EU Commission blames low R&D investment for economic stagnation

20 Jun 2024 | News

Latest economic policy report puts research and innovation at the top of Europe’s new competitiveness agenda

Photo credits: Dati Bendo / European Union

The European Commission is blaming the EU’s economic stagnation on low investment in research and innovation, in the European Semester report, the bloc’s main policy tool for coordinating economic and fiscal policy across the 27 member state, which was published on Wednesday.

Research rarely features at the top of the report, but this year the Commission is insistent member states need to invest more in R&D if the EU is to recover from the downward spiral of sluggish economic growth and a slowdown in productivity over the past two decades.

The slowdown in productivity began in the early 2000s and was then amplified by low investment rates after the economic crisis in 2008 and a widening productivity gap compared with other major economies.

While investment rates have been recovering, the EU’s productivity growth is still lagging behind the US. “This is due to the smaller size of high growth sectors like ICT manufacturing and digital services, innovation not being sufficiently scaled-up, a lack of investment in research and innovation and persistent skills shortages,” the Commission said.

The suggested remedy is to speed up efforts to increase scientific excellence, attract talent and boost public and private investment in research and innovation. The Commission also wants member states to tighten links between academia and business.

But ultimately, turning things around depends on how much national governments are willing to spend on research and innovation.

We need to raise productivity growth through research and innovation, improve access to finance, reduce labour and skills shortages and improve the business environment,” said executive vice president Valdis Dombrovskis.

For more than two decades, member states have been urged to increase domestic R&D investment to at least 3% of GDP, but efforts have been sluuggish at best in most member states. Only Belgium, Sweden, Austria, Germany and Denmark had reached the 3% target by 2020, according to Eurostat. The EU average of 2.2% is well below the US, Japan, and South Korea.

Back in 2021, EU research ministers adopted conclusions on the governance of the European Research Area (ERA) and a agreed a pact for research and innovation, which is meant to be a political guide to implementing ERA. The pact included a commitment by member states to reform national R&D systems and refresh attempts to reach the 3% of GDP target. The agreement was not binding.

Anna Panagopoulou, director for ERA & Innovation at DG RTD said the emphasis on R&D in the economic outlook report is a “clear and timely reminder” that investment in science and technology are essential for economic growth.

Last week, former Italian prime minister Mario Draghi said the EU must make research and innovation a “collective priority”, as he outlined some of the key points from his highly anticipated report on EU competitiveness, due to be submitted to the Commission next month.

Draghi’s view echoes a previous report from another former Italian prime minister, Enrico Letta, where he urged the EU to create a “fifth freedom” dedicated to research, innovation, knowledge and education. That, along with setting clear R&I targets in the European Semester, would enable the Commission to get a tighter grip on how member states prioritise research and innovation.

“The strong R&I coverage in the European Semester is a promising signal to turn the fifth freedom into reality through a strong and well-functioning European Research Area,” DG RTD said in a statement.

Kurt Deketelaere, secretary general of the League of European Research Universities (LERU), said the recommendations in the Letta report should be implemented.  “We need a top down legislative approach to realise the fifth freedom, a voluntary bottom up approach, as practiced for decades now, is completely insufficient.”

Deketelaere expects to see the same vision for the fifth freedom in the upcoming Draghi report, but hopes the language will be stronger.

It is unclear whether the Commission’s approach of not waiting for a top-down legislative initiative to establish research and innovation as a fifth freedom, but rather to include milestones in the European Semester, will bear fruit.

“The European semester approach is a perfect tool to push member states towards specific national R&I measures, but member states will only move and do what the Commission suggests if non-action has consequences,” said Deketelaere.

Stagnating budgets

It’s not clear how much attention member states will pay to the Commission’s suggestions on R&D investment and reforms. Defence expenditure has been going up since Russia invaded Ukraine, while finance ministers have been struggling with inflation and a rise in the cost of living.

In Brussels, at least for now, business goes on as usual. The Commission proposed a budget of €13.5 billion for research and innovation in 2025, of which €12.7 billion will go to Horizon Europe. That is slightly down on the €12.9 billion agreed last November.  

Researchers are now awaiting a response to the budget proposal from the newly elected European Parliament. MEPs have a reputation for fighting for consistent budgets for research and innovation, and some of them have already committed to fight for a €200 billion budget for Horizon Europe’s successor programme, FP10, due to start in 2028.

The total budget of Horizon Europe is €95.5 billion until 2027 and MEPs, the Commission and researchers are facing an uphill battle to convince member states to double its budget in the next multiannual financial framework.

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