Pagella Politica gathered various economic studies in order to shed a little more light on the question of who comes second to Germany as Europe’s greatest industrial power.
Can we say that Italy is no longer the second greatest industrial power in Europe? We contacted various experts, and it turns out that their opinions tend to diverge.
As reported by other media outlets, there are those who insist that we should focus on added value rather than production value, or that employee numbers should also be considered. According to another expert, we need to instead look at the relationship between net turnover and added value, to establish a country’s so-called “industrialisation level”.
The debate is still open, and the European Commission’s own statistics agency - Eurostat - told us that it is not easy to establish which indicator, or ensemble of indicators, needs to given emphasis.
Let’s try, then, to bring a little more clarity to the issue and to draw some conclusions.
How was it done in the past?
In the past, when politicians and the media claimed that Italy was the second largest manufacturer in Europe, their sources were often the “Industrial scenario” report produced by Confindustria’s research centre.
The report has relied, over the years, on various indicators to establish Italy’s second place position. For example, in 2015 it placed Italy second in a ranking sorted on the basis of “Percentage share of global manufacturing output”. Thus the criteria used here is production value.
In 2017 the same report again placed Italy second in a ranking based on “Percentage of global added value”.
We contacted the research centre and spoke with Dr. Livio Romano, who gave us a clearer explanation of the situation.
“Up until a few years ago we used the criteria of industrial production value, because this was the data we had for the purposes of international comparison, but more recently we realised that, being a gross figure, it can be misleading”. Romano continues: “looking at production, we see how much businesses sell in a given country, but we don’t see how much value is produced in that country. Let’s take an example: if I import a large proportion of raw material and services to produce the product I then sell, only a small portion of the revenue stays in my pocket. Therefore, we decided that it makes more sense to look at added value”.
“In any case, the Eurostat data, even on added value, is only partial”, Romano concludes, “because, apart from the fact that it doesn’t take into account the informal economy, it only takes into account limited companies, therefore excluding artisans and, in general terms, partnerships, which are so important in Italy”.
In short, the Confindustria report recently changed from production value to added value. Let’s take a look at what these indicators actually refer to.
Production value or added value?
Production value - the indicator initially used by Confindustria and then abandoned - is the total value of that which is produced, calculated on the basis of sales. Thus the figure records, in essence, how many billions of assets the Italian industry has sold. Obviously, the more populous and developed a country is, the easier it is to reach a high production value, relative to smaller countries or those with a lower GDP per capita.
As we suggested, if we look at the production value in absolute terms, in 2017 France surpassed Italy in manufacturing: almost 890 billion euro versus 884 billion.
Now we come to the second indicator: added value. This is, as professor of industrial economics at Sapienza Riccardo Gallo explained to us, “what the business uses of its own in that which it sells”.
In essence, an industry transforms raw materials into final products in its own facilities. Then these final products are sold on the market. “If from the total sales - the turnover - we subtract the incurred expenses (the cost of raw materials, energy, consultation, and so forth)”, explains Gallo, “we reach added value”.
With added value the business then pays its workers, consumption of fixed capital, interest on borrowed capital, taxes and remuneration for venture capital invested in the company.
In countries of similar dimensions, then, the country which has an industry focused on extracting raw materials will have lower added value than the country where the industry is high-tech.
Focusing on added value, Eurostat data confirms Italy in second place in 2017, behind Germany but ahead of France (257 billion versus 232 billion), and also in 2018 (263 billion versus 232 billion). Indeed, if we look at all the data from recent years we see that the gap between Italy and France has been constantly widening for the last five years: in 2013 the gap was barely three billion (222 billion versus 219).
As we have seen, this means that in 2017 France produced and sold more than Italy, but Italy “burned” a smaller proportion of its production value along the industrial chain. Thus, it ends up with higher added value.
So, which of the two countries deserves the title of second industrial power in Europe? The debate, as we said, is still open.
Data on employees
Another indicator which has emerged from the debate is number of employees. This by itself would not seem to tell us much, since a less developed country could employ more workers than a more technologically advanced country but still produce less.
However, given that the comparison is between countries which are very similar in terms of demographics and economic development, the data does have some relevance.
Again according to Eurostat, workers in the manufacturing sector in France in 2018 number 2.56 million, or 9.1% of total workers. In Italy in the same year there were 3.95 industrial workers, or 15.6% of total workers. Thus the number of workers in Italy’s industrial sector is significantly higher than in France, whether in absolute terms or as a percentage.
Another indicator at which we can look at is the “industrialisation level”. This parameter was suggested by professor Gallo, and measures the relationship between industrial turnover and added value.
If, for example, my turnover amounts to 100, and added value amounts to 10, I have an industrialisation level of 10%. This indicator, expressed as a percentage, tells us nothing about the industrial dimensions of a country, but it is very useful for measuring the wealth-creating capacity of the manufacturing sector.
“In the last twenty years, this indicator has collapsed in Italy”, Gallo tells us. “At the end of the 90s, the figure was close to 26-27 percent. Then it fell to 16 percent in 2014, before rising again to 20 percent during the Renzi and Gentiloni governments”.
However, given that this measure is not influenced by a country’s dimensions, it turns out that Germany does not top this ranking. “The European country with the highest industrialisation level”, Gallo concludes, “is Switzerland”. Thus, a small country, but better equipped than any other to create wealth through industry.
Nevertheless, this indicator does not seem adequate for drawing up a ranking of the greatest industrial powers in Europe: it can - and in fact does - place a small state on top, which, regardless of its efficiency, sells far fewer billions of goods, produces far fewer billions of added value, and employs fewer millions of workers.
As we have seen, there are many factors which can be taken into account to evaluate a country’s industry.
Simplifying as far as possible what we have seen up to now, it seems possible to say that in 2017, for the first time, the French manufacturing sector became larger than that of Italy. The latter, however, is still firmly ahead in terms of wealth-creation capacity (added value) and capacity to generate employment (number of employees).
In any case, it is important to remember that nowadays in Italy manufacturing (according to data from 2017) accounts for less than 15 percent of GDP, and in France little more than 10 percent.