The EU is falling behind on its “Lisbon objective” of making Europe the most competitive economy in the world, admits José Manuel Barroso. Both Brussels and member-states need to play their part

Europe has much to be proud of. The devastation of the first half of the 20th century has given place to an unprecedented period of peace and security. This has allowed Europe to prosper. The European Union (EU) is today the largest economy in the world, the largest trading partner in the world economy and one of the largest recipients of foreign investment. It is also the largest donor of development assistance. Europe’s socio-economic model – with universal welfare systems – provides for a society based on solidarity and risk-sharing. This European model has proven attractive, as illustrated by successive enlargements of the EU.

However, the foundations on which this model relies are increasingly being challenged. The European model is built on a productive economy generating the resources necessary to finance welfare programmes. However, economic growth in Europe has been so disappointing over recent decades that the long-term viability of our welfare ambitions has been called into question. Today, potential output growth in the 15 pre-2004 enlargement states (EU-15) averages just 2%, which is a decline of a full percentage point in a single generation. (In 1970 real growth was 3%.) During the same period, the United States has increased its potential growth to 3.5%. Consequently, since the mid-1970s Europe has no longer been catching up with American living standards or per capita income.

Overall, Europe has found it difficult to reconcile its way of doing things with the macroeconomic and microeconomic challenges of globalization. The challenge is to achieve stability in an increasingly volatile world economy and, at the same time, to make our businesses more responsive.

Naturally, the realization that Europe is part of a more and more competitive world economy is not new. The Single Market programme was launched in the mid-1980s with the aim of improving the microeconomic underpinnings of the European economy. Moreover, the euro was created with the aim of achieving currency stability and hence wider macroeconomic strength. By and large, these measures have been a success: a large internal market without currency borders has provided a much better foundation for economic growth. The euro, in particular, has been a success, as shown by its stability during recent periods of turmoil and its increasing popularity as a reserve currency.

Beyond the single market
To address the challenges beyond the reach of the Single Market, Europe’s leaders in 2000 agreed the Lisbon Strategy, setting the objective of Europe becoming “the most competitive and dynamic knowledge-based economy in the world” by 2010. It outlines a strategy of closer coordination in the areas of economic, social and labour market policy and environment to achieve this objective. But, in contrast to the success of the single market and the euro, the Lisbon agenda has not brought about a reform spree. Although it has contributed to initiating a discussion on subjects traditionally considered the domain of national governments, five years down the line the reform record is still largely disappointing. Of course the past four years were not the best environment for such an ambitious project. But the truth is that we have our own faults. This has clearly been confirmed by the recent report of the High Level Group chaired by Wim Kok. The group pointed out four flaws: an overloaded agenda, poor coordination, conflicting priorities and a lack of determined political action as underlying reasons for failure. In sum, what has been done so far are necessary foundations for improving Europe’s growth potential. They are not sufficient, however. Achieving the Lisbon objective is hence the major challenge facing Europe and, therefore, the European Commission (EC).

Arguably, Lisbon rightly sets the objective of competitiveness. But we must always bear in mind that this is not an objective per se. What we really want to achieve is more growth and more jobs. And this requires us to focus on this aim and on how Europe can modernize its unique economic and social system in order to safeguard its achievements over the long run.

There are many reasons for Europe’s relative and absolute economic underperformance. In economic terms, Europe’s weakness is derived from a decline in productivity growth and the fact that fewer and fewer of our citizens work. This is particularly the case for the young and the old. Europe has failed to address these problems sufficiently. This is partly a result of a lack of implementation, as with the Single Market, which remains less of a reality in services than in goods. Sometimes this is by virtue of design. For example, the Single Market programme was conceived to meet the primary concern of companies in the 1980s: to achieve economies of scale. It did not, and perhaps could not, devote sufficient attention to the concerns of today’s companies, for example, access to financing or knowledge. Moreover, the Single Market programme excluded the reform of labour markets, which remains the preserve of national governments. The Lisbon Agenda, on the other hand, aims to address these precise deficiencies by completing the Single Market, seeking to modernize labour and social policies, and emphasizing innovation and knowledge. Moreover, it was enhanced with the objective of environmental sustainability.

A joint responsibility
The crucial point is how to ensure the implementation of the Lisbon agenda in the short time that is left. The fact that we have largely failed so far simply makes action more urgent. Europe can only be successful if all its levels of governance work together, if its policies are mutually supportive and if all important actors are involved in the process. This is more useful than apportioning blame for the past among member-states and the commission. In fact, both are responsible, and failures of delivery should not be ascribed to one side by the other. Overcoming the unfinished business of Lisbon requires that both member-states and the commission take responsibility for areas that lie in their own competence.

Lisbon cannot be implemented à la carte. For open product markets to deliver jobs and growth, labour markets have to be sufficiently flexible to facilitate changes in jobs and different ways of working. The proper mix of skills needs to be developed, adequate infrastructure provided and efficient public administration supplied. However, the fact that success requires all the elements to be in place does not mean that the EC should be seen to be responsible for everything. On the contrary, the EC needs to concentrate on its core functions of opening markets, maintaining competition and sound money. Member-states ought to concentrate on the weaknesses in their national systems that prevent them from growing.

Achieving Lisbon might require difficult choices. Different preferences will most likely give rise to different solutions from one country to another. These choices cannot be imposed from above but must emerge from democratic debate. This is why the task of explanation and discussion at a decentralized level is essential for the success of Lisbon.

Refocusing on a limited number of areas and assigning clear responsibilities for each will help provide the necessary impetus behind a relaunch of Lisbon. The areas should be:
making the Single Market work. The EC has a clear responsibility for this, but failures in national implementation have also to be addressed;
promoting innovation and knowledge. This is a shared responsibility, with the EC mainly involved in the transnational aspects of research and development (R&D;) and higher education and additional actions going beyond those of member states;
modernizing national labour and social policies. Responsibility here must lie with member states, with European institutions playing only a supporting role.

Much rests on the member-states
A central dilemma confronts the EU with regard to the Lisbon strategy. The instruments available at the centre are mainly to do with market opening and competition, while the policies that deal with the social and employment consequences of liberalization are national ones. It therefore becomes difficult to integrate economic and social aspects at the same level. With regard to the reform agenda, huge progress has already been made with the original Single Market programme and with monetary union. The EU can do more and, above all, it can do things better. But full success depends largely on economic and social reforms being made in member-states.

The Single Market and active competition policy remain the cornerstone of efforts at EU level to improve European growth performance. Since 1993, the single market has been largely a reality for goods. On the other hand, services markets remain highly fragmented, in spite of recent progress in financial services. Yet efficient provision of services is vital for the growth of a modern economy. The achievement of the Lisbon agenda requires the completion of the Single Market and the removal of barriers to entry in product and capital markets. The quality of regulation should become a priority for the EU. This implies fewer and simpler rules with better enforcement.

But Lisbon goes much beyond the Single Market since it also seeks to promote innovation and knowledge, and to modernize labour and social policies. The EU can greatly facilitate the necessary restructuring of national budgetary policies to foster innovation and knowledge, and modernize labour and social policies. The EU budget is the most important lever for achieving this goal because the EU can redistribute funds towards national budgets in a way that fosters growth and employment. More resources should be devoted to R&D; and higher education and to social policies aimed at overcoming the temporary effects of restructuring, namely by helping workers who have been laid off with retraining and mobility.

Another important EU instrument that cannot be taken as independent from the Lisbon agenda is the eurozone’s Stability and Growth Pact. Although the pact has brought unprecedented stability to Europe, its implementation has been problematic.

Accordingly, the EC has suggested a limited set of changes. The revised pact would concentrate more on the long-term sustainability of member states’ budgets and the quality of their public finances. It would also provide for coordination of economic policies going beyond the purely disciplinary. We should not forget that sustainable public finances are a means to an end: enhancing our growth potential. In improving the growth of our economies, we need to create an environment where fiscal strategy, structural reform and growth are reflected upon in common. The EC’s proposals contribute towards this kind of economic coordination and would bring the pact’s objectives and methods more in line with those of the Lisbon agenda.

For instance, meeting the Lisbon objectives requires member-states to spend more on R&D; and higher education, and to undertake social reforms that can be costly to national budgets in the short term. A revised Stability and Growth Pact should not exclude these expenditures in the assessment of excessive deficits. However, there should be room to take account of this growth-promoting expenditure when examining the “close to balance” objective of the pact. But we should never forgo sound public finance. Without it, we would have higher interest rates, which would lead to the crowding out of private investment and to lower growth in the medium term.

It is crucial, therefore, that the Lisbon strategy, the EU medium-term budget and the Stability and Growth Pact be consistent with one another so as to promote growth and employment in Europe.

The EC certainly has a big responsibility and it is important that we organize our work well. To that effect I decided to chair a special group of commissioners with responsibility for Lisbon. I believe that the EC must be regarded as the defender of the general interest, as a builder of bridges between member-states and as a supporter of their reform efforts.

The involvement of member-states is also essential if the Lisbon objective is to be achieved, as they retain a key responsibility for delivery. They need to agree on essential measures among themselves in the Council of Ministers. They need to implement and explain the agenda at home. Moreover, in order to improve transparency at the domestic level, member-states should ensure appropriate coordination within their own government departments on various aspects of the Lisbon agenda.

Need for national dialogue
Arguably, the EC should focus on those areas where it adds value, for example, making the single market work and promoting innovation. Member-states should focus on what they do best – for example, modernization of their national labour and social policies. Following the recommendations of the Kok report, each member-state should formulate precise commitments on how it intends to implement the Lisbon Agenda nationally. Such commitments have several benefits. Economic reform is associated with decisive policy choices. These cannot be imposed from Brussels, but need to result from national debate involving all relevant stakeholders. These commitments would move the debate from Brussels to where it is most needed: the national arena. Such a dialogue is a precondition for trust, without which reforms are unlikely to advance.

I firmly believe that the Lisbon Strategy is crucial for restoring Europe’s growth potential and its ability to create more and better jobs. My dream is to turn Europe into the best place to invest, to produce, to work and to live – for us and for our children. A place where a friendly business environment coexists with our unique social model. A place where our diversity is respected, but where, at the same time, these diverse countries and peoples are united by our common values and cultural roots.

José Manuel Barroso
José Manuel Barroso is president of the European Commission and the former prime minister of Portugal.