We are very worried about the sort term problems of the Euro economy, but if are trying to define a more integrated economy it is necessary to forget the current financial situation that they are only a reflex of the different structures of the countries in the Euro Zone, and trying to analyze the requisites for a strong economy under a monetary union, where we came from, and where we go.
It is interesting to analyze what is the origin of the current differences of the performance of the Euro economies. For instance, the GDP of the different countries
First of all, we can analyze the R&D expenditure.
Graph 1 Gross Domestic Expenditure on R & D in percentaje. Source OECD
Spain has made a great effort last years in order to improve this index, but it will be very far from the large economies for a lot of years. As we will see now the real problem of the banking sector is to bet in the incorrect casino. Construction sector has a natural limit in any economy, and as construction is a mature sector with low innovation rates this should not be the proper option to preserve the growth in the long term. Construction was a great funding source for municipalities and the public administration in general because the terrain is a public resource that could be sold with a high benefit for the public treasure to support a fat structure. This fact created an inefficient economy for the long term growth, with a lot of employment in a certain period but with low added value having a strong influence in the productivity of Spain as country.
This structural behavior of the Spanish economy was not bad if public funds were well applied. Construction could be a good source of incomes that should be used to change the productive model for the future growth. The reasons for the current situation of Spain have been mainly a bad use of the public funds. Although Spain has some research centers of reference, for instance, in Astrophysics or Health there has not been a concern for impulse the private innovation that is clearly establishing big difference among the countries of the Euro Zone.
The following graph shows how private innovation is the best source of sustainable welfare if we relate innovation figures with the current situation of the different countries.
Graph 2 Structure of the Research funding. Data source OECD.
As we can see Germany has two thirds of his R&D expense funded by its private sector. This is showing two important facts:
– The future of the German economy is clearly driven by its private productive sector.
– The innovation in the German economy is the nearest to the market.
The cases of Spain and Italy are similar; perhaps, Italy is receiving more European funds for research than Spain. It is important to notice that these graphs are showing the funding source of the research work and some private R&D is funded with public resources, but I want to highlight who is driving the innovation because the research areas with public funds usually are preselected by governments.
Looking at this figures we can asked ourselves if government ought to impulse the private research instead of funding public one in order to be more effective. Through my personal experience, I am conscious of the excellent working level of the main public research centers but governments must be concern about the needs of the private sector to provide a sustainable economy instead of thinking only with the mind of a public official.
With this brief discussion we can extract a few conclusions and advance some pieces of advice for a good future of the Euro Zone:
– Research and Development is not an illusion. Real powerful countries do not live as some centuries ago, and there is an obvious reason for this fact.
– The main objective of public funds and any other resources for researching should be to leverage private research investment in order to get better ratio Research expenditure over GDP in the Southern Countries.
– Financial system should consider providing credit to industrial innovative projects with real return in terms of additional employment as the best investment for the future instead of promoting bubbles.
– The public structure of the countries and the UE needs to continue with its work of thinking in the long term economy, although financial press is very interested in any punctual problem of the short term.