The Commission neglects the services sector and favours industry

Antonio Tajani, Vice-President of the EC, participated at the conference on the ‘Europe 2020 strategy for growth’, organised in Lisbon. (EC Audiovisual Services 29/11/2013).

On 22 January the European Commission will present a Communication on an EU wide project, under the grandiose name of “European Industrial Renaissance”. Despite its name, the Communication doesn’t seem to have a strong connection with reality. Even the early pre-announcement of this Communication released on 20 December contains elements of futility. It says “While industrial performance has stabilised thanks to improvement in exports, industry’s share in Europe’s GDP in 2013 has further declined from 15.5% of GDP to 15.1% getting Europe far from the 20% target”.

It is evident that the target of achieving a 20% participation of industry in Europe’s GDP is not just a dream but an always moving away benchmark. On top of that, it’s very probable that targeting such a much stronger presence of industry in Europe’s economy may be quite erroneous. For decades now the participation of industrial production in developed world’s GDP is constantly receding and the sector of services is emerging as a strong replacement. Let’s follow the facts.

Services produce trade surpluses

According to Eurostat, “EU28 international trade in services increased in 2012, with EU28 exports of services to the rest of the world rising by 9%, from €609 billion in 2011 to €662bn in 2012, and EU28 imports by 6%, from €478bn to €509 bn. As a result, EU28 trade in services recorded a surplus of €153bn in 2012, compared with €131bn in 2011 and €109bn in 2010”. There is more evidence in favour of services. During the third quarter of 2013 the EU28 balance of external trade in goods (mainly industrial products) was a mere +€1.4bn, while the relevant figure for the surplus of trade in services with the rest of the world reached €39.6bn.

Undoubtedly, Europe is the world’s largest provider of services. The two main powerhouses of this huge economic sector are transport, including, the oceangoing shipping, and tourism. At this point it has to be noted that both those two sectors of services are dominated by smaller EU member states. Greece and Denmark are specialising in shipping, while all the south EU countries plus France are dominant in the tourist sector. In a peculiar way all those countries are particularly hit by the financial crisis and their ability to exit from recession is largely based on their performance in shipping and tourism.

This said, it is an absurdity insisting that industry is the only way out from Europe’s present problems. Still, the Commission insists that “the Communication for a ‘European industrial renaissance’ puts the real economy and industry at the heart of our growth strategy. The aim is to revert the industrial decline and reach the 20% target of GDP related to manufacture activities by 2020”. Not a word about services. Is this due to the fact that Germany is a dwarf on both tourism and transport? Who knows.

Industry Vs services?

In any case, the Commission with this statement cited above sidesteps a double reality. Firstly, as noted above, Europe is a world leader in services and produces a vast external balance of payments surplus in this sector of economic activities. Secondly, down to earth economic reality has gradually guided Europe away from what was once called heavy industry. For a long time now investments in this sector are decreasing. According to Eurostat all along the past two years Gross fixed capital formation (GFCF) has been negative.

According to Eurostat’s definition “GFCF is also known as ‘Investments’ and consists of resident producers’ acquisitions, less disposals, of fixed assets during a given period plus certain additions to the value of non-produced assets (ESA 1995, 3.102)”. These assets acquired are intended for use in processes of production. “GFCF includes acquisition less disposals of, e.g. buildings, structures, machinery and equipment, mineral exploration…This is the kind of investments mainly used in industry”.

The relevant Eurostat statistical table informs us that GFCF in Eurozone decreases constantly. On a yearly basis, in the first quarter of 2011 (2011Q1) it receded by -2.4%, in 2011Q2 by -4.6%, in 2011Q3 -4.3%, in 2011Q4 -4.9%, in 2012Q1 -6.9%, in 2012Q2 -3.3%, in 2012Q3 -1.9%. Undoubtedly, the financial crisis has had its toll on industrial investments during this period, but a good part of this negative turn must be attributed to the long term tendency that drives industrial production outside the developed world, towards emerging economies like China, India, South America and elsewhere.

Why insisting on industry?

So then, it’s a bit awkward to watch the Commission insisting that industry is the only way out from the present EU recession. The above mentioned Commission Press release states that, “¾ of exports and several jobs (are) directly depend on industry”. Of course nobody can deny that hundreds of thousands of jobs depend on industry. However, it is questionable if industry surpasses the services sector as the leading export powerhouse.

According to Eurostat, “The EU28 external current account recorded a surplus of €35.6bn (1.1% of GDP) in the third quarter of 2013….the deficit of the (industrial) goods account turned into a surplus (+€1.4bn euro compared with -€6.8bn)…The surpluses of the services account (+€39.6bn compared with +€43bn) were reduced”. Even though the industrial goods balance became slightly positive and the services surpluses were reduced, the absolute might of services trade surpluses is undeniable. Let’s see the truth behind the numbers.

This passage tells us that the external trade balance in industrial goods oscillates around zero, while the surpluses of the services foreign account is well pegged around +€40bn. No wonder then why the EU economy gradually disinvests in the industrial sector and performs well in its services departments.

No conflict, just reality

Undoubtedly, the key role of industry in the European economy is beyond question, but its scope is nowadays restricted in subsectors like pharmaceuticals, the aerospace, the defence and security industry, the food and drink specialities and the likes. In all those cases research plays a pivotal role. It’s a natural development then that Europe, redirects its industrial base only to the sectors with high human capital content, leaving the rest of industrial production to… China.

Consequently, the Commission has to address the issue of industry’s growth in relation to long term tendencies and realities, while at the same time has to start vigorously supporting those subsectors of services which can drive south Europe out of its misery. If Germany has a special interest in everything that relates to industry it can spend its own money to promote it. For the same reasons Berlin should leave the EU’s proper subsidies to be distributed fairly aiding primarily the countries in distress, which by the way specialise in some services subsectors, like transport and tourism.

Eurozone cannot prosper only on the German automotive industry. Around 80% to 85% of world trade is transported through sea-going shipping, and crisis hit Greece is a champion in this area. At the same time, all the south Eurozone countries plus France are the largest tourist markets of the world. Unfortunately, the EU spends almost all its proper funds subsidising industry and neglecting the services. This has to change.