Reports that should shake Europe

The Mario Draghi report on the future of European competitiveness describes the current situation of Europe in bold terms:

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. The EU is weak in the emerging technologies that will drive future growth.

The report sets the general goal: Europe must profoundly refocus its collective efforts on closing the innovation gap with the US and China, especially in advanced technologies" … At the root of Europe's weak position in digital tech is a static industrial structure which produces a vicious circle of low investment and low innovation."

The report points out that "Only four of the world's top 50 tech companies are European" and concludes: "A key question that arises is how the EU should finance the massive investments needs that transforming the economy will entail."

The Draghi report suggests that the EU's new industrial strategy should be based on the four "building blocks":

• full implementation of the Single Market;
• Industrial competition and trade policies;
• massive investment unseen for half a century in Europe;
• reform of the EU's governance and reduction of the regulatory burden.

One of the important findings of the Draghi report has to do with the state of higher education and research: "There are not enough academic institutions achieving top levels of excellence and the pipeline from innovation into commercialization is weak,"

And, in broader terms: "Europe is suffering from skills gaps across the economy, reinforced by a declining labour force. The European economy displays persistent skills shortages in several sectors and occupations, for both low- and high-skilled workers. Around one-quarter of European companies have faced difficulties in finding employees with the right skills, while another half report some difficulties. 77% of EU companies report that even newly recruited employees do not have the required skills."

"Almost 60% of EU companies report that lack of skills is a major barrier to investment and a similar share report difficulties in recruiting ICT specialists."

The Expert Group on the Interim Evaluation of Horizon Europe led by Prof. Manuel Heitor in a report called: Align, Act, Accelerate Research took up the ideas and direction of the Draghi report and presented a program that "should be a game-changer for Europe´s declining competitiveness, by stimulating public and private investment in research, development and innovation (RD&I)".

The increasing global competition is a wake-up call for Europe - As measured by the top 1% most cited scientific publications worldwide, the EU ranks third, behind China and the USA, with its share of the total declining from 20.7% in 2000 to 17.8% in 2020.

The situation does not look any better when it comes to patents: "The EU's share in total patent applications has been declining in recent decades. Accounting for around 30% of the world's patent applications in 2000, the EU's share declined to 17.3% in 2021".

The current Framework Program with its emphasis on short-term objectives and short-term collaborative innovation projects (typically, for 2 to 4 years) appears to be suboptimal, or at least insufficient, in bolstering of Europe's international competitiveness.

"Europe must profoundly refocus its collective efforts on closing the innovation gap with the US and China, especially in advanced technologies."

Heitor's report stresses: "A world-leading research institution necessitates a critical mass of talent, with a significant number of top-tier researchers collaborating on closely related topics within the same physical space. […] ERC-I should build on the high number of well-established European research institutions that rank in the middle to high tiers of the global distribution and propel some of them to the very top of academic excellence"

The report brings up another weakness of the European system, its inability to build on its own research:

"Currently, US Companies exploit more ERC funded basic research discoveries than EU companies, possibly due to the increased density of innovative scaling companies in USA".

While the Draghi report admits that in some areas of AI, Europe has already lost the competition with the US, the Heitor's report seems to be less alarming:

We are at the very beginning of the use of AI in the sciences, and at the same time this use is spreading very rapidly, so it is important at this stage of its development to put in place the necessary infrastructure to monitor practices and experiment to rapidly capitalise on the potential benefits and establish the necessary safeguards.

Report's recommendations seek to boost Europe's competitiveness through:

• Implementing a strategy to secure long-term investment in world class research and technology infrastructures
• strengthening university alliances to promote learning and institutional cooperation and development across borders.

World Development Report 2024 "The middle-income trap" based on the rich pool of data assembled by the World Bank over decades concentrates on the economic, technology and social barriers countries with middle income face when striving to move higher. The European Union, with few exceptions, represents high income countries, yet several findings in the WB report are valid for Europe, too; some correlate with the conclusions of the Draghi and Heitor reports.

Destruction - a necessary evil that clears the way for creation by freeing up misallocated resources and sweeping away outdated institutions - is kept weak in middle-income countries by opposition from those with market power or government influence.

Talent drives economic progress, but social immobility holds back the development of talent; fostering talent is a priority

The climate and energy crises could trigger restructuring and reallocation Disruptions are accelerating the diffusion of innovative lower-carbon technologies.

The fact that: "Extraction and processing of critical minerals for the clean energy transition remain highly concentrated in certain countries" creates a barrier for Europe as well as most of the middle-income countries.

The World Bank Report 2024 proposes a "3i strategy" for countries to reach high-income status. Depending on their stage of development, countries need to adopt a sequenced and progressively more sophisticated mix of policies:

• Low-income countries can focus solely on policies designed to increase investment - the 1i approach.
• Lower-middle-income countries must shift gears and expand the policy mix to 2i, investment + infusion.
• Upper-middle-income countries need to shift gears yet again-to 3i: investment + infusion + innovation.

Merit must be rewarded - and vested interests must be disciplined.

The handful of countries that have made speedy transitions from middle- to high-income status have done so by disciplining vested interests, building their talent pool, and modernizing policies and institutions. Today's middle-income countries can do the same:

• Discipline vested interests. Powerful incumbents—large corporations, state-owned enterprises, and powerful citizens—can add immense value, but they can just as easily reduce it. Governments must devise mechanisms to discipline incumbents through competition regimes that encourage new entrants without either coddling small- and medium-size enterprises or vilifying big corporations.
• Reward merit. Middle-income countries have smaller reservoirs of skilled talent than advanced economies and are also less efficient at utilizing them. So they will have to become better at accumulating and allocating talent.
• Capitalize on crises. Cheap, reliable energy has long been a cornerstone of rapid economic development. But prospering while keeping the planet livable will now require paying greater attention to energy efficiency and emissions intensity. Climate change and other exigencies can provide opportunities to forge the consensus needed for tough policy reforms.

The recommendations, due to the World Bank's nature, apply to middle-income countries all over the globe. In Europe, especially within the European Union, countries that fall into the middle-income category – such as Poland or Romania, should pay particular attention to the recommendation under 3i: investment + infusion + innovation.

by KAZIMIERZ BILANOW