The EU’s review of its economy is refreshingly candid

VW is a microcosm of the EU’s problems. Its last CEO left two years ago after his changes were blocked by powerful unions. VW’s governance structure gives considerable clout to unions and is further complicated by the fact that the large German provincial government of Lower Saxony owns a fifth of the company and opposes plant closures that are urgent and necessary. 

As The Economist notes, in its largest market, China, VW sales have fallen from 4.2 million units in 2019 to 3.2 million last year, a market share of 14.5%.

Also read: VW CEO: Chinese automakers should be allowed to avert tariffs by investing in EU

The EU report is clear that the region is falling further behind the US. “The EU-US gap in the level of GDP at 2015 prices has gradually widened from 15% in 2002 to 30% in 2023," says the report, titled The Future of European Competitiveness. 

“The main driver of these diverging developments has been productivity. Around 70% of the gap in per capita GDP with US at [purchasing power parity] is explained by lower productivity in the EU. Slower productivity growth has in turn been associated with slower income growth and weaker domestic demand in Europe: on a per capita basis, real disposable income has grown almost twice as much in the US as in the EU since 2000."

And yet, reading the report from an India obsessed with the US and China, it is hard not to be struck by how much progress Europe made in the 21st century’s first two decades. 

It is now a single market of 440 million consumers and 23 million companies, accounts for 17% of global GDP and has rates of “income inequality that are around 10 percentage points below those seen in the US and China." Its achievements in building safety nets and in health and education are also impressive. 

I had long assumed that the narrative of trade this century would be dominated by East Asian companies from Taiwan, Korea and Hong Kong embedding Chinese factories in global supply-chain networks to serve large American and European retailers. 

This is partly a function of my having been a foreign correspondent for the Financial Times in Hong Kong, covering factories in southern China and dynamic entrepreneurial trading firms in Hong Kong for about half that time. 

But, “between 2000 and 2019, international trade as a share of GDP rose from 30% to 43% in the EU, whereas in the US it rose from 25% to 26%."

Also read: India-EU trade mustn’t stumble on digital sovereignty

The new world disorder threatens to upend this integration: “The era of rapid world trade growth looks to have passed, with EU companies facing both greater competition from abroad and lower access to overseas markets. Europe has abruptly lost its most important supplier of energy, Russia (which was the source of almost half its natural gas imports). All the while, geopolitical stability is waning, and our dependencies have turned out to be vulnerabilities." 

Global trade is slowing perceptibly; as the report notes, the IMF expects “world trade to grow at 3.2% over the medium term, well below its annual average from 2000-19 of 4.9%"

The EU’s challenges in dealing with this changed world are not dissimilar to India’s. In an era when industrial policy is all the rage, the EU’s attempts to decarbonize and build green and high-tech industries also suffers from a lack of coordination among regulatory authorities and member states. 

As with India, the EU lags its competitors in productivity growth, which has held income growth back and resulted in weaker consumer demand within the European economy than would otherwise have been the case.

Consider India’s current bind, which is similar. As the recent Annual Survey of Industries showed, wage growth in our manufacturing sector over the past decade has been decelerating and is barely keeping pace with inflation. 

Also read: India-EU free trade talks: Carbon tax back on the table

If the EU looks sluggish in comparison with the US and China, our micro, small and medium sized enterprises appear to be reeling. In the first five months of this financial year, India’s exports to China were only 12.4% of the country’s imports from China, a drop from 15.4% over the same period last year. 

As Plain Facts in Mint noted last week, “In the MSME export sector, imports from China remain substantial in industries such as electronics and pharmaceuticals, despite the government’s push for higher domestic manufacturing."

What is admirable about the EU competitiveness report is how clear-eyed it is, a contrast from the bombast that tends to characterize many official communiques issued by China and India. 

The EU report notes, “Europe largely missed out on the digital revolution led by the internet and the productivity gains it brought: in fact, the productivity gap between the EU and the US is largely explained by the tech sector. Only four of the world’s top 50 tech companies are European."

Greater optimists than I will point out that companies in Bengaluru and elsewhere are using technology to re-engineer how business is done. This is true, but overblown. 

India’s Economic Survey this year highlighted that the country’s investment in research and development as a percentage of GDP is just 0.64%. This is much too low, given China’s figure of 2.41% and the US number of 3.47%. We urgently need to face up to some plain facts of our own.