Too many cooks spoil the broth, and this seems particularly true in the case of the European Union (EU). The Brexit debate, on whether or not Britain will leave the European Union, has raised questions on where the EU’s economy is headed. After years of stress post-2008, most major economies have got back on their feet, but not the EU. It remains a meaningful economy, but its continued woes are a definite cause for concern.

Why did the EU reach this woeful state?

An increasing number of diverse economies, each of varying maturity, meant an institutionalized method of policy-making to ensure each EU member benefited. But this machinery of bureaucracy was outside the direct control of citizens, and often became impractical from a business practitioner’s perspective.

Loss of competitiveness

The debate about the EU’s current economic state boils down to the loss of competitiveness in the global context. Its bureaucratic machinery and the protectionist environment fostered due to tariffs, quotas and excessive regulations seem to have inhibited its competitiveness, and hence economic progress.

Is lack of innovation a cause of this drop in competitiveness?

The complacency from knowing that competition was controlled from entering its market reduced regular innovations. Competition forces industry to bring in new ideas and new ways of efficiencies. Innovation forces changes in a product’s quality, features, pricing and delivery; it means reinventing the value-proposition in the client’s best interest. But was the lack of innovation really a culprit?

Data from the World Economic Forum’s Competitiveness Ranking seems to show so. The innovation rank is one of the components that make up the global competitiveness ranking. It is worth noting that the larger EU members have dropped by more places in the innovation ranking between 2013 and 2016, than in the competitiveness rank. This includes UK, Germany, Italy, Netherlands and Spain. Sweden, Finland and Denmark improved by more places in their innovation rank than in their competitiveness rank, and this is probably a result of their higher allocation to research and development — 3% of GDP vs. 2% of GDP in EU as a whole. World Bank’s data on R&D expenditure as % of GDP shows Europe not only lags behind the USA and Japan, but even developing countries like China have ramped up their R&D spends significantly.

Research and innovation can become a key driver for the EU’s economy competitiveness. The correlation between changes in innovation rank vis-à-vis competitiveness rank is uncanny. Europe has the infrastructure. It has research institutions, IPR frameworks and support structures. Innovation can lower the cost of production and make the EU’s corporations profitable. Even if it loses production volumes to Asian peers who can produce more cheaply, it can come up with innovations in the product’s technology or method of production to keep itself relevant in the value-chain. It can cement its place as a research partner. While this means it may become a trading-region instead of a producer-region, its innovations will mean it has a say in how the value-chain would flow.

In conclusion, post-war Germany or non-EU Switzerland show how scrapping excessive controls can make economies dynamic and diverse and rank high on production, exports, wages and employment to create world-class multinational corporations. Irrespective of whether the British populace votes for or against Brexit, the EU really needs to make itself more competitive in the global context. If it does not, then its own people will pay the ultimate price.

Image Courtesy: Bloomberg via Getty Images & HuffPost India

Originally published here – http://www.huffingtonpost.in/sourajit-aiyer/brexit-or-not-the-eu-real_b_10130908.html