1. Growth in Europe beyond the crisis Implications for State Aid policy André Sapir Professor of Economics, Université Libre de Bruxelles Senior Fellow, Bruegel European Competition Forum 2012 Brussels, 2 February 2012

2. Before the crisis: challenges were mainly M/L term 2  Technological change and globalization  Demographic change: ageing of population  Climate change and energy security  Need to transform Europe’s economic and social model towards an innovation-based society  Europe’s response: The Lisbon Agenda (2000-2010)  Achievement: modest at best Issue of sustainability of Europe’s economic and social model

3. With the crisis: challenges became mainly short term 3  Saving the financial system (incl. Temporary SA regime)  Saving the euro  But medium/long-term challenges have not go away…  … on the contrary the crisis has made these challenges even more acute AND revealed new problems

4. The crisis: an accelerator of change 4  Globalization »Acceleration of the catching-up by emerging countries »Acceleration of the need for industrial restructuring  The sustainability of public finances and of social models »Large public debt increase »Acceleration of the need to address the effect of ageing on public finances  Need to return to medium/long-term focus NOW

5. The danger: a vicious circle 5  Crisis: has resulted in »Lowering of potential growth »Debt increase  Ageing: will result in »Lowering of potential growth »Debt increase  Lowering of growth => debt increase  Debt increase => lowering of growth  How to avoid the danger of this vicious circle? »Focus on sustainability, not austerity Reforming public finance Increasing productivity growth: Europe 2020  Need to mobilize Europe’s assets Exactly the opposite situation in emerging countries

6. One of Europe’s key assets is the Single Market 6  Monti Report (2010): building and delivering a “stronger Single Market”  Europe should not be afraid of its diversity, on the contrary it should take full advantage of it to strengthen its competitiveness  The Single Market needs to be not only strong but also dynamic  It must foster not only a better allocation of resources and greater efficiency, it must also foster dynamism and growth by providing opportunities »For new firms to enter in existing and new markets »For successful firms to grow »For unsuccessful firms to exit  The churning process or creative destruction is crucial for productivity growth Churning process (entry & exit)

7. Europe is lagging in Young Leading Innovators (YLI) 7 (Young means born since 1975)  In the US, YLI account for more than 50% of all LI. In Europe only 1 out of 5 Leading Innovators is Young.  In the US, YLI account for 35% of total R&D of all LI. In the EU it’s only 7%.  In the US, YLI account for 16% of total sales by LI. In the EU it’s less than 5%. EUUS YLI/LI in Region’s firms (%) 20 52 YLI/LI in Region’s R&D (%) 7 35 YLI/LI in Region’s net sales (%)4.5 16 Source: Cincera & Veugelers (2010) (Bruegel & IPTS) on the basis of IPTS R&D Scoreboard

8. Europe is lagging in Young Giants: Top FT500, 2007 8 Firm number Europe: 150 USA: 170 Firm size identical Source T. Philippon and N. Véron, Bruegel Policy Brief January 2008

9. Implications for State Aid Policy 9  SA policy needs to look beyond the crisis and be more than ever supportive of the goal of having a strong and dynamic, i.e. integrated and contestable Single Market  SA control is crucial to ensure that the Single Market is not distorted and that it generates opportunities for new entrants and prevents “zombies”  SA needs to meet a double test »Market failure: is there a market failure and is the SA targeted to correct it? Is the SA the correct instrument to correct the market failure or should the market failure be corrected by regulatory changes? Even if the SA is the correct instrument in principle is it actually designed to foster structural change? »Distortion of competition: does the SA introduce a distortion of competition?  SA policy must help promote change through »Pan-European restructuring and churning »Support (R&D, lagging regions) that creates opportunities for new entrants