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Hamish McRae

Hamish McRae: No one does luxury like Europe but it takes more to spur growth

Economic View

So what is Europe good at, aside from being world leader in creating unemployment? Those figures at the end of last week showing unemployment in the eurozone rising yet further, to 12.2 per cent, with youth unemployment topping 40 per cent in Italy, Portugal and Spain, make one wonder how on earth much of Europe will manage to avoid a lost decade of opportunities, particularly for its young.

But there is another Europe, one of success – and not just in the perceived successful regions such as Germany and Scandinavia. At a macro-economic level, there have been huge errors, and the eurozone is experiencing its second year of economic contraction. But if you look at European companies, they have an extraordinary strength in one area: luxury goods.

That is an area that happens to be the fastest-growing segment of consumer spending. So there is a paradox. Europe, which has the lowest differentials of income in the world, is also the most adept at creating goods for top-end consumers.

One way of measuring commercial strength is to look at the value of brands. Every year Interbrand, a consultancy specialising in services for such companies, does a tally of such value, and I have shown a shortened version of its top 100 brands in the graph.

The top eight, as you can see, are all American. Then come Samsung and Toyota, then Mercedes and BMW. After that, the graph picks out only the luxury brands but, with the exception of Tiffany and Ralph Lauren, they are all European. It depends a bit on how you define luxury, but something like 70 per cent of the luxury goods in the world originate in Europe.

This is a very good segment of the market. The main study of the growth of luxury items is done by Bain, the management consultants, and the latest one is just out. Bain has a rather narrower focus because it does not include cars and some other top-end products, but looks more at perfumes, accessories and top-end clothing.

It estimates that global sales of such personal luxury goods are running at more than $200bn (£132bn) a year, and this year will be up 10 per cent. As you might expect, home sales – that is sales in Europe – are struggling. But US consumers are rediscovering luxury, and of course the emerging world has carried on with double-digit increases in demand.

Looking ahead, Bain sees the global luxury market continuing to grow at a rapid rate for at least another decade. This seems sensible as wealth spreads more widely and the newly affluent seek to display their success.

We in Britain have not been as successful as continental Europe in building luxury brands in the sense that we do not have a Mercedes or a BMW – Jaguar Land Rover is doing wonderfully well under its Indian ownership but it is tiny by comparison. Nor do we have a Gucci or a Cartier, though Burberry does feature on the Interbrand list, and that is a tribute to the way the brand has been nurtured and developed over the past 15 years. But the broader point stands that in brand terms, Britain is a part of Europe – even if we have to go abroad to get the talent to develop our brands and shape them for the global market place.

Europe's ability to create top-end brands in a way that the US, Japan and the Brics don't seem to be able to do raises a string of questions. One is whether Europe can continue to develop this competence, or whether we will find ourselves challenged by brands created in China and beyond. Can we retain leadership? I think the answer is probably yes. Go back 30 years and many expected Japan to create global luxury brands. But while it has created very good luxury products – Lexus cars, some Suntory whiskies, for example – it has not really created any true luxury brands.

A second is whether Europe can extend luxury brands from goods to services. I think the answer again is yes. Indeed to some extent it is already doing that. Look, for example, at the top brands in football: all European. But continental Europe is lagging in some other areas. Take top-end education services: only the UK can challenge the Americans in the university league tables, though continental business schools do rank highly. As the balance of global trade shifts from goods to services, a clear priority for Europe is to try to develop luxury service industries alongside its luxury goods business.

A third question is whether top end will really go on growing. Here I feel the answer is probably yes. The demand for luxury goods and services is driven by the numbers of people able to afford them. It depends on how you define it but the global middle class is expanding by something like 50m a year. That expansion pushes up people at the top end of middle class towards defining themselves by buying luxury goodies, and it is hard to see that expansion of the global middle class slowing down for another decade at least.

There is a huge amount of work going on, not least by Bain, on what the trends will be: why Generation Y is different to Generation X, and what Generation Z (the under 20s) will want. But the main point here is that the taste for luxury in the emerging world is massive, and will drive onwards.

There must be a real concern for Europe, however. And that is: is the luxury trade big enough to sustain growth and employ its young people? The answer to that is evidently no. Europe can do luxury, but it needs to do more than that to rekindle growth.