1. Enlargement and the competitiveness of European industry André Sapir Université Libre de Bruxelles and Group of Policy Advisors, European Commission

2. Two competing hypotheses Enlargement will boost competitiveness & bring the revival of European industry and growth Enlargement will simply create rents & leave E’s competitiveness and growth unchanged

3. Europe’s growth problem

4. The golden age: 1950-1973 Magic triangle: growth-stability-cohesion Growth: 4.6% Cohesion Unemployment: 2% Government spending < 35% Stability Inflation: 4% Public deficit: < 2%

5. The fall: 1973-1993 Negative spiral: low growth - costly cohesion and low stability - low growth Growth: 2.4% Cohesion Unemployment: 8% Government spending: 37% => 51% Stability Inflation: 8% Public deficit: 0% => 6%

6. Stabilisation: 1993-2000 Stability Inflation: 3% Public deficit: 6% => 0% BUT Cohesion Unemployment: 9% Government spending: 51% => 46% Growth: 2.4%

7. Inflation - unemployment Unemployment rate InflationrateInflationrate

8. Growth

9. Labour Productivity EUUSEUUS 1970s-0.51.83.51.4 1980s0.01.72.41.4 1990s0.31.91.81.7 1995-20001.22.01.42.0

10. Japan EU-15 USA Levels Per capita GDP at PPP

11. Why did the SMP failed to boost growth? Problem of implementation ? Problem of complementary policies ? Problem of design ?

12. Low growth = symptom Failure to adapt the economic system based on Assimilation of existing technologies Mass production Large firms with stable markets & labour relations Failure to become an innovation-based economy Entry Labour mobility within & across firms Retraining External financing Investment in R&D and higher education

13. Enlargement and competitiveness Enlargement will boost competitiveness & bring the revival of European industry and growth Enlargement will simply create rents & leave E’s competitiveness and growth unchanged

14. Two reasons for caution Size effect: Eastern vs. Southern enlargement Impact on incumbents and entry: – Competition and imports (J&S, 1991) – Complementarity vs. rivalry (Z&S, 1998)

15. Tentative conclusion Enlargement is an opportunity for the competitiveness of EU industry BUT it is only an opportunity EU policies must promote innovation by – helping to remove entry barriers – boosting investment in knowledge

16. A final note on China (and India) Historical perspective China bashing China is not Japan: bashing will not work! Cancun