Europe must discover its competitive edge, but to really secure its economic future, education and innovation are key, says Lynd Morley

The European Council was probably not channelling Donald Trump’s exhortation, “as long as you’re going to be thinking anyway, think big”, when it established the Lisbon Strategy in 2000, but it clearly reflected the American magnate’s sentiment, declaring that Europe should become “the most competitive and dynamic knowledge-based economy in the world”.

The problem is, nobody actually said what a ‘knowledge-based economy’ was. “Neither the term, nor the measurements you might use, were ever defined,” notes Ian Brinkley of UK think-tank The Work Foundation.

Although considered mostly in relation to technology and R&D-focused industries, and sectors involving large numbers of graduates, the knowledge-based economy can also embrace manufacturing, communications, financial services, health and education. Eurostat also includes recreational, cultural and sporting services.

Brinkley is two years into a three-year project, which set out not just to identify the nature of the knowledge economy, but how it affects value creation and how it is transforming the workplace. While critical of the Lisbon Strategy’s fuzzy definition, Brinkley is very clear about the progress Europe has made in the knowledge industry over the past decade: “In pretty much every European country, it’s the knowledge industries that are growing as a share of economic activity. They are big generators of jobs, and while it obviously varies from country to country, we can see an overall pattern of change in the industrial structure towards knowledge-based industries.”

This does not mean, however, the continent can rest on its laurels. While employment figures are good, there is little evident payoff in productivity growth; vitally important higher education is woefully underfunded; and a cultural shift is needed to recognise the benefits of globalisation to Europe. Tellingly, forward-looking companies such as Rolls-Royce, Microsoft, PricewaterhouseCoopers and Merck sponsored his report.

The problem with productivity figures for the knowledge economy may simply be that we’re not very good at measuring it, according to Brinkley. “Measurements haven’t kept pace with the changes. We have vast details on exports of crocheted knitwear, but hardly anything about what’s happening in say, electronic publishing or the computer industry, or the services industries – which are actually the ones growing very rapidly and producing all the jobs. So there’s a real possibility that we’re underestimating productivity growth.”

There is no such question over the lack of investment in higher education, and the need to produce greater numbers of European graduates in engineering, science, maths and technology. Brinkley notes that the US, for instance, is investing more in higher education than most of Europe, with the exception of the Nordic countries. “Knowledge economies absorb a lot of graduate level labour, and you also need high-quality people to keep R&D and centres of excellence located within Europe. If you’re not producing enough graduates, you will eventually start to lag behind the world leaders.”

And that is precisely the risk Europe is running, according to Pierre-Yves Cros, group strategy director at Capgemini, the consulting, technology and outsourcing firms, who believes that the Western knowledge economies are currently well ahead of the game, but adds: “The question for the next 10 to 20 years is whether we’re investing enough to keep our position, because other economies are investing massively to catch up.”

India, for example, is producing thousands of engineers each year. The country may lack good roads, but it has chosen to invest in a highly educated workforce, and a world-class communications network, the combination of which makes it an attractive proposition as an offshore location for European knowledge economy companies.

Cros argues that it is precisely the ability to offshore – with its attendant savings in wages – that is facilitating greater innovation in European companies. He describes a “positive loop” of funds freed up by offshoring, enabling greater investment in development, while the increasing wealth of countries such as India – due in large part to European offshoring – will provide new markets for European firms. The result, he says, far from impacting negatively on European jobs, will create a more buoyant knowledge economy.