The (NON) Competitiveness of the European Union: Facts, Causes and Solutions

And the productivity per hour 13% below?

And the productivity per person 22% below?

And the rate of unemployment almost the double of the USA’s?

“Inspiring and eye-opening.

Outstanding”.

Marc Wagener (Director, Idea Foundation/Chamber of Commerce Luxembourg)

“Engaging, erudite, witty and to the point. It brings abstract concepts of business and the economy to life”.

Fredrik Erixon (President of the European Centre for International Political Economy in Brussels)

The royalties of this edition are fully dedicated to the charity institution “Associação das Creches de S. Vicente de Paulo”

THE (NON) COMPETITIVENESS OF THE EUROPEAN UNION FACTS, CAUSES AND SOLUTIONS

Why is the European GDP per capita only 3/4 of the USA’s?

Jorge Vasconcellos e Sá With the collaboration of Fátima Olão, Magda Pereira and Cristina Fidalgo

THE (NON) COMPETITIVENESS OF THE EUROPEAN UNION FACTS, CAUSES AND SOLUTIONS

ISBN 978-989-768-417-3

www.vidaeconomica.pt ISBN: 978-989-768-417-3 Visite-nos em livraria.vidaeconomica.pt

9 789897 684173

VS Vasconcellos e Sá Associates, S.A.

INDEX

I. Facts are our friends .......................................................... 9 II. The gap: EU15-USA difference in GDP per capita ............ 13 III. The immediate causes .................................................... 19 IV. The initial causes (and solutions) .................................. 27 V. Why the world needs a stronger European economy...... 57

I. FACTS ARE OUR FRIENDS This book focus on the European economy. Not on its political aspects. And it states facts, shying away from judgments and opinions.

Sure, that the European project is not only economic, but also political.

And Europe is politically a success, as it brought peace. After all, what were the two world wars initially, if not European civil wars? As Jean Monnet noted, “there would be no peace in Europe if the states were to rebuild themselves on the basis of national sovereignty�.

Jean Monnet

But as chapter five analyzes, a weak economy (33% below the USA GDP 1 per capita and 22% in productivity per per1 - Gross domestic product.

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The (Non) Competitiveness of the European Union: Facts, Causes and Solutions

son), has strong negative impacts which extends far beyond the economic arena.

First, it precludes the social model as there are some virtues that only the rich can have; second, it makes far more difficult the promotion of European values across the world, since people tend to listen more to the wealthy; and third and most of all, it harmens liberty: with high productivity, Europeans have a choice between (more) leisure, or (working longer for more) money. They can opt. They are free to choose. But if productivity is low they are condemned to work harder and harder only to make ends meet.

So, economy is paramount. And the best way to address it is with official statistics and facts.

Franklin D. Roosevelt (1882-1945)

Please don´t bring opinions; bring facts... (label on top of his desk)

1 - Andy Grove, former Intel CEO.

As Aldous Huxley pointed out, facts are obstinated: they don’t disappear just for being ignored. On the contrary: they become even more dangerous, since denial doesn’t change reality but can make it deadly 1.

And so, as the former Chinese leader Deng Xiaoping insisted: we must seek truth in the facts, since facts are our friends.

I. Facts are our friends

But what are those facts 1?

Where did we start?

As a peace project among adversaries.

What is our greatest accomplishment?

The spread of stability and democracy across the continent.

Javier Solana

And what is our task for the future?

To make Europe a global power, a force for good in the world.

1 - In the analysis which follows we will compare the USA and EU15; not the EU28, Eurozone or even exclude the UK from the analysis, because of the Brexit.

The reasons are straightforward. The EU15 is the core of Europe and so its members have had far more time to experience the benefits from the absence of trade barriers, scale and experience effects.

So, if we were to compare EU28 instead of EU15 against the USA, the results would be still worse for Europe.

On the other hand to use the Eurozone would exclude the UK from the analysis which, (regardless of the Brexit) has been both an important EU member (its GDP represents 16% of the EU15 total GDP) and a long staying member (since its entry in 1973). And the results which are presented next would not differ significantly.

Thus again, it is preferable to include the UK in the analysis to erase any doubts that the EU non competitiveness is a problem neither of the euro, nor of today.

In short, henceforth, whenever one writes Europe and unless otherwise explicitly mentioned, it is meant EU15.

11

20

The (Non) Competitiveness of the European Union: Facts, Causes and Solutions

There is first the GDP per hour ( 1 in figure four) which is the productivity per hour, the amount of value that each hour of labor produces. That multiplied by the number of hours 2 that those employed work, gives the productivity per person (see that the variable hour crosses out both in 1 and 2 ).

Then if we multiply the productivity per employee by the % in total population of those who are in age of working, the so called active population 1 ( 3 in figure four) and by the employment rate (1 – unemployment rate) and which corresponds to those in the active population who have indeed a job, we end up with the GDP per capita (the variables employed population and active population crosses out in the formula of figure four).

So, to understand why the US GDP per capita is 33% above Europe’s one must focus on the four parcels of figure four: 1. Productivity per hour; 2. Number of hours worked; 3. % of active population; and 4. Rate of (un)employment.

As it happens, Europe is worse than the US in all variables, except in the activity rate, which is similar (around 50% in the right end top of figure five) being highest in Japan (53,6%).

1 - The active population are those within a country’s total population which are either employed or unemployed. In the first case be it full time or part time and in the second case including both short term or long term unemployment. The inactive population (that is, the total population less the active population) is the sum of five components: 1) those who do not wish to work (housewives, etc.), 2) pensioners (people with serious and long term illnesses, etc.), 3) students, 4) those who for some reason are not immediately available and 5) all who have given up seeking a job.

IV. THE INITIAL CAUSES (AND SOLUTIONS) We can divide the original causes of why the USA is so much more productive (per hour and employee) and enjoy such a better standard of living into five categories (see figure eight): 1) the body; 2) the heart; 3) the mind; 4) what goes on in the productive units (the organizations); and finally 5) the system where everything is immersed. Let’s briefly see one by one.

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The (Non) Competitiveness of the European Union: Facts, Causes and Solutions

Figure 12: Correlation between the % of population (25-64 years) with higher education and the GDP per capita PPP GDP per capita PPP, 2016 dollars2

Coefficient of correlation

80000 70000

Value: 0,6 Level of statistical significance: 0,00 Norway Switzerland USA

60000 50000

EU-15

40000

Japan

30000 Turkey

20000 South Africa

10000

Brazil

0 0

10

20

Sources: 1OECD, 2016; 2World Economic Outlook, IMF,

30

April 2017 Note: Correlation calculated with the 44 countries for which there is available data for the % of population (25-64 years) with higher education.

40 50 60 % of population (25-64 years) with higher education (2015)1

Much has been said about differences in work ethics, not only between the US and Europe, but also between the “two Europes�: North and South. And there are (among others) three indicators, frequently used.

The first is the number of hours worked, which as per figure six before is about 11% more in the USA than in Europe.

A second indicator is the number of paid vacations per year. In the USA? 9 days. In Japan? 15. EU15 average? 26. 1

1 - Source: Eiro, Working time developments, June 2014. Latest data available.

IV. The initial causes (and solutions)

Then, the highest the degree of competition in the private sector, the greatest the stimulii for all organizations to give their best in order to survive and continually improve.

Making of every competitor a helper.

E. Burke

As a consequence there is a strong correlation between the economic freedom and GDP per capita in figure sixteen.

A competitor is a helper.

Figure 16: 2017 Curve of economic freedom A comparison of Economic Freedom and Wealth

Correlation coefficient = 0,63

Hong Kong

Singapore New Zealand North Korea Venezuela

Source: Heritage Foundation, 2017 Note:

The richest countries in the world (Singapore, Ireland, United Arab Emirates, Switzerland), are also the economic freest (2nd, 9th, 8th, 4th), respectively.

41

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The (Non) Competitiveness of the European Union: Facts, Causes and Solutions

Figure 20 In Conclusion: Original Causes

+ Younger population + Proud/motivation (American exceptionalism) + Instruction + Work ethics Greater innovation + Economic freedom + Transparency Greater political cohesion

Âą Management quality ~ % women in workforce (+ diversity)

+ Ethical behavior of firms Greater economic cohesion

Europe is superior in the two variables (in blue) of ethical behavior of firms and greater economic cohesion. And both the US and Europe are similar in the variables in green: management quality (although the US is here still somewhat better) and participation of women in the work force.

Then as systematized by figure twenty one, these twelve variables impact upon the five others of the system, companies, head, heart and body 1; which by its turn imply the four others of productivity per hour, number of hours worked, activity rate and unemployment rate, which finally (as by figure four before) explain the GDP per capita difference of 33%.

1 - Of figure eight before.

IV. The initial causes (and solutions)

So, there are exceptions. Recalling Margaret Fuller’s saying that nature provides exceptions to every rule.

However, there are no exceptions to the rule that the rule rules over the exceptions.

Thus, let’s see in the next chapter why the rule (of Europe’s low productivity) matters.

55

62

The (Non) Competitiveness of the European Union: Facts, Causes and Solutions

The final reason why we need a strong European economy respects the promotion of European values: freedom, trust, civility, solidarity.

Promoting these values worldwide requires diplomacy and the willingness of the people to listen. Both require wealth since people listen more to the rich than to the poor.

And there is no one which can promote these values as Europe can. Not the emerging powers as illustrated by the left side of figure twenty six which ranks several countries in terms of democracy: freedom of speech, of the media, in politics, independence of the judicial system, government accountability and gender equality in education and work.

Figure 26 Freedom (equality) +

Trust (consensus)

Promotion of European values of

+

Civility (dialogue) +

Solidarity (fraternity)

Democracy index: world ranking, 2016 (total 167 countries)

Global Peace Index: world ranking, 2017 (total 163 countries)

160 136

120

100 80

100

60

80

40

60 40 0

114

120

134

140

20

USA

USA

Emerging powers Emerging powers

21

22

32

0

1 Norway

31

20 1 Iceland

USA

EU-15 (weighted by population)

Source: The Economist, Intelligence Unit, 2017

India

Russia

China

10 Japan

EU-15

(weighted by population)

USA

Source: Institute for Economics & Peace, 2017 Notes: 1) Global Peace Index is an average of factors such as crime level, terrorism, relations with neighboring countries, military spending, etc.

JORGE VASCONCELLOS E SÁ

A SHORT BIO 1. Jorge Vasconcellos e Sá is a tenured Professor with two undergraduate degrees, one in Economics and one in Business Administration, a graduate degree in Macroeconomics, a master’s degree from the Peter F. Drucker Graduate School of Management in California, where he studied with Peter Drucker (who offered letters of recommendation and endorsements for his books), and a doctorate (PhD) in Business Administration, from Columbia University, in New York, where he was a student, research and teaching assistant. He finished first in his class and always in the Dean’s list.

2. He was awarded the Jean Monnet Chair by the Jean Monnet Foundation at Brussels (the highest European academic award), with several distinctions including Fulbright fellowships, Beta, Gamma, Sigma, etc..

3. He published twenty three books in twelve languages: English, Portuguese, Spanish, Chinese (Mandarin), Russian, Ukrainian, German, Lithuanian, Thai, Korean, Norwegian and Iranian and have received endorsements, among others, from Peter F. Drucker, Cecily Drucker, Philip Kotler, Al Ries (author of the bestsellers Marketing Warfare and Positioning), Don Hambrick (Professor at Columbia University and at The Pennsylvania State University), Karl Moore (Professor at Oxford and McGill University), Luiz Moutinho (Professor at Glasgow University), Peter Starbuck (President of the London Drucker Society), etc.

4. Addressed conferences and gave seminars at several international universities and institutions including TED USA (https://youtu.be/ SOkjPVi1Fts), Drucker School, London Business School, IESE, Glasgow Business School, ESSEC (France), ESSAM (European Consortium of Business Schools), Oxford, Manchester Business School, George Washington University, University of São Paulo School of Economics, Institute of Ex-

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The (Non) Competitiveness of the European Union: Facts, Causes and Solutions

perimental and Technological Biology, Liberty Forum (Brazil), University Jorge Amado, American Chamber of Commerce Luxembourg, Foundation Idea/Chamber of Commerce Luxembourg, European Centre For International Political Economy, Timbro, European Commission, Marketing Institute Estonia, etc. He also addressed conferences and presented articles in several academic meetings, namely Academy of Management, Western Economic Association, Peter Drucker Society of Europe, etc.

5. He has also worked as private consultant, has been a non-executive director or has taught in the executive programmes of multinational companies such as: Coca-Cola, SHELL, Unisys, IBM, Price Waterhouse, Klynveld Peat Main Goerdeler, Glaxo, British Petroleum – BP, Dun & Bradstreet, Deloitte & Touche, Makro (Metro group), Systéme U, I.F.A, Intermarché, Mini Prix Bonjours, Accenture, Watson Wyatt, Cap Gemini, Cesce, Scottish & Newcastle, Sara Lee, Microsoft, Total, Johnson & Johnson, Pfizer, Logica, Indra, Grandvision, Jafep, Euler Hermes, Cosec, Pestana Group Hotels, Tivoli Hotels & Resorts, Millennium Bank, Julius Baer, SGG, Henkel, Abencys, Broadbill, Volkswagen Group, McDonald’s, MiTek, United Steel Products, Base Group, UnitedHealthcare, Inapa, Vodafone, etc. That, besides all companies where his office (Vasconcellos e Sá Associates) acted as advisor in M&A operations.

6. Professor Sá founded the Institute for Economic Freedom and his hobbies are History, Krav Maga and Kapap (black belt and instructor, by the respective international federations) and soccer (degree as a professional soccer coach). He speaks and writes (by alphabetical order) English, French, German, Portuguese and Spanish.

“Congratulations Professor Sá on your wonderful career.”

(Peter Drucker, founder of modern management)

Website: www.vasconcellosesa.com Linkedin: www.linkedin.com/in/vasconcellosesa Twitter: @VasconcelloseSa Weekly articles and diagrams: www.economiadasemana.blogspot.pt Blog Institute of Economic Freedom: www.institutoliberdadeeconomica.blogspot.pt

And the productivity per hour 13% below?

And the productivity per person 22% below?

And the rate of unemployment almost the double of the USA’s?

“Inspiring and eye-opening.

Outstanding”.

Marc Wagener (Director, Idea Foundation/Chamber of Commerce Luxembourg)

“Engaging, erudite, witty and to the point. It brings abstract concepts of business and the economy to life”.

Fredrik Erixon (President of the European Centre for International Political Economy in Brussels)

The royalties of this edition are fully dedicated to the charity institution “Associação das Creches de S. Vicente de Paulo”

THE (NON) COMPETITIVENESS OF THE EUROPEAN UNION FACTS, CAUSES AND SOLUTIONS

Why is the European GDP per capita only 3/4 of the USA’s?

Jorge Vasconcellos e Sá With the collaboration of Fátima Olão, Magda Pereira and Cristina Fidalgo

THE (NON) COMPETITIVENESS OF THE EUROPEAN UNION FACTS, CAUSES AND SOLUTIONS

ISBN 978-989-768-417-3

www.vidaeconomica.pt ISBN: 978-989-768-417-3 Visite-nos em livraria.vidaeconomica.pt

9 789897 684173

VS Vasconcellos e Sá Associates, S.A.