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Is Europe’s Economy Really Sick?

Geplaatst op feb 13, 2014 in News

You cannot pick up a business newspaper magazine these days without reading some article about Europe’s economic crisis; there seems to be an almost universal consensus that Europe is sick, that its institutional frameworks and governments are unfriendly to business, and that its prospects for getting better are dim.

For example, a survey answered by some 1,300 business executives worldwide that we conducted for INSEAD’s European Competitiveness Initiative shows that hardly anyone disagrees strongly with the proposition that innovation in Europe is hampered by a lack of culture of innovation and entrepreneurship, while about two thirds of those surveyed thought that Europe was actually unfriendly to innovation.

How Europe Is Perceived Chart

What exactly are the issues that people have with Europe’s innovativeness? Well, it’s not about the people. Half or more of those surveyed believed that European innovators were good, even world class, and that they had good business and technological skills.

The culprits were institutional. Most survey participants believed that government and financial institutions gave relatively little support to innovation.  And while innovators may have had good business skills, the general culture of business in Europe did not encourage innovation.

Why Managers Think Europe Is Sick Chart

And who exactly is doing the complaining? The Europeans themselves seem to be pretty evenly balanced on the state of their Union. Outside Europe, though, opinions are distinctly less positive. A shocking 83% of Latin American respondents expressed concern for Europe’s future and nearly three quarters of those surveyed in the big emerging economies like China and India felt the same way. Nearly two thirds of North Americans were pessimistic.

Who Are the Critics Chart

While they’re somewhat comfortable with innovation, European managers are worried about their overall competitiveness, which they feel is compromised by large, expensive and rigid social systems and labor markets, that are almost impossible to reform.

There’s some variation on just how deep the concern is. Hungarians don’t seem particularly troubled by the question but the Austrians, Belgians, British, Italians, Swedes, Danes, and Romanians are very concerned by it. The rest are not quite so worried but generally agree with the proposition that their countries’ inability to reform makes them uncompetitive.

Is Social Security the Problem Chart

But is all this negativity really justified? A seemingly contradictory message is emerging from other surveys and analyses that I and my colleagues at INSEAD and across partner institutions such as the World Economic Forum, Harvard or Cornell conduct for the Global Innovation Index Report (GII), the Global Information Technology Report (GITR), and the Global Talent Competitiveness Report (GTCI).

Let’s look at innovativeness. The data that goes into creating the Global Innovation Index is based on some 84 variables, covering over 140 countries. It gives us a reasonable sense of how successful at innovation different countries and regions are.

The US is usually seen as a hotbed of innovation. And it is certainly in the top ten. But in 2013 it was comfortably beaten by Singapore and Hong Kong and by four other countries: Denmark, Finland, Sweden, and Switzerland. What’s more, the countries just below the US and Canada are all European as well. Of course, not all the European countries are as successful as those listed here, but on an aggregated regional level, we find that Europe is just as innovative as the US, and that both are well ahead of the other world regions.

Innovation's Top Performers Chart

And what about those anti-competitive social systems? Take a look at this chart, which plots country competitiveness scores as per the Global Competitiveness Index against the proportion of GDP spent on welfare. Strikingly, the most innovative countries all spend a lot on the social safety net. Of course, correlation is not causality, but it does at the least suggest that social protection and competitiveness are not mutually exclusive.

Social Security Is Not the Problem Chart

So is Europe really sick? Maybe, but not perhaps in the way we think, and very possibly it’s at least somewhat psychosomatic.

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