Will a lack of R&D spend and innovation hamper the long-term recovery efforts of the PIIGS economies?
As Greece stumbles towards a certain partial default and an increasingly likely exit from the euro, new figures have been published that suggest that all of the PIIGS countries except Ireland have an underlying problem that could hamper their recovery efforts.
They don't invent much
Figures recently published by the European Patent Office (EPO) records show that, although 2011 was a record year for patent filings, very little of that innovation came from southern Europe.
I combined the EPO figures with the official EU population numbers to enable me to compare the state of innovation across the EU:
| Country | Patent applications
per one million
population (2011) |
|---|
| Greece | 11.6 |
| Portugal | 15.3 |
| Spain | 54.3 |
| Italy | 82.8 |
| United Kingdom | 105 |
| Ireland | 155 |
| France | 184 |
| Germany | 405 |
To put Greece and Portugal's performance into context, the Czech Republic, another small EU economy, filed 22.8 patent applications per million inhabitants in 2011.
It pays to innovate
Innovation is essential to fuel economic growth and improve productivity. According to research by Rabobank, Greece spends just 0.6% of GDP on research and development and Portugal spends 1.6% -- both well below the OECD average of 2.33%. Similarly, productivity levels in Greece and Portugal are just 65% and 77% of the European average.
Given all of this, it is no surprise to see that today's European government bond yields increase in inverse proportion to patent applications:
| Country | Government
bond yield |
|---|
| Greece | 34.1% |
| Portugal | 13.8% |
| Italy | 5.6% |
| Spain | 5.0% |
| United Kingdom | 2.2% |
| Germany | 1.9% |
Sources: FT, Bloomberg
No end in sight for eurozone crisis
To me, these figures suggest that there is no end in sight for the eurozone crisis, especially if Greek membership of the euro continues. Although the German economy may continue to prosper, it will remain shackled to the crippled economies of the southern European PIIGS.
The schizophrenic conflicts this creates for European economic policy may not be very attractive for investors, who may look for a more stable investment market.
UK a safe haven?
The UK certainly has its own economic problems but, like the USA, it benefits from having total control over its currency and its economic policy. This gives our government the critical advantage of being able to inflate away its debt -- not nice for savers, but a more palatable scenario than defaulting on government bonds.
I reckon that the UK might end up being one of the safest places in Europe to invest over the next few years, providing indirect exposure to European markets without the risk of direct investment.
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