What exactly is the job of EU’s Competitiveness Council? The man in charge Vice President Mr. Guenter Verheugen believes it to be bridging the economic divide between various countries of EU. Mr. Verheugen describes the free-market agenda he and commission President Jose Manuel Barroso unveiled on Feb. 2 as "a kind of revolution" for the single market of more than 450 million people. The agenda focuses on two dimensions: growth and jobs; without specifying which is the prime goal. The overarching objective of the agenda is to cut costs through competition. This certainly flies in face of what works in Europe. Witness, the textile industry's success in Emilia-Romana in spite of strong competition from Turkey and Asia. The industry did not succeed because they were able to cut costs, but because they were able to exploit their immense knowledge of what fashion designers look for and giving it away for free in their annual exhibitions. They are certainly more sanguine about their prospects as the WTO textile quotas came to an end this January.
Apart from the validity of their goals, there are 2 fundamental points in here which kind of stick in my throat. The assertion that EU is a single market and that the role of Competitiveness Council is to bridge the economic divide between member countries.
Does EU really constitute a single market? I was taught that you have a single market when the opportunities for price arbitrage within the market are zero or negligible. I was also taught that we have a single market when customers in one part can reference customers in another part of the market. In such a case, EU is definitely not a single market. An internal study by EU shows that prices can vary by as much as 178% for oranges and by 56% for video cassette recorders within EU. Now usually, if there is such a huge difference between prices, there definitely are price arbitrage opportunities. So why are the prices equalizing as people exploit these arbitrage opportunities? I believe the reason to be quotas and protection within EU. This is similar to US government mandating that a business in Florida cannot export oranges to New York or can market only a fixed quantity per year. Now, I do not know if such a rule exists, but if it does, I for one, would find it very funny.
Secondly, EU is not a single market because the product adoption rates vary significantly across countries. In a paper published by they argue that the adoption rates vary across countries in Euro Zone. For example, most of the companies prefer to launch a product in the bigger economies of France or Germany. For marketers who are under pressure to quickly ramp up penetration and recoup the marketing costs, these countries could prove to be graveyards given their history of slower adoption behavior. A new product launch in these countries takes on an average 6 years before it takes off. Marketers under pressure to build momentum quickly can pull the plug on new products too early because they see the adoption rate not rising quickly enough. What are the worst countries when it comes to launching new products? The Mediterranean area earns that dubious distinction. On average, the Mediterranean countries take twice the amount of time required in Scandinavian countries to takeoff.
What about the role of the Council to bridge the economic divide? I think it is time the commission executives articulate what they have known for some time now: the commission has very little to do with economic progress made in Europe. In fact, bridging the economic divide is something Europe has been talking about for a long time now, since 1961, 3 years after ECSC transformed into EEC. The four prime movers behind ECSC and EEC, German Chancellor Konrad Adenauer; French foreign minister Robert Schuman, French economic adviser and international statesman Jean Monnet and the American secretary of state Dean Acheson. Of these, the credit for architecting ECSC should go to Jean Monnet, who while not holding any public office during the time, worked hard behind the scenes to make ECSC happen. The point is ECSC and EEC have been formed to achieve two goals: to integrate Germany into European destiny, so it can not become a threat again; and to present a bulwark against the onslaught of communism from east. The economic progress achieved by Ireland, Emilia-Romana and surrounding districts in North-Eastern Italy, Toulouse and surrounding areas in South-Western France are achieved due to local, micro economic structural conditions like culture, access to universities, location and timing; not because of special initiatives or subsidies of EU.
Economic growth has been and always will be in spurts. I do not believe that EU or any other organization can or should try to smooth the growth. Instead, the council should focus on creating the right environment to encourage entrepreneurship at grass root level by providing cheaper credit, eliminating legal and culture barriers to bankruptcy, reduce protection given to employees, provide high level of vocational training and create support systems for small businesses.