Europe's Manufacturers Feel Squeezed

As Officials Talk of Rebuilding Industry, Business Leaders See the Real Challenge as Just Holding On


By Stephen Fidler

Business leaders from across Europe met here Thursday to discuss—among other things—a proposal from the European Commission to "reindustrialize Europe." The idea is to raise the share of industry in the region's economic output to 20% by 2020, from 15.6% now.

Some executives at the annual European Business Summit, however, viewed the target as not much more than a vain hope. The real challenge they say is to prevent further deindustrialization of the continent.

The problem faced by European industry derives from more than the fact that, as new figures this week emphasized, their home market is mired in the longest recession since World War II. It is that many companies are stuck in a competitive vise.

On the one hand, they face challenges from U.S. industry, revitalized by falling energy costs thanks largely to the successful exploitation of shale gas. On the other, there are the formidable Chinese exporters supported by bountiful cheap government credit and low-price inputs.

Trade tensions between the European Union and China have mounted over the past few weeks with a decision by the commission, the EU executive, to impose heavy tariffs on Chinese solar-panel imports and to prepare an unfair-trade investigation into two Chinese network equipment suppliers, Huawei Technologies Co. and ZTE Corp. 000063.SZ +1.63%

While there is a debate over the wisdom of confronting China, some executives at least believe that over time China will become a more conventional competitor as it responds to unfair trade cases.

But on energy, companies are confronting a real conundrum. They face among the highest energy prices in the world and the single EU market in energy—which advocates say could offer a real boost to European productivity—is little more than an aspiration.

Meanwhile, the continent's efforts to curb carbon emissions are viewed as further hampering the competitiveness of EU companies and have led to unintended consequences.

According to the PBL Netherlands Environmental Assessment Agency, the EU was responsible in 2011 for just 11% of global carbon-dioxide emissions, compared with 29% for China and 16% for the U.S.




Though part of the recent decline is accounted for by recession, some industrialists argue that the figures show that the EU can do little more to contribute to further reductions in carbon emissions. The big gains lie elsewhere.

Indeed, they say high energy prices are encouraging the closure in Europe of energy-intensive plants—for example, those manufacturing steel or aluminum—in favor of imports from outside the region from manufacturing facilities that sometimes are less energy-efficient.

This process, known as carbon leakage, may increase overall global carbon emissions since more efficient plants in Europe are closed in favor of less efficient plants outside. The effect of confused EU policy targets for energy security, carbon emissions and renewable energy sources has been to increase coal consumption in Europe at the expense of lower-carbon natural gas, said Helge Lund, chief executive officer of Norway'sStatoil ASA STL.OS +1.03% .

For some, the idea of reindustrializing Europe sounds like old-fashioned thinking. Pascal Lamy, the departing head of the World Trade Organization, told the conference that services were increasingly embedded into production chains. "The frontier between goods and services is becoming totally blurred," he said.

Yet, some industrialists point out that it is those economies that have protected their industrial base, led by Germany, that have been the most resilient in the face of the continent's recession. Each industrial job supports two in services, said Jürgen Thumann, president of Business Europe, a business-lobby group.

The news isn't all bad. Leif Johansson, chairman of Ericsson and chairman of the European Round Table of Industrialists, said economic reforms in parts of Southern Europe are beginning to bear fruit. Receding fears of a euro breakup will also bring forward investments that have been put on hold, he said.

But the energy dilemma remains and is moving up the agenda of European governments. EU leaders will be discussing it at a summit in Brussels next week.

Herman Van Rompuy, who presides over EU summits, pointed out that real energy prices in Europe had increased 27% between 2005 and early 2012, more than in most other industrialized economies. By 2035, the continent's dependence on foreign oil and gas imports is forecast to exceed 80%. "This will have an impact on the competitiveness of our companies, and of our economy as a whole," he told the conference.

He suggested a policy with four elements: energy efficiency, modernizing infrastructure, diversifying energy sources and pushing to integrate Europe's national energy markets into one.

Creating a true single market in energy could save buyers an annual €30 billion ($38.7 billion) in gas and €35 billion for electricity, he said. The resultant reduction in energy bills would provide a significant boost to productivity.

Up until now, national governments, encouraged by their big energy companies, have blocked a single market in energy. Their willingness finally to act in this area will be aninteresting signal of their determination to claw back their economies' lost competitiveness.

—Daniel Michaels contributed to this article.

A version of this article appeared May 17, 2013, on page A9 in the U.S. edition of The Wall Street Journal, with the headline: Europe's Manufacturers Feel Squeezed.

Read the original article on the WSJ website: