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Closing the US-Europe Technology Gap

In the second half of the 1990's, Europe's average annual growth rate of productivity amounted to 0.7%, while the US hummed along at 1.4%. However, if we distinguish between the industries that produce information and communications technologies (ICT) and those that are simply users of such technologies, we can see that the productivity growth gap stems almost entirely from the weakness of Europe's ICT producing sector. Annual productivity growth in sectors that are users of ICT technologies averaged 0.63% in the US between 1995 and 2000, and a very similar 0.41% in Europe.

This confirms a well known fact: Europe is less efficient than the US at producing research that is conducive to innovation--either because Europe allocates fewer resources to research, or because the available resources are used less efficiently, or both.

To be sure, total spending on research and development is lower in Europe than in the US, but not by much. In the 1990's, the US devoted 2.8% of GDP annually on R&D, compared with 2.3% in Germany, 2% in the UK, and 1.9% in France. Still, European governments typically complain about the lack of fiscal resources to support R&D (a far fetched argument given the miniscule share of research spending in the oversized European budgets) and, whenever the European Commission allows them, they subsidize innovative firms, or those that they think are more likely to invest in R&D.

France and Italy, for example, demanded that the limits imposed the budget deficits of euro zone members by the Stability and Growth Pact exclude public spending for research. Similarly, the French government decided to bail out Alstom--a company that developed a number of high-tech products, including the TGV, the French fast train--before ending up bankrupt.