European integration: the third step

Abstract

A perception of declining EU competitiveness has intensified calls for structural reforms within the EU. This paper examines recent evidence on changes in relative EU competitiveness and considers the observed changes in relation to the evolving competitive environment facing EU firms. Our analysis suggests that recent declines in EU competitiveness reflect changes (or lack thereof) within the EU in response to an evolutionary “Third Step” in the process of EU integration: global market integration. Starting from the mid-1990s, we find that the EU began to face unprecedented increases in external sources of competition. The rising competition from external sources and declining export market competitiveness created pressures for EU firms to alter their organizational and product market strategies to meet the challenge of a globally integrating market. While many leading EU firms have responded to this challenge, most EU firms remain hampered by anachronistic EU product and labor market regulations that have inhibited adjustments that could better restore the competitiveness of EU based firms. In particular, our analysis points to labor market rigidities and limited growth in the services sector as factors limiting adjustment to the realities of a global market. The growing calls for structural reforms therefore reflect the rising external competitive pressures on EU firms as they attempt to respond to growing global competition.