Commission plan - 're-industrialise' Europe, reject offshoring

With unemployment rates in double digits in most EU countries, the European Commission is launching a new strategy to re-industrialise Europe with the aim of creating more jobs and tackling the worsening social crisis of the old continent, PublicServiceEurope.com reports

Recent decades have seen an unprecedented number of European companies move their production lines out of Europe, mostly to Asia. This has contributed in lowering the prices of certain goods, such as clothes or hi-tech products, but has significantly reduced production capabilities within Europe. Unemployment has steadily increased as plants have relocated to East Asia.

The original plan was to transform Europe into a 'knowledge-based economy', increasingly relying upon services rather than manufacturing. Financial services, telecommunications, transportation and trade were to become the undisputed backbone of the continent's economy. At the same time, the plan involved the gradual dismantling of old-fashioned and polluting factories. It was meant to be the triumph of the white collar over the blue collar. As a consequence of this blueprint, over the years the importance of manufacturing has steadily decreased in the European Union. The sector accounted for almost 20 per cent of the EU's overall gross domestic product in 2000. Some 10 years later, its share of GDP had shrunk to around 15 per cent - according to Eurostat.

At last, the European Commission wants this trend reversed as the continent faces its worst economic crisis in 60 years, widespread social unrest and average unemployment at 10.5 per cent - with a 25.5 per cent peak recorded in Spain last August. Supporters of re-industrialisation argue that manufacturing is key to creating jobs. They reckon that for each job created in industry, another one is generated in the services sector as production plants need transport, communications and other services to function properly.

In a new European industrial strategy, to be published today, the commission will propose a 20 per cent target for the manufacturing sector. Factories will have to come back to the old continent. The arguments to reverse the trend of offshoring are numerous. First of all, the move is pushed by the social emergency of growing unemployment. There is much more than that though. The commission argues that the financial margins for producing abroad are not as appealing as they once were. Labour costs are growing in China and India, the major destinations for European companies relocating their plants. Increased fuel prices are also making it more expensive to ship goods from Asian ports to European ones. Producing goods closer to the final consumer seems to make sense once again.

The experience of the world's largest clothes maker, Zara, is often used as a model among the supporters of re-industrialisation. Contrary to its main competitors - Zara produces most of its clothes in Spain, Portugal and nearby Morocco - rather than heavily offshoring to China or other Asian countries. This makes production slightly more expensive, but consumers are ready to pay more for products that are more quickly adapted to new trends and fashions. Being geographically closer to its customers allows Zara to rapidly change the products on offer in its shops - while H&M clothes are still on their way from Asia. In a fickle market which is increasingly subject to sudden changes of taste, this gives Zara a key advantage.

In a study to be published today, the commission also argues that offshoring is affecting investment in innovation - which is seen as a key ingredient for a stable and sustainable economy. "Offshoring firms tend to spend less on research and development than non-offshoring firms," reads the report about European competitiveness. "This finding might mean that in-house research and development, and specialisation in knowledge intensive products, is an alternative to offshoring to lower cost locations."

Challenging a widespread view, the European Commissioner for Industry and Entrepreneurship Antonio Tajani has often said that the re-industrialisation of the continent would be good for the environment. Factories in Europe are subject to tougher environmental regulations than anywhere else in the world. Therefore, bringing factories back to Europe would increase compliance of higher environmental standards, goes his reasoning.

Should these arguments be considered as worthy of attention, the key question remains still unanswered. It is good to have more plants in Europe but how is this possible in a continent dominated by red tape, lofty taxes, strict rules and high labour costs? For the EU, the answer is straightforward: Europe should ride the new industrial revolution by heavily investing in innovative, clean sectors. New materials and methods of production are radically changing the ways and means of manufacturing goods. For instance "3-D printing allows production in much smaller quantities than is currently economically feasible, enabling low cost customised production for new niche products and opening up new market opportunities for innovative small and medium-sized enterprises" reads the commission paper. In these conditions, offshoring should not be as appealing as it is today.

New markets are about to develop for innovative products such as electric cars, smart grids or bio-based goods. The commission is committed to channelling investment funds into these emerging markets, which are seen as pioneers of a green and hi-technology industrial revolution. New efforts to harmonise industry standards, cut red tape and facilitate access to credit for sound enterprises are the other key ingredients in the EU recipe to ride the wave of the new industrial revolution. Will it be enough? It would take a brave soul to hazard a guess either way, given the economic flux in which Europe finds itself.