With weak European growth performance over a longer period of time, it is time to push reforms raising the rate of productivity growth. The EU’s best strategy for it is to cut restrictions for single market trade in the services sector. There are still major restrictions in place and services regulations differ substantially between EU countries. Reforming regulatory barriers that create excessive costs for production and trade in services is therefore key to improving productivity growth. Although some reform has taken place over the last year, changes in these regulatory barriers however have been marginal and much more needs to be done in order to create significant economic gains. As a result, there is a strong economic case for countries to reduce excessive regulation, find as much harmonisation in regulation that is possible, and instruct regulators to cooperate across countries to synchronize their regulatory systems in services.
With sluggish growth performance in the EU over the last years, it is increasingly important to make reforms that lift economic growth. While there are various sources of growth, one outstanding factor determining growth rates is how productively an economy uses economic resources such as labour and capital, or what we in normal speak would call productivity. Productivity measures how much value-added can be extracted from efficiently using economic resources and, consequently, is one of the most important sources of growth, especially in developed economies like Europe. A chief task for a growth programme for Europe is therefore to raise the weak rates of productivity growth that it has experienced over the past two decades.
Research has shown that what actually explains the divergent performance of economic growth in European countries is the rate of productivity in the services sector. Services dominate in most (if not all) European economies. On average the EU holds a level of value added in services that comprises around 73 percent of its Gross Domestic Product (GDP). Per country this level ranges from 87 percent in Luxembourg and 80 percent in Greece to 59 percent in the Czech Republic. Although the importance of the services sector expands with the level of development, this, however, is not necessarily the case. For instance, Germany holds a percentage in services of 68 percent, well below the European average, which may be due to its advanced manufacturing base in which many services are integrated. Greece and Portugal ranks among the top countries with high services value-added which is mainly due to their tourism sector.
The share of domestic services value-added of a country is important because it helps to explain the success of being competitive abroad. In other words, a greater “services base” of a country indicates how successful a country is in terms of trade in services. For instance, smaller countries are usually good in exporting services, because their relative share of services value-added is also bigger. Indeed, within Europe, a larger share of value-added in services is associated with greater levels of trade in services as part of the domestic economy. This, in turn, is associated with greater levels of value-added growth across European countries. In 2014, Europe’s growth rate averaged a 1.44 percent. Countries above this average had higher services trade while countries below this average had a lower level of services trade.