"ECB board member Isabel Schnabel warns of a "crisis of competitiveness." She talks about weaknesses in the euro area in IT and management - and the consequences for inflation.
The European Central Bank is now also concerned with the lack of competitiveness of the local economy - and sees the danger that higher wages will have an impact on inflation due to weak productivity development.
ECB Executive Board member Isabel Schnabel spoke on Friday in a speech at the European University Institute in Florence of a "crisis of competitiveness" in the euro area: "At the turn of the millennium, Europe was a world leader in technology, but today many companies in the euro area are laggards." Compared to many international competitors, local companies invest too little in physical capital and research and development and are less productive.
IT is not being used properly to advance productivity
Schnabel named some notable causes - and outlined solutions. After the Second World War, Europe was an "engine of productivity growth". In the four largest economies in the euro area, labor productivity rose from 25 percent in 1945 to 100 percent in 1995 compared to the United States.
At the beginning of the 21st century, Europe was at the forefront. But that changed in the following years. Between 1995 and 2007, annual hourly gross domestic product growth increased measurably in the United States, while it slowed in the euro area. Until the financial crisis of 2008, the economies of the euro area had accumulated productivity losses of around 20 percent compared to America.
The euro area never recovered from this, said Schnabel: "Productivity growth remained subdued, which has recently been exacerbated by the effects of the pandemic and sanctions on Russia." Most economists agree that one of the main causes is the failure of European companies to capitalize on the efficiency gains brought about by information and communications technologies.
One difference between the United States and Europe is the young American "superstar" companies that are particularly productive and invest a lot in IT. There are financiers for starting up companies in Europe. But the financial system, which relies more heavily on bank loans than in the United States, makes it more difficult for companies of a certain size to grow.
According to the so-called “management hypothesis”, weaknesses in local management also played a role. Studies have shown that even branches of American companies in Europe are more successful in achieving productivity improvements through IT than local companies, even though they are otherwise exposed to the same conditions. This points to the importance of management.
Experience from the American police service also suggested its important role: There, higher investments in IT alone could not have increased the clearance rate. That changed when a management system called CompStat developed by the New York City Police Department was introduced.
The population is aging and people are working less
Overcoming the "technology gap" between Europe and America is also important because of sanctions on Russia caused the rise in energy prices that has dealt a blow to local industry in terms of price competitiveness, said Schnabel: "Today electricity prices in the industrial sector in the EU are almost three times higher in the United States and more than twice as high as in China." As a result, production of very energy-intensive goods is falling "at a worrying pace", undermining the euro area's strength in traditional industries.
In addition, the population is aging rapidly - and people are working less and less. "Based on recent projections, the proportion of people aged 65 or older relative to people of working age is expected to increase from 37 percent in 2022 to 60 percent in 2070," Schnabel said. On the other hand, the average working time per employee has been declining since the 1970s, which is mainly due to the fact that the number of hours that employees want to work is decreasing.
As a solution, Schnabel suggests political steps that "strengthen competition, reduce bureaucracy and promote the further integration of product, labor and financial markets." There is ample evidence that strict product market regulations, rigid labor markets and excessive bureaucracy are hindering the introduction of digital technologies in the euro area have been significantly hindered in the past.
In the digital world, competition plays an even greater role than before. In order to move from laggard to leader, a "virtuous cycle" must be set in motion between public and private investment on the one hand and productivity growth on the other. Schnabel quoted Nobel Prize winner Paul Krugman: "Productivity is not everything - but in the long run it is almost everything." [1]
1. Wird Europa faul und träge?: EZB-Direktoriumsmitglied Isabel Schnabel spricht über Schwächen im Euroraum bei IT und Management - und die Folgen für die Inflation. Frankfurter Allgemeine Zeitung (online) Frankfurter Allgemeine Zeitung GmbH. Feb 16, 2024. Von Christian Siedenbiedel
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