Standard Life Investments

Weekly Economic Briefing

Europe

2020 vision

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In 2010, European leaders laid out their vision for the future of the Union called the ‘Europe 2020 strategy’. The agenda focuses on generating “smart, sustainable and inclusive growth as a way to overcome the structural weaknesses in Europe’s economy, improve its competitiveness and productivity and underpin a sustainable social market economy”. The framework for achieving this is five-pronged, focusing on employment, R&D, climate change, education and poverty & social exclusion. R&D targeting is a particularly intriguing proposition, given the productivity challenges facing many developed markets and strikingly low potential growth in the monetary union more specifically. The latest data we have suggests that R&D intensity – the ratio of gross domestic expenditure on R&D to GDP – has risen from 1.93% in 2010 to 2.03% (preliminary) in 2015, though still a far cry from the 3% target set out in the 2020 strategy (see Chart 6).  

Great aspirations Crisis crimped R&D

The difficulty with these high-level aspirational frameworks is often that adherence and incentivisation tend to be under sovereign control. An additional problem for the EU is the differing economic structures and strengths of member states, such that not all member states are starting from the same footing – which is why most countries have their own national targets. Drilling down to the member state level; Sweden, Austria and Denmark rank highest, with R&D intensity of 3.26%, 3.07% and 3.03% respectively. It comes as little surprise that economic powerhouse Germany comes pretty close too at 2.87%. The worst performers, on the other hand, were the newest EU members and Greece. That economic structure and R&D intensity go hand in hand makes sense when we consider who is doing the investing. R&D spending is dominated by the business enterprise, government, higher education and private non-profit sectors. Of these, the business enterprise sector tends to be the biggest contributor – particularly pharma and autos – making up 63.9% of total EU R&D expenditure. European countries with the highest proportion of business enterprise R&D intensity are those with the highest levels of overall R&D intensity.

To better capture the progress of different states in increasing R&D, a useful question to ask is: which countries have seen the most R&D investment increases in recent decades and since the 2020 strategy was agreed in 2010 (see Chart 7)? Top-ranking Sweden saw R&D decline through the noughties before recovering a little since 2010, while Finnish R&D intensity fell more than any other EU member in the period since 2010. Austria stands out as the ‘most improved’ country in average annual terms in both time periods, with total R&D intensity rising by 1.18ppts since 2000 to 3.07. OECD research indicates that the Austrian government policy is likely playing an important role. In 2014, Austria ranked 7th in the world for overall government R&D funding support – which is implemented through a mix of both direct funding and incentivising R&D by corporates though more generous tax incentives – having risen 0.06ppt as a percentage of GDP since 2006 versus the OECD average of 0.02ppt for that period. This reminds us that governments have a dual role to play to support R&D; both as a direct contributor to R&D sector and, importantly, incentivising enterprises to invest in R&D through preferential tax treatment for these expenditures.

Stephanie Kelly, Political Economist, Standard Life Investments