TCS Daily

Lisbon or Bust

By Ram nas Vilpiaauskas - March 11, 2004 12:00 AM

In January of this year, the European Commission issued a rather downbeat assessment of the progress the EU has been making toward the goals of the Lisbon strategy. The strategy aims at creating conditions for the EU to become within a decade "the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion." As President Romano Prodi stated in his speech, "Four years after Lisbon it is clear that we are going to miss our mid-term targets." As a result, the Commission urged member states to improve investments in knowledge and technology, strengthen the competitiveness of the EU economy and increase labor market participation.

The Lisbon strategy (after the city where the EU summit in March 2000 took place) has been presented as one of the EU's most ambitious projects of this decade. It aimed to reduce a growing gap between a more productive economy in the US and a lagging economy in the EU, to give a fresh impetus to the integration process after the move to the monetary union had been completed, and to respond to the common problems faced by most of the EU member states (such as their aging population and brain-drain). The strategy is based on setting recommended targets, sharing best practices and regular monitoring of progress. It includes policy areas as diverse as entrepreneurship, employment, pension reform, education, macroeconomic policies, health protection and others.

A closer look at the strategy reveals several features which are quite characteristic of EU policy making. First is the obvious attempt to combine policy objectives which are hardly compatible. On one hand, the emphasis is on the need to boost entrepreneurship, productivity, employment and competitiveness growth in the EU; on the other hand, every time such objectives are raised, they are accompanied by assurances that they include "an adequate level of security." Put simply, it's US growth and competitiveness, but with European social guarantees. Some people call it "the third way" and others simply point out that this is the kind of compromise between different interests and member states which is so common to EU policies, and which results in a muddling through without achieving any of the objectives.

But it is clear that without member states undertaking reforms to allow for more flexibility and competition in so-far protected markets, in particular the labor market, the EU has little hope of catching up to the US. Efforts to keep labor markets closed to citizens from new EU countries or the continuous breach of the Stability and Growth Pact rules show that the political rhetoric remains detached from the actual policies in a number of member states and encourages similar behavior in new members. Although structural reforms are being initiated in Germany and France, the political opposition makes them slow and piecemeal. It should be noted that the Lisbon strategy with its time schedule and concrete recommendations could be used by willing member states' governments as an additional argument to justify necessary reforms in the face of domestic opposition. Although in such a way the EU might be seen as a scapegoat in the eyes of some people, this could bring concrete long term benefits.

The enlargement of the EU, while providing new opportunities for growth and bringing to the Union the experience of recent reforms, also raises important questions about the implementation of the Lisbon strategy. These countries, in particular the Baltic states, are the fastest growing economies in Europe. For them the main goal is to preserve the current economic growth by taking advantage of the common market opportunities and reducing other barriers to competition and productivity growth. The objectives of the Lisbon strategy in the areas of entrepreneurship, in particular reduction of administrative and tax burdens, health reforms, education and pension system reforms, are also priority areas for new member states.

At the same time, the very fact that the strategy includes policy objectives which are contradictory requires new members to choose their own priorities and not emulate the current EU welfare state policies that have caused the current economic slowdown (in particular, high social benefits reducing incentives to work). Moreover, in many areas the strategy makes only half a step in suggesting adequate solutions for social and economic problems (reduction of tax but only for small enterprises, increase in competition but excluding agriculture, etc.). Still, other policy recommendations provided in the strategy direct the efforts of acceding countries in the wrong direction (cohesion policy), or are relevant but due to the fast growing economy the governments in the acceding countries seem to disregard them (for example, the recommendation to reduce budget deficits during the times of economic growth).

Finally, measures undertaken in relation to EU accession contradict some of the important recommendations -- for example, in Lithuania the supply of EU structural funds will actually increase the level of state aid to business; support to farmers will increase public spending; and implementation of the most costly regulatory norms creates higher barriers to market entry, in particular for small companies. These measures go against the general trend of transition reforms, they reduce competition and distort motivations. While some of them are required as part of the accession measures, each new member state would benefit from critically evaluating new similar policy proposals on the EU agenda (and most of them are exactly about stricter regulatory norms) and should evaluate each of them in relation to the potential distortion of competition.

The Lisbon strategy will be nothing more than rhetoric detached from practical policy if the contradictions among its different objectives continue to be ignored. Plus, economic growth and competitiveness, and eventually the welfare of citizens, will depend on the productive forces and incentives, rather than EU or member state support. Meantime, for new member states, the challenge is to use the membership in the EU to remove remaining barriers to trade and business, which include regulations impeding market entry and innovation, the discriminatory nature of the EU in its external trade relations and such relics of central planning as the Common Agricultural Policy.

The author is Senior Policy Analyst at the Lithuanian Free Market Institute.


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