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EU manufacturing can be strong, but jobs won’t return

07 October, 2013

The decline in European manufacturing has slowed down, but the European Commission’s goal of raising manufacturing’s share of EU GDP from 16% to 20% is unlikely to be met, according to a new analysis of the future of manufacturing in Europe, published by the Bruegel economic think tank.

The report called Manufacturing Europe’s Future, argues that the contribution of manufacturing to European economies is changing, creating fewer jobs. Those that are created are usually skill-, value- and service-type positions that generate productivity growth and external competitiveness for Europe.

The report suggests that the EC’s current targeted, sector-based approach to industrial policy, should be replaced by a “horizontal” cross-sectoral policy. This would allow economic processes to take place, without intervening in those processes. Examples of such intervention include competition policy, help in setting up businesses, and promoting education and training.

Over the past 30 years, manufacturing’s share of GDP has been declining around the world. But the report argues that this relative decline has been a reflection of manufacturing’s strength. Higher productivity growth in manufacturing than in the wider economy has resulted in the relative decline. A strategy to reverse this trend and to move to an industrial share of above 20% could risk undermining industry’s strength – its productivity growth.

The report emphasises the extent to which European industry has become integrated with other parts of the economy – in particular, with the services sector, and how both sectors depend on each other. Manufacturing employment has increasingly become highly skilled, while those parts of production for which high skill levels are not needed have been shifted to regions with lower labour costs.

But this splitting up of production is not driving the apparent manufacturing decline. The internationalisation of production has resulted in EU manufacturing becoming more integrated, with different member states specialising in different sectors. It has therefore helped to raise productivity and growth.

As a result, the foreign content of exports has increased. Germany, in particular, has outsourced parts of its production to central and eastern Europe and to emerging markets, and has shown one of the smallest declines in manufacturing share over the past 15 years.

The Bruegel report warns that capital-intensive manufacturing faces both short- and medium-term challenges. One of the most pressing problems is the fragmentation of Europe’s financial markets, which is undermining access to finance. This affects smaller firms in particular because they are the most dependent on bank credit.

The report argues that, given the strong links between innovation, internationalisation and productivity, it is important to get rid of the dividing lines between industrial policy, single-market policy, ICT policy and service-sector policy. Attempts to promote one sector at the expense of another are likely to result in inefficiencies and weaker growth.

Governments are notoriously bad at picking winners, it points out. Instead, Europe needs policies that are conducive to a better business climate, less-burdensome regulations and the right framework conditions.

The report’s authors also argue that public policies need to be more supportive of industry. For example, the education system needs to be adapted to the needs of modern economies. The single market is important for both manufacturing and services and progress is needed to unleash its potential for growth. Distortions in energy prices are also detrimental to industrial activity and should be avoided.

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