What is needed for EU competitiveness? The view from Croatia

Alexandra Zeitz (Global Economic Governance Programme, University of Oxford)

Speaker: Boris Vujčić, Governor, Croatian National Bank

Chair: Gillian Edgeworth, Wellington Management and St. Antony’s College, Oxford 

What will it take to boost the EU’s competitiveness and firm up a shaky economic recovery? In late November, PEFM hosted Governor Boris Vujčić of the Croatian National Bank, who presented his views on the roadblocks to productivity in the EU and argued for structural reforms to encourage convergence among different European regions and increase competitiveness.

There are many explanations for Europe’s competitiveness woes, particularly for why it lags behind the United States across indicators of productivity. Indeed, Jeffrey Franks’ PEFM presentation in October outlined how the IMF accounts for Europe’s flagging competitiveness.

In his account, Governor Vujčić stressed the importance of the revolution in information and communications technology, which has made huge contributions to private sector productivity in the US, but lagged in Europe. He also highlighted the problem of financing – without well developed equity markets and venture capital funders, young European entrepreneurs often lack the investment to get their ideas off the ground. Europe has also been slow, Governor Vujčić argued, to bring research and expertise from academia into the private sector. While Europe’s universities are well represented on global league tables, transfer of knowledge into business is still lacking.

Ultimately, however, Governor Vujčić argued that structural factors are the chief impediment to European competitiveness. In pointing out the striking divergences between Europe’s different subregions – Northern, Southern and Central and Eastern Europe – Governor Vujčić made the case that structural reforms are necessary to bridge the gaps between EU members. These structural reforms could help to attract foreign direct investment, he argued, driving exports and facilitating knowledge exchange through multinational firms.

In pointing to Southern European economies as lagging in terms of their structural competitiveness, Governor Vujčić touched on one of the central political questions of European integration: how much convergence can be expected among EU member states? The remarks also hinted at the political economy of regional splits within the EU. As the Greek debt crisis made clear, the EU’s newer members, several of whom introduced structural reforms under the guidance of the IMF, have often had little solidarity with their Southern neighbors.

Governor Vujčić’s remarks on regional divergence in competitiveness sparked debate in the audience. Some argued that Eurozone membership has been a serious constraint. Without the possibility of devaluing their currency, these economies can only engage in competitive disinflation, and requiring structural reform in times of austerity may push publics past their breaking point.

In making the case for structural reforms, Governor Vujčić issued recommendations in line with the conventional wisdom of the IMF: reforms need to be appropriately sequenced, coordinated across sectors, properly targeted and effectively communicated to the public in order secure both short- and longer-term benefits. But this pragmatic advice may risk brushing over the fundamental and valid disagreements that often underlie political conflicts over structural reform. Opposition to liberalization of, for instance, employment regulation comes not only from entrenched or corrupt elites.

In Croatia itself, the recent November 2015 elections may usher in the sorts structural reforms Governor Vujčić was advocating. A new centre-right party, the Bridge of Independent Lists (MOST), came in third place with an unexpected 19 seats on the basis of a platform that promised reform of the public sector and public finances. With coalition talks still ongoing, MOST are considered the king-makers and may see their structural reform proposals implemented in the next government.