The European Union (EU) is going through one of the most difficult periods since its establishment, with multiple challenges facing the region’s policy-makers.

While many countries are struggling to recover from the worst financial and economic downturn since the Great Depression and some economies are even facing sovereign default for the first time in 60 years, political discontent is mounting. Some gloomy forecasts portend a lost decade for growth unless decisive action is taken at scale and speed to address the bottlenecks to reform that are strangling economic development. However, amid all of the short-term fire fighting, it is critical not to lose sight of the fact that to address the underlying concerns in the region, Europe must become more competitive.

Ranking: who are the most competitive European economies?

Europe 2020 Competitiveness Report

The World Economic Forum’s Europe 2020 Competitiveness Report focuses on measuring Europe’s performance in becoming smart, inclusive and environmentally sustainable. It is the first in a series to measure the region’s performance against the European Commission’s own Europe 2020 growth strategy and especially around seven flagship initiatives: enterprise environment, digital agenda, innovative Europe, education and training, labour market and employment, social inclusion and environmental sustainability.

What are competitive economies?

Competitive economies are those that are able to provide high and rising livings standards, allowing all members of a society to contribute to and benefit from high levels of prosperity.

What are the main findings and recommendations of the Europe 2020 Competitiveness report?

The report researches and monitors to what extent the EU is making progress to achieve these competitiveness goals. In brief, the main findings of the report show that:

  • In comparative terms, the EU tends to perform better than other advanced economies (United States, Japan and Canada) in ensuring inclusive and sustainable societies…
  • But it lags behind in terms of becoming a smarter place, hindering therefore its capacity to shift towards truly differentiated, higher value added activities and sustain its economic competitiveness.
  • A more nuanced analysis shows that in terms of inclusion, Europe provides better social cohesion policies but fails to provide the right conditions for gainful employment for large shares of its population.
  • The EU underperforms in every single pillar that builds a smarter, knowledge-intensive society.The gap is evident in building a highly skilful, digital savvy, innovative economy with favourable business conditions for entrepreneurship.
  • The aggregate data for the EU masks large national disparities. A tale of four very different Europes emerges and shows the important competitiveness divide in the EU, with the Nordic countries leading the way internationally and several southern, central and eastern European countries falling behind.
  • In general, accession and candidate countries, with the exception of Iceland, have a low competitiveness profile, lagging in virtually all analysed dimensions. Preparing them for accession will require the addressing of their specific competitiveness weaknesses.

From this analysis, a number of policy insights can be derived for both individual Member States and the European Union as a whole. The ten key findings and recommendations are highlighted in the box below.

  1. High levels of economic prosperity cannot be sustained without high levels of competitiveness.
  2. While addressing fiscal imbalances is crucial for short-term stability and to regain confidence, improving competitiveness is essential to supporting medium- and long-term prosperity.
  3. The European Union on average trails the world’s most  advanced economies on building a smarter economy,  hindering competitiveness. Building a knowledge-based society should be a priority to build a truly differentiated offer.
  4. A competitiveness divide exists in the European Union. The likely result will be a lack of sufficient economic and social convergence across Member States.
  5. In general, candidate countries face important competitiveness challenges.
  6. There are no necessary trade-offs between building a smart economy and achieving an inclusive or environmentally sustainable society.
  7. Fragmentation in the internal market for tradable services, insufficient openness to trade and administrative and cultural barriers for an effective free movement of people hinder overall competitiveness in Europe.
  8. There is a sense of urgency and scale to undertake the necessary investments and implement the necessary reforms to boost competitiveness and avoid a lost decade for Europe. Innovative financing mechanism need to be further explored.
  9. The necessary reforms will require political leadership to overcome vested interests and to create shared commitment by all agents of the economy so that the effects of the reforms are perceived as fair and worth the necessary pain.
  10. Efforts to raise competitiveness need to be coordinated and sequenced in a way that they generate public support within the political cycle.

2012 Ranking of Europe’s best competitive economies

Sweden
Rank: 1st

Sweden maintains the lead from last year. This is driven by a large focus on education and training to skill its workforce, as well as an excellent enterprise environment with healthy competition in the national market, a strong culture of entrepreneurship, well developed clusters, and financing that is more readily available than in many other parts of Europe. Sweden also has made great strides to encourage the uptake of the latest digital technologies to enhance productivity and innovation.

Finland
Rank: 2nd

Finland’s enterprise environment fosters business creation, supported by readily available finance for business investment. It also occupies the top position in the higher education and training pillar, the result of a strong focus on education over recent decades. This has provided the workforce with the skills needed to adapt rapidly to a changing environment and has laid the groundwork for high levels of technological adoption and innovation.

Denmark
Rank: 3rd

Denmark receives strong marks for its innovative capacity, it stands out most particularly for its top rank in the area of “inclusive Europe”. This represents a marked difference with regard to the other Nordic countries, with Denmark continuing to distinguish itself through the benefits of its flexicurity system as it has one of the most efficient labour markets internationally, combined with a strong social safety net.

Netherlands
Ranked: 4th

The Netherlands demonstrates one of the strongest competitiveness performances in Europe. This should provide a solid base for a recovery in economic growth. Overall, the country has been able to build a highly productive, knowledge-intensive, service-based economy. A high-quality educational and training system coupled with a good uptake of technology and innovation and innovative business practices have provided the foundations for doing so.

Austria
Ranked: 5th

Austria’s greatest strength relates to the environmental sustainability, with extensive use of renewable energy in the country and well enforced environmental regulations, as well as an unpolluted environment and relatively low CO2 emissions. Austria also has strong provisions of social services in the country, and strong labour market participation, particularly among the young.

Germany
Ranked 6th

German companies are among the most innovative in the world, spending heavily on R&D and displaying a high capacity for innovation — complemented by the country’s harnessing of the digital agenda for higher productivity. Germany is also relatively successful in its environmental sustainability efforts with well-enforced environmental legislation leading to rather strong environmental outcomes.

The United Kingdom
Ranked 7th

The United Kingdom has a strong leveraging of ICT, which is instrumental in supporting business innovation in the services sector, high levels of training and favourable business conditions related to high levels of competition and available financing via local equity markets and venture capital. Despite this relatively strong position, the country still faces some problems in providing gainful employment for some segments of the population, especially for youth

Luxembourg
Ranked 8th

Luxembourg presents a competitiveness profile that can be regarded as in transition. With an economy largely driven by the financial sector, the country has embarked on a diversification strategy aimed at developing ICT and innovation as new sources of economic growth and employment. Overall, despite benefiting from very favourable conditions for business activity, the country still trails neighbouring countries in building a smart economy.

Belgium
Ranked 9th

Belgium presents a competitiveness profile that reflects in many ways the average position of Western Europe, with strengths in many pillars and the need to improve in a number of others in order to create a smart, inclusive and sustainable economy. The country has traditionally benefited from a very high-quality education and training system that has provided a skilful labour force, including a large number of scientists and engineers and a strong scientific base. In general, pro-business policies, despite the very high taxation system, have provided the right conditions for businesses to develop their activities.

France
Ranked 10th

France has a stronger performance in the “smart Europe” and environmental sustainability components than in those measuring inclusiveness. A relatively strong education and training system has provided the basis for a business sector that is aggressive in adopting digital technologies for productivity enhancements. These attributes have resulted in a relatively innovative business culture, with high R&D spending, highly qualified scientists and engineers available in the country, and with a strong culture of marketing that helps to get new ideas picked up by the market.

Estonia
Ranked 11th

Estonia greatest strength relates to the country’s digital agenda, driven by strong ICT laws, high government prioritization and strong company use of ICT. Its enterprise environment is supportive overall.

Ireland
Ranked 12th

Ireland, until recently a European “poster child” of rapid growth, demonstrates a need to create better conditions for innovation in order to regain a sustainable growth path. The country can count on a range of good assets to do so. A traditionally good quality and well performing educational system has created a dynamic and skilful labour force, including scientists and engineers, who are instrumental in boosting the technological capacity of the country. Moreover, the dense network of national universities has also managed to create a scientific base that scores high at the European level, and pro-business policies have facilitated the creation of a highly entrepreneurial culture.

Slovenia
Ranked 13th

Slovenia’s educational system turns out large numbers of graduates with fairly good skills and knowledge, and the country has a stronger capacity for innovation than most countries from the region, due to high levels of R&D expenditure, many available scientists and engineers and numerous patent applications

Portugal
Ranked 14th

Portugal’s competitiveness remains somewhat mediocre after a lost decade of economic growth. Creating an innovation-driven economy will require several reforms and important investments in knowledge generation areas, such as education and training or R&D, which may be difficult to attain in a period of sharp fiscal consolidation. In terms of reforms, the country needs to improve the efficiency of the educational and innovation systems. While enrolment rates are reasonably high, especially in secondary education, the quality of the overall educational system lags behind other European countries.

Spain
Ranked 15th

Spain has not managed to fully shift towards a knowledge-based economy. The rapid economic growth that Spain experienced over the past fifteen years came to an end with the financial and economic crisis that brought to light the country’s competitiveness weaknesses. These hinder its capacity to sustain economic growth and have caused strong employment adjustments in the population.

The Czech Republic
Ranked 16th

The Czech Republic is characterized by an inclusive economy, led by low income inequality as measured by Gini coefficient and an efficient labour market with a healthy relationship between pay and productivity. Its enterprise environment attains a performance similar to the European average with relevant strengths in local competition, openness to foreign investments and non-distortive taxation.

Cyprus
Ranked 17th

Labour market efficiency and labour participation are the main drivers of the country’s inclusive economy. Flexibility on hiring and firing practices does not generate major frictions between labour and employers and youth unemployment is somewhat lower than in many other European economies.

Malta
Ranked 18th

Malta has one of the lowest youth unemployment levels in Europe, relatively low income inequality and widespread access to healthcare. Compared to Cyprus, Malta has a sounder digital agenda with excellent government prioritization of ICT and sizeable access to basic online services.

Latvia
Ranked 19th

Latvia is not sufficiently geared towards a knowledge-based economy. Despite efficient labour markets, considerable segments of society do not benefit from rising prosperity. Putting growth on a more stable footing will require reforms and investments in a number of areas.

Lithuania
Ranked 20th

Lithuania’s moderately efficient labour market ensures comparatively high employment in the country and benefits from the largest share of women in the labour force in the EU. The cornerstones of the country’s productivity are the progressive digital agenda, which ensures that the latest technologies have the desired impact as well as solid results on education and training, reflecting in particular the country’s high enrolment in tertiary institutions.

Italy
Ranked 21st

Italy still has some strengths in its enterprise environment, in particular its well developed clusters, broad presence in the value chain and corporate activity spread among many firms, ensuring competition. Also, Italy is characterized by its ability to compete based on its unique products and processes rather than on low costs or natural resources.

The Slovak Republic
Ranked 22nd

The country’s enterprise environment benefits from higher levels of competition, better functioning clusters and a better framework for entrepreneurship than many other European economies.

Poland
Ranked 23rd

Competitiveness is supported by the country’s relatively good educational outcomes reflected in rather high tertiary enrolment rates and high quality of education, as assessed by the OECD’s PISA study, as well as by a training system that benefits from numerous training institutions and enterprises providing on the job training to their employees.

Hungary
Ranked 24th

Hungary’s traditional strengths in innovation and ICTs are mirrored by good results in these two areas. The country benefits from a good availability of scientists and engineers, some collaboration between universities and industry and a capacity for innovation that is higher than in most East European economies.

Greece
Ranked 25th

Although Greece demonstrates some good performances on individual indicators it decidedly struggles in achieving both smart and inclusive growth.

Romania
Ranked 26th

Romania has a comparatively acceptable level of renewable energy production and CO2 intensity. At the same time, Romania trails almost all EU economies.

Bulgaria
Ranked 27th

Bulgaria is still in the process of reinforcing its institutions. The labour market and employment area represents Bulgaria’s main strength. Flexibility in hiring and firing practices and a healthy relationship between pay and productivity make the labour market relatively efficient, while the relatively high participation of women in the labour force is a competitive strength.