatory uncertainty for carbon

capture and use, regulatory uncertainty for plastics

recycling, or unfair competition on biomass markets

or the functioning of waste markets. Work on

identifying investment barriers in other industry

sectors than the ones mentioned above is currently

ongoing.

(

)

New rules on securitisation; new rules on Solvency II

treatment of infrastructure projects; public consultation on

venture capital; public consultation on covered bonds;

assessment of cumulative impact of financial legislation.

kom (2015) 0550 - Ingen titel

1.4

Conclusions

Third, Single Market barriers, like differences in

business services across Member States, public

procurement inefficiencies, other restrictions like in

the area of acquisition of land or real estate and

several barriers in the area of e-commerce. These

obstacles can limit cross border expansion

opportunities, creation of new business models and

investment in innovation. The Single Market

Strategy to which this report is attached, aims at

deepening the Single Market by removing

unnecessary barriers to the free movement of goods

and services and above mentioned restrictions in

order to favour investment inter alia in innovation.

The Letter of Intent from President Juncker and

First Vice-President Timmermans to the Presidents

of the European Parliament and the Presidency of

the Council accompanying the President's State of

the Union speech 2015 indicated that the

identification of key obstacles to investment at

national level will be a priority of the 2016

European Semester.

The fact that European economies (unlike in the

US) did not manage to rebound to their pre-crisis

investments levels shows that there are some

consistent barriers that continue to hinder

investment in the EU. This chapter tried to analyse

these barriers and to identify their impact on

specific sectors or types of investment by giving

some specific examples where possible from

Member States. The taxonomy proposed includes

three types of obstacles:

First, barriers linked to regulatory instability,

unpredictability, overregulation or bad regulation

which impact all types of investment decisions but

mostly longer term ones. Investments with longer

pay back periods like the ones in the energy sectors

need in general not only political but also

regulatory stability. It was also shown that

regulatory inefficiencies generally increase running

costs for businesses especially for SMEs. The third

strand of the investment plan aims at improving the

investment framework conditions. The Better

Regulation package adopted earlier this year, aims

at making regulation more lean, consistent and

agile.

Second, obstacles linked to financing constraints.

Although there are significant discrepancies among

EU Member States, European firms are in general

too dependent on bank lending and equity markets

remain underdeveloped in comparison to other big

economies like the US. This coupled with

information asymmetries and other restrictions,

limit investment opportunities, expansion potential

and innovation of EU firms. In this case,

investment in innovation is particularly hit as

smaller and more innovative companies face

significant challenges in accessing seed stage and

early stage venture capital. The financing strand of

the Investment Plan will mobilise finance for

additional investment through the European Fund

for Strategic Investments (EFSI) while the Capital

Markets Union will explore ways of reducing

fragmentation in financial markets, diversifying

financing sources, strengthening cross border

capital flows and improving access to finance for

businesses, particularly SMEs.

kom (2015) 0550 - Ingen titel

The evolution of EU competitiveness and innovation

The economic recovery in Europe is gaining strength.

While this is encouraging, we seem destined to return

to weak growth rates. Economic expansion alone is

not enough to guarantee lasting and sustainable

growth. As the possibilities for accumulating capital

and labour appear limited, the onus is on productivity

to drive long-term growth. But the long-term trend of

declining productivity growth has not been reversed

yet.

The barriers that have hampered investment and

(

)

There is an ongoing debate on the measurement of

productivity. Various economists have highlighted the

limitations of the standard measures that may be biasing

down productivity growth, such as: the incapacity for

capturing quality improvements; time lags for capturing

changes; and the existence of activities not captured by

GDP. For instance, the United Kingdom has launched an

independent review of economic statistics which is expected

to address these issues among others. Adjusting for these

measurement errors may indeed attenuate the decline in

productivity growth. Yet, this report focuses on factors

behind the productivity slowdown that are not related to

measurement. On the debate on productivity measures, cf.

Citi,

Global Economics View – poor productivity, poor data,

lowered capital accumulation (see chapter 1) are also

responsible for the slowdown of productivity growth.

Revitalizing investment is needed to improve

productivity.

The problem of low productivity remains therefore

one of the greatest threats to improve competitiveness

and raise living standards. The generalised

productivity slowdown and the opportunities from a

better allocation of resources and innovation offer a

window of opportunity to the EU to improve global

competitiveness. A strong commitment to

productivity-enhancing structural reforms is needed.

However, while common principles may apply,

reforms should be country and sector specific.

and plenty of polarisation,

Citi Research, August 2015. On

the UK independent review of economic statistics, cf. UK

HM Treasury and Cabinet Office,

Review of economic

statistics: call for evidence,

August 2015.

2.1

The evolution of sectoral performance

of both the share of value-added and the share of

employment generated in services sectors. However,

there are still relevant differences across Member

States. As shown in Figure 2.1 below, the weight of

manufacturing is overall higher in Central and

Eastern European (CEE) Member States and several

EU-15 Member States. As concerns services, all CEE

Member States have a share of total value added

below the EU average.

2.1.1

GDP composition

Economic development has been characterised by a

gradual shift of activity and resources from

agriculture to manufacturing, followed by a shift from

manufacturing towards the service sector. The tertiary

sector has gained in importance, both in terms of

employment and output, and all EU economies are

becoming increasingly services economies, in terms

kom (2015) 0550 - Ingen titel

2.1

The evolution of sectoral performance

Figure 2.1:

Relative contributions to total value added in the EU and Member States (2014)

Manufacturing

Services

Share of total value added (%)

Note:

2014 data for EU and all Member States but Luxembourg (2013) and Romania (2012. Data for Bulgaria not available.

Source:

Own calculations based on Eurostat data

There are several possible explanations for the

increasing importance of services in the economy.

First, income elasticity of demand for certain services

(education, health, leisure related, and personal

services, among others) is higher than for most

manufactured goods. This high income elasticity

together with increases in income in the EU-28

during the period studied resulted in a disproportional

increase in the share of services in the economy.

Second, the use and relative cost of services as

intermediate inputs in manufacturing increased

during this period. Third, productivity increased

faster and prices increased more slowly in

manufacturing

than

services.

Finally,

manufacturing was more exposed to competition

from low cost producers outside EU, which could

lead to reduction in manufacturing production and

reallocation of resources within the EU towards

services, which were less exposed to such

competition.

Figure 2.2 below shows that during the period 2000

to 2014 the shares of agriculture, industry and

construction in GVA decreased, while the shares of

services increased. These changes resulted in services

(market and non-market)

accounting for 74 % of the

GVA in 2014. During the same period, the share of

manufacturing decreased from 18.8 % to 15.3 %.

(

)

Market services are those services produced for sale on the

market at a price intended to cover production costs and to

provide a profit for the producer (e.g. retail, financial

intermediation). Non-market services are those services

provided free of charge, or at a price that is not

economically-significant i.e. does not reflect production

costs (e.g. public health, education).

kom (2015) 0550 - Ingen titel

2.1

The evolution of sectoral performance

Figure 2.2:

Shares in EU-28 GVA by sector (2000-2014)

2000

2014

51,2

48,7

22,2

2,2

Agriculture, forestry

and fishing

Industry (except

construction)

Manufacturing

Construction

Market services

1,6

18,9

18,8

21,1

22,9

15,3

5,8

5,4

Non-market service

Source:

European Commission,

EU Structural Change 2015,

DG GROW.

The share of services in GVA has increased overall

by 0.4 percentage points, with respect to 2009. Figure

2.3 below shows that the service sector accounts for

more than 59 % in GVA in all Member States. In ten

of them – Luxembourg, Cyprus, Malta, Greece, the

United Kingdom, France, the Netherlands, Belgium,

Portugal and Denmark – it even accounts for more

Figure 2.3:

90.0%

than 75 % of GVA in 2014. Only six Member States

– Germany, Estonia, Lithuania, Hungary, Slovenia,

and the Czech Republic – have seen a reduction in the

weight of the services sector. These are Member

States were the relative importance of this sector was

already below the EU average, while that of their

manufacturing sector was well above the EU average.

Services as a percentage of gross value added (2009 and 2014)

85.0%

80.0%

75.0%

70.0%

65.0%

60.0%

55.0%

2009

2014

2009

2014

2009

2014

2009

2014

2009

2014

2009

2014

2009

2014

2009

2014

2009

2014

2009

2014

2009

2014

2009

2014

2009

2014

2009

2014

2009

2014

2009

2014

2009

2014

2009

2014

2009

2014

2009

2014

2009

2014

2009

2014

2009

2014

2009

2014

2009

2014

2009

2014

2009

2014

2009

2014

2009

2014

50.0%

Source:

Eurostat

The relative importance of manufacturing has

increased overall by 0.5 percentage points, with

respect to 2009. However, performances vary slightly

among Member States and across time, as shown in

Figure 2.4. It is interesting to note that, with the

exception of Germany, the seven Member States with

a larger manufacturing sector (as percentage of GVA)

— the Czech Republic, Hungary, Slovenia, Germany,

Romania, Slovakia and Lithuania — mostly catching-

up economies that are likely to grow more than the

EU average in years to come.

kom (2015) 0550 - Ingen titel

2.1

The evolution of sectoral performance

Figure 2.4:

Manufacturing as a percentage of gross value added (2009 and 2014)

Source:

Eurostat

After several difficult years at the start of the century,

EU manufacturing output expanded rapidly from

2003 to 2008, when it peaked. It then fell by almost

20 % in 2008 and 2009 as the full force of the

recession required manufacturers to close down, or at

any rate downsize in order to survive. From its lowest

point in 2009, manufacturing has recovered more

than half the output lost in 2008–2009 but remains

lower than pre-recession peak production in most

Member States. On average across all Member States,

the negative gap is around 9 %, but in crisis-stricken

economies such as Cyprus, Greece and Spain,

manufacturing output only represents 60–75 % of

pre-recession levels. In fact, in fifteen Member States

manufacturing output remains lower than before the

recession, in nine it is higher, and in the remaining

four (Austria, Germany, Hungary, Netherlands) it is

very close to pre-recession levels.

In other parts of the world, manufacturing has

recovered more quickly than in the EU. Despite

initially rebounding quicker than in the United States,

EU manufacturing has since fallen behind in

recovering from the recession.

In many Asian

economies, manufacturing output plunged deeper

than in the EU or the United States, but recovered

( )

much faster.

A case in point is South Korean

manufacturing, which returned to pre-recession levels

of production in less than 18 months.

Even in Japan

— initially hit harder by the crisis than any of the

other three economies — the economy recovered

almost at a par with South Korea for some time, until

the devastating earthquake and tsunami of 2011 dealt

a second blow to the economy.

From a sectoral perspective, most sectors experienced

growth in 2014 (see Figure 2.5).

However, in spite

of recent strong output increases in certain sectors,

only three sectors have exceeded their pre-crisis

production levels (pharmaceuticals, other transport

equipment and food and beverages) while motor

vehicles is nearly at the same level of production as

before the crisis. At the other extreme of the

performance spectrum, other non-metallic products,

textiles, basic metals and chemicals saw their

production levels fall and are still far from their peak

production.

(

)

The corresponding average for Japanese manufacturing was

more than 15 % below peak production, whereas South

Korean manufacturing output was 20 % higher than its pre-

crisis peak in 2008.

Some of the main reasons for South Korea’s rapid recovery

from the crisis are explained in OECD (2011).

The fastest growing sectors over twelve months were

pharmaceutical products and preparations; coke and refined

petroleum products; computer, electronic and optical

products; motor vehicles, trailers, semi-trailers and other

transport equipment. The greatest output losses over the

same twelve months occurred in tobacco.

(

)

(

)

US manufacturing output has grown consistently from its

lowest point in 2009 — by 6.1 % in 2010, 3.4 % in 2011, 4.1

% in 2012, 2.6 % in 2013, and 3.6 % in 2014 — and now

exceeds pre-crisis levels by a small margin.

kom (2015) 0550 - Ingen titel

2.1

The evolution of sectoral performance

Figure 2.5:

Sectoral performance of manufacturing output in the EU-28 (2014 and 2008-2014)

Electrical Equipment

Computer and electronics

Wood Products

% CHANGE IN 2014

-5

-10

-15

-20

Motor vehicles

Coke and Refining

Plastics

TOTAL

Other transport eq

Pharmaceuticals

Other

non-metallic

products

Textiles

Fabricated metal products

Food, Beverages & Tobacco

Basic metals

Chemicals

Paper and printing

Machinery and other equipment

-40

Source:

Eurostat

-30

-20

-10

% CHANGE SINCE MARCH 2008

Given its importance in terms of upstream and

downstream links to other sectors of the EU

economy, as well as internationally in the global

value chain, it is worth highlighting the motor

vehicles, trailers and semitrailers sector and its

remarkable recovery after the crisis. The initial

impact was considerably more severe than in most

other EU manufacturing sectors: from early 2008 to

early 2009, output fell by more than 40 %, production

plants were closed down or offshored, employees

were laid off, and some manufacturers went out of

business. However, the sector survived in a smaller,

restructured and (presumably) more efficient form

and rapidly expanded production. Two years after its

lowest point in 2009, production had increased by

70 %, and since then it has edged within a few

percent of its peak in early 2008. For 2014 as a

whole, production reached an all-time high.

As concerns services, reliable data on output volumes

are difficult to obtain except for retail trade, where

trade volume grew rapidly and consistently until it

peaked in 2008. After the crisis and throughout the

recession it fell back but is now rising again. For all

services apart from retail trade, only turnover data are

available, showing a steady increase over time,

although with no reliable way of distinguishing

between the effects of price and volume changes.

2.1.2

Employment evolution

In EU manufacturing, both employment and

production fell sharply during the longest and deepest

recession in European post-war history but have since

recovered somewhat and, in the case of

manufacturing employment, returned to the same

level as in 2010. Between 2013 and 2014

employment in manufacturing grew by 160 000 units.

However, 1.7 million jobs still need to be recovered

in the EU manufacturing sector with respect to 2009.

Figure 2.6:

Production and employment in

EU manufacturing (2000-2014)

Production

120

Employment

Index 2010=100

110

100

2000

2002

2004

2006

2008

2010

2012

2014

Source:

Eurostat

kom (2015) 0550 - Ingen titel

2.1

The evolution of sectoral performance

There is no contradiction between the long-term

trends of falling manufacturing employment and

cyclically growing output (see Figure 2.6), on the one

hand, and the diminishing contribution of

manufacturing to total value added on the other hand.

Both are in fact driven by the higher productivity

growth in manufacturing than in services. Being able

to produce as much or more goods with less input (of

labour, capital, energy, intermediate goods, raw

material) means that output can increase even though

employment goes down, while at the same time the

relative prices of the goods are pushed down because

of competition.

Therefore the value of the produced

goods does not increase by as much as the volume

and over time manufacturing tends to represent a

smaller proportion of total value added.

Concerning services sectors, they now employ more

people than ever before and are set to continue

expanding their employment. Employment in services

diminished in 2008 and 2009 as a result of the crisis

but quickly recovered and is now higher than ever

before.

paid technicians

and well-paid managerial

administrative roles, while employment has been

destroyed across all wage quintiles for low-tech

industry. However, during 2014 the polarisation trend

was somehow eased. While services continued

creating jobs at the lower extreme of the wage

distribution, manufacturing created jobs in the top

three quintiles, contributing to a more even

distribution of jobs along the pay scale.

Figure 2.7:

Change in employment (1000

jobs) by wage quintiles for EU-27

by sectors (2011-2014)

Manuf

4.000

3.000

2.000

1.000

(1.000)

1593,541

709,976

287,105

-397,679

30,865

Services

Rest

Total

-803,856

(2.000)

2.1.3

The impact of changes in the

economic structure of the EU on

wages and the quality of jobs

(3.000)

Total

Note:

Wage quintiles are numbered from 1 (= lowest wage

levels) to 5 (=highest wage levels).

Source:

Eurofound

The changes in the composition of GVA of the EU

and its economic structure have impacts on the

distribution of jobs across sectors and the absolute

level of employment, but they also have an impact on

the quality of those jobs and the distribution of

wages. The new jobs created in manufacturing will

not have the same characteristics as those destroyed

during the crisis. Since 2011, net employment has

been created mostly in the low and high-paid levels

leading to a greater polarisation of employment

(Figure 2.7).

This trend is repeated for

manufacturing (Figure 2.8). However, high-tech

industry has been capable of providing a wider range

of mid and high paying jobs, corresponding to mid-

(

)

A measure that could take into account both productivity

and competitiveness is profitability. Cf. Amoroso, Sara &

Moncada-Paterno-Castello, Pietro (2015),

Profits, R&D and

the demand for labour,

JRC-IPTS Working Papers on

Corporate R&D and Innovation (forthcoming); and

Brännback, Malin, Alan L. Carsrud, and Niklas Kiviluoto

(2014),

Understanding the Myth of High Growth Firms,

Springer, New York.

Eurofound (2015).

Upgrading or polarisation? Long-term

and global shifts in the employment structure,

European

Jobs Monitor 2015.

Figure 2.8:

Change in employment (1000

jobs) by wage quintiles for EU-27

by industry sectors (2011-2014)

High tech industry

TOTAL

145,636

Low tech industry

200

100

(100)

(200)

-27,283

-85,244

-191,924

-193,862

(300)

(400)

(500)

(600)

-352,677

TOTAL

Note:

Wage quintiles are numbered from 1 (= lowest wage

levels) to 5 (=highest wage levels).

Source:

Eurofound

(

)

Jobs were allocated to quintiles in each country based on the

job-wage ranking for that country. Mid-paid technicians

correspond to quantile 3 and represent close to 20 % of

employment in the relevant period. Cf. Eurofound, (2015).

(

)

kom (2015) 0550 - Ingen titel

2.1

The evolution of sectoral performance

Figure 2.10:

The distribution of job creation across sectors and the

quality of those jobs presents significant differences

across Member States (Figures 2.9 and 2.10).

Germany and France have experienced employment

creation mainly in the lower quintiles of the wage

distribution. While Germany has seen employment

growth both in the manufacturing and services sector,

France has only created net employment for the latter.

On the other hand, employment losses continued

across the board in the southern Member States, more

so in Greece and Spain where no wage quintile has

experienced net job gains during the period 2011-

2014. Italy has only seen a significant growth of low-

paid services jobs. Zooming into the creation of jobs

in industry, high paid jobs are being created, or

destroyed at a slower pace, in high-tech sectors.

Note:

Change in employment (1000

jobs) by wage quintiles for

selected Member States and

sectors (2011-2014)

Figure 2.9:

Change in employment (1000

jobs) by wage quintiles for

selected Member States and

industry sectors (2011-2014)

Wage quintiles are numbered from 1 (= lowest wage

levels) to 5 (=highest wage levels).

Source:

Eurofound

This polarisation of jobs can also be seen in terms of

tenure. During the crisis, manufacturing job tenure

increased showing that job destruction was centred in

the late arrivals to the sector which should be the

youngest and more qualified.

(

)

RWI (2015). Labour market transitions in turbulent times.

Research Project Report for Eurofound.

Note:

Wage quintiles are numbered from 1 (= lowest wage

levels) to 5 (=highest wage levels).

Source:

Eurofound

kom (2015) 0550 - Ingen titel