Competitiveness in European Union – Let Us Find the Holy Grail Again!

The concept of competitiveness and its economic and statistical agents, the full-cast legal jacket vesting it with measurable powers and the possibility of enforcement are already lay enough to play around with.  But isn’t it all simple? Theoretically, it is – if it were so unpretentious.

The objective of this opinion is to provide with a historical-economic framework for the current dialogue and based on that, to point out opportunities for the Hungarian presidency of the Council, which will start in July 2024.

It is time to reshape Europe’s future! What are we, Europeans, better at than moulding the upcoming? Not now, but of course, in the future?! Unfortunately, we cannot really shape the future, especially not by our once-hailed “strong international competitiveness”, we, in the EU, are ill-placed for that. Notwithstanding the relative economic downsides of the single European market, I argue that it is all right that we won’t call the major shots – we are still inhabitants of the most stable, secure, and overall happy part of the world.

People at the helm of the European Union’s leadership are so twitterpated that they must ask a couple of former Italian prime ministers to help us find it out where the trails shall take us (what us refers to is, once again, at least foggy). Sig. Draghi and Sig. Letta both have a task to complete; come up with solutions for the global economic race and find the fuel for Europe’s motor: power the engine of competitiveness.

The good, old methodology they are using to substantiate their claims and findings are interviews with Commission Directors-General, encounters and dinners in Member State capitals, talking to their former peers essentially. Primarily, that’s it. And the main problem, that that is really it. Et après… criez-vous au loup!

European leaders do find themselves in the state of nervous excitement towards the end of their mandate and start engaging in grandiose projects (Barroso – being proud after the last G20 in Saint-Petersburg how the world esteemed the European way of handling the economic crisis – wanted to bring the “EU discussions” to member states’ capitals for the sake of European identity, and contemporarily, fixing the fragmentation of financial markets, through jointly tackled unemployment in the member states, and coordinated lending policies; while Juncker, during his last year, wanted to open up the Eurozone – and have an EU finance minister on the top – and expose Schengen to all eastern European members, and also advocated for a directly elected Commission president).

These policy initiatives and ideas are the ones, it seems, which could have been dealt with during any part of the entire mandate of the outgoing president with just a little bit of more focus on thought-through economics and trade policy. And I do not mean long-engraved neoclassical obsessions. But such policies weren’t part of the policy focus, for the sake of tackling numerous imminent threats, one must acknowledge: the financial and economic crisis, the upheap of terrorist activities in Europe, and expansion of ISIS in the Middle East plus the increased migration towards Europe, the COVID-pandemic, the war in Ukraine, and the re-boiling Middle East. Fair enough. But the rule of law, economics and long-term thinking were out the door.

But when the team is falling apart, one must change the gaffer, or indeed, come up with a new strategy. Change can be rather shocking, oftentimes painful, but usually it is also a relief. Damage contained; the sun rises again as it should. Sport strategy implemented to geopolitics and new wave economic thinking without a sugar coat.

When Ursula von der Leyen sat down with her cabinet members in late August – well, those members have had some work-dinners some time before, one can assume – and came up with the great idea of having to fix Europe’s international competitiveness (whatever that means, really), it must have sounded the best idea after a hot and moderately interesting summer. To be fair, EU policy-wise, it was. The regulation of Artificial Intelligence systems was temporarily put on hold, the Energy Performance of Buildings Directive was still staggering, and Cybersecurity matters – horizontal and product-specific – being put aside, the e-Privacy proposal is essentially dead, and nobody yet grasped the how-abouts of the EU Chips Act. Waste, textiles, food also question marks. Competitiveness does sound fancy: a bit of industry, a bit of green policies, state aid and competition policy, a hitch of consumer protection, and of course, extraterritoriality. “Improve internally, do better, be more efficient, so you gain at global markets.” By August 2023, we had gotten used to the Russia-Ukraine conflict, COVID-19 has “disappeared”, and some players from the team have said good-bye in the hope of new titles – so far, not so successfully.

So far, this may sound like a long-prepared rant, a pub-discourse of shady paradigms, which are only offering little contribution to the discussion, if at all. Let’s change the tone then because this is not the idea, nor the purpose.

The von der Leyen Commission has been – aimed at – focusing on geopolitics, upgrading from Juncker’s theme of a more “political Commission”, probably more than any of its predecessors, and the president did that to the detriment of economic development in the EU. “Economic development” in the European Union means, in short, the completion of the single European market. When entering her office, following advice from the big think-tanks, such as CEPS, President von der Leyen set her priorities to serve the interest of the “geopolitical Commission”. Transparently, she was advised also to launch an EU industrial policy, too, especially to counter the US-China technological rivalry. The president tried to counter emerging nationalism and the rise of protectionism with balancing the respective global power dynamics. But she couldn’t succeed: trade is indeed with the Commission, but defence is still a national competence and hustling military, economic and political will is hardly an easy task. Therefore, little has changed since 2020: she did try to champion multilateralism and the Commission promoted fair and sustainable trade, too. But the EU is no more a sovereign region and a technological leader globally than it was four years ago.

What does competitiveness refer to?

Competitiveness has been assessed and defined in various ways but there is not much that would be considered novel: groups, regions, countries have always wanted to be richer, and being richer means excessive wealth in comparison. Because well-being has more often than not been measured by possession, the spoils, the riches. And corresponding power. In more peaceful times, economic excellence – frequently referred to as innovation – provided for temporary superiority. 

Competitiveness is mostly considered “the ability of firms to mobilise and efficiently employ the productive resources required to successfully offer their goods and services in a global economic environment.” (For the sake of simplicity the aggregate number of firms is intended as a country (or economic bloc)). In other words, the aptitude to change through innovation and utilize and allocate effectively the resources and excel with firm-related comparative advantage on the global market by maximising the value they can add to the integrated global value chains. Adaptation to changing environments and increasing productivity in a sustainable way are key factors.

National competitiveness, in the twenty-first century’s globalised trade reality, isn’t essential to a regional economic model – which the European Union is – as it only provides with a distorted view, compartmentalizing the position to national industrial policies and rankings. Regional competitiveness is.

What does the EU’s competitiveness depend on?

The European Investment Bank’s 2016 report states that “the competitiveness of EU economies depends on the capacity of firms and industries to drive and adapt to change through innovation, raising productivity and achieving a presence in key strategic sectors.”

Competitiveness is only one measure to assess how well a region is doing, though indeed, it is a very important one. The EU functions as it does - by providing security and ensuring a globally outstanding quality of life to its citizens, avoiding de facto war between its Member States – because of what it is: not a hand-driven, autocratic country like China where personal freedom is relative if anything at all, not a federalist, wealth-driven state like the US where a great deal of the citizens has no access to universal health care, has the lowest life expectancy at birth or the highest death rates for avoidable or treatable conditions.

The European Union is a complicated unity with oftentimes a lengthy decision-making process when compromise is the key word for any policymaker, and for most of the policy areas (except for the sensitive policy areas, which require unanimity in the Council, such as taxation, social security, common foreign and defence policy, police cooperation between its Member States) the actors must strive for a do ut des. Also, for the sake of regional strategic resilience and security, through a diversified local production ramp-up.

Competitiveness also depends on long-term objectives and the capacity, ability, and united determination behind such objectives. Such goals could be, for example, global sustainability and the ability to pressure global players to become more sustainable themselves as well, even at the cost of short and medium-term economic sacrifices (nobody knows about long-term economic performance, and in the wake of an imminent environmental catastrophe, nobody will). This requires a coordinated approach, and also vis-a-vis different sectors of the economy: agriculture, automotive, energy, technology, financial markets and so on. How? By promoting European food standards; by promoting European climate objectives and emission standards and systems; integrating European energy markets; enforce global data protection (GDPR has a global role, few deny) and AI-system baselines for international standards; enforce EU financial rules for Euro-based trade and consumer protection standards globally, etc. Overall, we’re looking good: good job.

What’s with the “EU’s competitiveness” then?

Despite the general down-talking as to how austerity measures slay European companies, a couple of things seem to be changing for the EU in the positive. Europe’s venture capital scene seems to be picking up pace and the gaps with the US markets are closing down: money directed towards digital starts ups in Europe outpace greatly the money poured into US counterparts – thanks to governmental support in the EU. The EU is also closing the performance gap on Australia and China, according to the European Innovation Scoreboard, while intra-EU innovation-performance is also levelling out: moderate and strong innovators are now closer to one another than ever before.

The EU’s internationally significant competitiveness has been decreasing (rather declining) over the past twenty years, while international pressure, competition, some would say, has been increasing from China, India, and from the US. For example, the European Union is not in for the global race in chip-making – the EU’s semiconductor industry is hardly part of any global map. Though the Volkswagen group alone is a known electric vehicle market player with around 8% of market share, the EU as whole is lagging behind Tesla (17%), and looking at a region: China (58%) the picture is even worse. Another example, given the high energy costs in Europe in general – and many claim, because of strict environmental regulations – the EU27’s chemical industry, in 2023, has reported the largest (over 10%) drop in production, compared to the US and the Middle East. Manufacturing has shifted to Asia and emerging technologies aren’t really emerging in the EU either at mass scale. Also, regulations – standards – often are able to drive innovation and serve competitiveness rather than halting it (think of the standardisation promoter under Horizon Europe). Look at the New European Innovation Agenda, for example, which recognized the importance of regionally integrated research and development activities, engaging in over 20 actions, some already realized, some to be carried during the next couple of years.

The general view is that economic growth should be “boosted”. One can only hope that this refers to sustainable and environment-focused growth. To be able to see how this unfolds, we desperately need open markets, and then need to win these markets, then to measure how we are doing, and to fail at large, if needed, in order to learn from policy mistakes, misplaced trade strategies and their execution.

The often-blamed scapegoat of the abundance of EU industrial regulations shouldn’t be pointed out as the ultimate problem. Regulations have never truly been – they are there for a reason that serves the society: consumer protection, safety, security, well-being, privacy, behaviour, democratic control, or consciousness, after all. Rather, their lack of enforcement[22] is tricky, and the corresponding and lenient national implementation that prefers local champions over an EU titleholder (in 2023, Germany alone, reportedly, spent over fifty percent of state aid allocated in the European Union - where is there the collaborative European spirit?). Green policies, sustainable reporting, and related transparency requirements in the medium-long run benefit consumers, public buyers, and companies which are focusing on sustainability too, not just economic growth. At the end of the day, such buyers will set the market dynamics. No one wants to buy faulty products, and no one truly wants to destroy the environment they live in. 

Also, another matter is that sectoral policies are not followed by a strong and visionary EU industrial policy either. There is much to do regarding better regulations and more efficient, less burdensome law-making. For example, how sustainability company reporting requirements fit with ecodesign product designs and label-represented transparency towards the consumer. Or how product-level cybersecurity binds with EU-wide cyber resilience and the financing of broadband network layout (and its protection). Apparently, one of the reinstated ex-premiers seems to propose this, too. And capital market union, which is not new.

We must insist on the strategic expatriation of our industrial policy (e.g., Net-zero industry act, Carbon Border Adjustment Mechanism, Energy Performance of Buildings Directive, Artificial Intelligence act, General Data protection regulation, Cyber resilience act, broadband infrastructure support, European standardisation policies, PFAS, etc.). If we see the same standards arising elsewhere globally, in segments which are important for European traders, the level playing field is going to be adjusted – but not before.

Let us also learn from the past: what went wrong with the monetary policy, how we are doing concerning the fiscal policy integration, why the lack of a coordinated European employment policy is a mistake? It is almost common economic sense that in case of challenges in a regional economic bloc, a step towards a closer integration is the solution, never the dissolution of the bunch. Ask the Brits.

Hungary will hold the EU presidency during the second half of 2024 and hence will set the agenda in the Council. Competitiveness should not only be a keystone in the presidency program, but specific outputs must be delegated to this objective. Compromise-free outputs, which benefit the entire European Union. This will not be an easy task given that the Commission will only be forming, and the European Parliament must go through the administrative preparation phase with “who is taking what position”. Nevertheless, the government must try.

How could Hungary help move forward competitiveness in the European Union?

Let’s start with something that we already have: Hungary has a national Artificial Intelligence (AI) strategy. Yes, it should be upgraded and the put on a palette to the other member states in Brussels as a showcase of forward-thinking. In the light of the recent policy developments in Brussels, let’s align the objectives in this national strategy with the AI regulation and help finalising it. Then let’s focus on the AI liability directive – no doubt, consumers must be protected and supported regarding products coming from other regions in the world. Plus, businesses need to know what to expect, how to change their product line developments.

Competitiveness isn’t only attacking others by trying to triumph markets regardless: competitiveness is also a defensive economic policy. Free trade isn’t only uncontrolled quantities of low-priced products, and low prices don’t just do good. Consumers buy and the best consumers buy in the long-term too. And if they are hurt, they move on to other sellers. A presidency that uptakes this mission is a presidency of the people.  

There is also an ongoing work concerning semiconductors and microelectronics in Hungary. We are actively analysing the European semiconductor markets and are preparing the national strategy on chips. A well-studied, well-informed, and discussed plan. Let’s develop it further with a specific implementation plan, especially in view of the coming presidency. The European strategy of becoming a more determinant market player by 2030 – having 20% of the global chip production capacity – is hardly achievable with the funds earmarked for such activities by the EU Chips Act. It will barely be enough to maintain the current and modest number. America spends much more – only tax breaks will result in approximately twenty-four billion USD, let alone direct investment opportunities and the declared brain drain strategy for AI engineers. Such ambitious EU plan must be reflected in national and supportive industrial approach and coupled by private investment. Yes, Hungary should build its local chips ecosystem: it should start wooing companies, – European or not – to establish base in the CEE by tax breaks, direct support, joint educational programs, long-term investment. This will fortify local strength and elasticity and will consequently contribute to reinforced regional stability by providing a sound base to the eastern front of the EU’s economy. It should also create its dedicated venture capital supporting AI related chip research, design, testing and manufacturing, and university spin offs.

It is evident that we lack qualified engineers in Europe, experts who are fundamental to a resilient 21^st century economy: despite the pandemic, engineering need remains to be very high in Europe and in North America. Hungary and the CEE region are no exceptions. We need to pay more for several types of employees in which we are short stacked, teachers and engineers. Even above-the-market. A faulty non-resilient national system cannot be well-integrated into a regional economic bloc, never mind the global markets. Hungary is still in the position to upscale its educational capacities for hardware and software engineers, and perhaps create a special tutoring line at university level for packaging engineering. Education serves the industry, the industry serves the economy, and a strengthened economy provides for more strategic independence and stable, sovereign but globally respected Europe.

Hungary is in a special position being at the outermost post of the European Union, having non-EU member countries Ukraine and Serbia bordering the country, and being very close to the entire Balkan region. Geopolitics is about geography and politics. We should focus more on the previous, for once, and utilize the position we have; governments in the Balkan countries still listen to us, people up north-east should do, too. But only a result-oriented, pragmatic and EU-spirited presidency can be of service to the European Union’s competitiveness and only such approach would strengthen Hungary’s position in Europe. Leveraging the recent history would also create a better atmosphere in Brussels with the new Commission and Parliament. Bush-fighting is for the brainless: wars are won at the planning table. Which, for a country that loves combat-related allegories, should be very describing.

And finally, continuing with the realization of the regional innovation valleys, bringing them closer to the Hungarian actors is a national interest. Innovation networks, product value chains are being built as part of these Commission-driven initiatives, and national players shouldn’t miss out. If the presidency is well manoeuvring the waters, local companies may be able to jump on the train and the EU’s overall competitiveness will improve.  

By PAl Belenyesi, Of Counsel, Dentons