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CENTRE FOR EUROPEAN REFORM

THE LISBON SCORECARD V Can Europe compete? Alasdair Murray and Aurore Wanlin

about the CER The Centre for European Reform is a think-tank devoted to improving the quality of the debate on the European Union. It is a forum for people with ideas from Britain and across the continent to discuss the many political, economic and social challenges facing Europe. It seeks to work with similar bodies in other European countries, North America and elsewhere in the world. The CER is pro-European but not uncritical. It regards European integration as largely beneﬁcial but recognises that in many respects the Union does not work well. The CER therefore aims to promote new ideas for reforming the European Union. Director: CHARLES GRANT

ADVISORY BOARD

The Lisbon Scorecard V Can Europe compete?

PERCY BARNEVIK............................................................................................. Former Chairman, AstraZeneca CARL BILDT............................................................. Former Swedish Prime Minister and Chairman, Kreab Group ANTONIO BORGES..................................................................................................... Former Dean of INSEAD NICK BUTLER (CHAIR).......................................................................... Group Vice President, Strategy, BP p.l.c. LORD DAHRENDORF ................................... Former Warden of St Antony’s College, Oxford & EU Commissioner VERNON ELLIS............................................................................................ International Chairman, Accenture RICHARD HAASS................................................................................... President, Council on Foreign Relations LORD HANNAY................................................................................... Former Ambassador to the UN & the EU IAN HARGREAVES........................................................ Group Director of Corporate and Public Affairs, BAA plc LORD HASKINS OF SKIDBY.......................................................................... Former Chairman, Northern Foods FRANÇOIS HEISBOURG......................................................... Director, Fondation pour la Recherche Stratégique CATHERINE KELLEHER........................................................... Visiting Research Professor, US Naval War College LORD KERR............ Director, Rio Tinto, Shell, and Scottish Investment Trust and former Ambassador to the EU & the US, and former Permanent Under Secretary, FCO FIORELLA KOSTORIS PADOA SCHIOPPA................................................ Professor, La Sapienza University, Rome RICHARD LAMBERT.............. Member of the Monetary Policy Committee, Bank of England and former editor, FT PASCAL LAMY................................................................................................. Former European Commissioner DAVID MARSH.................................................................................................... Partner, Droege & Comp. AG DOMINIQUE MOÏSI................................................ Senior Advisor, Institut Français des Relations Internationales JOHN MONKS..................................................................... General Secretary, European Trades Union Congress DAME PAULINE NEVILLE-JONES................................ Chairman, QinetiQ p.l.c. and former Political Director, FCO WANDA RAPACZYNSKI................................................................... President of Management Board, Agora SA LORD ROBERTSON OF PORT ELLEN..Deputy chairman, Cable and Wireless, and former Secretary General of NATO LORD SIMON OF HIGHBURY..................................... Former Minister for Trade and Competitiveness in Europe PETER SUTHERLAND.......................................................... Chairman, BP p.l.c. & Goldman Sachs International ADAIR TURNER................................................................................. Vice Chairman, Merrill Lynch Holdings Ltd ANTÓNIO VITORINO....................................................................................... Former European Commissioner

Published by the Centre for European Reform (CER), 29 Tufton Street, London, SW1P 3QL Telephone + 44 20 7233 1199, Facsimile + 44 20 7233 1117, info@cer.org.uk, www.cer.org.uk © CER MARCH 2005 ★ ISBN 1 901229 60 2

Alasdair Murray and Aurore Wanlin

ABOUT THE AUTHORS

AUTHORS’ ACKNOWLEDGEMENTS

Alasdair Murray is deputy director of the Centre for European Reform. He was previously an economics and Brussels correspondent for the Times and a business journalist for the Times and the Mail on Sunday. He is the author of the Lisbon scorecards III and IV (March 2003 and March 2004). His other CER publications include: ‘The future of European stock markets’, May 2001; (as co-author) ‘New designs for Europe’, October 2002; ‘European economic reform: Tackling the delivery deﬁcit’, October 2002; ‘Corporate Social Responsibility in the EU’, June 2003; ‘An unstable house? Reconstructing the European Commission’, March 2004; and ‘A fair referee? The European Commission and EU competition policy’, October 2004.

A great many experts have helped with this (and previous scorecards), many of whom would wish to remain anonymous. But we would specifically like to thank Olivier Bailly, Edward Bannerman, Pascal Brice, Franz Folker, David Frost, Simon Manley, Anthony Murphy, Anders Nordstrom, Paul Rankin, André Sapir, Paul Skehan and Robert Specterman. Thanks are due to all CER staff for their comments, but particularly to Chloé Berger for her invaluable research and Kate Meakins for layout and production.

Aurore Wanlin is a research fellow at the Centre for European Reform. She previously worked in the cabinet of former European trade commissioner Pascal Lamy. She has a MSc in EU policymaking from the London School of Economics. Her other CER publications include ‘The EU’s constitutional treaty: The ﬁnal deal’ (June 2004) and ‘The EU’s common ﬁsheries policy: The case for reform, not abolition’ (December 2004).

Any remaining errors are the authors’ own. The views expressed within do not necessarily reflect those of APCO Europe, the Corporation of London, KPMG, SAP or Unilever. But we are grateful to all of them for supporting this publication. ★

★

Copyright of this publication is held by the Centre for European Reform. You may not copy, reproduce, republish or circulate in any way the content from this publication except for your own personal and noncommercial use. Any other use requires the prior written permission of the Centre for European Reform.

Contents

About the authors Authorsâ€™ acknowledgements Forewords 1

Introduction

The Lisbon Agenda

The Scorecard

1 13

A. Innovation

B. Liberalisation

C. Enterprise

D. Employment and social inclusion

E. Sustainable development

Conclusion and summary of results

The Scorecard

Foreword

At APCO Europe we are pleased to support the Centre for European Reform in promoting the vital debate on energising and invigorating the Lisbon Agenda. As European Commission President Barroso has so clearly stated, creating more jobs and faster growth are central to all of Europeâ€™s other goals, and Lisbon is above all a shared project â€“ a partnership. Many companies across Europe are already active partners and ambassadors for Lisbon; and, within a positive enabling environment, they are ready to contribute further through the policy debate, their business investments, and their corporate citizenship partnerships. That is why the CER Lisbon Scorecard is such an important contribution. It is an independent assessment that helps spotlight progress or otherwise in building the enabling policy environment for securing the Lisbon goals. We salute the CER on another fine piece of scholarship. At APCO Europe we are ourselves committed to Lisbon principles and priorities such as growth, innovation and good corporate citizenship. We have staff from 10 European countries speaking 12 European languages and we share a strong commitment to excellence in the practice of European public affairs and communications.

Brad Staples Chairman, APCO Europe

For more information on APCO Europe please see our website www.apco-europe.com or contact Brad Staples on + 32 2 645 9811 or via email bstaples@apco-europe.com.

Foreword

It goes without saying that, as Europe’s financial and business capital, the City of London takes an intense interest in the activities of the European Union. Indeed, it is fair to say that the EU has become as important to the interests of the UK financial services industry as the British government always has been. For instance, during the last few years, the City has been closely involved with the implementation of the Financial Services Action Plan – the EU programme of more than 40 measures to create a single market in financial services across the Union.

KPMG is delighted once again to sponsor the CER’s European economic reform “scorecard”. This is the fifth annual assessment of progress on the Lisbon Agenda for the current decade adopted in 2000.

It is the job of the Corporation of London, as the voice of the City, to ensure that London continues to be the best place in the world in which to do business. And this we do, in Europe as well as in Britain. For instance, following a wide-ranging consultation among City institutions, practitioners and trade associations, we have opened a City office in Brussels, which has been operational since June 2004. We see this as crucial to strengthening the dialogue with Brussels about increasing European competitiveness through an effective market for financial services. Through the City office, and through our work advocating London to politicians at home and abroad, we have been consistent champions of the Lisbon Agenda. The Agenda’s objectives are welcome, and much needed if the EU is to fulfil its economic potential. The Lisbon goals must be energetically pursued by Brussels as well as all the member-states of the European Union. The good work by the Centre for European Reform, and in particular, its Lisbon Scorecard, is an excellent contribution to the pursuit of the Lisbon Agenda. The Corporation is delighted to continue its association with the Scorecard.

Michael Snyder Chairman of the Policy and Resources Committee

At the half-way point, it has become fashionable to brand the project a failure. But, as chronicled by the CER over the years and summarised in this mid-term report, considerable progress has, in fact, been made in spreading the reality of the single market and dismantling barriers to competition. Certainly it has not been smooth sailing, and it is clear that the speed of reform needs to accelerate if the EU is to remain competitive, particularly against the Asian economies. The new Commission intends to focus on growth and jobs, but now that the frameworks are in place, the onus is very much on individual member governments to make reform a reality. As this report makes clear, some of the larger EU members could learn from the more enthusiastic approach of some of the new member-states. Both governments and business have their parts to play in promoting the reform agenda. But political leaders must confront the hard choices and provide the leadership for change if the naysayers are to be proved wrong and Europe is to meet the challenge of improving competitiveness in the 21st century.

Mike Rake International Chairman, KPMG

Foreword

As the world’s leading software company working with governments and businesses in 120 countries around the globe, SAP is proud to support the Centre for European Reform’s fifth Lisbon Scorecard.

The fifth edition of CER’s Lisbon scorecard comes at a crucial time. The midterm review and spring summit provide the springboard to help re-launch the Lisbon agenda. The challenges of Europe’s relative economic performance and its ageing population make this an absolute priority. Europe must work collectively to create the right conditions for economic growth and sustain its social welfare model in the medium to long term.

Two thousand and five marks the mid-point in the work programme begun at Lisbon in 2000 to improve the competitiveness of all EU member-states. This year’s Scorecard highlights the genuine progress that has been made across the EU in terms of greater labour market flexibility, tax and welfare reform, and freer product and capital markets. Time and again the Scorecard stresses that “the underlying importance of new technology to the long-term health of the European economy continues to increase”. According to the Commission, “technology could help governments save up to 5 per cent of their total expenditure on public sector procurement and reduce transaction costs by at least a half”. The Scorecard also stresses the need for both public and private sectors to dramatically increase their funding of research and development.

I remain convinced that the vision of Lisbon continues to be valid – even if it is extremely unlikely that its goals will now be met by 2010. Progress to date can be demonstrated in a number of areas, but the Lisbon process has become overwhelming in its complexity and scope. The mid-term review is a good opportunity to re-focus on a few priority areas that are critical to Europe’s sustainable economic growth. Unilever commends the CER scorecard for its clear assessment of where we stand and what should be done to make real progress in terms of growth, prosperity and employment.

The Scorecard’s detailed and rigorous analysis exposes the superficiality of the US versus EU economic debate. While some of the figures continue to show the EU as a whole lagging behind the US, when looked at from a member-state’s perspective the Scorecard identifies a wide range of policies that are delivering genuinely world-class performance and from which others can learn.

What is needed is the political will to deliver on this agenda and a more coherent approach at the EU level as well as a broader engagement of stakeholders. Performance should continue to be assessed against a limited and essential set of key indicators. Only then will we create a greater sense of ownership and competition.

Crucially, this Scorecard is a timely reminder that completion of a single market in goods and services is by no means “yesterday’s business”. There is much work still to do to create a genuinely single market, not least in the areas of public procurement and patent law.

Unilever firmly believe that if Europe acts now, its ability to compete will follow. This is essential, not only for business, but also for the future of Europe’s unique social and economic models, and its position in the world.

Antony Burgmans Torben Haase Managing Director of SAP Public Sector, EMEA

Chairman, Unilever More information on Unilever can be found on: www.unilever.com

1 Introduction

The EU’s economic reform programme – ‘the Lisbon agenda’ – was launched in a spirit of heady optimism in the spring of 2000. Europe was enjoying the fastest rate of economic growth for a decade. EU heads of government, meeting in the Portuguese capital, talked optimistically of matching or even bettering the stellar performance of the United States economy during the 1990s. In Lisbon the member-states signed up to a series of ambitious growth and employment targets to be met by 2010. They agreed to make their labour markets more ﬂexible, stimulate innovation, encourage more people to become entrepreneurs, spend more on research and development and complete the single market. The European Commission predicted that the successful completion of this package of reforms would increase the EU’s underlying annual growth rate from around 2.25 per cent to close to 3 per cent over the decade, bringing it into line with the US. Five years on the economic landscape could not look more different. The optimism of 2000 has given way to a deep-seated pessimism about Europe’s long-term economic prospects. The economic downturn, which followed the bursting of the US ‘dot.com’ bubble in 2001, has proven deeper and longer lasting in the EU than in America. While the EU economy is now showing signs of recovery, most forecasters predict that growth will still not be fast enough to make great inroads into Europe’s job queues. Symbolically, unemployment in Germany climbed above ﬁve million in January 2005. The EU’s Lisbon reform process has thus reached the half-way stage with few obvious signs of improvement in the performance of the European economy. The EU has already admitted that it will miss a

The Lisbon Scorecard V

number of key targets, such as raising the employment rate to 70 per cent. Between 1999 and 2004, economic growth averaged 2 per cent, compared with 3 per cent in the US. The CER’s prediction in 1 the first Lisbon Scorecard that the “impact Edward Bannerman, ‘The Lisbon Scorecard: The status (of the Lisbon agenda) could be more farof economic reform in Europe’, reaching than that of the euro” is far from CER, March 2001. becoming fulfilled.1 As a result, a growing band of critics of the Lisbon agenda are ready to bury the reform agenda with the epitaph of yet another failed EU venture. Disillusioned by the pace of reform, businesses have become increasingly critical of all ‘Brussels’ initiatives. Some US based sceptics question whether the EU is capable of effectively reforming its economy. They increasingly view Europe as a continent gripped by decline, destined to become an irrelevance on the global stage. However, a second group of Lisbon critics provide a very different perspective on the EU economy. Economists such as Olivier Blanchard and John Kay argue that the EU’s economic performance has not been 2 John Kay, ‘Is Europe failing? nearly as bad as is commonly depicted.2 Facts and fantasies, opportunities and threats to European economic growth’, in ‘Economic reform in Europe: Priorities for the next five years’, Policy Network, 2004. Olivier Blanchard, ‘European growth over the coming decade’, MIT, September 2003.

They argue that most of the EU’s supposed economic weaknesses can be explained by Germany’s particular postreuniﬁcation difﬁculties. Stripped of that country’s sickly growth rate, the EU’s performance looks respectable. Blanchard and Kay also emphasise that faster growth in the US derives in large part from higher immigration rates and longer working hours, rather than any supposed superiority in the American business model. European workers, they argue, choose to work less than their US counterparts, which naturally results in a lower growth rate. There is much to commend in Blanchard’s and Kay’s optimistic revisionism. The EU economy is nowhere near as moribund as its

Introduction

harshest critics maintain. Similarly, the EU’s obsession with US economic superiority has become almost unhealthy. There is an increasingly sterile debate conducted between those who believe the EU must import the American economic model to compete, and those who reject the notion that Europe could learn anything from the US. However, Blanchard’s and Kay’s critique is ultimately too sanguine about the EU’s economic prospects for three reasons. First, it understates the importance of the decline in EU productivity growth over the last decade. EU-15 productivity growth averaged just 1.5 per cent a year between 1995 and 2004, compared with 2.5 per cent in the US.3 In contrast, between 1987 and 1995 productivity growth in the EU-15 was twice that of the US, at 2.2 per cent compared with 1.1 per cent. The EU has relied on 3 Robert H McGuckin and Bart faster productivity growth as its main Van Ark, ‘EU labour productivity ‘catch-up’ mechanism with the US since and employment improve in 2004 but US still leads’, Executive the Second World War. This process now Action no. 129, Conference seems to have gone into reverse. Board, January 2005. Second, EU employment rates – while showing some signs of improvement in recent years – are still far too low. In comparison with the US, the EU is struggling to create jobs for younger workers, women and those close to retirement. Long job queues are neither economically efﬁcient nor socially just. Third, even if the EU’s economic performance could be described as adequate at the moment, Europe has to face up to a series of major economic challenges in the coming decades. The rising economies of the East – India and China – pose a major competitive threat (and opportunity) to EU manufacturing and service companies. At the same time, Europe will undergo profound demographic change as the ‘baby boom’ generation reaches retirement. The size of the workforce will shrink while the proportion of retired rises dramatically, resulting in a substantial drag on the economy. The Commission estimates that on current trends, demographic changes

The Lisbon Scorecard V

will push down underlying growth to just 1.25 per cent by 2040. The EU needs to greatly improve both its productivity and employment levels to help tackle these challenges. Growth matters. It matters if Europeans are going to be able to maintain the quality of life they have become used to in the face of demographic change and increased global competition. It also matters if the EU continues to aspire to play a major role on the world stage. A number of recent works have stressed the ongoing 4 strength of the ‘European model’ and its Jeremy Rifkin, ‘The European Dream: How Europe’s visions of potential attractiveness to other cultures and the future is quietly eclipsing the nations.4 But this can only hold true if the American dream’, Penguin, European economy is perceived as a success. 2004. Mark Leonard, ‘Why Nobody is going to buy into the values of a st Europe will run the 21 declining civilisation. Century’, Fourth Estate, 2005. Thus the Lisbon reform agenda is even more vital now than when it was launched in 2000. Some of the overblown language surrounding the project, not least the now embarrassing commitment to “become the most competitive and dynamic knowledge-based economy in the world by 2010”, deserves criticism. Similarly, this scorecard confirms that the EU has failed to make much progress in parts of its reform agenda. But those measures which are at the heart of the Lisbon programme – product market reforms, encouraging the young and old back into work, promoting innovation, curbing red tape and so on – are exactly what is needed to help the EU economy adapt to future challenges. If the EU did not already have an economic reform agenda, it would urgently need to devise one. Nor is it the case that the EU has entirely wasted the last five years. As this scorecard shows, member-states have pushed through a raft of far-reaching reforms, often in the face of fierce political opposition. In particular, France and Germany deserve more credit than their critics are willing to give for making labour market and pension reforms, as well as privatisations. Of course,

Introduction

both the French and German governments should do more. But neither government has yet fully persuaded voters of the urgent need for change. As a result, Germany’s package of ‘Agenda 2010’ labour market reforms and the French government’s plans to cap generous state sector pensions met with strikes and voter hostility. Inevitably such domestic political opposition has limited the pace at which governments can proceed. Other EU countries have managed to undertake a series of bolder experiments. New member-states, such as Slovakia, have slashed corporation tax rates and overhauled their regulatory frameworks to try and stimulate investment. The EU itself has pushed through a series of important liberalising measures in the last few years, which have increased competition in sectors such as energy, telecoms and ﬁnancial services. Moreover, many EU member-states already possess vibrant and ﬂexible economies that are capable of competing in the global economy. Every previous edition of the scorecard has highlighted the strength of the ‘Nordic three’, Denmark, Finland and Sweden. These countries score well in every aspect of the Lisbon agenda – a fact borne out by their high-ranking in the Lisbon ‘league table’ (see page 7). These are world-class economies. Over the last few years, they have regularly matched or even bettered the US in surveys of global competitiveness, such as those conducted by the World Economic Forum and the IMD business school. Their success is an important reminder that it is possible to achieve high levels of competitiveness without slavishly following the US economic model.

The Lisbon ‘league table’ This scorecard contains an important innovation – a Lisbon ‘league table’, which provides an assessment of a country’s overall Lisbon performance in 2005, as well as its relative progress since 1999 towards the economic reform goals. Table 1 is based on the EU’s full Lisbon ‘structural indicators’ list, which measures member-states’ performance in over 100 economic, social and environmental categories – such as employment rates, greenhouse gas emissions, state aid payments and so on. For the purposes of our league table, we have excluded those indicators which fail to yield a meaningful country comparison, for example because the data was too old (sometimes pre-Lisbon), or included an insufficient number of member-states.5 We then ranked countries on 5 For a full list of the indicators their average performance across all the indicators. Meanwhile, table 2 lists the ten used, see www.cer.org.uk/ economics/lisbontables.html. countries that have made most progress The candidate countries since 1999, according to the EU’s ‘short-list’ Romania and Bulgaria are fully of indicators. The short-list contains 14 integrated into the Lisbon process and are thus included in indicators (taken from the full list) which the EU decided best summarised progress the table. towards the Lisbon goals. The Lisbon league table confirms the success of the Nordic three. Sweden tops the table and the country has established a clear lead in the number of Lisbon targets already met, an impressive 12 out of 17. Denmark ranks second and has also met the second highest number of targets at nine. Despite their already strong performance, the Nordic countries are not resting on their laurels: Sweden ranks fifth and Denmark sixth in terms of progress made since 1999. Surprisingly, Finland – which so often tops the competitiveness surveys – is placed only fifth. Finland’s performance is (relatively) held back by the country’s high levels of state aid payments (see section C2, page 47), and its more modest employment record.

Table 1: The Lisbon league table: Overall Lisbon performance 2005* Country 1

Sweden

Progress made since Number of Lisbon 1999 targets met** 5 12

Denmark

United Kingdom

Netherlands

Finland

Austria

Slovenia

Luxembourg

Germany

France

Ireland

Estonia

Belgium

Lithuania

Latvia

Czech Republic

Spain

Portugal

Cyprus

Greece

Hungary

Slovakia

Italy

Poland

Romania

Bulgaria

Malta

* Ranking based on average performance in the EU’s structural indicators list. ** Out of 17 quantiﬁable Lisbon targets.

The Lisbon Scorecard V

The Lisbon league table also provides firm evidence that a second group of EU member-states is making great strides in economic reform, and can be described as ‘competitive’. Austria, the Netherlands and the UK all score well, while Ireland is rapidly climbing the table (and is ranked third in terms of progress). The UK’s performance is especially impressive as it is ranked third overall, second in terms of progress and has already met a creditable seven Lisbon targets. However, the UK’s relatively weak innovation record, and poor social inclusion performance, mean that it cannot yet claim to match the EU’s best. Importantly, the table highlights that several new member-states are making rapid progress towards the Lisbon goals. Hungary tops both sets of progress rankings supplied here. Latvia, and soon to be member Bulgaria, are also making good progress. Slovenia, which is ranked seventh, and Estonia, twelfth, already achieve respectable positions in terms of their overall Lisbon performance. The performance of France and Germany can be described as disappointing, although at ninth and tenth in the league table it is hardly disastrous. These countries still have significant strengths, such as their innovation base, and remain among the richest member-states. However, the progress rankings suggest that their relative performances may diverge sharply in the near future. While Germany is ranked 20th for progress, France is placed fourth. Germany has averaged the lowest growth rate in the EU-25 since 1999. Unfortunately for the German government, its Lisbon performance may deteriorate, before the Agenda 2010 reforms start helping to make things better. Finally, there are the Lisbon laggards. It is hard to make a definitive judgement about the tiny island state of Malta – it does not supply data for many of the key Lisbon measures. But the performance of Poland and Romania is of concern, because unlike Bulgaria, they also score poorly in terms of progress. The Slovakian government must also be hoping that the benefits of its much-lauded reform programme soon start showing up in the data.

Table 2: The Lisbon ‘short-list’ table: Progress made since 1999* Country 1

Hungary

Bulgaria

Latvia

United Kingdom

Greece

France

Estonia

Lithuania

Belgium

Sweden

* Ranking based on progress made since 1999 in the 14 indicators contained in the EU’s ‘short-list’.

Meanwhile, Italy is ranked lowest among the ‘old’ member-states. The plight of Europe’s fourth largest economy remains a major cause for concern. Italy is making some progress in key Lisbon measures such as employment growth. But its GDP growth and productivity performance are woeful – productivity, for example, fell by an average of 0.4 per cent a year between 2000 and 2004. Italy fell sharply in the latest World Economic Forum competitiveness survey – the authors blaming its declining innovation capacity and overregulated business environment. Some of Italy’s growth problem is demographic: the Italian population has barely grown in the last decade, compared with average population 6 Goldman Sachs, growth of 0.5 per cent a year in the rest of the ‘What’s wrong with Italy?’ Weekly Analyst, EU.6 Worryingly, Italy’s demographic problems Euroland May 21st 2004. will only get worse in the next few years.

The Lisbon Scorecard V

The Berlusconi government has at last begun to translate its continual talk of reform into action. In 2004, the government introduced pension reforms and more ﬂexible part-time working rules. But given the country’s poor starting point, it is questionable whether such reforms are sufficient to kick-start the country’s ailing economy.

Introduction

should soon see the beneﬁts. Italy’s performance is weak, while its government squandered the opportunity to introduce much-needed reforms in the ﬁrst half of the decade. Therefore, Italy emerges as the scorecard villain.

The Lisbon process

The CER’s assessment This pamphlet is the ﬁfth Lisbon scorecard. Each year, we have attempted to provide an overall assessment of the EU’s progress and single out those member-states which have done the most, and the least, to push forward economic reform. This assessment of progress includes an important subjective element that focuses on the politics behind economic reform. Countries that are pushing hard for reform, as well as those that already show best practice achieve ‘hero’ status in our scorecard. Those that are least willing to improve are designated as ‘villains’. Because this is the half-way point in the decade-long Lisbon process, we have also taken into account the results of the previous scorecards as well as the Lisbon league table. On this basis, Sweden – which tops the league table, leads the way in terms of meeting Lisbon targets and has received the most previous ‘hero’ mentions – is the undoubted hero of the first five years of the Lisbon programme. But Denmark, Hungary, Ireland and the UK also deserve credit for the progress they have made, and their commitment to reform since 2000. It is difficult to single out a villain – no member-state has performed universally badly. Previous scorecards have strongly criticised France and Germany for their opposition to aspects of the Lisbon agenda. But both governments have brought forward some wide-ranging reforms, and as the league table shows, France at least is beginning to make good progress. Poland also scores poorly – but the Polish government has embraced reform and

Heroes

Sweden

Villains

Italy

2 The Lisbon Agenda

The key elements of the Lisbon agenda are set out below. For the purposes of the scorecard we have grouped the main targets under ﬁve broad headings. ★ Innovation Europe will not be able to compete in the global economy on the basis of low-tech products in traditional sectors. Europe’s record in generating new ideas is good and it possesses a skilled workforce. But with a few notable exceptions – such as pharmaceuticals and mobile phones – the EU has struggled to commercialise its inventions for international markets. European businesses still spend too little on research and development. The United States, Japan and increasingly China look set to dominate the production of hi-tech products unless the EU rapidly improves its performance. ★ Liberalisation In theory, the EU succeeded in creating a single market for goods and services in 1992. In practice, many barriers to crossborder business remain in place. At Lisbon, the heads of government agreed to complete the single market in key sectors such as telecoms, energy and financial services. The liberalisation of these markets should help to reduce prices for businesses and consumers alike, and accelerate the EU’s economic integration.

The Lisbon Scorecard V

★ Enterprise Dynamic new firms are the key to job creation and innovation. But Europe does not reward entrepreneurial success sufficiently, or accommodate failure. Europe’s citizens are averse to taking financial risks, and small businesses often face obstacles to expansion, such as regulatory red tape. The EU and its governments need to ensure that small firms face a more benign environment. It should also ensure that member-states reduce market-distorting state subsidies and that competition policy promotes a level-playing field. ★ Employment and social inclusion The Lisbon agenda spelt out the vital role that employment plays in reducing poverty, as well as in ensuring the long-term sustainability of public finances. The EU and its governments need to find ways of persuading people to take up jobs, and to train them with the skills necessary to compete in fast-changing labour markets. EU member-states must also tackle the problems of an ageing population by reducing the burden of pensions on state finances, while ensuring that pensioners are not pushed into poverty. ★ Sustainable development and environment The EU added the objective of sustainable development to the Lisbon agenda during the Swedish presidency of 2001. The EU is aiming to reconcile its aspirations for higher economic growth with the need to fulfil its international environmental commitments such as the Kyoto greenhouse gas targets.

3 The Scorecard

A. Innovation A1. Information society ★

Increase internet access for households, schools and public services

★

Promote new technologies, such as 3G (third generation) mobile phones and broadband internet

When the member-states launched the Lisbon strategy in 2000, they hoped Europe would be able to replicate the US high-tech boom. Five years on, the new economy hype has long faded. However, the underlying importance of new technology to the long-term health of the European economy is more important than ever. Overall, the EU has made considerable progress in boosting its use of information and communication technologies (ICT). The proportion of households with internet access in the EU-15 more than doubled between 2000 and 2004, from 18.3 per cent in 2000 to 47 per cent in 2004. Internet usage in Germany has risen fourfold, to 60 per cent, during the same period, the fastest growth rate in the EU. Even in Lithuania, which has the lowest level of internet access among the 25 member-states, the number of households online has climbed from just 2.3 per cent in 2000 to 12 per cent in 2004. A recent report for the European Commission highlights the high price of computers, as well as the poor quality of telecoms

The Lisbon Scorecard V

infrastructure, as obstacles to the spread of the internet in Eastern Europe. The cost of a personal computer is at least twice the average monthly salary in Bulgaria, 8 Lithuania, Latvia and Romania.7 In contrast, European Commission, ‘Eover half of the population in the EU-15 use a inclusion revisited: the local dimension of the information computer at home.8 Five countries: Bulgaria, society’, February 2005. Hungary, Lithuania, Latvia and Romania report household internet access at 10 per cent or lower. These countries should focus their efforts on setting up wireless networks – 3G and satellites – which offer cost-effective high-speed internet access across national territories. 7

Danish Management, ‘Central and Eastern Europe Information society benchmarks’, September 2004.

However, some of the EU newcomers are matching or even bettering the EU-15 in their use of new technology. The recent report by the Commission on information society policies in the new memberstates ranked the Czech Republic, Estonia and Slovenia highest. For example, the percentage of people using online government services is 61 per cent in Estonia, compared to an EU-15 average of 21 per cent. In Slovenia, 94 per cent of enterprises and in the Czech Republic, 93 per cent, have access to the internet, compared with 86 per cent in the old member-states. Over the last ﬁve years, the EU has also seen a rapid spread of other technologies, such as broadband and 3G (third generation) mobile phones. The number of people accessing broadband in the EU-15 has tripled from 2.3 per cent in 2002 to 7.6 per cent in 2004. Among the new member-states, Estonia is clearly the leader with 7.6 per cent of households using broadband, above the EU-25 average of 6.5 per cent. In contrast, Ireland still has very low rates with only 1.7 per cent of households connected to broadband in 2004. 9

See Broadband@Ovum’s top-ten DSL benchmark: http://www.ovum.com/ go/content/c,49063.

According to a report by Ovum, a consultancy, France had the highest rate of broadband growth in Europe – the number of new connections more than doubled between 2003 and 2004.9

Innovation

The French telecoms regulator has been particularly active in forcing France Telecom, the incumbent provider, to allow rivals to use the ‘local loop’ – copper wires that run from telephone exchanges to homes. This ‘unbundling’ process is important to ensure that companies can compete fairly in the market for local calls and internet connections. At the time of writing (March 2005), France had the second-largest number of unbundled local loops in Europe. However, the report from the high level group, chaired by Wim Kok, on the Lisbon strategy (‘the Kok report’) found that “broadband’s take-up remains slow and patchy in too many 10 Report from the high member-states”.10 Less than 1 per cent of people level group chaired by Wim in Greece, Poland, the Czech Republic and Kok, ‘Facing the challenge, Slovakia have access to broadband. Belgium is the Lisbon strategy for growth and employment’, the first EU country to provide complete European Commission, coverage, meaning that its citizens can access November 2004. broadband as easily as the telephone. EU member-states are also committed to making government services available online. New technology should enable governments to offer cheaper and more efﬁcient services, such as online 11 Ramboll Management, tax forms or licensing applications. A recent ‘User satisfaction and usage, survey found that EU businesses could save S500 survey of e-government services’, December 2004. million a year by using online VAT declarations.11 EU member-states are among the world leaders in using new technology for public services. A UN report recently ranked Denmark, the United Kingdom and Sweden second, third and fourth in the world, behind the United States. 12 The report conﬁrmed that the new member-states are also making progress. Estonia and Malta joined the top 25 e-ready countries, ahead of France. Hungary, Belgium, the Czech Republic and Romania all improved their positions in 2004. With the help of funding from the Commission’s e-Europe action plan, the 12 United Nations, ‘Global countries of Eastern Europe are fast improving e-government readiness survey’, 2004. their e-services.

The Lisbon Scorecard V

However, while the member-states offer a wide variety of services online, the scope and sophistication of the technology varies greatly. In Denmark, all basic services for businesses can be processed entirely online. Austria and Sweden also score well, whereas Luxembourg and the Netherlands are the EU laggards. In 2003 in the UK and Germany, only 26 per cent and 13 Fernand Reis, ‘E-government: 30 per cent respectively of businesses used Internet based interaction with government websites to obtain information, the European businesses and citizens’, Eurostat, 2005. the lowest levels in the EU.13 Despite real progress in the use of new technology, the EU continues to lag behind its main competitors in terms of its total expenditure on information technology (IT). According to Commission data, the EU-25 spent an average of 2.95 per cent of GDP on IT between 2001 and 2004, compared with 5.05 per cent in the US and 3.5 per cent in Japan. Sweden has invested the greatest share of its GDP in IT during this period, but at 4.22 per cent its spending is still far below that of the US. Greece spent on average just 1.27 per cent between 2001 and 2004, the lowest figure in the EU. IT expenditure provides only a crude measure of a country’s technological development. The figures do not show whether spending goes towards games consoles or productivity-boosting investment. Moreover, the economic impact of IT spending depends on how effectively technology is used. Recent research has emphasised the importance of the efficient use of new technologies in boosting US 14 productivity performance.14 Here it seems European Commission, ‘The EU economy: 2004 review’, that European companies have much to October 26th 2004 learn from their US counterparts.

Information society

Heroes

Denmark, Estonia, Slovenia

Villains

Bulgaria, Greece, Romania

Innovation

A2. Research and Development (R&D) ★

Agreement on the European Community patent

★

EU annual R&D spending to reach 3 per cent of GDP by 2010

In March 2002, EU leaders decided to add another target to the list of Lisbon indicators: annual spending on Research and Development (R&D) should reach 3 per cent of GDP by 2010, with at least twothirds of the increase coming from businesses. R&D is crucial to the future of the European economy. According to the Kok report, “up to 40 per cent of labour productivity growth is generated by R&D spending”. However, three years on, the member-states have made little progress towards meeting this ambitious target. Most EU governments have set national R&D targets, but they have given little thought as to how they might achieve such goals. Moreover, many of the targets are not sufﬁciently demanding to ensure that the EU can reach its overall goal. Even if the memberstates met all their targets, the Commission calculates in a recent report that EU R&D expenditure would only reach 2.5 per cent of GDP in 2010.15 The growth rate in R&D spending has jumped 15 from 0.6 per cent in 2002 to 2.5 per cent last European Commission, ‘Research investment targets year. But even this faster ﬁgure is far below the and current trends’, 6.5 per cent rate required for Europe to hit its September 24th 2004. overall target in 2010. The Commission concludes that the R&D spending gap between the EU and the US has started to close. But this progress is mainly due to a decline in US spending rather than an increase in EU funding. In 2002, the EU-25 spent an average of 1.93 per cent of GDP on R&D, compared with 1.86 per cent in 1999. Meanwhile, the US spent 2.64 per cent and Japan 3.12 per cent in 2002. The EU average disguises wide differences between individual countries, some of which outperform the US and Japan. For example, Finland spent 3.46 per cent on R&D in 2002, according

to the latest Commission data. 16 Sweden, 16 Eurostat, ‘EU-25 spent which spent 4.27 per cent of GDP on R&D in nearly 2 per cent of GDP 2001, is ranked second globally in terms of on research and developR&D spending. 17 But the Nordic success ment in 2002’, Newsth release, February 24 2005. stands in stark contrast to the performance of the Mediterranean countries. In 2003, Spain 17 Michel Camdessus, spent 1.1 per cent and Portugal 0.8 per cent on ‘Le sursaut vers une R&D. Cyprus, Latvia, Slovakia and Poland all nouvelle croissance pour la spent less than 1 per cent of their GDP on France’, 2004. R&D. In Slovakia and Poland R&D investment has declined since 1999. Moreover, R&D spending in the larger member-states, such as France and Germany, is virtually static. France only increased its spending from 2.18 per cent in 1999 to 2.19 per cent in 2003, while spending in Germany rose modestly from 2.44 per cent to 2.5 per cent. The EU hopes that private funds will make up 18 Janez Potoˇcnik, the R&D shortfall. However, private ‘Competitiveness and investment will have to double if the EU is to economic growth: R&D reach its 3 per cent target.18 A Commission policies and the Lisbon agenda’, Roundtable scoreboard of business R&D investment shows Conference, Slovenia, that the top five EU companies (Daimler November 24th 2004. Chrysler, Siemens, Volkswagen, Nokia, GlaxoSmithKline) are among the top 12 19 European Commission, companies globally when it comes to investing ‘Industrial R&D Investment Scoreboard’, in research.19 However, in 2003 EU business December 2004. spending on R&D dropped on average by 2 per cent. As a result, the total R&D investment by the top 500 EU companies is about 50 per cent of their non-EU competitors. In 2003, nearly half of the 25 biggest EU companies reduced their R&D expenditure, four of them by more than 10 percentage points. In the same year, only four of the top 25 US companies reduced their R&D, and only one by the same magnitude. The Commission analysis of business R&D also shows that spending is highly concentrated in terms of sectors, companies and

The Lisbon Scorecard V

geography. The top 20 companies account for more than 55 per cent of the total business R&D investment. Similarly, two-thirds of all investment takes place in just four sectors: automobiles, pharmaceuticals and biotechnology, IT hardware, and electronics and electrical equipment. 20

According to the Commission’s ‘innovation scoreboard’, the US outperforms the EU in nine out of the 12 indicators.20 The EU does produce more science and technology graduates than the US. But even this small success is qualiﬁed by the fact that the EU is not making good use of its human resources. Many of the EU’s best and brightest move to the US where research budgets are larger and researchers are likely to get substantially higher pay packages. A study by the Commission in 2003 showed that 70 per cent of the Europeans who did a PhD at an American university between 1991 and 2000 had no intention of returning to Europe. In 2003, 400,000 scientiﬁc researchers born in the EU were working in the US. Three out of four of these did not want to come back.

European Commission, ‘European innovation scoreboard 2004, comparative analysis of innovation performance’, November 2004.

In 2001, the US had eight researchers per 1,000 people, compared with ﬁve in the EU15.21 In terms of output, EU scientists appear to beat their US counterparts: EU-based scientists account for 41 per cent of all 22 scientific papers published worldwide, European Commission, ‘Europe and basic research’, compared with 31 per cent for the US. 22 January 14th 2004. However, the quality of scientific work matters as much as quantity. One indicator of quality is how often a scientiﬁc paper is quoted in other works. Here the US is in the lead, with papers by European scientists receiving one-third fewer references than US papers. Another indicator is the number of Nobel prize laureates. Over the last two decades (1980-2003), US scientists have won more than twice as many prizes as their EU colleagues (154 to 68).

Innovation

The Commission has taken several initiatives over the last ﬁve years to improve European research and encourage more public and private investment. Last year, the Commission reformed European state aid rules to make it easier for governments to support the research efforts of small and medium-sized enterprises (SMEs). In addition, the Commission has proposed the establishment of ‘technology platforms’ – networks for researchers to share information in key areas such as nanotechnology, plant genomics, and hydrogen technologies. In April 2003, the Commission and the member-states adopted an ‘investing in research’ action plan that aims to improve the quality of the research and the EU’s capacity to diffuse innovation. For example, member-states are trying to use 23 European Commission, tax measures to encourage businesses to ‘Research investment targets invest in research. 23 In 2004, the French and current trends’, September 24th 2004. government introduced a scheme offering SMEs tax breaks to employ researchers. Fiscal and other indirect measures represent around 12.5 per cent of all public spending on R&D in the Netherlands, 16 per cent in Austria and 42 per cent in Latvia.

European Commission, ‘Towards a European research area: Science, technology and innovation key ﬁgures 2003-2004’, 2003.

The EU has also had some success with large research based industrial projects, such as the Galileo space programme, Airbus, and the rocket-maker Ariane. These industrial projects show that the EU can be a vehicle for innovation and the creation of high-quality jobs. The current focus of European efforts is Galileo, a satellite navigation system which will cost more than S3 billion to complete. EU transport ministers took the decision to 24 Carl Bildt et al, back Galileo in 2002. The new system should ‘Europe in space’, CER, be up-and-running by 2008. Galileo’s October 2004. proponents claim that developing Galileo will 25 European Commission, help Europe to maintain its high-technology ‘Progress report on the industrial base.24 The Commission calculates Galileo research programme’, that it could beneﬁt the European economy by February 2004. creating more than 100,000 jobs.25

The Lisbon Scorecard V

A report by Erkki Ormala, vice president of technology policy at Nokia, has concluded that the Commission’s initiatives have had a positive effect on Europe’s potential for innovation.26 However the report added that the EU needed to do more to encourage investment in R&D. The EU is a long way from developing a competitive single European research area. The mobility of European researchers and co-operation across countries remains low. In February 2004, the Commission proposed to more than double the part of the EU budget devoted to research during the next ﬁnancial period, which runs from 2007 to 2013. The EU’s research budget currently represents 0.04 per cent of the EU’s total GDP, around S17.5 billion. But the Commission’s proposal is unlikely to succeed. The larger member-states are reluctant to increase the overall size of the EU budget. Meanwhile, France will lead the battle against any attempt to reduce spending on the common agricultural budget in favour of research.

Panel chaired by Erkki Ormala, ‘Five-year assessment of the European Union research framework programmes 1999-2003’, December 15th 2004.

EU member-states also deserve heavy criticism for their failure to reach agreement on a community patent. Companies will only invest in innovation if they know that they will be able to reap the rewards of this investment. Businesses need a legal framework for the protection of intellectual property rights which is accessible and cheap for SMEs. At present, the European patent system is a mess. Businesses must employ lawyers and translators to secure a patent from every national office in the EU. The cost of obtaining a patent for the entire European Union is prohibitively high for smaller firms and 27 European Commission, individual inventors. A recent survey found that the vast majority of innovative firms had not ‘Innobarometer 2004’, November 2004. applied for patents, or registered a trademark, to protect their inventions due to the costs 28 European Commission, involved.27 Whereas it costs around S10,000 to ‘Second implementation obtain patent protection across all the US, it costs report of the internal S50,000 to achieve the same protection in only market strategy 2003-2006’, 2005. eight EU countries.28

Innovation

Consequently, EU companies are filing fewer patents than their main competitors. In 2002, European companies filed 159 patents per million of population at the European Patent Office (EPO). US firms filed similar numbers at the EPO, at 154 per million of population. However, at the United States Patent Office, US companies filed 301 patents per million of population in 2002, compared with just 60 per million by European businesses. The Community patent was supposed to resolve these problems. The idea is simple: the EPO would award patents valid in all memberstates, greatly reducing the need for translators and lawyers. EU heads of government have repeatedly claimed success in agreeing the patent. However, each time the supposed deal has come up in the Council of Ministers, some governments – most notably those of Spain and Germany – have raised fresh objections. After four years of negotiations the existing proposal is effectively dead. Some governments are now looking to the so- 29 Nikki Tait, called London protocol as a way of breaking the ‘Bright ideas to put deadlock surrounding the Community patent. Europe in harmony’, Under the terms of this protocol, which was first Financial Times, December 6th 2004. agreed in 2001, companies can apply for a patent in English, French or German.29 If they wish to use a different language, they need only supply a translation in one of these three ‘official languages’. Experts, such as Alain Pompidou head of the EPO, argue that implementation of the protocol would effectively end the language battles which have dogged the Community patent proposal. However, to take effect, the protocol needs to be ratified by eight countries, including France, Germany and the UK. As of December 2004, only five countries had taken this step: Slovenia, Iceland, Monaco, Germany and Denmark, although the ratification process is under way in three others, including the UK.

Research and Development

C-

B. Liberalisation B1. Telecoms and utilities

Heroes

Finland, Slovenia, Sweden

Villains

Greece, Poland, Slovakia

★

Increase competition in telecoms markets to reduce charges

★

Liberalise gas and electricity markets

Market integration is essential to generating economic growth and boosting Europe’s competitiveness. The Commission estimates that in the last decade the EU’s single market has helped create 2.5 million jobs and increased total GDP by 1.8 per cent.30 However, the single market is far from complete. Many sectors are not fully integrated and prices still vary greatly among EU member-states. As the Kok report concludes, EU governments 30 European Commission, ‘The often make the political error of treating the internal market – ten years completion of the single market as without frontiers’, 2003. yesterday’s business. The EU has had a good deal of success in liberalising Europe’s telecoms markets. The number of companies providing ﬁxed-line telecoms services doubled between 1998 and 2001, and many incumbent operators lost substantial market share to newcomers. However, the pace of market opening has slowed down in recent years – although there were some signs of an improvement in 2004. Increased competition has driven down telephone charges for European businesses and consumers. The average price of a ten minute national call in the EU-15 has fallen from S1.67 in 1999 to S1 in 2003, according to Commission data. Greece has made the largest reductions in the price of national calls: the cost of a ten minute call has fallen from S2.78 in 1999 to S0.73 in 2004. Meanwhile, the cost of a local call has declined in Austria from S0.8 in 1999 to S0.49 in 2004, the largest fall in the EU. The Commission calculates that between 1998 and 2003, the monthly phone bill of the

The Lisbon Scorecard V

Liberalisation

average EU household has fallen by 13.5 per cent. Businesses have enjoyed even greater savings in the same period of 22.7 per cent.

calls has fallen by 32 per cent since 1997, but at S0.44 for ten minutes prices remain well above the EU local calls average of S0.36.

The number of mobile subscribers has increased dramatically in the EU-15: 87 per cent of the population owned a mobile phone in 2004 compared with 52 per cent in 2000.31 There are now more than 379 million mobile subscribers in the EU. In Finland, 95 per cent of the population owned a mobile phone in 2004. In the EU-15, the average market share of leading operators has dropped from 47 per cent in 2003 to 43 per cent in 2004.

The EU is also encouraging greater competition in the postal services market. In 2002, member-states agreed to the creation of a single postal market by 2009, although they left many of the details of how this market will function open to further 32 Wik-Consult, ‘Main negotiation. Around 60 per cent of the EU’s developments in the letter market should be open to competition by European postal sector’, 2007. The member-states have made some July 2004. progress in opening up their postal markets and 33 European Commission, most are on course to meet the 2007 deadline.32 ‘Second implementation However, only a few countries, such as the report of the internal United Kingdom and the Netherlands, have market strategy introduced signiﬁcant measures to modernise 2003-2006’, January 2005. their postal services.33

European Commission, ‘European electronic communications regulation and markets 2004’, December 2nd 2004.

However, the Commission remains concerned about the high cost of ‘international roaming’, which allows people to use their mobile phones abroad. The high cost of roaming is a particular problem in Germany where, according to the Commission, T-Mobile and Vodafone have been charging other mobile operators excessive rates for using their networks. The Commission has recently launched an EU-wide investigation into roaming prices. The EU has some way to go to achieve a truly competitive telecoms market. Some countries have barely begun the process of opening their telecoms markets to competition. In Slovakia, the incumbent provider still retains 100 per cent of the market. In Greece, the former monopoly provides 91 per cent of the local calls, 84 per cent of long distance calls and 76 per cent of international calls. In general, incumbents continue to exercise a very strong hold on the market for local calls. This is particularly true in the ten new member-states, where the former monopolies continue to dominate more than 90 per cent of the market in many cases. Even in those countries that have gone furthest in market opening, prices are not universally low. For instance, liberalisation has led to ﬁerce competition in the UK telecoms market. The cost of UK local

In contrast to telecoms and post, the EU has made painfully slow progress in opening up its energy markets. It was only in April 2002 that EU leaders ﬁnally reached a deal to liberalise European energy markets, after overcoming long-standing opposition from France and Germany. The EU heads of state and governments agreed that member-states would open their electricity and gas markets for business customers by July 2004, and for all consumers by July 2007. In November 2003, the EU took another important step towards liberalising the energy market when it established a committee of national energy regulators to oversee market opening. As a result of these initiatives, most member- 34 European Commission, states have started to liberalise wholesale energy ‘Towards a competitive and markets. Companies across the EU are enjoying regulated European more choice in selecting their electricity supplier. electricity and gas market’, January 2005. In 2004, electricity prices were 15 per cent lower in real terms for business consumers than in 1995.34 Electricity prices for companies have fallen most sharply in Austria. Latvia supplies the cheapest electricity prices both for industrial and household users in

The Lisbon Scorecard V

the EU-25. Cyprus has the most expensive electricity prices for industrial users and Italy the most for household users in the EU-25. Gas prices have risen across the EU (and globally) in recent years, making it difficult to assess the benefits of EU liberalisation efforts. But price differences between individual EU countries seem to reflect the degree of market opening. The UK, which has fully liberalised its gas market, has the cheapest prices within the EU-15 for household users. Prices for businesses have risen by 42 per cent in the UK since 1995, compared to 73 per cent in Finland. Latvia supplies the cheapest gas for both household and industrial users in the EU-25. EU governments have much work to do before they can claim that energy markets are fully open. Most countries have apparently beaten EU deadlines to allow companies and (in some cases) households to choose their own suppliers. The Commission reports that “after five years of competition for electricity and over three years for gas, fewer than 50 per cent (of companies) have switched supplier in most member-states”.35 Foreign suppliers have only won around a fifth of the market for business customers. In Greece and 35 some of the newer EU members, there is still no European Commission, ‘Annual report on the competition between energy suppliers. In implementation of the gas contrast, in the Nordic countries and the UK, and electricity internal where energy liberalisation is most advanced, th market’, January 5 2005. over half of big firms have changed suppliers. Most energy markets are still dominated by the same companies as before liberalisation. Those firms that are able to control their home country market are also the most successful at winning new business abroad. France’s Electricité de France (EdF), Spain’s Endesa and Germany’s E.ON and RWE have all been able to expand internationally: they have a large and profitable customer base at home and few rivals to worry about. As a result, a ‘superleague’ is emerging in Europe’s energy market. Smaller players are left looking for merger partners in order to survive. However, EU competition rules often preclude energy market mergers. For example, in

Liberalisation

November 2004 the European Commission blocked a proposed tieup of Portugal’s leading electricity and gas firms, on the grounds that the merged company would be too dominant in the Portuguese energy market. The Commission has tried to clamp down on anti-competitive behaviour by the larger suppliers. Companies such as EdF, which used to be notorious for blocking competition in France, are increasingly being forced to give rivals freer access to their markets in exchange for greater access abroad. In December 2003, the Commission ruled that EdF should repay S1.2 billion of subsidies to the French government – the largest ever state aid repayment (the company is currently appealing this ruling). Just as importantly, the Commission also secured a commitment from the French government to remove its guarantee from EdF’s debt, which effectively protected the company from bankruptcy and enabled it to borrow more cheaply than its rivals. The Commission will shortly turn its attention to the EU’s water services, now that the legislative process for telecoms and energy liberalisation is nearing completion. The EU’s water sector has a turnover of S80 billion a year – greater than the market for gas. However, water charges vary greatly: in 2003, Berlin charged seven times more for its water services than Rome. The Commission argues that the sector would benefit from modernisation and greater competition. However, it will not express any view on the politically sensitive question of whether water services 36 European Commission, should be provided by state-owned or private ‘Second implementation companies. At the time of writing (March 2005), report of the internal the Commission had undertaken a review of the market strategy water and water-waste sector but had not 2003-2006’, 2005. published its findings.36

Telecoms and utilities

C+

Heroes

Latvia, UK

Villains

Germany, Italy, Slovakia (for telecoms)

B2. Transport ★

Increase rail services competition

★

Create a single European sky

EU countries are slowly beginning to open up the transport sector to greater cross-border competition. An efficient and comprehensive transport system would help the EU fulfil its economic, social and environmental Lisbon targets. Transport contributes up to 10 per cent of the Union’s GDP, employing around 10 million workers.37 The sector is directly responsible for consuming nearly a third of the EU’s entire 37 European Commission, energy needs and generates 28 per cent of ‘Energy and Transport, Report 2000-2004’, 2004. Europe’s CO2 greenhouse gas emissions. Traditionally, national monopolies have dominated the railway sector. But in the last ﬁve years, member-states have agreed on a series of measures (known as the first and second railway packages), which are designed to increase cross-border competition in rail services. For example, member-states are committed to opening up national freight services to competition from 2006, and to establishing a European railway agency to oversee international services. However, not all EU governments have fully implemented even the first railway package and the Commission has opened infringement procedures against eight member-states – Germany, Greece, Sweden, the United Kingdom, Ireland, Luxembourg, Belgium and the Netherlands.38 According to 38 European Commission, IBM’s ‘rail liberalisation index’, the degree of ‘Staff working document in market opening is most advanced in the support of the report to the United Kingdom, Sweden and Germany, while Spring European Council’, th Italy and Portugal have made significant January 28 2005. progress. 39 But the rail markets in Spain, 39 IBM Consulting Services, Ireland, Greece, Lithuania and Estonia lack ‘Rail liberalisation index 2004’, May 2004. any meaningful competition.

The Lisbon Scorecard V

The EU is currently discussing a third railway package which would increase competition for international rail passenger services. This would mean that services like Thalys and Eurostar could face competition on key cross-border routes. However, some member-states, such as Belgium, France and Luxembourg, are strongly opposed to this measure. They point to the poor state of 40 Jacques Barrot, the British railway network as evidence of the dangers of liberalisation. Jacques Barrot, the ‘Work programme for 2005’, European transport commissioner, has consequently made Commission, finding an acceptable compromise on the new February 1st 2005. measures a priority.40 The Commission has led attempts to increase competition in Europe’s ports. In 2003 it proposed a port services directive which would force port owners to conduct open tenders for pilot and cargo handling services. But maritime unions and municipally owned ports lobbied intensively against the law, arguing that it threatened jobs and safety standards. The European Parliament subsequently voted down the proposal, forcing the Commission back to the drawing 41 Le Monde, board. It submitted a new proposal in October ‘Bruxelles veut libéraliser les services 2004. However, the directive still faces significant portuaires’, opposition from France, Germany, Sweden, January 11th 2005. Belgium, Netherlands and the UK.41 The Commission is also pushing a liberalising agenda for the air transport sector. In 2002, the Commission secured a mandate to negotiate airport access for the whole EU on transatlantic flights. Previously, individual member-states reached bilateral agreements with the US. Such deals often protected the preferential transatlantic take-off and landing slots of national carriers, and thus restricted competition. The European Court of Justice declared these bilateral deals illegal in November 2002. The Commission began negotiations with its US counterparts in October 2003 to conclude a US-EU ‘open sky’ agreement. It cites evidence that the creation of an ‘open sky’ or single market for transatlantic flights would save

Liberalisation

consumers more than S5 billion a year, and 42 Brattle Group, increase passenger numbers by a quarter.42 ‘Assessment of economic impact of an EU-US

The Commission is struggling to persuade the US open aviation area’, January 2003. to amend laws that protect its airlines from foreign ownership and prevent foreign airlines from providing internal flights, a practice called ‘cabotage’. It rejected a US offer for an agreement in June 2004 because the US continued to oppose opening up its internal routes. At the time of writing, negotiations appear to have reached stalemate. John R Byerly, 43 The United States the US deputy assistant secretary of state for Mission to the transportation affairs, recently described talks as European Union, ‘US’s “adrift”, adding that while they “may not be in Byerly on US-EU air services negotiations’, hell yet, [they are] certainly not in heaven”.43 February 8th 2005. In any case, the EU has not yet fully liberalised its own markets, including handling services and the allocation of landing and takeoff slots to airlines. In 2004, the EU finally adopted a series of measures which should help create a ‘single European sky’. The new regulations force member-states to bring national air traffic controls into line with common European standards. The Commission hopes that this will make co-operation between air traffic controllers easier and contribute to developing a common air space (or single sky). The EU is also committed to upgrading key transport (and utility) infrastructure as part of the Lisbon agenda. A decade ago, the EU agreed on 16 priority ‘trans-European networks’ (TENs) at an estimated cost of S400 billion. However, only three of these projects have so far been completed: the bridge/tunnel link between Denmark and Sweden, a high-speed train between Brussels and Marseilles, and Malpensa airport in Northern Italy. None of the Alpine crossings, such as the Lyon-Turin route, which have been on the agenda since the end of the 1980s, has seen the light of the day. The completion of these projects is not expected until 2015 at the earliest.

The Lisbon Scorecard V

Consequently, many analysts are sceptical about the likely beneﬁts of the EU’s ‘action plan for growth’, which was agreed in December 2003. The action plan includes 56 projects worth S76 billion, including the outstanding TENs and initiatives to upgrade energy and shipping infrastructure. However, the EU continues to struggle to persuade the private sector to back its investment strategy. Largescale cross-border infrastructure projects are complex and ﬁnancially risky. The fact that at least two member-states must be involved in each TEN has created legal confusion resulting in a lack of project leadership. The Commission is consequently trying to develop common rules for public-private infrastructure investment in crossborder projects.

Transport

C+

Heroes

European Commission

Villains

Belgium, Spain

B3. Financial and general services ★

Complete the ﬁnancial services action plan by 2005

★

Create a single market in services

The Commission, the European Parliament and EU governments have shown unprecedented determination in pushing through the raft of measures contained in the EU’s financial services action plan (FSAP). However, many companies – and some member-states – are beginning to question whether, in its haste to complete the FSAP, the EU has agreed measures which will hinder the creation of a competitive European capital market. A well-functioning financial services sector is vital to ensure the efficient allocation of capital, to mobilise savings and help to discipline company management. Access to low-cost capital promotes the growth of new and innovative businesses. 44 London Economics, London Economics, a UK consultancy, estimates ‘Quantification of the that the benefits of integrating Europe’s wholesale macro-economic impact of integration of capital markets could amount to S130 billion, or EU financial markets’, 1.1 per cent of EU GDP, over the next decade.44 November 2002. On paper, at least, the FSAP is a success. The EU has reached agreement on 39 of the plan’s 42 measures. In December 2004, finance ministers reached an outline agreement on the one important outstanding measure: the capital adequacy directive, which sets the rules for how much money banks must set aside to help guard against insolvency. Overall, the EU deserves credit for delivering such an ambitious legislative action plan on time. However, financial services companies, particularly those based in the City of London, have become increasingly critical of the quality of the legislation. The member-states have sometimes reached less than satisfactory compromises on key directives. At other times, the EU has reneged on its commitment to avoid producing overly detailed or

The Lisbon Scorecard V

cumbersome rules. Bogged down in endless rows over the fine print of the new directives, the EU risks losing sight of the plan’s potential economic gains. The EU’s biggest legislative failure was the takeover directive, which sought to create a level playing field for corporate mergers and acquisitions. Member-states finally reached agreement on the directive in December 2003, after more than a decade of trying. The Commission had originally proposed outlawing ‘poison pill’ defences against a takeover bid, such as the right of directors to sell subsidiaries or issue new shares without the permission of shareholders. But German businesses and politicians fought hard against this proposal, fearing that prominent German companies, such as Volkswagen, could become vulnerable to foreign takeovers. Heavy German government lobbying had persuaded the European Parliament to vote down an earlier version of the directive in 2001. The final text of the directive does ban companies from taking defensive actions during a takeover battle without the express permission of shareholders. But all member-states retain the right to opt-out of this provision. Moreover, even companies from countries that have not opted-out may still use poison pills if the takeover bid comes from a country which allows such defences. Similarly, Sweden led a successful effort to water down a clause which would have restricted the ability of family-run firms to maintain control by using different classes of shares. These opt-outs mean that the directive is unlikely to achieve its original aim of encouraging more cross-border mergers and takeovers within the EU. Many financial services firms are equally disappointed with the final outcome of the investment services directive – now renamed the directive on markets in financial instruments (MiFID). The directive establishes common rules for firms wishing to compete across the EU and is thus the cornerstone of the EU’s drive to create a single market in financial services.

Liberalisation

In November 2003, Italy – which at the time held the EU’s rotating presidency – forced through two protectionist amendments to the directive, despite the strong opposition of UK, Ireland, Sweden, Finland and Luxembourg. The European Parliament eventually succeeded in hammering out a compromise which went some way to addressing the concerns of financial services firms, in particular by exempting larger share trades from some 45 Alasdair Murray, ‘Over but of the disclosure rules. However, many City far from finished: The firms claim the directive will increase costs financial services action plan’, CER, September 20th 2004. and reduce competition in share trading.45 The dispute over the MiFID has overshadowed the real economic gains that other parts of the EU’s action plan will deliver. For example, the European Federation for Retirement Provision estimates that the pensions directive will save multinational companies as much as S10 billion a year. This directive will mean that firms can for the first time operate a single pension fund for all their European employees, and it will reduce restrictions on where such funds can invest. Ultimately, the real damage of the MiFID affair is likely to prove political as much as economic. Until the Italian amendments, the City of London had assumed that, as by far the largest financial services centre in Europe, its views would take precedence. But its defeat over the MiFID left a bitter taste, and many City firms now seem to have lost faith in the EU’s ability to deliver a competitive single market in financial services. Similarly, the British government – once the most enthusiastic proponent of the FSAP, has now come out against any further major EU legislative initiatives. The FSAP on its own will not create a fully functioning single market in financial services. But the EU should pause to take stock before proposing a second action plan. Many financial firms claim that they are suffering from ‘regulatory fatigue’, and they will have to spend the next few years implementing 14 major legislative measures. This is particularly important in the

The Lisbon Scorecard V

Liberalisation

far less developed capital markets of Central and Eastern Europe. The new member-states will struggle to implement the FSAP, given that many do not even comply with long-standing EU rules on financial services, such as those on capital adequacy and deposit insurance.

2002 were within the services sector. 4 6 A 46 European Commission, recent report for the European Commission ‘Services directive extended forecast the directive could raise total GDP by impact assessment’, 0.6 percentage points and lead to the creation January 2004. of 600,000 new jobs in the medium-term.47 47 Copenhagen Economics,

In May 2004, four expert groups reported to the Commission with suggestions for the post-FSAP agenda. The consensus was that businesses have little appetite for further legislation. Charlie McCreevy, the new internal market commissioner, seems to have taken on board these comments. He intends to wait and observe the impact of the current legislation before making fresh proposals. The commissioner has also promised to withdraw any legislation which threatens to undermine the competitiveness of EU ﬁnancial services ﬁrms.

However, the Commission’s proposal has run barriers to the internal into ﬁerce opposition from trade unions and a market in services’, number of EU governments. The French January 2005. Prime Minister, Jean-Pierre Raffarin, attacked the draft directive as “unacceptable”, adding that “France would take any measure [necessary] to oppose it”. Belgium, Italy, Germany, Greece and Spain share many of the French concerns. The European Parliament is split down the middle on the proposed directive.

‘Economic assessment of the

Meanwhile, the Commission is soon likely to turn its attention to the highly fragmented retail financial services market. European consumers stand to gain greatly from increased cross-border competition between banks, insurance and investment ﬁrms. But the Commission must learn the lessons of the FSAP and adopt a light touch and pragmatic approach towards stimulating competition in the retail market. The internal market commissioner also faces the tough task of pushing forward the services directive – by far the most ambitious piece of outstanding single market legislation. The Commission’s proposal, drawn up by former commissioner Frits Bolkestein, seeks to liberalise services ranging from estate agents to employment firms to advertising. The directive would cover services accounting for around 50 per cent of the EU’s entire GDP. The Commission argues that the directive is essential to help the EU meet its job targets. Services already provide around 63 per cent of employment in the EU. The Commission claims that virtually all the new jobs created during the period from 1997 to

Critics of the directive make two main complaints. First, the directive is extremely wide-ranging and could in theory apply to politically sensitive sectors, such as healthcare. Second, the directive will permit services firms to operate on the basis of ‘the country of origin’ procedure. This means that a firm would only need to satisfy the regulations of its home country to do business anywhere in the EU. Unions fear this will lead to a ‘race towards the bottom’ in employment standards, thereby undermining national health and safety legislation in sectors such as construction and private security. Opponents of the directive are thus calling on the EU to reach agreement on some new harmonised employment and safety standards for the affected sectors, before proceeding with liberalisation. They argue that the rest of the single market has been founded on the principle of basic common standards. This desire for harmonisation also reflects concerns among some governments that the new member-states lack the judicial capacity, or the political will, to enforce labour rules fairly. However, the new member-states will fiercely resist any attempt by other EU governments to enforce higher standards.

The Lisbon Scorecard V

At the time of writing, the Commission had indicated its intention to review the directive. This announcement led some critics to claim that the Commission was preparing to drop the legislation. The Commission has responded that it remains committed to services liberalisation but wants to ﬁnd an acceptable compromise – most likely by excluding the most sensitive sectors from the scope of the directive.

Financial and general services

B-

Heroes

Villains

France, Italy

C. Enterprise C1. Business start-up environment ★

Develop a programme to support enterprise and entrepreneurship

★

Develop and implement a European charter for small businesses

Small businesses, and start-up companies in particular, are vital to helping the EU meet its ambitious employment goals. Small businesses employ around 95 million people within the EU – around 55 per cent of all jobs. Unfortunately, too many budding European entrepreneurs are put off setting up a business by administrative and financing obstacles, or even the stigma of failure. A recent Eurobarometer poll found that just 45 per 48 Eurobarometer flash cent of Europeans would like to start their own 160, ‘Entrepreneurship’, April 2004. company, compared with 61 per cent in the US.48 Nearly twice as many Europeans as Americans said they did not intend to start a business because they wanted the stability of employment. Europeans also have a higher fear of failure: half agreed that they would not set up a business if they were not sure of its success, compared with just one-third of Americans. The Eurobarometer survey also found that just 49 Babson College et al, 2 per cent of Europeans are in the process of ‘Global entrepreneurship setting up their own business compared with 8 monitor 2004’, GEM, per cent of Americans. This finding is borne out January 2005. by the Global Entrepreneurship Monitor (GEM) which provides an annual snapshot of new business activity in 31 countries.49 GEM found that on average only 5 per cent of the EU population is involved with an entrepreneurial venture, compared with 11.3 per cent in the US. Poland and Ireland record the highest levels of entrepreneurial activity at 8.8 per cent and 7.7 per cent respectively. In Belgium the figure is just 3.5 per cent, while in Slovenia it is only 2.5 per cent.

The Lisbon Scorecard V

In the last ﬁve years, member-states have launched a series of action plans aimed at removing the obstacles to new business creation. In an annual report the Commission monitors member-states’ progress in tackling common problems faced by small businesses, such as access to ﬁnance and red tape. For example, many EU countries have sought to cut the time and cost of setting up a new business. In Spain it now takes just 12 days to register a business (online) compared with 80 days previously. However, the World Bank’s ‘Doing Business’ database shows that many EU countries need to cut back further on unnecessary red tape. While it takes just two days and two procedures to set up a business in Australia, in Portugal entrepreneurs must go through 11 procedures – a process that takes on average 78 days. According to the World Bank, the easiest and cheapest place to establish a business in the EU is Denmark, where it takes just four days and costs nothing. In Greece, it costs several thousand euro to set up a business. Most member-states are aiming to encourage potential entrepreneurs by introducing some form of business education in school. A few, including the Czech Republic, Spain, Ireland, Poland and Finland, have made entrepreneurship a formal part of the school curriculum. Sweden and the UK are also encouraging some lessons in primary schools. However, the Commission, in its latest small business charter implementation 50 European Commission, report, singles out Portugal for failing to ‘Report on the implementation of the bring forward any public initiative to European Charter for small encourage entrepreneurship education.50 enterprises’, February 8th 2005.

EU governments have also been overhauling bankruptcy laws to try and ensure a better survival rate for small businesses, and make it easier for failed entrepreneurs to begin again after a business failure. The Commission reports that in 2004 alone half of the memberstates conducted reviews of national bankruptcy laws. It praises Spain, Estonia and France, in particular, for substantially improving

Enterprise

insolvency laws. However the Commission concludes that Greece, Luxembourg, Slovakia and Poland could still make further progress towards making bankruptcy rules more accommodating to the needs of small businesses. Member-states are also committed to giving small businesses better access to finance, for example by setting up state-backed loan guarantee schemes to encourage banks to lend more to small businesses. However, access to finance remains a major problem for Europe’s small businesses. EU governments completed ‘a risk capital action plan’ in 2003, which was designed to increase the quantity of venture and other investment capital available for start-up businesses. Member-states sought to encourage the growth of venture capital funds through tax incentives and the removal of regulatory or legal obstacles. The EU had some initial success in stimulating the growth of venture capital through tax breaks and other measures. However, the collapse of the ‘dot.com’ boom has resulted in a substantial decline in the amount of available funds. Venture capital funds have also become much more reluctant to lend to high-tech ventures – just 9 per cent of available funds were allocated to high tech investments in 2003, compared with 15 per cent in the previous year. As a result, most governments now look unlikely to meet a series of (nationally-set) targets for increasing venture capital. For example, Ireland is aiming to increase the quantity of available venture capital to 0.8 per cent of GDP by 2010. However, funds fell to just 0.06 per cent in 2003, according to Commission data. Overall the UK and Finland had the highest levels of venture capital at 0.26 and 0.2 per cent of GDP respectively in 2003. Slovakia and the Czech Republic had their fledgling venture capital sectors all but wiped out in the dot.com boom fallout. Greece and, surprisingly Germany, had the lowest levels of venture capital among the old member-states.

Business start-up environment Heroes Villains

C2. Regulatory burden ★

Simplify the EU’s regulatory environment to reduce the burden on business

★

Member-states to implement 98.5 per cent of all EU legislation by 2002

Ireland, Spain Greece, Portugal

The problem of EU red tape has become one of the defining elements of the Lisbon agenda. Business organisations are increasingly vocal about the damaging impact of poorly framed and cumbersome EU rules on the European economy. Companies have repeatedly criticised EU initiatives, ranging from the mass of financial services legislation to the working time directive, for greatly increasing compliance costs and reducing their ability to compete in a global market. Smaller companies, in particular, find directives and regulations costly and time-consuming. They regard excessive administrative and regulatory burdens as the main obstacle to growth.51 The Commission has calculated that better regulation could save businesses around S50 billion a year.52

compliance with many EU 51 European Commission, ‘Summary report: The public debate following the green paper entrepreneurship in Europe’, October 19th 2003. 52 European Commission, ‘Simplifying and improving the regulatory environment’, December 2001.

Above all, it is the Commission’s proposal for a chemicals directive (known as REACH) which has turned regulatory reform into a hot political issue. Under the terms of the proposal, companies would be obliged to register around 30,000 widely used chemicals and conduct tests to prove that they did not pose health and environmental risks. The Commission has estimated the directive would cost businesses S5.2 billion over the next decade. At the time of writing, the member-states and the European Parliament were in the process of watering down REACH to make it more palatable to the chemicals industry. More generally, the

The Lisbon Scorecard V

EU has made a number of commitments to curb red tape. For example, at the Barcelona summit in March 2002, EU leaders endorsed the conclusion of the Mandelkern committee on better regulation, including a proposal for a 40 per cent reduction in the quantity of EU legislation by 2005. A number of member-states, led by Germany, the Netherlands and the UK, have increased the pressure on the Commission to cut all forms of EU red tape. More recently, the six countries holding the EU 53 ‘Advancing regulatory presidency in 2004, 2005 and 2006, reform in Europe: A joint statement of the Irish, Dutch, including the UK and the Netherlands, united Luxembourg, UK, Austrian to demand that the Commission develop new and Finnish presidencies of proposals for regulatory reform, including the European Union’, exploring the ‘do nothing’ option when December 7th 2004. considering new legislation.53 But the EU has so far made only slow progress towards this goal. The Commission admitted in its most recent progress report that it would miss a number of important regulatory targets, including a reduction of the length of the EU rulebook, the acquis 54 European Commission, communautaire, by 25 per cent by 2005.54 The Commission blamed problems with ‘Updating and simplifying the Community acquis’, translating the acquis into the languages of June 16th 2004. the new member-states for the delay. Business organisations also vigorously complain that the Commission has not fulﬁlled a commitment to introduce rigorous impact assessments on new legislative proposals. Impact assessments are supposed to provide a thorough analysis of the costs and beneﬁts of new regulations. But businesses argue that the Commission is trying to produce too many assessments with too few resources, which has resulted in poor quality analysis. 55 55 Moreover, the Commission does not yet carry European Policy Centre, ‘Achieving a new regulatory out assessments on around a third of major culture in the EU: an action proposals. As a result, a coalition of business plan’, Working paper number organisations has proposed that an 10, April 2004. independent agency, and not the Commission,

Enterprise

should in future carry out impact 56 European Commission, assessments. The Commission has responded ‘Impact assessment: next st with a new impact assessment action plan.56 steps’, October 21 2004. The EU took one step forward in November 2004, when memberstates agreed to a Commission proposal to scrap around 100 draft laws. The Commission is also examining some 900 potentially obsolete legal acts with the aim of withdrawing the legislation. Member-states are only too happy to lay the blame for cumbersome and costly new legislation on the Commission. But the Commission is not solely to blame. EU governments and the European Parliament ultimately decide on new legislation, and often introduce amendments which increase the regulatory burden. Member-states sometimes add extra rules and regulations when they implement new directives – a practice known as ‘gold plating’. However, the perception that the Commission endlessly churns out red tape is damaging the credibility of the EU legislation. The creation of the single market has meant that the EU is now responsible for around half of all important business legislation. Businesses are inevitably scrutinising EU proposals much more closely than in the past. Thus the Commission needs to be seen to take the issue of regulatory reform more seriously. To its credit, the new Commission seems to have grasped this point. Günter Verheugen, the commissioner for enterprise and industry, made clear at his conﬁrmation hearing in the European Parliament in October 2004 that the battle to cut red tape would be his “personal trademark over the next ﬁve years”. The Commission has also promised to launch a new regulatory reform initiative as part of its mid-term review of the Lisbon process. EU governments are also beginning to reform national rules and regulations. As the World Bank points out, red tape is a cost to governments as well as business: EU member-states spend between 8 and 11 per cent of their budgets on administering

50 57

The Lisbon Scorecard V

regulations.57 Several member-states have set national targets for reducing the quantity of regulations. For example, the Netherlands and Denmark are seeking to cut red tape by 25 per cent. Sweden and the UK lead the way in terms of employing impact assessments – with virtually all measures which impact on businesses now fully costed. Greece, Ireland and Hungary have also embarked on business friendly reforms of their regulatory systems.

World Bank, ‘Doing business in 2005 – removing obstacles to growth’, September 2004.

The new member-states have made especially rapid progress in regulatory reform. The World Bank concludes in its 2005 ‘Doing Business’ survey that competition in the enlarged EU was the “major impetus for reform”. EU countries made up seven out of the top ten ‘most improved’ countries. The survey ranks Slovakia most highly for progress, following a raft of reforms including more flexible working hours, easing restrictions on hiring firsttime workers, halving the time it takes to establish a business and improving debt laws. Lithuania and Poland also score well for taking actions that have “significantly lightened the burden on businesses”. Among the old member-states, the World Bank notes that Belgium, Finland, Portugal and Spain have all recently reduced the costs of regulation. Overall, however, EU member-states still have some way to go to meet top ranked New Zealand or secondplaced United States. Among the EU-25 countries, the World Bank ranks the UK most highly, at seventh, and Sweden at ninth. Better regulation is not simply about cutting red tape. Businesses cannot take full advantage of the single market if key legislation is not properly implemented throughout the Union. However, member-states do not always implement EU legislation in a timely and efficient manner. EU governments had promised to reduce the quantity of legislation not yet transposed, that is written into national laws, to less than 1.5 per cent by March 2002. However, the

Enterprise

Commission’s most recent internal market 58 European Commission, scoreboard found that this deficit had ‘Second implementation widened to 3.6 per cent in November 2004, report of the internal market strategy 2003-2006’, compared with a low point of 1.8 per cent in January 2005. 58 Part of this increase is due to May 2002. the failure of some new member-states, which are integrated in the scoreboard for the first time, to finish adoption of the EU’s acquis. But the EU-15’s average deficit also increased substantially, to 2.9 per cent. As a result, over a quarter of all internal market directives have not been fully transposed in every member-state. Just two member-states, Lithuania and Spain, currently meet the 1.5 per cent target. In contrast, 9.6 per cent of EU legislation is not yet on the statute book in the Czech Republic, while Italy and Greece are the worst performers among the old member-states. Meanwhile, Italy and France account for nearly 30 per cent of all internal market infringement cases. The EU-25 has made no progress towards meeting the Commission’s target of halving the number of outstanding infringement cases by 2006.

Regulatory burden

C+

Heroes

Slovakia, UK

Villains

France, Italy

Enterprise

C3. State aid and competition policy ★

Promote competition and reduce subsidies to industry

★

Overhaul public procurement rules and make them accessible to SMEs

An effective competition policy is vital to the long-term health of the European economy. Competition increases the incentives for firms to reduce costs, cut prices and improve the quality of their products. It encourages the reallocation of capital from less to more productive firms. It ultimately benefits not just consumers through lower prices and better products, but also businesses who gain from greater competition between suppliers. Recent economic research has underlined the importance of competition in helping to increase productivity and thus long-term economic growth. The Organisation for Economic Co-operation and Development (OECD), for example, finds that low levels of competition in some EU markets are a key factor behind Europe’s relatively poor productivity record (in comparison with the US) over the last decade. The International Monetary Fund has suggested that 59 reforms leading to an increase in competition Cited in UK Treasury, ‘Joint initiative on regulatory could boost overall GDP in the EU by as much reform’, January 26th 2004. as 7 per cent in the longer term.59 The EU has worked hard at modernising its state aid and competition rules in the last five years. In particular, the reforms which came into effect in May 2004 should allow the Commission to focus its resources on the most important competition cases. For example, businesses no longer notify the Commission of the many routine agreements that they sign with competitors and 60 European Commission, ‘Guidelines on the assessment rivals: companies must now review the impact of horizontal mergers under of such deals themselves. The Commission has the Council Regulation on also issued its (first ever) set of merger the control of concentrations guidelines, clarifying its approach for between undertakings’, businesses.60 Furthermore, the Commission has February 5th 2004.

tightened up its merger review procedures, and taken steps to improve the quality of its economic analysis, following three embarrassing defeats in the European Court of Justice in 2002. The Commission’s competition directorate- 61 Alasdair Murray, ‘A fair general is beginning to see its role as more referee? The European Commission and EU than simply policing mergers and anti-trust competition policy’, CER, cases. Rather, it is seeking to raise the overall October 2004. level of competition within the EU’s single market.61 As the Commission explained in a 62 European Commission, recent paper, it wants to “actively remove ‘A proactive competition policy for a competitive barriers to entry and impediments to effective Europe’, April 20th 2004. competition that most seriously harm competition in the internal market and imperil the competitiveness of European enterprises”.62 The Commission has promised as part of its mid-term review of the Lisbon agenda to analyse obstacles to competition in the energy, telecoms and ﬁnancial services markets. The Commission has also begun to update the EU’s state aid rules. Member-states are committed to the broad goal of reducing overall levels of industrial subsidies. Furthermore, governments have agreed that the remaining subsidies should go towards ‘horizontal’ goals, such as training or research and development, rather than to speciﬁc sectors or companies. This form of aid is in line with other Lisbon goals, such as promoting innovation, and is less likely to distort the market. The EU has had some success in reducing the overall level of subsidies. The Commission’s state aid scoreboard shows that aid payments (excluding railways) fell slightly from 0.6 per cent of EU15 GDP in 2000 to 0.56 per cent in 2002. Around three-quarters of all subsidies are now directed to ‘horizontal’ objectives. Finland, which heavily subsidises uneconomic agriculture in the north of the country, pays out the most aid at 1.42 per cent of GDP in 2002. The UK grants the least, at just 0.25 per cent of GDP, although this is an increase compared with 0.19 per cent in 2000.

The Lisbon Scorecard V

The new member-states, which have only just begun to apply fully EU state aid rules, have had mixed success in reducing subsidies. The Czech Republic, Poland, Malta and Cyprus pay the highest level of subsidies. Poland, for example, spent 2.76 per cent of GDP on aid – the largest subsidies going to its coal sector. However, much of the extra aid paid by these member-states is now being phased out. The Czech Republic made a one-off payment of S2.4 billion to its banking sector in 2002-3 to help clear bad debts. If this aid is excluded from the data, Czech aid payments in 2003 decline from 2.8 per cent of GDP to just 0.47 per cent. Moreover, four new member-states – Estonia, Latvia, Lithuania and Slovenia – hand out 63 the lowest subsides in the entire EU. Latvia, for European Commission, ‘State aid scoreboard: example, granted aid worth just 0.11 per cent of autumn 2004 update’, GDP and Estonia 0.12 per cent in 2003.63 November 11th 2004.

The Commission’s tough stance on state aid and competition policy has recently come under attack. Some member-states – most notably France and Germany – have become increasingly critical of what they regard as the Commission’s over-zealous application of competition rules. They argue that the Commission is undermining the competitiveness of the EU economy by stopping the emergence of ‘European champions’. The new competition commissioner, Neelie Kroes, recently sparked opposition from France, Germany, and the UK, by indicating that she wanted to end subsidies paid to attract big companies to invest in the poorer regions of the wealthier member-states. On the other hand, Günter Verheugen, the enterprise and industry commissioner, has hinted he might favour greater ﬂexibility in the Commission’s handling of state aid and competition cases, if it helps the emergence of new industrial champions. However, it is not clear whether Verheugen’s comments foreshadow a battle to change the substance of the Commission’s approach to competition, or simply the tone. The EU has made good progress in recent years in opening up member-states’ public procurement to greater competition. A competitive market for public procurement is of great importance

Enterprise

for EU businesses – EU governments award contracts worth more than 16 per cent of EU GDP each year.64 64 European Commission, The Commission calculates that if member- ‘Report on the functioning of states succeeded in trimming 10 per cent public procurement markets in from the costs of their procurement the EU: Benefits from the application of EU directives and budgets, not one member-state would challenges for the future’, breach the 3 per cent Stability Pact deficit February 3rd 2004. limit.65 Some governments have already 65 European Commission, made substantial savings: for example, Italy ‘Second implementation report estimates it saved 16 per cent on its S23 on the internal market strategy billion purchase budget in 2003. 2003-2006’, January 2005. In December 2003, the member-states agreed on new procurement measures that are designed to reduce red tape, spread the use of new technologies and clarify when governments can apply social and environmental criteria in awarding contracts. The Commission argues that technology could help governments save up to 5 per cent of their total expenditure on public sector procurement and reduce transaction costs by at least half. The Commission encourages member-states to publish details of procurement contracts in the EU journals, so that firms from across Europe can bid for the work. The number of invitations to tender and contract award notices published in the EU journals has doubled since 1995. But the Commission estimates this figure represents only around 16 per cent of all procurement contracts. Greece openly advertises the largest number of contracts, which are worth 5.77 per cent of GDP compared with just 1.27 per cent in Germany. Sweden has made the most progress in increasing the number of contracts advertised, from 2.54 per cent in 1999 to 3.94 per cent in 2002. Despite this increase in the number of advertised tenders, the Commission estimates just 3 per cent of contracts are won by cross-border bids (although as many as one-third are awarded to subsidiaries of foreign firms). The British government recently

The Lisbon Scorecard V

asked an independent committee, led by Alan Wood, chief executive of Siemens UK, to examine the problems faced by firms 66 Alan Wood, ‘Wood review, trying to win procurement contracts overseas. The committee’s report sparked Investigating UK business experiences of competing for wild reports in the British media about the public contracts in other EU supposed systematic discrimination faced by countries’, UK Office of UK companies when competing for Government Commerce, contracts abroad.66 November 2004. In reality, the report gave a much more measured assessment of the problems of procurement and supplied no evidence of anti-British discrimination. It concluded that while the letter of EU law is respected, governments sometimes take advantage of grey areas to favour ‘local’ firms including foreign-owned subsidiaries. The Commission finds it difficult to tackle such practices with the blunt instrument of infringement proceedings. However, the Commission should keep pushing further market opening reforms, including the services directive (see B3), which would make it easier for foreign firms to win contracts.

D. Employment and social inclusion D1. Bringing people into the workforce ★

Raise the overall workforce participation rate to 70 per cent by 2010

★

Raise the participation rate for women to 60 per cent by 2010

★

Raise the participation rate of older workers to 50 per cent by 2010

The most important proof of success of the EU’s economic reform efforts would be for member-states to meet the employment targets. Unfortunately, as the Commission admits, the overall goal – to increase the employment rate to 70 per cent of the population by 2010 – is unattainable. The EU economy would need to create another 22 millions jobs in the next ﬁve years, 67 European Commission, which implies doubling the average employment ‘Draft joint employment report 2004-2005’, growth rate to 1.5 per cent a year.67 January 2005.

State aid and competition policy

C+

Heroes

Estonia, Latvia

Villains

Germany, Poland

Employment growth has nearly ground to a halt in the last couple of years. The EU-25 employment rate stood at 63 per cent in 2003, up only modestly from 61.9 per cent in 1999. The EU has fared better than Japan and the United States during this period – both countries suffered a net loss of jobs between 1999 and 2003. However, the US and Japan still have far higher overall employment rates than the EU, at 71.2 per cent and 68.4 per cent respectively. There are a few signs that the member-states’ labour market reforms are beginning to have a positive effect on the EU’s employment rate. The Commission notes in its most recent employment report that the EU-15 suffered no net loss of jobs during the downturn of 20022003, compared with a decline of 3 million during the recession a decade earlier. Similarly, the OECD has detected a decline in ‘structural unemployment’ – that is the level to which unemployment

The Lisbon Scorecard V

could fall without sparking higher inﬂation. This measure provides a rough and ready estimate of an economy’s capacity to generate high levels of employment. The OECD ﬁnds that between 1996 and 2003, most EU countries recorded a healthy fall in the structural level of unemployment. In Ireland the structural rate declined by 5.4 percentage points. The Netherlands and Finland also recorded falls of more than 2 percentage points, although Germany and Greece both recorded a small increase. The four best performing member-states, Denmark, the Netherlands, Sweden and the UK, have not only already met the 70 per cent target but have also achieved higher employment rates than the US. A further four countries, Cyprus, Austria, Portugal, and Finland, have met the EU’s interim (2005) target of 67 per cent. At 75.1 per cent, Denmark has the highest employment rate in the EU. Cyprus is the only new member-state in touching distance of the 70 per cent target, having increased its employment rate from 65.7 per cent in 1999 to 69.2 per cent in 2003, the second fastest growth rate in the EU. Spain has recorded the fastest pace of job creation, increasing employment from 53.7 per cent in 1999 to 59.7 in 2003. Many of the new member-states in Eastern Europe are struggling to create new jobs. Poland has the lowest employment rate in the EU, at 51.2 per cent, and has also suffered the highest job losses since 1999. Italy has the lowest rate among the old member-states at 56.1 per cent, although it has at least recorded a 3.4 percentage point increase in employment in this period. An increase in the number of older workers accounts for around half of all employment growth in the EU since 1999. Many EU memberstates introduced policies in the 1970s and 1980s which encouraged older workers to retire early, in a misguided attempt to cut unemployment. Most governments are now removing the incentives to early retirement. As a result, the employment rate among 55 to 64 year-olds has risen in the EU-25 from 36.2 per cent in 1999 to 40.2 per cent now. However, the pace is too slow to ensure the EU will

Employment and social inclusion

meet its supplementary target of boosting the number of older workers to 50 per cent by 2010. The new member-states have particularly low numbers of older people in work, a legacy of the industrial restructuring of the 1990s. In Slovenia and Slovakia less than a quarter of older workers are in employment. Poland and Romania are the only two countries to have recorded a decline in the number of older people in employment since 1999. Belgium is the worst performer among the old member-states, with just 28.1 per cent of 55-64 year-olds in work. Austria, Italy and Luxembourg also have less than a third of older workers in employment. Finland, Hungary and Bulgaria have been most successful in getting older people back into the workforce, each increasing the participation rate by around 10 percentage points. Overall, Sweden and Denmark have the highest employment rates among older workers, at 68.6 per cent and 60.2 per cent respectively. The UK, Estonia, Portugal and Cyprus also meet the 50 per cent target, while Finland and Ireland are within striking distance of this ﬁgure. At least, the EU is on track to meet its other employment target, that of boosting the female employment rate to 60 per cent. The Commission calculates that average female employment growth between 2000 and 2003 has comfortably exceeded that required to meet the 2010 target. Sweden and Denmark again lead the way, with more than 70 per cent of women in work. Six other countries – the Netherlands, Finland, the UK, Austria and Portugal – already meet the 2010 target, while Estonia, Germany, Lithuania, Latvia, Slovenia and France have reached the interim target of 57 per cent. Overall, female employment in the EU stood at 55.1 per cent in 2003, compared with 52.9 per cent in 1999. Spain and Cyprus have recorded the fastest growth in female employment, while Poland and Romania have seen the sharpest declines. Malta, at just 33.6 per cent, and Italy at 42.7 per cent have the lowest female employment rates in the EU.

The Lisbon Scorecard V

As part of their efforts to raise female employment levels, memberstates are also committed to increasing the provision of childcare. The EU is seeking to provide childcare places for 90 per cent of children between three and ﬁve and for a third of children under three. The issue of childcare is moving rapidly up the political agenda in many countries and is likely to be a major election issue in the UK, for example. Recent research has emphasised the positive affect that pre-school education can have on 68 David Willetts, ‘Old reducing educational inequalities. Some policyEurope? Demographic change and pension reform’, makers have also made the link between good CER, September 2003. childcare provision and a rising birth rate.68 69

It is difficult to assess progress as the EU does not yet publish harmonised data on childcare provision (although figures are expected by 2006). But the Commission concludes in its latest Lisbon review that, based on the responses of the member-states, childcare provision for the under-threes is “deficient”.69 Only Sweden and Denmark claim to have met the target while eight countries, including Germany, Italy and the UK, provide places for less than 15 per cent of under-threes. EU governments fare better in terms of providing childcare for three to five year-olds. Eight countries, including again Sweden and Denmark, say that they already meet the 90 per cent target for three to five year-olds. However, the Commission reports that Finland, Lithuania, Slovenia and the UK are making only slow progress.

European Commission, ‘Staff working document in support of report from the Commission to the spring European Council’, January 28th 2005.

Member-states have several times pledged to step up their efforts to raise employment levels in the last few years. Most notably the EU set up a special employment taskforce, chaired by the former Dutch prime minister Wim Kok in 2003, which made a series of practical and country speciﬁc solutions. This expert group called on EU governments to make labour market regulations simpler and more ﬂexible; to redesign social security systems to make working worthwhile; and to reduce payroll taxes, especially for low wage earners.

Employment and social inclusion

EU governments are beginning to make progress in many of these areas, although arguably still at too slow a pace. For example, the French government introduced greater flexibility into the country’s infamous 35-hour working week in early 2005. The new rules allow private sector employees to work longer hours if they wish. However, businesses have criticised the reforms for creating a very complex and bureaucratic system of opt-outs. Many member-states have reformed their tax and benefit systems to encourage people back into work. But with public finances stretched, governments are finding it harder to cut taxes. According to the European Commission, the tax burden on low wage earners in the EU-15 fell from 38.6 per cent in 1999 to 37.1 per cent in 2003. Hungary, Romania and Ireland have made the greatest reductions in taxes. However, in the same period taxes on low earners have risen in Cyprus, the Czech Republic, the UK and Spain. Overall Malta has the lowest tax burden for low wage earners, at 15.8 per cent, followed by Ireland, Cyprus and the UK. Belgium and Germany have the highest rates, at 46.7 per cent and 47.5 per cent respectively.

Bringing people into the workforce

Heroes

Cyprus, Denmark, Sweden

Villains

Belgium, Poland

Employment and social inclusion

D2. Upgrading skills

★

Halve the number of 18 to 24 year-olds with only a basic secondary education by 2010

★

Foster a culture of lifelong learning, with support from social partners

Better education can help raise the EU’s employment and productivity levels. For example, the Commission argues in a recent paper that productivity levels are boosted by at least 6 per cent in the long term for every additional year of education attained by the adult population.70

Andrea Montanino et al, ‘Investment in Education: The implications for economic growth and public ﬁnances’, European Commission Occasional Papers no 217, November 2004.

As Europe ages, and the size of the working population declines, it will become even more essential to ensure that everyone has the skills necessary to participate fully in the workforce. The memberstates have established common targets for raising the share of young people who have fully completed secondary education, improving the literacy rates of 15 year-olds, and increasing the amount of training among the adult working population. The EU has made some modest progress towards meeting its goal of ensuring that at least 85 per cent of 18 to 24 year-olds have completed secondary education. The percentage of 20 to 24 years-olds who have secondary qualiﬁcations rose from 74.8 per cent in 1999 to 76.4 per cent in 2004. The new member-states perform especially strongly on this measure of educational attainment. Slovakia, the Czech Republic, Slovenia and Poland are the four best performers in the EU, with 90 per cent or more of young people completing secondary education. Four other member-states – Sweden, Lithuania, Ireland and Austria – also meet the EU’s 85 per cent target. Portugal and Poland have made the most progress since 1999. Poland’s performance is especially impressive: a comprehensive

reform of the country’s education system in 1999 has led to an increase in the percentage of 20 to 24 years-olds with full secondary education from (an already above average) 81.6 per cent in 1999 to 89.5 per cent in 2004. In Portugal the share has risen from 40.2 to 49 per cent in 2004. Despite this improvement, only in Malta, at 47.9 per cent, do fewer students reach this level. Member-states have also reduced the number of early school leavers, deﬁned as those who only complete lower secondary education or less. The percentage of 18 to 24 years-olds without a full secondary education fell from 17.2 per cent in 2000 to 15.9 per cent in 2004, although it remains well above the target of 10 per cent or less. Seven EU countries already meet this target, including Poland which has the fewest early leavers in the EU, at 5.7 per cent. Malta and Portugal have the highest numbers without a full education, at around 40 per cent. Poland’s educational reforms have also led to an improvement in the country’s educational standards. The OECD’s regular educational survey (known as PISA), provides a snapshot of performance in key areas such as maths, science and literacy. The latest survey, published in December 2004, found that the Polish reforms had led to a big improvement among lower-performing students. Belgium, the Czech Republic and Germany – which had scored surprisingly poorly in the last survey in 2001 – also showed improvement. Finland was ranked top of all the countries surveyed, its students performing especially strongly in maths and science. The EU is also seeking to increase the proportion of people completing higher education. A degree is the best safeguard against unemployment – more than 80 per cent of people who have completed tertiary education are in employment, compared with 50 per cent of those who have only reached basic secondary level. The OECD education ﬁgures show that in eight EU member-states, including Austria, Italy and the Czech Republic, less than 20 per cent of the 25 to 34 year-olds have studied to degree level, compared

The Lisbon Scorecard V

with 33 per cent in the US. However, the proportion of the population with a tertiary education has risen by more than 50 per cent in the Czech Republic, as well as Greece, Hungary and Poland between 1995 and 2002. In some member-states, the problem is not the numbers entering higher education, but the high drop-out rate. More than 40 per cent of students fail to complete their degree in Austria, France, Italy and Sweden, compared with just 17 per cent in the UK and 15 per cent in Ireland. Thus many member-states would do better to focus on reducing the drop-out rate, and cutting the average length of study, rather than trying to increase student numbers. EU governments already spend a signiﬁcant amount on education. So, the EU is committed to encouraging more private sector spending on education, rather than raising overall expenditure levels. In the US, private sector spending helps fund high-quality adult training and research, especially in science and technology. OECD figures show that private sector education spending in the US amounts to 2.3 per cent of GDP – more than twice the share in Germany, the EU country with the largest private sector share. The US spends twice as much as the EU on private tertiary education, because of private sector ﬁnancing. In a fast-changing economy, education needs to continue beyond the school and university campus. The EU is seeking to raise the numbers of people undergoing some skills training – or ‘lifelong learning’. It has set a ‘benchmark’ that 12.5 per cent of the working population should be participating in some form of training at any one time. According to Commission data, the EU falls short of this target at present: 9.4 per cent of workers in the EU-25 were undergoing training in 2004, compared to 7.9 per cent in 2000. Six member-states – the Nordic three plus the Netherlands, Slovenia and the UK – have already exceeded the benchmark. Greece, Romania and Bulgaria have the lowest rates, at less than 4 per cent.

Upgrading skills

C+

Heroes

Finland, Poland

Villains

Italy, Malta

Employment and social inclusion

D3. Modernising social protection ★

Overhaul pensions systems to ensure the long-term sustainability of public ﬁnances

★

Increase the effective retirement age by ﬁve years (to 65) by 2010

★

Signiﬁcantly reduce the number of people at risk from poverty and social exclusion

The EU’s occasional legislative forays into social policy, such as the working time directive, continue to provoke widespread political controversy. Many businesses argue that such measures are contrary to the goals of the Lisbon agenda and undermine the EU’s competitiveness. Those social goals which are formally part of the Lisbon agenda have in general proven less contentious. The EU has two very broad ambitions: overhauling social protection systems – such as pensions and healthcare – to ensure their long-term sustainability and tackling social exclusion. The Lisbon agenda spells out that the best weapon against social exclusion is a high level of employment. Moreover, the EU is seeking to realise these goals using ‘soft’ measures, such as its the ‘open method of co-ordination’ – the EU’s system of benchmarking and peer pressure – rather than legislation. EU governments are steadily overhauling their pensions systems. Europe will experience a major demographic shift over the next few decades as the ‘baby boomer’ generation reaches retirement age. The proportion of the retired to working age population will increase substantially in all European countries. For example, by 2020 one in three of the UK population will be over 60 compared to around one in four now. Other European countries will experience an even more dramatic shift over the next few decades, due to declining birth rates and rapidly rising life expectancy. On current trends, there will be two pensioners for every three workers in Italy

by 2050. Many East European countries could suffer a large loss in population. For example, in the first half of this century, the population of Estonia is predicted to halve to just 660,000. Such a demographic shift has profound structural implications for Europe’s pension systems. The decline in the size of the working population will result in falling taxation at the very same time that the number of pensioners receiving state benefits increases. EU governments already spend up to 29 per cent of their budgets on pensions and other age-related services. The EU estimates that unless the member-states reform their pension 71 Economic Policy systems, they will face additional age-related Committee, ‘The impact of spending amounting to between 3 and 7 per ageing on public finances’, European Commission, cent of GDP over the next five decades.71 October 2003.

The EU has made a number of recommendations to member-states for pension reform. Governments need to reduce the incentives for early retirement, increase private pension provision and adapt pension systems to support more ﬂexible employment patterns. The EU has placed particular emphasis on increasing the effective retirement age. The Commission estimates that if the EU succeeded in raising the retirement age by five years (without increasing pensions or other beneﬁts), spending would remain stable despite the rise in the retired population. The EU has succeeded in raising the effective retirement age from 59.9 in 2001 to 61 in 2003. Lithuania and Greece have made the most progress in reducing early retirement: the retirement age in those countries has risen from 58.9 to 63.4 and from 59.4 to 63.2, respectively. These two now have the second and third highest average retirement ages in the EU, behind Ireland at 64.4. But in five member-states, including Latvia and Finland, workers are retiring earlier than before. Slovenia has the lowest retirement age in the EU, at 56.2, followed by Slovakia with 57.8 and Poland with 58. Among the old member-states, Belgians retire earliest, at 58.7 on average.

The Lisbon Scorecard V

Many EU countries have made substantial reforms to their pensions systems in the first half of this decade. For example, Germany in 2001 capped future pension contribution rates and increased incentives to make private provision, although the take-up of new private pensions has so far been disappointing at around 10 per cent. In 2004 Germany undertook further reforms, including linking pension benefits to the ratio of employees to pensioners, and raising the early retirement age from 60 to 63 by 2008. Meanwhile, France has increased the number of years people must remain in employment to qualify for a full state pension and it has also capped future pension payments by linking them to prices not wages. In 2004 the French government also took an important step towards curbing generous public sector pensions by harmonising rules with the private sector. Similarly, in the same year Italy undertook a series of important reforms including new tax incentives for people to remain in work longer, and a rise in the statutory age of retirement to 65 for men and 60 for women. However, analysts are sceptical that these reforms will ensure the long-term sustainability of pensions systems. The OECD estimates that France and Germany 72 OECD, ‘Economic would still need to raise taxes by 4 percentage points and Italy by 2 percentage points to keep government surveys: Euro area’ September 2004. debt levels stable.72 Many of the new member-states have gone further towards introducing private pensions. Bulgaria, Estonia, Hungary, Latvia and Poland have all added compulsory, privately financed ‘second pillars’ to their pay-as-you-go (PAYG) systems. Slovakia and Lithuania are planning to follow suit. Poland and Latvia have followed Sweden in linking pension payouts from the PAYG systems more closely to lifetime contributions. In the Czech Republic, more than half of the workforce had opened private pension accounts by late 2003. The EU has not turned its fine words on tackling social exclusion into effective action – although the time lag in much of the available

Employment and social inclusion

data makes it difficult to provide a definitive assessment. The Commission estimates that around 68 million people, or 15 per cent of the EU population, are still at risk of poverty.73 Within member-states the numbers at risk range from 73 European Commission, less than 10 per cent in the Nordic three, ‘Joint report on social Hungary, Czech Republic and Slovenia to more protection and social than double that ﬁgure in Ireland, Slovakia, inclusion’, January 2005. Greece and Portugal. The member-states have had little success in reducing the numbers of long-term unemployed, who are particularly at risk of poverty. The number of people out of work for a year or more in the EU-25 stood at 4 per cent in 2003, only slightly below the level of 4.1 per cent recorded in 1999. Latvia, Spain and Italy have recorded the largest falls in the number of long-term unemployed. However, Slovakia and Poland both recorded large increases in the same period. Long-term unemployment stands at more than 10 per cent in both these countries, the highest in the EU. On the other hand, in seven member-states – Luxembourg, Netherlands, Sweden, Austria, Cyprus, Denmark and the UK – long-term unemployment is at 1.1 per cent or below. However, there is no perfect correlation between high levels of employment and low poverty rates. The UK has one of the highest employment rates in the EU. Yet some 16.8 per cent of children in the UK live in households where no parent holds a job, the highest rate among the EU countries which currently supply data for this ﬁgure. Belgium and Hungary also face disproportionately high levels of child poverty: 13.2 per cent of children in both countries live in jobless households. Meanwhile Ireland – somewhat surprisingly – has the highest proportion of the population at risk of poverty (after social transfers). This suggests that the economic gains of recent years have not spread throughout the population. Some 21 per cent of the Irish population are at risk of poverty, higher than in Greece or Portugal. The Czech Republic and Sweden perform best on this measure, with less than one in ten of their citizens at risk of poverty.

Modernising social protection Heroes Villains

BCzech Republic, Sweden Belgium, Ireland and the UK (for social exclusion)

E. Sustainable development E1. Climate change ★

Reduce greenhouse gas emissions by 8 per cent from 1990 levels by 2010 in line with the Kyoto protocol

★

Increase to 22 per cent the amount of electricity derived from renewable sources by 2010

★

Break the link between economic growth and transport volumes by prioritising public and environmentally friendly forms of transport

The EU belatedly added a series of environmental goals to its other Lisbon targets at the Gothenburg summit in June 2001. These either reflect long-standing commitments, such as a reduction in greenhouse gas emissions in line with the Kyoto protocol, or consist of some very vague aspirations, such as breaking the link between economic growth and transport volumes. As a result, environmental groups continue to protest that the EU is placing insufﬁcient emphasis on the environmental ‘pillar’ of the Lisbon strategy. The Commission’s mid-term review of the economic reform agenda has done little to reassure such critics. The document makes little mention of the environmental goals, although it leaves the existing targets in place. The EU aspires to global leadership on the issue of climate change and remains strongly committed to meeting its Kyoto commitments. The protocol finally came into legal effect in February 2005, following Russia’s decision to ratify. However, the refusal of the US to sign up, and the fact that the agreement does not apply to major developing countries, such as China and India, means that its longterm signiﬁcance remains in doubt. Furthermore, the protocol only

The Lisbon Scorecard V

applies to the period ending in 2012 and excludes some major sources of greenhouse gas emissions, such as aviation fuel. As a result of these shortcomings, some European businesses are questioning whether the EU should assiduously pursue the Kyoto targets. For example, in 2004, UNICE, the European employers’ federation, called for a rethink of the EU’s implementation of the Kyoto protocol. UNICE argued that the EU’s 74 UNICE, ‘UNICE urges adoption of Kyoto measures was contrary to competitiveness impact assessment of unilateral other Lisbon goals and would “widen the gap climate change policies’, between American and European economic July 2004. growth and undermine competitiveness”.74 Businesses are particularly concerned about the impact of the EU’s innovative emissions trading scheme, which came into operation in January 2005. Some 12,000 companies, operating in the most energy intensive sectors, are able to buy and sell permits to emit greenhouse gases. Business organisations argue that the costs of the scheme are likely to lead to a rise of as much as 5 per cent in electricity prices, undermining the competitiveness of EU industries. On the other hand, environmental groups have criticised EU governments for issuing too many permits, which has resulted in companies having little incentive to cut back on their consumption of energy. Even the European Environment Agency (EEA) has admitted that emissions trading will make only a “limited contribution” to meeting the EU’s Kyoto target.75 However, the 75 successful implementation of the emissions European Environment Agency, ‘Greenhouse gas trading scheme could prove a long-term model emission trends and for curbing emissions, despite its limited impact projections in Europe 2004’, in the near future. December 2004.

The EU-15 has had some success in meeting its Kyoto target of an 8 per cent reduction in greenhouse gas emissions, compared to 1990 levels by 2010 (different targets apply for the new member-states, see below). Emissions in the EU-15 were 2.9 per cent below their 1990

Sustainable development

levels in 2002, according to the EEA. However, progress has slowed in the last couple of years, and the EEA warns that just six old member-states are on course to meet their national targets: France, Germany, Luxembourg, Netherlands, Sweden and the UK. In contrast, Denmark, Italy, Portugal and Spain do not currently have action plans in place which would ensure that they meet their targets. The EEA warns that the EU will only meet its overall target if certain member-states, most notably Sweden and the UK, continue to pursue separate national targets which are more demanding than their Kyoto requirements. All the new member-states, with the exception of Slovenia, are on course to meet their Kyoto targets. Central and East European countries have recorded a steep fall in emissions – averaging around one-third since 1990 – due to the restructuring of heavy polluting and energy intensive industries. In particular, the new memberstates have made good progress in overhauling outdated industrial and power station technology. Emissions in Latvia and Lithuania, for example, have declined to less than 40 per cent of their 1990 levels. In contrast, emissions in Slovenia stand at 98.7 per cent, compared with that country’s Kyoto target of 92 per cent. However, Slovenia has promised to introduce new measures to ensure it meets its Kyoto commitments. The EU is also in danger of missing its supplementary target that of producing 22 per cent of electricity from renewable sources by 2010. In the EU-15, the amount of electricity generated from renewable sources fell slightly between 1999 and 2002, to 76 European Commission, 13.6 per cent. The Commission forecasts that ‘Renewable energy: existing policies will result in the EU Commission calls for a producing some 18 to 19 per cent of electricity stronger commitment of member-states to achieve from renewables by 2010.76 2010 targets’, May 26th 2004. Only four member-states, Germany, Denmark, Spain and Finland, are currently on course to meet their individual targets. Denmark, which has invested heavily in wind power, has recorded the largest

The Lisbon Scorecard V

increase, from 13.3 per cent to 19.8 per cent. Wind power provides some 16 per cent of the country’s electricity needs, compared with the EU average of just 2.4 per cent. On the other hand, Cyprus and Malta currently generate none of their electricity from renewable sources, although they are committed to meeting respectively 6 per cent and 5 per cent of their needs this way by 2010. Most of the new member-states have made good progress in improving the energy efficiency of their economies. They now use around twice as much energy to produce the same economic output as the EU-15, compared with four times as much in 1990. One recent report estimates that the new 77 World Wildlife Fund, could reduce energy ‘Ending wasteful energy use member-states consumption by 30 per cent, without incurring in Central and Eastern Europe,’ September 2004. any net cost, simply by fully exploiting existing technologies.77 Estonia and Bulgaria most improved the energy efficiency of their economies between 1999 and 2002, according to Commission data. However, Luxembourg, Portugal and Slovakia employed more energy per unit of output in 2002 than in 1999. Overall, Denmark has the most energy efficient economy in the EU, followed by Austria and Ireland. Romania, Lithuania and Bulgaria are the least efficient users of energy. Rapid road and air transport growth poses the biggest threat to the EU’s emissions targets. The EU is committed to breaking the link between economic growth and transport volumes (‘decoupling’). However, the EU has had limited success so far in designing policies to shift goods traffic off the road and onto rail or boat. The proportion of goods carried by road in the EU-25 rose from 74.8 per cent to 76.3 per cent between 1999 and 2002. In the EU-15 greenhouse gas emissions from transport rose by 22 per cent between 1990 and 2002. The EEA predicts that transport volumes will be some 34 per cent higher in 2010 than in 1990.

Sustainable development

The volume of road freight transport has grown especially strongly in the new member-states, reflecting steadily improving infrastructure and the fast pace of economic growth. For example, the percentage of freight carried by road has risen by more than 5 percentage points in the Czech Republic and in Poland, to 73.3 per cent and 61.3 per cent respectively. Among the old member-states, the Netherlands has moved the largest amount of freight off the roads, recording a decline from 64.8 per cent to 61.9 per cent between 1999 and 2002. Greece and Ireland are the member-states most reliant on the road network: 97.1 per cent of freight in Ireland and 98.2 per cent in Greece goes by road. In contrast, less than a third of freight goes by road in Latvia and Estonia. Air transport is also growing rapidly, in part due to the popularity of low-cost carriers. The EEA estimates that greenhouse gas emissions from air transport are 44 per cent higher than in 1990, making up around 6 per cent of all emissions. This figure is set to increase rapidly with air traffic volumes growing at 6 to 9 per cent a year. The British prime minister, Tony Blair, has stated his aim of reaching a global agreement on curbing air transport emissions during 2005. In February 2005, France and Germany specifically suggested the introduction of a tax on aviation fuel, with the revenues going to provide debt relief for the least developed nations. Although member-states have begun discussions on the proposed tax, it looks unlikely to win the unanimous support required to become EU law. 78

Netherlands The EU has traditionally relied on regulatory measures, such as rules limiting car exhaust environmental assessment agency (RIVM), ‘Towards a emissions, to meet its environmental goals. A more sustainable EU: The recent report by the Dutch environmental need for investments that agency concluded that such measures have beneﬁt economy and helped to curb greenhouse gas emissions by 5 environment alike’, per cent.78 However, EU environmental policies September 2004. are moving away from a regulatory approach towards a greater focus on target-setting and market-based instruments. This shift

The Lisbon Scorecard V

should make it easier for the EU to adapt its environmental policies to the Lisbon agenda during the second half of the decade. For example, in 2004 the EU launched an environmental technologies action plan. The action plan is designed to provide support for ‘clean’ technologies, such as hydrogen and solar power, which are part of a global market estimated to be worth as much as S500 billion and growing by 5 per cent a year.79 The EU can claim some success in harnessing such new technologies – member-states have secured a 90 per cent share of the world market in wind technology. However, as the Commission notes in its latest progress review, the EU is facing intense competition in eco79 European Commission, ‘Report on the implementation technologies from Japan and Canada. The of the environmental Commission has responded by making the technologies action plan in promotion of ‘eco-innovation’ a priority in 2004’, January 27th 2005. its mid-term review.

Climate change

C-

Heroes

Germany, Netherlands

Villains

Portugal, Slovenia

E2. Natural environment ★

Reduce exposure to particulates and ozone emissions

★

Improve management of natural resources and stop the depletion of biological diversity

As well as tackling climate change, the EU is committed to improving the quality of Europe’s natural environment as part of the Lisbon agenda. In particular, the EU is aiming to reduce harmful levels of pollution and to preserve bio-diversity. The Yale University Environmental Sustainability 80 Yale Centre for Index provides a useful guide to the overall health Environmental Law et al, of a country’s environment and its future ‘2005 Environmental prospects.80 The index ranks countries on factors Sustainability Index’, such as air quality, bio-diversity, water quality, January 2005. population pressure and environmental governance. The Nordic countries, which possess ample natural resources, strong economies and low population densities score particularly highly: Finland is ranked ﬁrst and Sweden fourth. Of the new member-states Latvia is the highest ranked, at 15th. In contrast Poland is ranked a lowly 102nd. Among the old member-states, the more densely populated countries fare less well: Belgium is placed 112th, while the UK also scores relatively poorly at 66th, behind developing countries such as Tanzania, Georgia and Uganda. The EU has taken a number of important steps in recent years to try and stem the decline in bio-diversity. In particular, the EU has designated a series of protected habitats (‘the Natura 2000 network’). The sites chosen within the EU-15 cover around 17 per cent of all land. The scheme is now being extended to the new member-states. However, the Dutch environment agency concludes in its recent report that the EU will miss its target of halting biodiversity depletion by 2010.

The Lisbon Scorecard V

EU policies, most notably the Common Agricultural Policy (CAP), must take some of the blame for the continuing decline in biodiversity. Birds are particularly vulnerable to the modern intensive farming methods which the CAP has encouraged. Recent research has revealed that Europe’s population of farmland birds has declined by nearly a third since 1980 due to the intensive farming techniques.81 Some 43 per cent of Europe’s bird species are now regarded as at risk. The European Environment Agency estimates that the farmland bird population in the EU-15 fell by as much as 12 percentage points between 2000 and 2002. The decline of birdlife has 81 Paul Donald, Rhys Green, been less severe in the new member-states. However, environmental groups are Melanie Heath, ‘Agricultural intensiﬁcation and the collapse concerned that more birds will become at risk of Europe’s farmland birds’, as the new member-states adopt the same Proceedings of Royal Society, intensive methods as farmers in the west of London, 2001. the continent. The EU has made a number of important reforms to the Common Agricultural Policy in the last five years. In particular, it is committed to phasing out farm production subsidies that encourage intensive farming and over-production. Instead, the EU will increase the amount of income support that is paid directly to the farmers. Moreover, farmers will have to meet more exacting environmental and animal welfare standards in order to claim aid. However, strong opposition from a number of member-states, most notably France and Spain, means that certain sectors, such as cereals, continue to receive subsidies that are tied to production. Moreover, CAP payments look likely to continue making up nearly half of the EU’s total budget for the period 2006-2013. The EU hopes that its CAP reforms will further encourage the development of the organic farming sector. Organic farming has increased steadily in popularity over the last decade, although growth has slowed in the last few years. In 2003, there were

Sustainable development

150,000 organic farms covering 5.4 million hectares, according to data compiled by the Research Institute of Organic Agriculture. France and Spain have recorded the fastest growth in organic farming in recent years. Italy has the greatest area of organically farmed land – some 9 per cent of total farmland. In contrast, just 0.29 per cent of land in Poland is organic, reflecting the lack of government support for organic certification schemes, and low consumer demand for organic products in many of the new member-states. In 2002 the EU made some modest reforms 82 Aurore Wanlin, ‘The EU’s to its fisheries policy, which should diminish Common Fisheries Policy: The its environmental impact. 82 However, case for reform, not abolition’, environmental groups continue to complain CER, December 2004. that fishing quotas owe less to the guidance of scientists than to the need for maritime nations to satisfy their vocal fishing industries. According to a report by the UN’s Food and Agriculture Organisation (FAO), nearly half of Europe’s stocks are fully exploited, and there is no room for any increase in fishing activity. The EU is struggling to meet its other environmental goals, such as a cut in harmful pollution and waste. The EU is committed to reducing non-recyclable waste by 20 per cent by 2010. The disposal of waste is a major contributor to 83 Netherlands environmental global warming – although few member- assessment agency (RIVM), states have made this link explicit. The ‘Towards a more sustainable Dutch environment agency calculates that EU: The need for investments waste is a direct cause of around a quarter that benefit economy and environment alike’, of greenhouse gas emissions.83 September 2004. In the last few years, the member-states have begun implementing a series of recycling directives, aimed at cutting waste from common consumer items such as fridges and cars. However, a number of member-states, such as the UK, failed to provide adequate recycling facilities alongside the introduction of the new rules, resulting in an increase in illegal dumping.

The Lisbon Scorecard V

The new member-states have made the greatest strides in cutting the total amount of waste. Slovenia, Lithuania and Poland all substantially reduced the amount of municipal waste collected between 1999 and 2003. Ireland, which is Europe’s most wasteful country, produces 732 kilos of waste per person each year. In contrast, Poland, Lithuania and the Czech Republic throw away less than 300 kilos per person each year. The new member-states also lead the way in reducing the amount of waste dumped into landfill sites. Estonia and Slovenia have both cut the amount in landfills by more than 100 kilos per person between 1999 and 2003. But Malta is now dumping into landfill sites 187 kilos more per person than in 1999. Overall, the Netherlands and Denmark make least use of landfill sites. Cyprus and Malta are most reliant on this form of waste disposal, closely followed by Ireland and the UK. Air pollution remains a major problem across the EU. The Commission estimates that one child in seven suffers from asthma, and around 60,000 deaths a year can be linked to dirty air. The EU is committed to reducing exposure to particulate and ozone pollution in major cities. However, Eurostat has withdrawn the detailed data relating to air pollution due to concerns over its quality. In general, the EEA estimates that 45 per cent of the EU’s urban population is exposed to particulate concentrations above safe limits and around 30 per cent to dangerous ozone levels. The Commission has proposed a new action plan focusing on such 84 environmental health issues, and will develop a European Commission, ‘The European environment range of new indicators to monitor and help and health action plan member-states improve air quality.84 2004-2010’, June 2004.

Natural environment

Heroes

Finland, Sweden

Villains

France (for CAP), Ireland

4 Conclusion and summary of results

★

Develop the world’s most competitive and dynamic knowledgebased economy by 2010

★

Ensure average annual economic growth of 3 per cent, leading to the creation of 20 million jobs by 2010

As the EU reaches the half-way point of its Lisbon economic reform agenda, the headline goals are clearly out of reach. Rather than accelerating towards the target rate of 3 per cent, EU growth averaged just 2 per cent between 1999 and 2004 – clearly lagging behind the US, which enjoyed average growth of 3 per cent over the same period. The US also continues to outstrip the EU in terms of labour productivity. In 1995 EU workers were 85 European Commission, producing on average 3 per cent less per hour ‘Staff working document in than their US colleagues. In 2005, the gap had support of the report to the Council’, grown fourfold, to an estimated 12 per cent.85 Spring European th January 28 2005

The EU has fared marginally better in terms of its employment record. The EU-15 created a net 6.5 million jobs between 1999 and 2003, pushing up the employment rate from 62.5 per cent to 64.4 per cent. Since the new EU members have fewer people in work, the average employment rate for the enlarged EU was lower, at 63 per cent in 2003. In order to reach its 70 per cent target, the EU-25 would have to generate jobs growth of 1.5 per cent each year until 2010 – clearly an unrealistic prospect. The EU has not achieved the hoped-for sea change in its economic performance during the ﬁrst ﬁve years of the Lisbon programme. But

The Lisbon Scorecard V

there are at least three good reasons for cautious optimism about economic reform in the second half of the decade. First, this scorecard illustrates just how much has been achieved since 2000. The EU has liberalised energy, telecoms and ﬁnancial services markets. Member-states have passed a raft of labour market and pension reforms. The Commission, and many EU governments, are credibly committed to curbing red tape. Competition from the EU’s newcomers in Central and Eastern Europe has turned up the heat on the slow-growing ‘core’ economies, Germany, Italy and France. Slowly but steadily, the EU is moving forward in virtually all the areas covered by the Lisbon agenda. The expected beneﬁts from the most recent reforms have not yet worked through into the EU’s economic performance, so future data should paint a rosier picture. Second, the political background for economic reform has changed radically since the Lisbon summit in March 2000. Then many EU countries were ambivalent or even hostile to the core of the Lisbon programme. Lisbon proponents tended to present a one-dimensional case in favour of reform, namely the need to catch up with, or even overtake, the United States. Today, governments may object to certain parts of the Lisbon agenda, such as the services directive, but they hardly question the broader thrust of the programme. The EU still seeks to close – or at least narrow – the economic gap with the US, but it also knows that it needs to prepare for the rapid ageing of its populations and growing competition from low-cost Asia. Although many European voters have yet to be fully convinced, the need for reform is now very much accepted wisdom in countries such as Germany and France. Third, José Manuel Barroso and his new European Commission have made Lisbon their chief political priority. They are seeking to focus the agenda on the key objectives of growth and employment and thus to rekindle political momentum among the member-states. The very breadth of the Lisbon reform programme has proven both a strength and a weakness. Since it contains ‘something for

Conclusion and summary of results

everyone’, the Lisbon agenda has at least some support in almost every constituency, be it business lobbies, trade unions or environmentalists. But the lack of focus also means that no constituency feels enough ‘ownership’ to really push for progress. The most successful EU projects have been those, such as the euro and the single market, that had a clearly deﬁned objective and single legislative method to achieve it. In contrast, the Lisbon strategy contains a raft of different goals and makes use of a wide range of instruments, including the ‘open method of co-ordination’ – the EU’s system of benchmarking and peer pressure. There is no easy solution to this problem. Integrationist critics of the Lisbon agenda suggest that if the EU wants to make faster progress on economic reform, it should make greater use of the ‘Community method’ – whereby the Commission proposes EU laws and the Council and the Parliament adopt them. However, it is not clear in what new areas the EU should employ the Community method. The Community method may be the best way of prising open energy and telecoms markets. But it would be problematic for deregulating national labour markets or modernising education systems. The Commission not only lacks the expertise and resources to plan such wide-ranging reforms for the member-states, but also the legitimacy. In its mid-term review of the Lisbon process, 86 European Commission, the Commission has come up with a number ‘Working together for of ideas on how to accelerate the pace of growth and jobs: A new start for the Lisbon strategy’, reform. The Commission acknowledges that February 2nd 2005. “member-state delivery is the Achilles’ heel of the Lisbon strategy”.86 So it has picked up on one of the proposals of the Kok committee: each member-state should produce an annual Lisbon ‘action plan’ detailing the measures they plan to take to meet their Lisbon targets. This action plan would replace the plethora of existing EU and national progress reports and thus add clarity and focus. According to some estimates, the EU produces up to 350 different reports a year that are connected to

The Lisbon Scorecard V

the Lisbon programme. The Commission also wants each EU country to appoint a ‘Mr or Ms Lisbon’ at government level to oversee national reform efforts. However, the Commission has rejected another key proposal made by the Lisbon review panel headed by Wim Kok. Rather than becoming tougher in ‘naming and shaming’ slow-reforming EU members, the Commission wants to offer more support to those who struggle to fulﬁl their reform commitments. Governments in Germany and elsewhere in the EU had argued that public criticism only played into the hands of their political opponents, making reform even more difﬁcult. Barroso, himself a former prime minister, sided with EU leaders on this matter. 87

The CER has long advocated national Lisbon action plans as a way of generating a greater sense of ownership among governments and parliaments.87 EU leaders should adopt this proposal at their next summit on March 21st 2005. It is unfortunate, however, that Barroso has promised to back away from ‘naming and shaming’ individual EU members. A clear, non-politicised assessment of progress towards the economic reform goals should be an integral part of the Lisbon strategy. Already, the Commission’s latest progress review is mild in its criticism, compared with the previous year’s report.87 Independent scorecards, like this one, can help to shine the spotlight on slowreforming EU countries.

Alasdair Murray, ‘The Lisbon scorecard IV: The status of economic reform in an enlarging EU’, CER, March 2004.

Of course, the Commission will never be able to force memberstates to implement measures that they do not want to adopt. Ultimately, the success on the Lisbon agenda will depend on the EU’s ability to build political momentum behind reform. The EU needs to focus on a limited number of achievable objectives and demonstrate it is making progress. Success in these measures should then feed through into improved economic performance, encouraging member-states to take further steps.

Conclusion and summary of results

The Commission seems to agree with this point. Its mid-term review of Lisbon concisely lists a number of immediate objectives, for example curbing red tape, pushing through the services directive and completing the single market in energy and transport. Critics were quick to accuse the Commission of downgrading the social and environmental aspirations of the Lisbon agenda. All parts of the Lisbon reform programme are important. But the ﬁrst half of the decade has shown that the EU will not make any progress unless its sets clear priorities. For the EU’s credibility, legitimacy and long-term economic success, it is imperative that it delivers on key Lisbon commitments over the next ﬁve years. Drawing up a realistic list of targets for the coming year is a good starting point.

Overall assessment of results: C ★

The Scorecard â˜…

Issues

The Lisbon Scorecard V

2005 Heroes

Villains

2004 2003 2002 2001

A. Innovation Information society

Research and development

C-

Denmark, Estonia, Slovenia Finland, Slovenia, Sweden

Bulgaria, Greece, Romania Greece, Poland, Slovakia

B-

C-

C+

B+

B-

The Scorecard

Issues

2005

Heroes

Villains

2004 2003 2002 2001

Cyprus, Denmark, Sweden Finland, Poland

Belgium, Poland

C-

B-

Italy, Malta

C-

B-

Czech Republic, Sweden

Belgium, Ireland & UK (for social exclusion)

B-

C+

D. Employment and social inclusion Bringing people into the workforce Upgrading skills

C+

B. Liberalisation Telecoms and utilities

C+

Latvia, UK

Germany, Italy, Slovakia (for telecoms)

C+

B-

B+

Transport

C+

European Commission

Belgium, Spain

C+

B-

D-

E. Sustainable development

Financial and general services

B-

France, Italy

C+

B-

C+

Climate change

C-

Germany, Netherlands

Portugal, Slovenia

C-

C+

(N/A)

Natural environment

Finland, Sweden

France (for CAP), Ireland

C+

C-

(N/A)

Sweden

Italy

C+

C-

B+

C+

C. Enterprise Business startup environment

Ireland, Spain

Greece, Portugal

B-

Modernising social protection

D Conclusion

Regulatory burden

C+

Slovakia, UK

France, Italy

C+

C-

D+

The Lisbon process

State aid and competition policy

C+

Estonia, Latvia

Germany, Poland

C+

B-

B+

Overall assessment of results

publications ★

The EU and China Pamphlet by Katinka Barysch, with Charles Grant and Mark Leonard (April 2005)

★

What happens if Britain votes No? Ten ways out of a constitutional crisis Pamphlet by Charles Grant (March 2005)

★

The EU and counter-terrorism Policy brief by Daniel Keohane (March 2005)

★

Ukraine after the orange revolution Policy brief by Kataryna Wolczuk (February 2005) web only

★

The EU’s common fisheries policy: The case for reform, not abolition Policy brief by Aurore Wanlin (December 2004) web only

★

When negotiations begin: The next phase in EU-Turkey relations Essay by Heather Grabbe (November 2004)

★

A fair referee? The European Commission and EU competition policy Pamphlet by Alasdair Murray (October 2004)

★

An asset but not a model: Turkey, the EU and the wider Middle East Essay by Steven Everts (October 2004)

★

Europe in space Pamphlet by Carl Bildt, Mike Dillon, Daniel Keohane, Xavier Pasco and Tomas Valasek (October 2004)

★

Over but far from finished - the EU’s financial services action plan Policy brief by Alasdair Murray (September 2004)

★

The CER guide to the EU constitutional treaty Policy brief by the CER (July 2004)

★

Europe’s new defence agency Policy brief by Daniel Keohane (June 2004)

★

How the EU should help its neighbours Policy brief by Heather Grabbe (June 2004)

★

The EU and Russia - Strategic partners or squabbling neighbours? Pamphlet by Katinka Barysch (May 2004)

★

Manufacturing first: a new way forward for global trade Working paper by Bruce Stokes (May 2004)

Available from the Centre for European Reform (CER), 29 Tufton Street, London, SW1P 3QL Telephone + 44 207 233 1199, Facsimile + 44 207 233 1117, kate@cer.org.uk, www.cer.org.uk COVER DESIGN: STEVE CHADBURN: steve.chadburn@illustrate.demon.co.uk

THE LISBON SCORECARD V Can Europe compete? Alasdair Murray and Aurore Wanlin

The EU is half-way through its ten year programme of economic reform, the ‘Lisbon agenda’. The EU is unlikely to achieve its goal of becoming the world’s most competitive and dynamic economy by 2010. But the EU can be proud of unsung successes in areas like pension reforms and the liberalisation of telecoms and energy markets. This pamphlet, the CER’s ﬁfth Lisbon scorecard, provides a comprehensive assessment of the EU’s progress – highlighting the heroes and villains of the reform process. Alasdair Murray is deputy director and Aurore Wanlin is a research fellow at the Centre for European Reform.

ISBN 1 901 229 60 2 ★ £10/G16