lin et al - national intellectual capital and the financial crisis in france, germany, ireland, and the united kingdom (2014)

SPRINGER BRIEFS IN ECONOMICSCarol Yeh-Yun Lin · Leif Edvinsson Jeffrey Chen · Tord Beding National Intellectual Capital and the Financial Crisis in France, Germany, Ireland, and the

SPRINGER BRIEFS IN ECONOMICS

Carol Yeh-Yun Lin · Leif Edvinsson

Jeffrey Chen · Tord Beding

National Intellectual Capital and the

Financial Crisis in

France, Germany,

Ireland, and the

United Kingdom

For further volumes:

http://www.springer.com/series/8876

http://avaxhome.ws/blogs/ChrisRedfield

Carol Yeh-Yun Lin • Leif Edvinsson

National Intellectual Capital and the Financial Crisis in France, Germany, Ireland, and the United Kingdom

123

Department of Business Administration

National Chengchi University

DOI 10.1007/978-1-4614-8181-2

Springer New York Heidelberg Dordrecht London

Library of Congress Control Number: 2013941349

Ó The Author(s) 2014

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Foreword I

The economic crisis is a consequence of many parallel factors which are all related

to globalization and digitalization My main concern, assessing this in more detailfrom the European perspective, is that revolutionary global forces have not beentaken early nor seriously enough by most national and regional decision makers.The Heads of European States and Governments have once again recalled theimportance of fiscal consolidation, structural reform, and targeted investment toput Europe back on the path of smart, sustainable, and inclusive growth The mainquestion is how capable and ready are the national governments to tackling thecomplex and manifold issues of crises and to renewing even radically many of ourpublic and private structures and processes

The first basic requirement is that all the European Union Member Statesremain fully committed to taking the actions required at the national level toachieve the objectives of the Europe 2020 Strategy The second basic requirement

is that the national and regional governments, as well as people, are ready forradical changes This booklet, and the other 11 booklets by the experiencedauthors, focus on National intellectual capital (NIC) and give necessary insightsand facts for us the readers and especially for our in-depth systemic thinking of theinterrelationships of NIC and economic recovery

How should the national and regional decision makers tackle the existingknowledge of intangible capital? The focus needs to be more on the bottom-upapproach stressing the developments on local and regional levels I highlight ourrecent statements by the EU Committee of the Regions The key priorities are toget more innovations out of research and to encourage mindset change towardsopen innovation

The political decision makers are finally aware that the traditional indicatorscreated for and used in industrial production cannot be applied to a knowledge-intensive, turbulent, and innovativeness-based global enterprise environment.Indicators that perceive the intangible dimensions of competitiveness—knowledgecapital, innovation knowledge and anticipation of the future—have been devel-oped around the world, but their use has not yet become established in practice.This booklet accelerates the development and the use of these indicators

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This helps the local and regional, as well as central, governments in takingbrave leaps forward on a practical level—giving greater ownership and involvingall the stakeholders This means the need of actions towards increasing thestructural and relational capital of regions, both internally in communities ofpractice and in collaboration with others.

The new generation innovation activities are socially motivated, open, andcollectively participated, complex and global by nature The regions need to movetowards open innovation, within a human-centered vision of partnerships betweenpublic and private sector actors, with universities playing a crucial role

Regions should be encouraged to develop regional innovation platforms, whichact as demand-based service centres and promote the use of internationalknowledge to implement the Europe 2020 Strategy, smart specialization andEuropean partnerships according to the interests and needs of regions For this tohappen, we need to apply the new dynamic understanding of regional innovationecosystems, in which companies, cities, and universities as well as other publicand private sector actors (the ‘‘Triple Helix’’) learn to work together in new andcreative ways to fully harness their innovative potential

New innovative practices do not come about by themselves One majorpotential is the use of public procurement The renewing of the European widerules must increase the strategic agility and activities of municipalities and otherpublic operators as creators of new solutions Especially, the execution of pre-commercial procurement should be reinforced even more in combination withopen innovation to speed up the green knowledge society development, i.e., forcommon re-usable solutions in creating the infrastructures and services modernreal-world innovation ecosystems are built upon Conditions must be created thatalso allow for extensive development projects which address complex societalchallenges and which take the form of risk-taking consortia

One of our working instruments within the Committee of the Regions is theEurope 2020 Monitoring Platform, which broadly reviews and reflects the opinionsand decisions on a regional level all around Europe It gives a flavor of cultural andother socioeconomic differences inside the EU This brings an important perspec-tive to the intellectual capital, namely the values and attitudes needed for citizenssupporting policymakers on appropriate long-term investments and policies.Emphasizing the importance of these issues, decision makers in all countriesand regions worldwide need a deep and broad understanding of the critical successfactors affecting the NIC With all the facts and frames for thinking this bookletgives a valuable insight in today’s challenges

Markku MarkkulaAdvisor to the Aalto University PresidentsMember of the EU Committee of the RegionsFormer Member of the Parliament of Finland

Foreword II

Financial crisis—words very much heard today What is all this about, actually,and how to get a grip on what we experience today? The booklet gives animportant insight on the factors affecting competitiveness and productivity inmodern knowledge society We need to see behind the obvious, and we need tohave increasingly ‘‘qualified guesses’’ as the character of the society and industryhas fundamentally changed

What is very important to notice is the shift towards intangible value creationbeyond the deterministic phenomena we saw very clearly in the industrial era Costdrivers were the important ones throughout the industry Mass production, bigger

is better; very traditional productivity factors, was the mantra

However, the production picture is changing Increasingly value is created bythe intangibles, often services related to the tangible components, and even totally

in immaterial value creation, where perceptions and expectations determine themarket value of the ‘‘extended product’’ We also see rapid change in organiza-tional forms, we see new type of entrepreneurship growing besides the traditionalindustry clusters, we see smart specialization of regions and countries

This means also that there will be clearly different and complementary roles ofthe actors in innovation and value creation ecosystems Large companies, smallones and even microenterprises together with the public sector are traditionallyseen as the active partners in such innovation environments The real issue in thedynamic markets is, however, that the end users are increasingly to be taken onboard as active subjects for innovation, and not merely treated as objects,customers Markets need to be shaped and created in much more dynamic way thanever before Open innovation beyond cross-licensing includes the societalcapital as an important intangible engine for productivity growth Innovation hap-pens only when the offering is meeting the demand Otherwise, we can onlyspeak about inventions or ideas

We need to have a close look at the intellectual capital and the different factorswithin it when we design our policy approaches Short-term investments in processcapital (infrastructures) and market capital seem to be very important for themanufacturing base as such, but at the same time measures for longer termintellectual capital development and efficiency need to be taken

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Increasingly, important is the structure and the open processes related tointangible capital and knowledge pools For sustainable long-term developmentboth the human capital and renewal capital are crucial, as they are directly related

to the innovation capability of the region The correlation between these factorsand the GDP growth is undisputable In knowledge intense industries talent isattracting talent, and the connectivity which modern ICT provides makes thistalent pool fluid across disciplines, organizations, and geographical settings It isimperative to modernize the innovation systems enabling the full dynamics neededfor success in knowledge intense industries, beyond the traditional boundaries.Measuring performance of innovation systems becomes increasingly complexdue to the mash-up of different disciplines, having new types of actors andinteractions between them Hence, the importance of analysis of the variouscomponents of the National intellectual capital (NIC) (and equally on nationalinnovation capability) as done in this booklet cannot be underestimated whenmaking qualified guesses for operational choices to create functioning innovationecosystems The only predictable in true innovation is the unpredictability and thesurprises The role of the public sector is to drive strategy and measures enablingthe unpredictable, and to catalyze a fluid, seamless and frictionless innovationsystem to grow, with strong interplay with the surrounding society

We need to have courage to experiment, to prototype in real-world settings, tohave all stakeholders involved to find and remove the friction points of innovationand to achieve sustainable innovation ecosystems for knowledge-intensive prod-ucts and services

I wish you interesting reading with this mind opening report

Bror SalmelinAdvisor, Innovation SystemsEuropean Commission

DG CONNECT

Foreword III

The 2008 global financial crisis hit the whole world with unprecedented speed,causing widespread financial panic Consumer confidence dropped to the lowestlevel since the Great Depression Taiwan, with an export-dependent economy, wasseriously impacted by the crisis and the unemployment rate hiked while householdconsumption levels dropped At the onset of the financial crisis, Prof Lin was theDean of Student Affairs here at National Chengchi University in Taipei, Taiwan.She was the dean in charge of financial aid and student loans and thus saw firsthandthe direct impact the financial crisis had upon our students The crisis was sodevastating that Prof Lin, along with the university, was compelled to launchseveral new initiatives to raise money and help students weather the difficult times

I am very glad that she took this painful experience to heart and set herself uponthe task of investigating the impact of the crisis; trying to look into the causes andconsequences for policy implications, not only for Taiwan but for an array of 48countries In particular, she approaches the crisis from the perspective of ‘‘nationalintellectual capital (NIC)’’ which is very important in today’s knowledge-driveneconomy

Taiwan is an example of a knowledge economy and has enjoyed the fame ofbeing referred to as a ‘‘high-tech island’’ Without an abundance of naturalresources, Taiwan’s hardworking and highly educated population is the singlemost precious resource that the island has Acknowledging the value of suchhuman resources and intellectual capital, we established the Taiwan IntellectualCapital Research Center (TICRC) under my leadership in 2003 Ever since then,Taiwan’s government has continuously funded the university to conduct relevantresearch projects aimed at enhancing the intellectual capital of Taiwan Havingbeen thus endowed with the responsibility of nourishing future leaders in thepublic and private sectors, we have focused on building up our strength in inno-vation, entrepreneurship, and technology management related research andeducation

To enhance intellectual capital research, we recently formed a joint team ofprofessors for a 4-year project in order to leverage their respective researchcapabilities Through this project we hope to provide policy suggestions for thegovernment by exploring the creativity, innovation, and intellectual capital at

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national, regional, city and county levels The goal is to come up with an gible assets (IA) agenda for Taiwan’s future sustainability Professor Lin is anintegral member in this research team.

intan-Following her 2011 book National Intellectual Capital: A Comparison of 40Countries, this booklet series is Prof Lin’s second attempt at presenting herresearch, conducted under the sponsorship of TICRC, to international readers Asthe Founding Director of TICRC and her President, I am honored to give a briefintroduction of the value of this booklet series

In comparison to her 2011 book, this series increased the number of countriesstudied to 48 and particularly focuses on the impact of intellectual capital on the

2008 global financial crisis Rarely has an economic issue been systematicallystudied from the view point of IA, particularly at such a large scale of 48 countries.The research results show without a doubt that NIC is indeed an important eco-nomic development enhancer In particular, the fact that countries with higher NICexperienced faster recoveries from the 2008 financial crisis provides a strongmessage for the policymakers

In addition to providing insights to national policy, the booklet also summarizesthe background of each country before the crisis, the key events during the crisis,economic development afterwards, and future prospects and challenges Eachvolume affords readers a holistic picture of what happened in each country in anefficient manner The linkage between NIC and this financial crisis also provides adifferent perspective of the crisis

We are happy that Prof Lin continues to share her valuable research resultswith international readers I sincerely hope that her insights can garner moreattention concerning the benefits of developing NIC for the well-being of everynation

Se-Hwa WuProfessor, Graduate Institute of Technology

and Innovation ManagementPresident, National Chengchi University

Taipei, Taiwan

Preface I

There are ‘‘mounting risks of a breakup of the Euro zone.’’ Such comments arefrequent today on how the European leaders are handling the escalating crisis andits potential impact on non-European countries But few leaders, reporters, orresearchers are actually addressing the situation of national intellectual capital(NIC) and its signals In addition to the financial crisis, is there an emerging NICcrisis as well? Why is it emerging? How should policymakers think about NIC? Inwhat way does it need specific attention? When will the outcome and impact oftaken NIC policy steps be realized?

In the midst of the European crisis, there are national interventions to addressthe issues mentioned above In leading economical nations the investments goinginto intangibles now exceeds tangibles, and is positively correlated to income percapita However, these still do not show up clearly in national mapping as well aspolicy making insights Therefore, the New Club of Paris is focusing the knowl-edge agenda setting for countries on Societal Innovation (see www.new-club-

Chairman Ben Bernanke of the U.S Federal Reserve was addressing some ofthese same aspects in a key note speech in May 2011 hosted by GeorgetownUniversity: http://www.icapitaladvisors.com/2011/05/31/bernanke-on-intangible-

on the model from Corrado–Hultén Japan has been developing both NIC andIntangible Assets (IA) at METI for some time now Their research on IC/IA hasresulted in a National IA Week with various key stakeholders, such as governmentagencies, universities, stock exchange, and enterprises Japan is so far the onlycountry in the world to hold such activities, and they have been doing so for thelast 8 years Australia, Singapore, South Korea, and China are currently under-taking various NIC initiatives Other countries are also becoming more and moreaware of NIC, with policy rhetoric centered on innovation, education, R&D, andtrade Despite this, the map for a more justified NIC navigation has been missing

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This booklet highlights NIC development for a number of countries, based on 48different indicators, aggregated into four major NIC components of human capital,market capital, process capital and renewal capital The model here is a refined andverified statistical model in comparison to the Corrado–Hultén model We call it theL–E–S model after the contributors Lin–Edvinsson–Stahle Based on a deeperunderstanding and the timeline pattern it sets forth, this model will add to a better NICnavigation, not to mention knowledge agenda setting for countries.

Upon looking at a global cluster NIC map, it is evident that the top leadingcountries seem to be small countries, especially Singapore, the Nordic countries,Hong Kong, and Taiwan For the U.S., Finland, and Sweden around 50 % or more

of its economical growth is related to NIC aspects Sweden, Finland, Switzerland,the U.S., Israel, and Denmark are strongly influenced in its GDP growth byfocusing on Renewal Capital

It might be that we will see a clearer map of the NIC ecosystem and drivers forwealth emerge in the extension of this ongoing unique research of NIC Thisbooklet will present a NIC map for various clusters of countries It can be used forbench marking as well as bench learning for policy prototyping The starting point

is awareness and thinking of NIC, and its drivers for economic results Based onthis more refined navigation, NIC metrics can be presented

Deeper understanding will emerge from this research, such as the scaling up oflimited skilled human capital in one nation by using the globalized broadbandtechnologies for migration and flow of knowledge (such as tele-medicine ormobile banking in Africa) This is also referred to as the IC multiplier It mightalso be the way the old British Commonwealth was constructed, but without the ICtaxonomy In modern taxonomy it might be the shaping of NIC alliances for themigration and flow of IC between nations?

Another understanding that might emerge for policy making is the issue ofemployment versus unemployment The critical understanding will be deployment

of IC drivers This will require another networked workforce of value networkers

on a global scale, such as volunteering software and apps developers Howeversuch volunteers do not show up in traditional statistics, for the mapping on behalf

of policymakers

On another level, there might be a clear gap analyses between nations tosupport the vision process of a nation On a deeper level, it is also a leadershipresponsibility to address the gap of NIC positions versus potential positions Such

a gap is in fact a liability to the citizens, to be addressed in due time

This will take us to the need for the continuous renewal of social systems Theso-called Arab Spring is explained by some as resulting from three drivers: lack ofrenewal of social systems, Internet, and soccer as cross class interaction space Thelack of social renewal and innovation is most likely critical early warning signals.For Greece, we can see such a tipping point occurred back in 1999

On a global scale we might see that the concern for the Euro zone crisis shouldand can be explained by a deeper and supplementary understanding of NIC, inaddition to financial capital So we need to refine our NIC understanding, NICmapping, NIC metrics, and NIC organizsational constructs into societal innovationfor the benefit of wealth creation of subsequent generations.

Leif EdvinssonThe World’s First Professor of Intellectual CapitalChairman and Co-founder of New Club of Paris

Our first book National Intellectual Capital:A Comparison of 40 Countries waspublished in early 2011, at a time when the 2008 global financial crisis had beendeclared over yet the European region was still plagued with sovereign debtproblems Before we finalized the book, we were able to retrieve some of our rawdata concerning the troubled countries, such as Greece, Iceland, Ireland, Portugal,and Spain The results of our analysis based on data spanning 1995–2008 revealedsome early warning signs of the financial turmoil in those countries In my preface

of that book, I mentioned the warning signs might reveal only the tip of an iceberg

At that time, my co-author, Prof Edvinsson, and I decided to do a follow up study

to trace the development of National Intellectual Capital (NIC) in as manycountries as possible, particularly through the lens of the 2008 global financialcrisis This 12 booklet series is the result of that determination

The 2008 global financial crisis came with unexpected speed and had such awide-spread effect that surprised many countries far from the epicenter of theinitial U.S sub-prime financial problem, geographically and financially.According to reports, no country was immune from the impact of this financialcrisis Such development clearly signifies how closely connected the world hasbecome and the importance of having a global interdependent view By reportingwhat happened during 2005–2010 in 48 major countries throughout the world,this booklet series serves the purpose of uncovering national problems before thecrisis, government coping strategies, stimulus plans, potential prospects, andchallenges of each individual country, and the interdependence between countries.The 6 years of data allow us to compare NIC and economic developmentcrossing before, during and after the financial crisis They are handy bookletsfor readers to have a quick yet overall view of countries of personal interest Thelist of 48 countries in 11 clusters is provided in the appendix of each booklet.Searching for financial crisis related literature of 48 countries is itself a verydaunting task, not to mention summarizing and analyzing it For financial crisisrelated literature, we mainly relied on the reports and statistics of certain worldorganizations, including OECD, World Bank, United Nations, International Mon-etary Fund (IMF), European Commission Office, the US Congressional ResearchService, the U.S Central Intelligence Agency, and International Labor Office (ILO).Some reliable research centeres, such as the National Bureau of Economic Research

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in the U.S., World Economic Forum, the Heritage Foundation in the U.S., andgovernment websites from each country were also our sources of information Due

to the requirement of more update and comprehensive information, we were not able

to use as much academic literature as we would have liked, because it generallycovers a very specific topic with time lag and with research methods not easilycomprehended by the general public Therefore, we had to resort to some onlinenews reports for more current information

In the middle of 2012, the lasting financial troubles caused the Europeaneconomy to tilt back into a recession, which also slowed down economic growthacross the globe However, almost 4 years have passed since the outbreak of theglobal financial crisis in late 2008; it is about time to reflect on what happened andthe impact of the financial crisis By comparing so many countries, we came to apreliminary conclusion that countries with faster recovery from the financial crisishave higher NIC than those with slower recovery In other words, countries thatrebounded fast from the crisis generally have solid NIC fundamentals, includinghuman capital, market capital, process capital, and renewal capital We also foundthat the higher the NIC, the higher the GDP per capita (ppp) This booklet seriesprovides a different perspective to look beyond the traditional economic indicatorsfor national development

In an era when IA have become a key competitive advantage, investing in NICdevelopment is investing in future national development and well-being

Reducing youth unemployment and increasing theircompetitiveness through work experience is likelythe only way to maintain the quality of life in Europe

in the future

One of the key causes of the financial crisis was that conventional financial tems failed to detect potential risks due to non-transparent information disclosure,including unsupervised financial activities across national borders Our earlierNational intellectual capital (NIC) research revealed warning signs of impendingfinancial crisis for Greece, Iceland, and Ireland Such findings indicate that NIC,albeit intangible, can provide valuable insights into risk control and strategy for-mulation This booklet looks at the connections between the financial crisis andNIC development for France, Germany, Ireland and the United Kingdom.Particularly, this report attempts to answer the following questions: How didFrance weather the financial crisis better than most EU countries? Why wasGermany so resilient to the 2008 global financial crisis? What role has Germany’sNIC played in its economic growth? What are the strengths and weaknesses ofIreland’s NIC? How did these affect Ireland’s recovery after its bailout? What is theNIC profile of the United Kingdom? What NIC pattern emerges for future sustain-ability?

sys-Data covering 2005–2010 for 48 countries indicate that the higher the NIC, thehigher the GDP per capita (ppp), accentuating the value of NIC as a driver in majorcountries throughout the world For the 6-year average of NIC rankings among 48countries, France ranks 23rd, Germany 17th, Ireland 16th, and the United Kingdom20th

The 2008 financial crisis caused severe impacts across the globe and is considered

to be the worst since the Great Depression of the 1930s The crisis came withunexpected speed and spread into a global economic shock, which resulted in anumber of bank failures During this period, economies worldwide slowed, creditstightened, and international trade declined In an effort to mitigate the crisis, gov-ernments and central banks across the globe responded with unprecedented fiscalstimuli, monetary policy expansions, and institutional bailouts These measures hadits desired impact and the financial crisis was declared over by the end of 2009

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However, the short global recovery in 2010 was overshadowed by the lingeringsovereign debt problems in Europe, thus a global economic slowdown recurred in thesecond half of 2011 Despite the efforts of European leaders to prevent large econ-omies like Italy and Spain from needing bailouts, Spain still asked for externalfinancial assistance in June 2012 As of early 2013, economic recovery in mostdeveloped countries was still hampered by the weak global development.

During the financial crisis, France was affected to a lesser degree mainly due to itslarge public sector and relatively low dependence upon exports Germany, heavilyreliant on exports, was hard hit yet its economy rebounded fast following the 2010global economic upturn Ireland’s economy was dragged down mainly by thehousing bubble and required a bailout in November 2010 The United Kingdom wasalso hit very hard, mainly because of its international financial connections How-ever, the British government swiftly released stimulus packages with massive taxcuts; the measures worked, and its economy revived in 2010

The Global Competitiveness Index ranking (Fig 1.1) of these countries (exceptIreland) advanced in 2011–2012, when compared to their 2005–2006 level Franceadvanced from 30 to 18, Germany from 15 to 6 and the United Kingdom from 13 to

10 Only Ireland declined from 26 to 29 Between 2005 and 2010, the real GDPgrowth pattern of France, Germany and the United Kingdom was similar—it leveled

in 2008, dropped to negative growth in 2009, and then rebounded to positive growth

in 2010 Ireland experienced negative 5.36 % real GDP growth in 2008, down to 8.35 % in 2009, then bounced to -1.3 % in 2010, reflecting its serious financialtroubles and coming emergence

-All the countries continuously increased their general government debt from 2008onward and exceeded EU criteria of 60 % GDP starting in 2009 Ireland’s 93.13 %debt in 2010 explains its bailout request Aside from GDP growth and governmentdebt, unemployment is another important indicator of the impact of the financialcrisis In 2005, France and Germany had high unemployment rates, whereas Irelandand the United Kingdom had low unemployment rates In 2010, the unemploymentrate in France increased only a little, Germany actually had a rate reduction, Irelandtripled its rate and the United Kingdom doubled theirs Germany’s short hour workscheme prevented a large number of workers from losing jobs The consumer priceinflation (CPI) development pattern is similar among the three larger economies,with a reduction in 2009, which however rebounded to pre-crisis levels in 2010.Ireland is the only country with large CPI fluctuation over the six years, peaking in

2007, sliding to –4.48 % in 2009 and then rebounding to –0.95 % in 2010

For NIC component capitals, over the studied six years (2005–2010), humancapital (HC) did not vary much among the four countries However, Ireland’s HCkept increasing, even during and after the financial crisis For market capital (MC),Ireland scored the highest, although it started sliding in 2008 Germany and theUnited Kingdom had overlapping MC development, with Germany continuouslyincreasing the score from 2008 onwards France consistently had the lowest MC, farapart from the other three countries The development of process capital (PC) wasrelatively stable for all four countries, with Ireland as the highest performer and

France the lowest performer from 2005 to 2008 In 2010, Germany had the highest

PC and France still had the lowest score

For renewal capital (RC), Germany consistently had the highest score and was farahead of the other three countries Ireland had the lowest RC until 2009 BothGermany and Ireland had an upward trend, whereas France and the United Kingdomhad a downward trend Financial capital (based on 1–10 scale) did not show muchdifference among the four countries For the overall NIC, France consistently had thelowest score, Germany had an upward trend, Ireland had the highest score untilsurpassed by Germany in 2009 and the United Kingdom had little NIC variationduring this period

For the co-development of NIC-GDP, PC-GDP and RC-GDP, Germany wasconsistently the best performer, whereas France was consistently the last in NIC-GDP, MC-GDP and PC-GDP Ireland had backward development in NIC-GDP, MC-GDP and PC-GDP; however it had forward development in HC-GDP and RC-GDP.The United Kingdom had the above co-developments either in between Germanyand France, or overlapping development with Germany and France

For dynamic NIC ranking changes in three time periods (2005–2006, 2007–2008and 2009–2010), the ranking gains represent increasing international competitive-ness (among the 48 countries) after the financial crisis and vice versa France lost itsinternational competitiveness in HC, yet gained competitiveness in MC on a rela-tively large scale of up to 6 ranks Germany gained international competitiveness in

HC, MC, PC and overall NIC on a relatively large scale of up to 9 ranks Irelandmainly lost its international competitiveness in MC, PC and financial capital on arelatively large scale of up to 5 ranks The United Kingdom gained its internationalcompetitiveness in HC and MC on a relatively large scale of up to 5 ranks Theranking changes over these three periods disclose the dynamics of NIC variationduring and after the financial crisis

NIC 3D trajectory analysis was conducted to detect the enhancing and impedingfactors of each country in reaching a targeted GDP per capita (ppp), benchmarkingthe U.S due to its high GDP per capita (ppp) (ranks 3), high RC (ranks 5) and highNIC (ranks 7) To reach the GDP level of the U.S., France has the longest distance(52.01 %) to cover, followed by the United Kingdom (37.59 %), Ireland (33.98 %)and Germany (21.97 %) (see Table3.4) Interestingly, even though Ireland sufferedfrom severe financial troubles, its route to reach the targeted GDP is shorter than that

of the United Kingdom A likely answer is that Ireland surpasses the United Kingdom

in HC, MC, PC and financial capital This finding explains how intangible NIC helpssustain a country’s development, despite its tangible woes in financial breakdown

As of early 2013, the world economic recovery has been hampered by the pendingdebt problems in the Euro zone, the modest growth in the U.S and the slower growth

in Asia The economies of these four large European countries were affected Eacheconomy’s resilience to crisis will again be tested if the world plunges back intorecession

This economic crisis provides an ideal opportunity for nations to examine/renew/innovate the soundness of their economic system and the effectiveness of national

governance related to NIC The following implications are drawn from our researchfindings Readers can refer toChap 5for the rationale behind these implications.

1 Reducing government deficit through effective public spending and ous structural reforms is the first priority in the wake of financial crisis

continu-2 Adhering to a set of governance criteria is important to keep national opment under control

devel-3 Capturing the art of balance between control and autonomy helps establish asustainable economy

4 A government’s timely and focused intervention is critical for restoring publicconfidence when a financial crisis unfolds

5 Reducing youth unemployment and increasing their competitiveness throughwork experience is likely the only way to maintain current level of quality oflife in Europe in the future

6 Adopting smart investments that add high values will further enhance nationalcompetitiveness in Europe

7 Straightening the aftermath exit transition is essential to continuously benefitfrom the stimulus package

8 Building a highly skilled workforce and reducing unemployment rates can beachieved through education reforms

9 Enhancing NIC helps strengthen national resilience and competitiveness

10 Designing country-specific NIC strategy facilitates a more focused nationaldevelopment

This report uncovers that France needs to pay more attention to its weakeninginternational competitiveness in HC and its consistently low MC Although Ger-many proved its resilience during this financial crisis, the country’s next stagedevelopment may lie in adding values to its renewal capability Ireland is stillcombating its financial problems; however with increasing HC and RC, itsrecovery and future prosperity can be anticipated The United Kingdom, as thethird largest economy in Europe, has comparatively slow development in both theintangibles and the tangibles, losing a little international competitiveness in RCand financial capital after the financial crisis It can utilize its rising HC and MC tobuild stronger renewal capability in the increasingly globalized knowledgeeconomy

In an era when the intangible asset has become a key competitive advantage,investing in NIC development is in essence investing in future economic devel-opment and well-being NIC should be nourished from both local culture view-point and global interconnectivity by social media Based on emerging newinsights of values, societal history and citizen relationships, a key focus for thefuture will be on the fusion of NIC and social service innovation as well as societalinnovation, for the enabling of a new societal fabric

1 Introduction 1

Economic Background 3

2 Impact of the 2008 Global Financial Crisis 7

Comparisons of the Four Countries 8

France 11

Germany 13

Ireland 15

The United Kingdom 16

3 National Intellectual Capital Development of the Four Large European Countries 19

National Intellectual Capital Development 19

Human Capital 21

Market Capital 24

Process Capital 25

Renewal Capital 25

Financial Capital 25

The Relationship Between Each Individual Capital and GDP Per Capita (ppp) 26

Long-Term and Short-Term National Intellectual Captial 31

Dynamics of National Intellectual Capital in Three Time Periods 34

3-Dimensional National Intellectual Capital Trajectory 41

4 Beyond the 2008 Global Financial Crisis 55

France 56

Germany 57

Ireland 58

The United Kingdom 60

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5 Future Perspectives and Policy Implications 63

Prospects 64

France 64

Germany 64

Ireland 66

The United Kingdom 67

Challenges 68

France 68

Germany 69

Ireland 71

The United Kingdom 72

Policy Implications 73

Concluding Remarks and Emerging Insights 78

Appendices 81

Glossary 101

References 105

Author Index 109

Subject Index 111

Fig 1.1 GCI Ranking of France, Germany, Ireland,

and United Kingdom 4Fig 2.1 Real GDP Growth per capita of France, Germany,

Ireland, and the United Kingdom from 2005–2010 9Fig 2.2 Total General Government Debt (% GDP) of France, Germany,

Ireland, and the United Kingdom from 2005–2010 9Fig 2.3 Unemployment Rate of France, Germany, Ireland,

and the United Kingdom from 2005–2010 10Fig 2.4 Consumer Price Inflation of France, Germany, Ireland,

and the United Kingdom from 2005–2010 11Fig 3.1 Human capital of France, Germany, Ireland,

and the United Kingdom 21Fig 3.2 Market capital of France, Germany, Ireland,

and the United Kingdom 22Fig 3.3 Process capital of France, Germany, Ireland,

and the United Kingdom 22Fig 3.4 Renewal capital of France, Germany, Ireland,

and the United Kingdom 23Fig 3.5 Financial capital of France, Germany, Ireland,

and the United Kingdom 23Fig 3.6 NIC of France, Germany, Ireland,

and the United Kingdom 24Fig 3.7 NIC versus GDP Per Capita (ppp)

for 48 countries in 2010 26Fig 3.8 The development of NIC and GDP per capita (ppp)

for the four large European countries from 2005 to 2010 27Fig 3.9 The development of human capital and GDP per capita (ppp)

for the four large European countries from 2005 to 2010 27Fig 3.10 The development of market capital and GDP per capita (ppp

for the four large European countries from 2005 to 2010 28

xxiii

Fig 3.11 The development of process capital and GDP per capita (ppp)

for the four large European countries from 2005 to 2010 28Fig 3.12 The development of renewal capital and GDP per capita (ppp)

for the four large European countries from 2005 to 2010 29Fig 3.13 Scatterplot of human capital versus renewal capital

for the four large European countries 31Fig 3.14 Human capital versus renewal capital for the four large

European countries 32Fig 3.15 Scatterplot of market capital versus process capita

for the four large European countries 32Fig 3.16 Market capital versus process capital for the four large

European countries 33Fig 3.17 Human capital, market capital, process capital, and ranking

changes in France 33Fig 3.18 Renewal capital, financial capital, average NIC, and ranking

changes in France 35Fig 3.19 Human capital, market capital, process capital, and ranking

changes in Germany 35Fig 3.20 Renewal capital, financial capital, average NIC, and ranking

changes in Germany 35Fig 3.21 Human capital, market capital, process capital, and ranking

changes in Ireland 36Fig 3.22 Renewal capital, financial capital, average NIC, and ranking

changes in Ireland 36Fig 3.23 Human capital, market capital, process capital, and ranking

changes in the United Kingdom 36Fig 3.24 Renewal capital, financial capital, average NIC, and ranking

changes in the United Kingdom 37Fig 3.25 The NIC trail of France, Germany, Ireland, and United Kingdom

con a 3D 48-country landscape 42Fig 3.26 The potential rotation and partial presentation of the 3D

formation 43Fig 3.27 The high capability region of human capital, market capital,

process capital, and renewal capital 44Fig 3.28 The middle capability region of human capital, market capital,

process capital, and renewal capital 44Fig 3.29 The low capability region of human capital, market capital,

process capital, and renewal capital 45Fig 3.30 Turning point and GDP growth enhancing and impeding

factors of France 46Fig 3.31 Turning point and GDP growth enhancing and impeding

factors of Germany 47

Fig 3.32 Turning point and GDP growth enhancing and impeding

factors of Ireland 48Fig 3.33 Turning point and GDP growth enhancing and impeding

factors of the United Kingdom 49Fig 3.34 Efficiency drivers and distance to targeted GDP of USA 52

List of Tables

Table 3.1 National Intellectual Capital Scores and Ranking of France,

Germany, Ireland, and the United Kingdom among

48 countries spanning 2005–2010 20Table 3.2 Ranking Changes in Three Time Periods for the four

large European countries 38Table 3.3 Enhancing factors and impeding factors of GDP growth

for France, Germany, Ireland, and the United Kingdom 50Table 3.4 The first five efficiency drivers targeting GDP of USA 53

xxvii

Appendix 1 Summary of the Main Stimulus Packages for the Four

Large European Countries 81Appendix 2 Important Meetings Held by World Leaders to Address

the 2008 Global Financial Crisis 85Appendix 3 Indicators in Each Type of Capital 87Appendix 4 Definition of the 29 Indicators 89Appendix 5 48 Countries by Cluster and by Continent 91Appendix 6 National Intellectual Capital Scores and Ranking for 48

Countries (2005–2010) 93Appendix 7 Country Profile Additional Statistics 97

xxix

National intellectual capital (NIC), mainly consisting of human capital, marketcapital, process capital, renewal capital, and financial capital, is a valuableintangible asset and a key source of national competitive advantage in today’sknowledge economy This booklet looks into the connections between the 2008global financial crisis and NIC development with a special focus on Bulgaria, theCzech Republic, Hungary, Poland, and Romania.

In addition to the summaries of financial crisis impact, the aftermath, futureprospects, and challenges of each individual country, NIC analysis based on datacovering 2005–2010 for 48 countries reveal that the higher the NIC, the higher theGDP per capita (ppp) Graphical presentations of various types allow for intra-country and inter-country comparisons to position the reported four countries on aworld map of NIC–GDP co-development

By looking into tangible economic development along with intangible NICdevelopment, this booklet provides valuable implications for policymakers

Keywords Competitiveness
Economic policy
Financial capital
Humancapital
Innovation
Intangible assets
Intellectual capital
Knowledgemanagement
Research and development (R&D)
Science and technology policy

xxxi

In November 2012, the European Commission (2012) announced that the term outlook for the economy of the European Union (EU) and the Euro zoneremains fragile; however, GDP growth is expected to gradually return in 2013,with further strengthening in 2014 According to the report, strong policy actions

short-to contain the lasting crisis and measures short-to improve the functioning of Economicand Monetary Union have helped stabilize the EU economy

In 2010 and 2011, some countries recovered from the turmoil of the 2008 globalfinancial crisis and were picking up growth speed, such as China and India; somewere still struggling to stand on their feet financially such as Greece and Portugal

In 2012, the U.S economy was growing but performance remained below whatwas expected and a slowdown has surfaced in many emerging economies, partlyreflecting the impact of the recession in Europe (Elliott 2012b) In China, India,and Brazil, production growth was also slowing down due to both a reduction inexport and lower domestic spending (CPB 2012) In Europe, economic situationwas still unstable, including the countries to be reported in this booklet In hind-sight, it is valuable to reflect what had happened during the past few years to gainsome insights for future preventive actions

Unexpectedly, what started off as sub-prime mortgage problems in the financialsector of the advanced economies has snowballed into the deepest and mostwidespread financial and economic crisis of the past 80 years With almost syn-chronized worldwide recession, global GDP was contracted for the first time sincethe World War II Governments and central banks around the world haveresponded to the crisis through both conventional and unconventional fiscal andmonetary measures in order to maintain financial order and help industries, privatecompanies, and citizens wade through the difficulties

The World Bank predicted that the 2008 global financial crisis would create anadditional 53 million people who lived under US$2 per day, due mainly to thedecline of the global economic growth The crisis is of a magnitude that it hasdisrupted the global financial system; consequently there is no single economy inthe world that was completely isolated from the effects of this crisis Its greatestimpact to the world economy was the downward spiral that caused companies to

C Y.-Y Lin et al., National Intellectual Capital and the Financial Crisis

in France, Germany, Ireland, and the United Kingdom, SpringerBriefs in Economics,

DOI: 10.1007/978-1-4614-8181-2_1, Ó The Author(s) 2014

1

fail, unemployment to rise, household consumption and housing investment toslide, thus brought further decline for business and industry along with increasedlosses on loans and financial investments at financial institutions.

In the wake of the crisis, causes of the disaster have become known although itsmagnitude varies after combining with the local factors of each country Brieflyspeaking, initially the collapse of sub-prime bonds in the U.S resulted in shortage

in the global money market, which caused huge amount of foreign investments to

be withdrawn from the invested countries all over the world to meet their quarters’ liquidity Thus, the credit squeeze affected domestic market operations.Due to the very negative cash flow position, many companies slashed their pro-duction levels and cancelled or postponed investment projects (Mendonça 2010).With the tight money market, export demands dropped and unemploymentincreased Adding to the scene, some EU countries were over-lending and over-spending even before 2008 Consequently, banks in many countries do not haveenough money to support the repayment of foreign debts and corporate loans.Afterwards, confidence fell, which directly hit the consumer market and globalfinancial crisis set in

head-One key factor that did not prevent the financial crisis from happening was thatthe conventional financial system failed to detect the potential trouble of sub-primebonds, very likely due to nontransparent information disclosure Therefore, at theearly stage of the crisis, management scholars criticized the inability of the tra-ditional accounting system to reveal intangible assets that explain hidden values aswell as risks for proper decision making (Reavis 2009) In line with such criticism,intellectual capital (Edvinsson and Malone 1997) advocates the values of intan-gible assets and has gained increasing attention in today’s keen global competition.After the financial crisis, the Chief Adviser at Tekes—the Finnish Funding Agencyfor Technology and Innovation—particularly pointed out, ‘‘In the future, intan-gible assets, such as patents, advertising, education and training, are highlightedincreasingly as a source of growth’’ (Palkamo 2011)

It is our deep belief that national intellectual capital (NIC), albeit intangible,can provide valuable insight to policy makers regarding future risk control andstrategy formulation Our earlier book, National Intellectual Capital: A Compar-ison of 40 Countries (Lin and Edvinsson 2011;www.nic40.org), was born out ofthis belief and traces the NIC development of 40 countries over 14 years(1995–2008) The data analysis revealed certain warning signs of impendingfinancial crisis for countries such as Greece, Iceland, and Ireland (Lin and Edv-insson 2011, pp 327–333) As a follow up study, this booklet series attempts tofurther explore the connections between the financial crisis and NIC development.The booklet series, in its entirety, will examine the NIC statuses of 48 countriesfrom the period of 2005–2010 to glean new understanding about whether there is aNIC development pattern that distinguishes the fast recovery countries from theslow recovery ones This is presented through a series of 11 country clusters, withone booklet focusing on one particular cluster The clusters are decided based uponseveral factors: geographical proximity, similar size or similar phase of economicdevelopment Focusing on one cluster at a time, we first probe within a single

country, then extend to comparisons between multiple countries to see whether thesituation before and after the crisis can be explained by the intangible NIC.Hopefully, this series will provide a different ex-post perspective when examiningthe financial crisis for future policy implications.

This volume—Volume Eight, will focus on the four relatively large Europeancountries—France, Germany, Ireland, and the United Kingdom This booklet firstprovides an economic background to these four countries as a whole before goinginto each individual country’s development Through this process, the authorshope to paint a general picture of the economic condition and provide a basis forour dataset and analysis in future sections

countries.Chapter 3elaborates upon the NIC development of these four countries

with future perspectives and policy implications

Economic Background

Since the economic history of these four countries goes back centuries, it isimpossible to cover the entire spectrum in our work As such, this backgrounddiscussion will consider events in the relative recent history mainly from 2005onwards that have the most direct impact upon the current economic conditions ofeach specific country In addition, particular attention will be given to the 2008global financial crisis In doing so, the authors hope that the background, inconjunction with our later data and analysis, will provide a ‘‘before, during, andafter’’ picture of what was happening from a macroeconomic and intangible assetsviewpoint

In 2012, although some EU countries were still trapped in the financial turmoil,these four countries had recovered from the financial crisis Even Ireland isgradually emerging from its banking breakdown, its real GDP growth hasimproved from -8.35 and -1.3 % in 2009 and 2010, respectively (Fig.2.1), to 0.7and 0.5 % in 2011 and 2012 (Global Finance 2013) To gain a general pictureabout their global competitiveness in the most recent year and before the financialcrisis, we introduce hereunder the Global Competitiveness Index (GCI) published

by the World Economic Forum

This index is relatively robust, for it takes into account 12 distinct pillars1containing basic requirements, efficiency enhancers, and innovation factors thatcontribute to a nation’s overall economic strength Based upon commonlyaccepted economic theory, the development of a total 142 countries was split into

1 The 12 pillars include: institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market development, technological readiness, market size, business sophistication, and innovation.

three stages in which different factors play a dominant role in determining theoutcome of a country’s economy Stage 1, Stage 2, and Stage 3 is, respectively,characterized by being factor, efficiency, and innovation driven (Schwab 2011).Plotting each country’s annual ranking against a time series of seven periods,Figure1.1 displays a rough pictorial overview of the four countries’ globalcompetitiveness before and after the financial crisis Over the years, Franceadvanced its global competitiveness ranking from 30 to 18, Germany from 15 to 6,and the United Kingdom from 13 to 10 Ireland is the only country in this groupthat decreased its global competitiveness from 26 to 29, very likely due to itssovereign debt problem France has the greatest ranking improvement, yet its GCIslid in the last period from 15 in 2010–2011 to 18 in 2011–2012.

According to European Commission’s November 2012 report (Neuger 2012),

‘‘Europe is going through a difficult process of macroeconomic rebalancing andadjustment which will last for some time.’’ Such economic falloff made it harderfor European governments to pull Greece back from the brink and provide aidprogram for Spain, leaving the debt crisis to fester for a fourth year (Neuger 2012)

In 2013, a gradual return to growth is expected: GDP is projected to increase by0.4 % in the EU and by 0.1 % in the Euro zone, although there are still largedivergences across member countries However, competitiveness that had beenlost in some EU countries is being gradually restored with continuous structuralreforms This will pave the way for a stronger and more evenly distributed eco-nomic expansion in 2014, when GDP is expected to grow by 1.6 % in the EU and

by 1.4 % in the Euro zone (European commission 2012)

For France, Moody’s predicted that it will barely grow in 2013, but the pacewill pick up gradually in 2014 (Witton 2013) Its weakening global competitive-ness is France’s key issue The Reuters (Flynn 2012) also reported that withunemployment running at a 13-year high and US$38 billion (€30 billion) addi-tional taxes on households and businesses in 2013, the bounce in French economywas unlikely to be maintained While France performed better than expected in thethird quarter 2012, the outlook is still gloomy because the Euro zone as a wholeslipped into its second recession since 2009 (Flynn 2012)

30

15 18 15

8 5

Fig 1.1 GCI ranking of France, Germany, Ireland, and United Kingdom

In June 2012, Deutsche bank forecasted that the German economy had a soundfuture outlook due to good structural position combined with a high employmentrate and strong wage increases (DB 2012) However, the European Commissionsaid that Germany is becoming less resistant to the economic woes of southernEurope (Neuger 2012) As the Euro zone was predicted to have an almost eco-nomic halt in 2013 with the debt crisis ravages southern Europe, the Euro fell afterthe downbeat forecast and European Central Bank sent a warning that debt-related

‘‘difficulties’’ are ‘‘starting to affect the German export-led economy’’ (Neuger2012)

For Ireland, in November 2012 the Irish government lowered its economicoutlook for 2013, saying ‘‘the slowing world economy will weigh on the country’sgrowth and jobs prospects as it prepares to exit its bailout program by the end of2013’’ (Quinn 2012) The Irish finance and budget ministries projected its econ-omy will expand by just 1.5 % in 2013, down from the 2.2 % growth it hadforecast previously and GDP will grow by 2.5 % in 2014, and then by 2.9 % in

2015 (Quinn 2012) Unemployment will stay high at 14.5 % in 2013; however, thegovernment said it will continue to meet its budget and fiscal targets of its bailoutprogram Ireland has been praised by its official creditors as a bailout exemplar.The IMF said, ‘‘Ireland is likely to be the only bailed out Euro zone country thatposts growth in 2012,’’ but acknowledged that the country experienced a ‘‘bumpyrecovery’’ (Business 2012)

In December 2012, the British Chambers of Commerce reported that UKgrowth in 2012 has been revised upwards from -0.4 to -0.1 %; however, fore-casts for the next 2 years have been downgraded from 1.2 to 1.0 % in 2013, andfrom 2.2 to 1.8 % in 2014 (BCC 2012) Although British businesses are resilientand have the ambition needed to drive national recovery, the reduced globalgrowth prospects and the possibility of more reductions in current spending willslow the pace of the UK’s recovery in 2013 and 2014 In addition, officials inBrussels predicted that UK’s outlook for growth remains very weak in the shortterm, stemming from weaker than expected consumption and investment, andincreased turmoil in the Euro area’’ (Elliott 2012a) OECD forecasted thatunemployment will rise again in Britain in 2013 as uncertainty about the globaleconomic climate weighs on business confidence (Aldrich 2012)

In summary, the global competitiveness ranking of these countries (exceptIreland) has advanced over the years Although declining in ranking, Irelandshould be able to regain its competitiveness in the near future with its relativelysolid fundamentals and its positive growth since 2011

global financial crisis as it relates to these four countries as a whole andindividually

Chapter 2

Impact of the 2008 Global Financial Crisis

In order to present the impact of the 2008 global financial crisis, this chapter firstdescribes the common problems in France, Germany, Ireland, and the UnitedKingdom Next, it graphically compares the GDP growth, total general govern-ment debt, unemployment rate, and consumer price inflation of the four countriesduring the time period from 2005 to 2010 Then, we elaborate on the financialcrisis impact on each country individually in the sequence of France, Germany,Ireland, and the United Kingdom

The scope of the 2008 financial crisis is without precedent since 1945 Theaggregate GDP of the OECD countries contracted by 4.5 % from the peak attained

in the first quarter of 2008 to the trough recorded in the first quarter of 2009 (EFI2009) It originated in the U.S real estate market, and the interaction between thereal estate and financial sectors was one of the major triggers of this financialcrisis Weakened balance sheets of related financial institutions and the confidencecrisis among those institutions led to an unprecedented freeze in interbank lendingand much stiffer credit terms The resulting higher borrowing cost and widespreadfears of systemic collapse prompted consumers to rein in spending and businesses

to scale back capital expenditures The demand drop combined with companies’inventory reduction provoked an abrupt contraction of world trade From Sep-tember 2008 to February 2009, the volume of world trade fell by nearly 20 %, afaster pace than following the 1929 stock market crash (EFI 2009)

This contraction has been particularly hard on countries such as Ireland andGermany that have heavily depended upon exports Yet, no country integrated intothe global economy was left unaffected by this financial crisis, including Franceand the United Kingdom The magnitude of the impact related to each country’sprevious debt levels, the soundness of its financial institutions, and its resilience toglobal recession In other words, how significant the wealth effect is, how open theeconomy is to world trade, how effective automatic stabilizers are, and howextensive the stimulus package is affect how soon a country recovers from the

2008 financial turmoil

To drive Europe’s recovery, in late November 2008, the European Commission(Europa 2008) announced a comprehensive Recovery Plan based on two mutuallyreinforcing elements: first, short-term measures to boost demand, save jobs that

C Y.-Y Lin et al., National Intellectual Capital and the Financial Crisis

in France, Germany, Ireland, and the United Kingdom, SpringerBriefs in Economics,

DOI: 10.1007/978-1-4614-8181-2_2, Ó The Author(s) 2014

7

help restore confidence; and second, longer-term ‘‘smart investment’’ to yieldclean, energy-efficient higher growth and sustainable prosperity The Plan calls for

a timely, targeted, and temporary fiscal stimulus of around US$256 billion (€200billion based on 11/26/08 exchange rate) or 1.5 % of the EU GDP, within bothnational budgets (around US$217.6 billion or €170 billion, 1.2 % of the GDP) and

EU and European Investment Bank budgets (around US$38.4 billion or €30 lion, 0.3 % of the GDP)

bil-In addition, to support small- and medium-sized enterprises, the EuropeanInvestment Bank (EIB) offered US$38.4 billion (€30 billion) in financing capitalfor the whole Europe until 2011 and the European Investment Fund (EIF) offersUS$1.28 billion (€1 billion) Europe-wide as mezzanine capital (Breuss et al.2009) Based on Euro zone regulation, the guarantee on deposit accounts (currentand savings accounts) was revised to US$133,905 (€100,000) (Government of theNetherlands n.d.) With the monetary policy of the Euro system, liquidity wasample at all times, ensuring that financial markets remained functional In thisrespect, the Euro proved to be a protective shield for the Euro area countries(Fuentes et al 2011) Yet, the backdrop as a Euro zone member is to relinquishnational monetary policy autonomy

In general, these four relatively large European countries have good domesticmarkets, except Ireland Particularly, France and Germany are the two largeEuropean economies that many European countries rely on The impact of the

2008 global financial crisis on each country can be easily observed from fourgraphs, namely, the percentage of real GDP growth per capita, total generalgovernment debt percentage of the GDP, unemployment rate of labor force, andconsumer price inflation

Comparisons of the Four Countries

This section presents four graphs in order to examine the four large Europeancountries as a whole from 2005 to 2010 Figure2.1shows that all the countries had

a relatively sharp real GDP growth drop in 2009, Ireland and the United Kingdomalso had an earlier negative growth in 2008 The decline in 2009 reflects theimpact of the financial crisis In 2010, Germany had the best rebound, followed byFrance, the United Kingdom, and Ireland Among them, France has the leastfluctuation during the crisis, very likely due to its relatively large public sector andless dependence upon foreign trade For Ireland, the aftermath of its financialbailout needs more time to recover and its real GDP growth was also negative in

2010 Over the 6 years, the real GDP growth development pattern is somewhatsimilar in France, Germany, and the United Kingdom, with Germany not onlyresumed but also surpassed its pre-crisis growth level after the financial crisis.Figure2.2indicates the total general government debt percentage GDP of thefour countries The reason for reporting government debt is based on an academicresearch finding After researching 800 years financial crises, Reinhart and Rogoff

(2009) commented that the overhang of public and private debt is the mostimportant impediment to a normal recovery from recession Figure2.2indicatesthat Ireland with the lowest government debt to GDP in 2005 (27.35 %) has drasticgovernment debt increase from 25.01 % in 2007 to 93.13 % in 2010, reflecting itsdeep financial troubles The United Kingdom also increased its government debtfrom 42.51 % in 2005 to 79.98 % in 2010 The general government debt of Franceand Germany are relatively high yet stable, with a little increase after the financialcrisis In 2010, all the government debts have exceeded the EU standard of below

60 % of the GDP and need to be dealt with in the future

Figure2.3 shows that 2008 is the transition year of unemployment rates forthese four countries Before 2008, France and Germany as a group had highunemployment rates, whereas Ireland and the United Kingdom as a group hadrelatively low rates After 2008, the situation somewhat switched, except France

1.28 1.08 1.64

0.02

-2.9

0.97 0.83

Real GDP growth per capita %

France Germany Ireland United Kingdom

Fig 2.1 Real GDP growth per capita of France, Germany, Ireland, and the United Kingdom from 2005 to 2010

Total general government debt (% GDP)

Fig 2.2 Total general government debt (% GDP) of France, Germany, Ireland, and the United Kingdom from 2005 to 2010

The unemployment of Ireland and the United Kingdom increased; on the contrary,unemployment in Germany decreased to even lower than its 2005 level and that ofFrance largely remained flat with only a small increase over its 2005 level Mostimpressively, although heavily impacted by the 2008 financial crisis, the unem-ployment rate of Germany kept on decreasing over the 6 years Very likely, theshort-time work mechanism agreed by both the management and the trade unionhas its positive effect.

Figure2.4 shows the consumer price inflation (CPI) of the four countries.Ireland had the highest CPI from 2005 to 2008, yet it reduced sharply in 2009 (-4.48 %) In 2010, CPI of Ireland bounced back to a little bit below zero The CPIdevelopment pattern of the other three countries is somewhat similar, with gradualincrease from 2007 to 2008 and then an obvious decrease in 2009, afterward someincrease again in 2010 Yet, the United Kingdom is farther apart from France andGermany from 2008 onward with higher CPI

In general, the above four figures indicate that real GDP growth per capita andthe general government debt of these four countries were clearly impacted by the

2008 global financial crisis The unemployment rate was affected as well, with theexception of Germany’s In 2010, Ireland was still low in real GDP growth and itsCPI had not resumed to its 2005 status

In what follows, we summarize the impact of 2008 global financial crisis oneach individual country in the sequence of France, Germany, Ireland, and theUnited Kingdom The depth of the report depends upon the English literatureavailable for each country For readers to gain a general picture about the effortsthat each economy has put into mitigating the negative impact of the financialcrisis, we summarized the details of stimulus packages implemented by these fourcountries in Appendix 1 Please note that the reported package is based on publiclyavailable data and is not an exhaustive list In addition, the reported amount ofstimulus package was based on the exchange rate at the time of each stimulus, and

9.70 10.60

Unemployment rate % of labor force

Fig 2.3 Unemployment rate of France, Germany, Ireland, and the United Kingdom from 2005

to 2010

thus varies Readers can also refer to Appendix 2 for the important meetingsconducted by key global leaders during this financial crisis.

France

France is transitioning from an economy that has featured extensive governmentownership and intervention to one that relies more on market mechanisms However,the country is still in the midst of a Euro zone crisis in 2012 (CIA 2012) Althoughpartially or fully privatized many large companies, banks, and insurers, the gov-ernment maintains a strong presence in some sectors, particularly power, publictransport, and defense industries In general, France has weathered the global eco-nomic crisis better than most other big EU economies because of the relative resil-ience of domestic consumer spending, a large public sector, and less exposure to thedownturn in global demand than in some other countries (CIA 2012)

The French economy began contracting in the second quarter of 2008 andcontinued declining through the last quarter of 2009 Domestic demand fell backsharply as a result of the drop in disposable household incomes, although itremained positive 0.3 % during the second quarter of 2009 Investment was alsodown and a marked fall in temporary employment followed by a fall in recruitmentwas a tough issue for the French government The reduction in overtime hours andthe use of short-time working arrangements came to existence 6–9 months later

As in most other European countries, it is young people who were the hardest hit

by the crisis In France, youth unemployment grew at twice the rate of totalunemployment, and in 2009 approximately one young person in every four waswithout work (International Labor Office 2010a)

Consumer Price Inflation

Fig 2.4 Consumer price inflation of France, Germany, Ireland, and the United Kingdom from

2005 to 2010

On December 4, 2008, the French government announced a stimulus packageworth around US$33 billion (€26 billion) to accelerate planned public investments,under the EU Recovery Plan guidance The package focused primarily on infra-structure projects and investments by state-controlled firms, including a canalnorth of Paris, renovation of university buildings, new metro cars, and construction

of 70,000 new homes, in addition to 30,000 unfinished homes the government hascommitted to buy in 2009 (Nanto 2009) The plan also included a US$256 (€200)payment to low-income households On December 15, 2008, France agreed toprovide the finance division of Renault and Peugeot US$1.2 billion in creditguarantees and an additional US$250 million to support the car manufacturers’consumer finance division, as the auto industry and its suppliers reportedly employabout 10 % of France’s labor force (Nanto 2009) In addition, the French gov-ernment also created two state agencies that provided needed funds One entitywould issue up to US$480 billion in guarantees on inter-bank lending beforeDecember 31, 2009 and valid for 5 years The other entity would use a US$60billion fund to recapitalize struggling companies by allowing the government tobuy stakes in the firms (Nanto 2009) The total size of the French stimulus packageare roughly equal to 2.4 % of its GDP, a rate higher than in the United Kingdom(1.5 %), but lower than in Germany (3.6 %) (EFI 2009) In absolute terms, theFrench plan was among the ten largest for the G20 countries Moreover, measuresadopted to support the financial sector totaled about 19 % of its GDP (InternationalLabor Office 2010a)

In general, the financial crisis impacted France relatively modestly, with GDPcontracting by 2.6 % year-on-year versus 4.6 % in the Euro area since the thirdquarter of 2008 (EFI 2009) In 2009, France’s GDP fell by 2.2 %, despite the factthat growth resumed in the second quarter and accelerated in the fourth quarter, asthe benefits of the recovery plan started to be felt (International Labor Office2010a) Starting from the second quarter of 2009, the French economy has held upwell, making France the only major country aside from Germany and Japan toreport a return to growth

The relatively faster rebound in France can be partially attributed to a tively sound financial footing of French consumers In 2007, French household debtstood at 94 % of gross disposable income, compared to 100 % in Germany and

compara-150 % in the United Kingdom (EFI 2009) This better financial standing of Frenchconsumers has enabled them to keep on spending even in troubled economic times,thus consumer spending has held up better in France than in the Euro zone area as awhole At the same time, total capital investment has declined more moderately andforeign trade has had less of a negative impact on the economy (EFI 2009), due to itsrelatively low reliance on exports with a large domestic market

The decision to focus the Recovery Plan spending has also enabled France toachieve maximum efficiency by providing a significant countercyclical boost whenthe business climate is most depressed In particular, the car scrap rebate introduced

at the start of 2009 has led to rapid recovery in the automobile industry, whilemeasures to bolster companies’ cash flow have partially offset the negative impact

of tougher lending terms (EFI 2009) With further measures designed to supportpurchasing power of lower-income families and to promote an accelerated publicinfrastructure program, the knock-on effect to the economy as a whole is consid-erable In addition, France’s banking sector is in a relatively good shape, which putFrance on a more favorable standing during the financial crisis (EFI 2009).

Germany

The German economy—the fifth largest in the world in PPP terms and Europe’slargest—is a leading exporter of machinery, vehicles, chemicals, and householdequipment with a highly skilled labor force (CIA 2012) It is the globe’s second-largest exporter After unification with East Germany, its consistent trade surpluseswere temporarily neutralized in the 1990s Yet, in 2007, its current account surplusgrew to around US$230 billion (€180 billion), with a net public-sector deficit ofjust 0.2 %, and an overall ratio of state debt to GDP of 65 % (Leaman 2010).Nevertheless, Germany’s export dependency rendered it seriously vulnerable tofluctuations in global trade and to global investment flows Germany’s tradedependency had risen significantly in the years before the crisis, as exports con-stituted 46.9 % of its GDP in 2007, compared to 27.7 % in 1982 (Leaman 2010).From 2000 to 2007, foreign trade accounted for close to 75 % of Germany’seconomic growth; yet, during industrial recessions, such a focus becomes a lia-bility (EFI 2009) About three-quarters of its exports went to other Europeancountries, including a full 70 % to other EU member states, where the financialsituation is still unstable as of 2012

Exports have fallen sharply since the second half of 2008, and were down20.1 % in the second quarter of 2009 year-on-year (YOY) Modest declines inGDP in the second and third quarters of 2008 were followed by much steepercontractions of 2.4 % in the last quarter of 2008 and 3.5 % in the first quarter of

2009 (International Labor Office 2010b) The current account surplus in Germanyfell from 7.7 % of its GDP in 2007 to 5 % in 2009 (Barnes 2010) The slumpaccelerated in the first quarter of 2009, with GDP ending 6.6 % lower than the firstquarter of 2008 (Leaman 2010) Manufacturing showed the most dramatic decline,reaching a nadir in February 2009 with a 38 % YOY decline, yet by September itimproved a little and became 20 % lower than the previous year Registeredunemployment rose less markedly in Germany than in other European countries in

2009, in part due to short-term arrangements between employers and trade unions(Leaman 2010)

The position of the German banking sector was considered to be comparativelyfavorable before the crisis, as the overwhelming majority of German banksappeared to fulfill the 8 % minimum capital adequacy ratio demanded by Basel II.Still, German banks were among the first to suffer from the crisis on financialmarkets due to the direct and indirect exposure of German banks to the devel-opments in international financial markets In particular, banks were directly

affected through their substantial exposure to structured credit products whichoriginated from the USA In total, toxic-structured credit securities in the Germanbanking system are estimated to amount to US$294.4 billion (€ 230 billion)(Hufner 2010).

By early October 2008, German officials were actively engaged in multilateralcrisis discussions, through the meeting of EU finance ministers on October 7 andsubsequently at a joint meeting of G-7 finance ministers and central bankers onOctober 10 On October 20, 2008, the German Financial Market Stabilization Fundwas established with a maximum budget of US$614.4 billion (€480 billion) (up to

€400 billion of bank financing and €70 billion for recapitalization and asset chases), amounted to about 19 % of its GDP applied over one year (Leaman 2010;Hufner 2010) On November 5, 2008, the federal cabinet agreed to the firststimulus package of around US$15.4 billion (€12 billion) ‘‘Securing Employment

pur-by Strengthening Growth,’’ including a predominantly tax incentive measuresstretching over 2 years (2009–2010) A second emergency stimulus package wasapproved in mid-January 2009, with a total additional budget of US$64 billion(€50 billion) over 2 years with major focus on public sector infrastructural—investments for the future (Leaman 2010) As a part of the second stimulus pro-gram, the government revived a scheme used briefly during German reunificationknown as ‘‘training instead of dismissals’’ which would be valid through 2010, andthe subsidies for apprenticeships grew during the crisis as well (InternationalLabor Office 2010b) Furthermore, there was a provision of US$3.8 billion (€3billion) for energy-efficient home improvements (Leaman 2010) As of August

2009, the volume of the government’s rescue programs amounted to 24 % of 2008GDP, broadly comparable with that in other countries; the average EU countryprovided 26 % of its GDP (Hufner 2010)

The second plan also includes a pledge by Germany’s largest companies toavoid mass job cuts in return for an increase in government subsidies foremployees placed temporarily on short work weeks or on lower wages (Nanto2009) Germany traditionally has responded to temporary economic downturnswith a short-time work compensation scheme (International Labor Office 2010b).Labor market adjustment primarily has occurred through a decline in workinghours in virtually all sectors of the economy, with total hours worked falling by

2 % on average between the first and third quarters of 2008 and 2009 For theparticularly hard hit manufacturing, the 4 % decline on average over the sameperiod reflected extensive use of working time reductions As a part of thepackage, the eligibility for short-term working benefits was extended by6–18 months and additional short-term working subsidies to employers of US$2.7billion (€2.1 billion) was to be paid out of the accumulated reserves of the FederalLabor Agency (Leaman 2010) Unemployment insurance was also provided with ashort-term loan subsidy of US$1.3 billion (€1 billion) In December 2009, thenumber of workers receiving short-time compensation declined to 890,000, areduction of almost 50 % from the peak in May 2009 (Leaman 2010), showing thesign of recovery