The 2014 edition of the The Europe 2020 Competitiveness Report, published this week, tracks Europe’s progress on its competitiveness agenda. The report includes an index which ranks the competitiveness of European Union member states. Here are the top 10 countries on this year’s list.

Europe’s top 10 most competitive economies

1. Finland ranks 1st in this edition of the Europe 2020 Competitiveness Index, supported by its stronger performance in laying the foundations for smart growth since the 2012 edition. This is driven by a large focus on education and training (1st in this pillar), which 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. Finland remains one of the innovation powerhouses in Europe, ranking 1st in the innovative Europe pillar, and a global leader in moving towards a digital economy (1st).

Finland’s enterprise environment (2nd) fosters business creation, supported by readily available finance for business investment. Finland also receives a strong assessment in the inclusive growth component (2nd); it has a well-functioning labour market and relatively strong labour market participation, as well as strong social inclusion (1st) based on low inequality in the country, providing social services and the opportunity for its citizens to improve their economic status independent of their socio-economic background (1st in social mobility). Finland’s strong showing on the sustainability component (2nd) demonstrates that its economic prowess does not come at the expense of environmentally sustainable practices and outcomes.

2. Sweden falls by one place and is ranked 2nd. It does well in the smart growth sub-index, driven by 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 in encouraging the uptake of the latest digital technologies to enhance productivity and innovation (2nd in the digital agenda pillar). Such emphasis over the years on creating the conditions for innovation-led growth has paid off in Sweden’s number two ranking in the innovative Europe pillar, with very sophisticated business techniques, high spending on R&D (albeit lower than in the previous edition) and excellent collaboration between universities and the private sector in research, leading to much innovation output making it to market.

Sweden is also ranked 1st in the environmental sustainability pillar, demonstrating that sustainability and innovation can go very well hand in hand, with well-enforced environmental regulations and much lower pollution levels than in many other parts of the world. Sweden is somewhat less strong in the inclusive growth sub-index (4th). With low inequality and a strong provision of health and social services, Sweden’s score is pulled down by its result in the labour market and employment pillar, where it is ranked 7th out of 28. This is related to a lack of flexibility in the labour market, some concerns about the relationship between pay and productivity in the country, as well as a notably high youth unemployment rate of 23.4%.

3. The Netherlands, ranked 3rd overall, continues to perform strongly, both in terms of building a smarter (3rd) and inclusive (3rd) society; this despite the economic and financial difficulties of the past years that have raised concerns about its housing and financial sectors, affecting the access to loans (9th), and have resulted in higher rates of unemployment. Overall, the country continues to perform strongly, with one of the most efficient and pro-business operating environments in Europe (3rd) and outstanding ICT use (1st) that, coupled with a well-performing educational system (2nd), allows for high levels of innovation in a service-based economy. These assets should play an important role in sustaining robust growth in the future. In the current economic context, and despite the rise in unemployment and the persistent rigidities in the labour market, the Netherlands has managed to maintain a high level of social inclusion (2nd).

This has come with no increase in income disparities, as evidenced by a very stable Gini coefficient (5th), and with effective government policies (2nd) to reduce poverty and inequality, and ensure access to public services such as healthcare (6th). In the future, the country should address the persistent rigidities in its labour market, based on the successful experience of some Nordic countries in implementing “flexicurity” models (that seek to reconcile employers’ need for flexibility with employees’ desire for security), and continue its public and private investments in productivity-enhancing intangible assets in areas such as R&D, education, training schemes or ICT.

4. Denmark falls by one place to rank 4th. While the country receives strong marks for its innovative capacity (3rd on the innovative Europe pillar), it experienced a deterioration of its enterprise environment, falling five places to 11th. By contrast, Denmark continues to distinguish itself through the benefits of its flexicurity system, as it has one of the most efficient labour markets (1st), combined with a strong social safety net, which has allowed the country to cope relatively well with the significant drop in employment during the downturn.

Overall, the system has led to very high labour market participation, including among youth, at a time when many other European countries are struggling in this area. Yet, a decline in the education and training pillar is apparent, although the country is taking steps to reform public school and vocational training. Denmark also receives a relatively strong assessment for sustainability, although less so than the other Nordic countries, and with some concerns related to the amount of protected land area and relatively high CO2 emissions, although an improvement has taken place in the past four years.

5. Germany overtakes Austria in this edition, moving up one spot to 5th place. German companies are among the most innovative in the world, with heavy spending on R&D (ranked 4th) – notably with an increase from 2.5% to 2.8% of GDP in both public and private sectors between 2010 and 2012 – and displaying a high capacity for innovation (2nd). Moreover, the country harnesses the digital agenda well to achieve higher productivity (7th). Germany is also relatively successful in its environmental sustainability efforts (ranked 6th in this pillar), with well-enforced environmental legislation leading to rather strong environmental outcomes.

On a less positive note, and despite some efforts, Germany’s labour market remains rigid (17th for rigid hiring and firing practices, although up from 22nd place two years ago), and with still relatively low participation of women in the labour market. While these rigidities have certainly kept unemployment low during recent economic difficulties, rigid rules continue to hinder job creation, and more flexibility would place the country on a more solid footing for the future.

6. Austria is ranked 6th in this year’s Index, falling one spot since 2012. The country’s greatest strength relates to the environmental sustainability component, and it ranks 4th on this pillar, with extensive use of renewable energy and well-enforced environmental regulations, as well as an unpolluted environment and relatively low CO2 emissions. Austria is ranked a similarly respectable 7th for social inclusion, based on its strong provision of social services and strong labour market participation, particularly among youth (ranked 2nd, with the second-lowest youth unemployment rate). With regard to areas for improvement, a more flexible labour market to encourage more job creation, as well as stronger private sector employment of women (15th), would further enhance this positive picture.

Austria’s greatest challenge will be to further improve its innovation capacity. The country ranks 8th out of 28 in the smart growth sub-index; its enterprise environment is of most concern compared to other European countries. Its 9th rank in this pillar is primarily pulled down by the many procedures and the significant time required to start a business in Austria, constraining business creation (Austria is ranked 24th in the entrepreneurship sub-pillar). Improvements in this area would give a significant boost to the country’s innovation potential.

7. With a highly developed, service-oriented economy, the United Kingdom is positioned in 7th place in the overall ranking, though it scores 5th in building a smart economy, right after Finland, Sweden, the Netherlands and Germany. This has been possible because of strong leveraging of ICT (4th), which is instrumental in supporting business innovation in the services sector; relatively high levels of training (6th); and favourable business conditions (5th) related to high levels of competition (5th) and available financing through local equity markets (2nd) and venture capital (4th). Despite this relatively strong position, the country still faces problems in providing gainful employment for some segments of the population, especially for youth, who face unemployment rates of over 20% despite quite flexible labour markets (5th).

The UK also registers one of the highest inequality rates in Europe (22nd). Altogether, this points to some areas that require improvement to continue competing successfully and spreading the benefits to all segments of society. More precisely, while the performance of the scientific system is good (4th) because of world class universities, the innovation uptake (9th) is relatively low due in part to falling rates of corporate R&D. While the country’s economic structure may partially justify these lower rates, several manufacturing industries may need to increase their investments to improve their innovative potential. Moreover, the overall quality of the educational system, while fairly good, scores behind many other European countries (declining two spots, to 9th), and enrols fewer students in tertiary education (18th). Finally, to ensure a more harmonious development process, greater focus should be placed on several dimensions supporting environmental sustainability (12th).

8. Luxembourg remains stable, in 8th place overall, despite comparative improvements in terms of building a smarter and more inclusive economy, moving up three places to 7th and one place to 5th, respectively. The country continues to demonstrate one of the most pro-business environments in the EU (4th), with high levels of competition (2nd), low taxes (1st) and, in comparative terms to other European economies, fairly fluid access to finance (3rd). In addition, and following a strategic long-term vision to diversify its economy, Luxembourg continues to strongly develop its digital readiness (1st) and usage (8th), and strengthen its innovation system.

Despite this progress, the country still suffers from relatively low levels of R&D (15th) and a shortage of scientists and engineers (19th), which is partially explained by its service-based economic structure that may rely on other sources than R&D to support and foster innovation. To continue supporting a well-performing knowledge-based economy, Luxembourg will need to address some of the persistent concerns about its educational system, both in terms of quality and quantity, to ensure a good supply of skilful labour, and to address any potential income disparities that may affect a fairly cohesive society (3rd) with effective government policies to reduce poverty and inequality (4th). More precisely, and according to the PISA results, while the quality of its educational system has improved in the past years, the country ranks 15th and continues to score below the EU average.

9. In 9th place, Belgium repeats its position in the overall ranking and depicts a very similar profile to the last assessment, both in terms of strengths and weaknesses. Overall, the country continues to enjoy one of the best-performing educational and training systems (3rd) that provides a skilful labour force. In addition, Belgium continues to excel in its scientific production (4th), which supports important innovations in a science-based industry with close ties to the university system (3rd), resulting in acceptable levels of technology development (9th). In general, pro-business policies, despite the high taxation system and very negative attitudes towards entrepreneurial failure (27th), have provided the right conditions for businesses to develop their activities (7th).

In terms of cohesion (5th), strong social networks (1st), and access to basic core services such as healthcare (1st), continue to cement an inclusive society, where income disparities have not grown despite the economic downturn (7th). Notwithstanding this important achievement, labour market participation, which is allegedly one of the best mechanisms to support inclusive societies in a sustainable manner, continues to be worrisome. Belgium has a very low activity rate (23rd) that could be partially explained by the negative effects of taxation on the incentives to work (25th), strong rigidities in hiring and firing practices (25th) and a certain disconnection between pay and productivity (22nd).

10. France is ranked 10th in the overall Index, despite a drop in score, with a stronger performance in the smart growth sub-index and environmental sustainability pillar than in components measuring inclusiveness. A relatively strong education and training system (10th) has provided the basis for a business sector that is aggressive in adopting digital technologies for productivity enhancements (ranked 9th for the digital agenda). These attributes have resulted in a relatively innovative business culture (10th in the innovative Europe pillar), with high R&D spending at 2.25% of GDP in 2012, and a strong marketing culture that helps new ideas get picked up by the market.

To corroborate its business culture, France could benefit from reducing the procedures for starting a business (17th) and addressing the high level of taxation that reduces the incentive to invest (24th). Furthermore, France ranks only 14th in the inclusive growth sub-index, pulled down particularly by inefficiencies in the labour market (26th) and low labour participation overall, with high youth unemployment (16th) and particularly low labour force participation by women (27th). Compared with other European economies, France also offers fewer opportunities to improve one’s economic status independent of one’s socio-economic background.

Read the 2014 edition of The Europe 2020 Competitiveness Report.

Author: Caroline Galvan is an economist in the World Economic Forum’s Global Competitiveness and Benchmarking Network

Image: Flags of European Union member states fly in front of the European Parliament building in Strasbourg, April 15, 2014. REUTERS/Vincent Kessler