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The Lisbon Agenda for Economic Reform

“The Lisbon strategy is even more urgent today as the growth gap with North America and Asia has widened, while Europe must meet the combined challenges of low population growth and ageing. Time is running out and there can be no room for complacency”.

Background

At the Lisbon European Council in March 2000, the Member States of the EU agreed a new strategic goal: “to become the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion”.

A report prepared by a team of experts in 2004, led by the former Dutch Prime Minister Wim Kok, examined performance so far. The report showed that the EU had not achieved the levels of growth or employment that it had set as its targets in 2000. The European Council debated this disappointing halfway report at its March 2005 meeting; its conclusions on the way forward are set out on the next page.

Recent developments in the EU have raised concern that economic reform might be further delayed but no one at government level in the EU is seriously challenging the Lisbon process.

The Lisbon Targets & EU Economic Performance

The study by Wim Kok’s expert panel concluded that the European Union had not made enough progress towards the goals set out in 2000. The Commission, in its analysis of what went wrong, was scathing about the structure of the Lisbon Agenda:

“We are now half-way through the process and the results are not very satisfactory. The implementation of reform in Member States has been quite scarce. The reform package consists of 28 main objectives and 120 sub- objectives, with 117 different indicators. The reporting system for 25 Member States adds up to no fewer than 300 annual reports. Nobody reads all of them”.

On current trends, the Commission has concluded,

“the potential growth of the European economy will halve over the coming decades and reach just over 1% a year”.

The reasons for this poor performance and alarming forecasts for the future are: the low population growth of the EU; its ageing population; the rigid structure of many of its Members’ labour markets; competition from an increasingly well-educated workforce in Asia; increased productivity in competitor economies; a lack of investment in research and development; and lower real employment costs in other countries.

The painful truth is that average growth in the eurozone was roughly 1.8 per cent in 2004, compared to 4.9 per cent in the USA, 6 per cent in India and 9 per cent in China. GDP per head in the EU is at 71 per cent of the US ratio. Under 44 per cent of the eurozone population is in work compared to just over 54 per cent of the US population. Europeans also work shorter hours than Americans.

But it is not all bad news. The central and Eastern European countries that joined the EU on 1 May 2004 saw their growth rates rise from an average of 3.7 per cent in 2003 to 5 per cent in 2004. The Single Market boosted trade within the EU dramatically – by 40 per cent in the first 10 years. And there are strong arguments for saying that different statistical methods distort the growth figures to the advantage of the USA; much of the US growth is the result of a substantial increase in its population from immigration, both legal and illegal.

But the EU cannot afford to be complacent. As the Prime Minister pointed out in his statement on the March European Council, there are six EU states in the World Economic Forum’s list of the 15 most competitive nations in the world – but there used to be eight. We may have created six million additional jobs over the past five years but there is still substantial unemployment in Europe, especially in Germany, France and Italy.

The Renewed Lisbon Agenda

At the March 2005 European Council, heads of government agreed a number of measures to speed up progress towards the Lisbon goals. These included steps to improve research and development within the EU; to develop the single market in services; the reduction of State aid and increasing competition; reducing the regulatory burden on business; and support for small and medium-sized enterprises.

The Council recognised the need to tackle the social side with support for improving education, including reducing the number of early school-leavers, and encouraging greater participation in the workforce. The aim is to encourage mobility in the EU by adopting the Directive on mutual recognition of professional qualifications in 2005.

The management of the Lisbon Agenda, and in particular the excessive number of targets, has been criticised. The European Council adopted a simpler, clearer structure to ensure that what is a partnership programme between Member States and the EU is managed better.

In future, the EU will have a three-year cycle for its Lisbon programme. This process will begin with a major strategy document prepared by the Commission, discussed at the Spring European Council each year. The Council will adopt the broad economic and employment guidelines provided for in the EC Treaty. Member States will then draw up their own “national reform programmes”, consulting regionally and elsewhere and they may appoint a Lisbon co-ordinator. The Commission will produce a “Community Lisbon programme” covering the action to be taken at a Community level.

There will still be annual reports submitted by Member States but these will be grouped together in a single document. The Commission will report annually on progress and the European Council will review that progress, making adjustments to the guidelines when necessary.

The first three-year cycle began in April 2005; Member States have now published their first national reform programmes and they will submit their first annual report in the autumn of 2006.

Although the rejection of the European Constitutional Treaty by France and the Netherlands raised doubts about the future of economic reform, national governments remain committed to it. There will continue to be a debate about the best way to bring about reform but no government is questioning the need for economic reform itself.

December 2005

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