Chapter 21: Nature of the European Technology Gap: Creative Destruction or Industrial Policy?
1 David Encaoua INTRODUCTION 21.1 In the technology race, can Europe catch up with its competitors, in particular the US? This is a central question on the European agenda, and the response depends on the diagnosis of the sources and the nature of the technology gap. First, let us recall why the technology gap poses an important question. Economic welfare, measured at first glance by per capita gross national product (GNP) is the product of two constituents: average productivity of labor and the employment rate among the working age population.2 In the last ten years (1995–2005), Europe has faced a two-sided problem: on the one hand, Europe is behind the US in its labor productivity and employment rate; and on the other, it has witnessed growth in only one of these constituents of economic well-being. Labor productivity growth has been obtained at the expense of employment rate, or the inverse. The consequent slowdown in European hourly productivity growth has awakened fears that the European social model is unsustainable. Of course there is heterogeneity in growth trajectories across member countries, but particularly in eurozone countries and taken as a whole, they incite serious worry despite the grandiose objectives and expectations declared at the Lisbon Summit in 2000. Among the most significant stylized facts is the now widely recognized downward shift in productivity growth in Europe in the middle of the 1990s. A period of technological divergence in which the productivity gap between Europe and the US widened began in 1995,...
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