SPECIAL FEATURE - No 21 (Mai 2000)

THE LISBON SUMMIT: CONCRETE ACTION TO STIMULATE EUROPEAN COMPETITIVENESS

The Extra-ordinary European Council of Heads of State and Government in Lisbon on 23 and 24 March was the most significant for years. It represents the Union's first major attempt to come to grips with the transition to a knowledge-based economy. The Summit was characterised by a remarkable degree of consensus among national leaders as to both the strengths and weaknesses of the European economy and the measures which need to be taken. They set out a far-reaching strategy for economic and social reform designed to ensure that the Union derives maximum benefit from new technologies in terms of growth and employment. They underlined the central role of the Internal Market and identified both the Internal Market Strategy and the Financial Services Action Plan as key instruments for delivery of a series of targets, with deadlines for action. Welcoming the outcome of the Summit, Commissioner Frits Bolkestein said: “The EU's Internal Market lies at the heart of European integration and is the single most important stimulus to European competitiveness.”

The challenge for Europe

The Summit took place amidst a growing awareness of the paradigm shift in the world economy driven by globalisation and rapid technological development. These changes, often referred to as the “New Economy”, offer important opportunities in terms of growth and employment for economies prepared to make the necessary adjustments. The widespread application of new information technologies is regarded as the main driving force behind the unprecedented sustained expansion of the US economy. Many economists believe that the productivity gains resulting from the spread of these technologies have shifted the US on to a higher growth trajectory without fuelling inflation. EU growth rates, on the other hand, have consistently failed to match those of the US in the last ten years and, for every percentage point of growth, Europe creates fewer jobs.

The technology gap only partly explains Europe's under-performance. Many believe that America's flexible and competitive markets give it the edge, allowing it to seize the opportunities created by the rise of new technologies. The EU's performance in this area is mixed.

The Internal Market programme has opened Member States' markets to increased competition and paved the way for efficiency-based growth. But in key sectors, such as public procurement or services, markets remain fragmented. European financial markets are not yet providing business and industry with the multiple sources of capital they need to compete in the modern, rapidly changing, globalised economy. Moreover, the knowledge economy is changing the skills needed for work. More and more employers complain that they cannot find people with the IT skills they require. And social protection systems need to be modernised if they are to provide the stable framework required for managing the structural changes involved in moving towards a knowledge-based economy.

However, there are signs of positive change. Europe is now the fastest growing market for Internet development. In the mobile telephony sector, Europe leads the world - which will be an important asset as the Internet goes mobile. The European Union's macro-economic growth forecasts are improving (3.4% growth forecast for 2000 and 3.1% for 2001) and net job creation is expected to be above 1%. This situation provides a unique opportunity to re-orient policy to capture the benefits of the new knowledge-based economy.

A decisive and far-reaching vision

A pre-condition for the success of this strategy will be the maintenance of the macro-economic stability, characterised by low and stable inflation, fiscal prudence and historically low interest rates, which has been created in the run-up to Economic and Monetary Union. The Heads of State and Government put particular emphasis on improving the quality and long-term sustainability of public finances, alleviating the tax pressure on labour and re-directing public expenditure to support research and development as well as innovation. If the strategy is implemented against this background, an average economic growth rate of around 3% should be a realistic prospect for coming years.

Many of the targets agreed by the leaders are aimed at promoting the spread of new technologies in the EU. They invited the Commission to draw up a comprehensive eEurope Action Plan for agreement at the Fereira Summit in June this year. They also called on the European Parliament and the Council to ensure rapid adoption of the legislation establishing a legal framework for e-commerce and the new electronic communications legislative package announced by the Commission following its 1999 review of telecommunications regulation. Most crucially, they called for action to reduce the cost of using the Internet by introducing much greater competition in local access networks before the end of 2000. And they committed themselves to ensuring that all schools have access to the Internet and multi-media resources by the end of 2001.

But beyond these measures designed to close the technology gap, the Summit looked at the bigger picture. Far-reaching economic and social reforms are needed if the EU is to make the adjustments necessary to reap the rewards of the New Economy. As far as social policies are concerned, the focus was on the need to modernise social protection systems so that they can underpin the transition to a knowledge-based economy. Leaders called for greater co-operation between Member States in this area and a high-level study on the future evolution of social protection systems, with particular emphasis on the sustainability of pension systems. This is the first time that these difficult problems have been placed so firmly on the EU agenda. Perhaps most significantly, the Summit called for more active employment policies to develop lifelong learning, reduce the skills gap and promote equal opportunities. This is vital: according to some estimates, the EU will have two million job vacancies in the IT sector by 2004/5 unless policy is changed.

On the economic side, the Summit set out actions on several fronts. In the area of research and development, steps will be taken to establish a 'European Area of Research and Innovation'. Better use will be made of national research capacity, the research community will be linked up with high speed networks and mobility and exchange of experience will be encouraged. Measures were also agreed to create a climate favourable to small and medium-sized enterprises (SMEs). These include a benchmarking exercise on issues such as the length of time and the costs involved in setting up a company. The Commission will shortly present a Communication on an entrepreneurial, innovative and open Europe and a European Charter for small companies is to be endorsed in June 2000.

The Internal Market at the centre of the strategy

•Low cost utilities as a pre-condition for competitiveness. Progress towards open and integrated utility markets has been mixed. Telecommunications is a success story. Less than two years after the introduction of the EU's regulatory framework, the benefits of full competition are clear: both consumers and business are benefiting from declining prices - business charges have decreased by some 25% and residential users' charges by up to 40% between 1997 and 1999. Hundreds of new companies have entered the European market. But the leaders agreed that the momentum of regulatory reform in the public utilities must be maintained. The Summit called for liberalisation in areas such as gas, electricity, postal services and transport to be speeded up. The Commission was asked to table proposals on the use and management of air space. The Summit also emphasised the importance of the Treaty provisions relating to services of general economic interest and asked the Commission to update its 1996 Communication on this subject.

•Public procurement accounts for more than 10% of EU GDP. It is important for the functioning of the EU economy that this key sector is opened up to EU-wide competition. This will also give taxpayers better value for money and make government services cheaper for all. Public procurement markets can only be efficient if good, relevant market information is easily available. The EU is making good progress in this area: numbers of public tender invitations have steadily risen across both sectors and countries since the late 1980s. But there has yet to be any measurable impact on the level of cross-border public purchasing, which remains well below the rate of intra-EU trade flows for goods and services. The Commission will shortly present proposals aimed at simplifying, clarifying and improving the functioning of the EU public procurement regime. The Summit called for work on these proposals to be concluded as rapidly as possible so that they can enter into force by 2002. Steps should also be taken to ensure that it is possible by 2003 for Community and government procurement to take place on-line.

• Services are labour-intensive and therefore represent a rich source of potential employment creation, as the US has shown. This potential has yet to be realised in the EU, however. Levels of employment in the services sector are low compared to the US. Market integration in many services sectors lags behind that observed for goods. This can, in part, be explained by the characteristics of some services which have traditionally required physical proximity to the provider (although with e-commerce, the cross-border provision of many services will become easier). Regulatory barriers to trade in services remain and must be removed and the Summit called on the Commission to draw up a strategy by the end of the year to do this. There is enormous potential for growth in many service sectors - business services (including the professions and security services), retail (including pharmaceuticals), distribution and commercial communications. Services as a whole can grow beyond their current share of over 60% of EU GDP.

• Intellectual and industrial property must be properly protected and rewarded to stimulate investment in research and innovation, Currently the cost of doing this is too high, especially for SMEs. Registering and maintaining a patent for ten years in just eight European countries is far more expensive than in the US. For this reason, the Summit emphasised the importance of reaching rapid agreement on a Regulation creating a Community patent. This has been widely demanded by European industry.

•Whether at Union or national level, the quality of the regulatory framework remains a central concern for business. In the 1999 EU Business Survey, of the 65% of companies reporting an improvement in the functioning of the Internal Market, over half (54%) ascribed that improvement primarily to reduced administrative burdens. On the other hand, of the 35% who saw conditions as stagnating or deteriorating, one third complained that European rules were too complex or unclear to be applied properly. For this reason, the Summit called on the Commission to develop a new regulatory and simplification initiative by June 2001. This initiative will aim at integrating EU and national initiatives to improve the quality and transparency of regulation at all levels.

The Summit conclusions identified the Commission's Internal Market Strategy, which was endorsed at the Helsinki Summit in December 1999 (see SMN 19), as an effective framework for ongoing review and improvement of current policies. The Strategy, which is designed to improve the performance of the Internal Market over the next five years, centres on concrete, measurable target actions which are to be revised and updated on an annual basis. The first review of the target actions will be presented to the meeting of the Internal Market Council on 25 May. The review is more than a mere stock-taking exercise; it is an exercise in prioritisation and identifies priorities which closely reflect the Summit's conclusions.

Efficient and integrated financial markets

Efficient and transparent financial markets foster growth and employment by improving the allocation of capital and reducing its cost thereby improving conditions for investment by enterprises. Recognising this, the Summit underscored the importance of the Commission's Financial Services Action Plan and set a deadline of 2005 for its full implementation.

The Summit called in particular for rapid progress on the long-standing proposals on takeover bids and on the restructuring and winding-up of credit institutions and insurance companies. It also identified steps which could be taken to accelerate the process of market-driven integration which the introduction of the euro has set in motion. A “single passport for issuers”, for example, will facilitate access to capital on an EU-wide basis for business, including SMEs. Those seeking to raise capital will no longer have to prepare several sets of documentation according to different national specifications. Investors will be able to assess the prospective performance of different securities on the basis of comparable financial information. The comparability of companies' financial accounts should be enhanced for similar reasons, whilst ensuring compatibility with international best practice.

In addition, the Summit called for new rules to allow pensions funds to operate more freely at European level while guaranteeing their prudential soundness. The Commission will shortly publish proposals in this area which will begin to lift restrictions on the investment activities of pension funds, allowing them to channel funds into equity or venture capital. Because pension funds operate on a long time frame, these proposals will increase the availability of the long term investment which new companies need. They will also improve the performance of pension funds, helping to guarantee a better standard of living for future generations of pensioners for whom supplementary pensions are likely to play an important role.

The leaders called too for the full implementation of the Risk Capital Action Plan by 2003. This will facilitate access to capital for the high technology companies which will form the backbone of Europe's “New Economy”, allowing them to grow and create new and high quality jobs.

Conclusion

The strategy for economic reform set out at Lisbon is both comprehensive and ambitious. The challenge is now to ensure that it is fully implemented. European leaders have made clear their commitment by setting tight deadlines and by agreeing to meet each Spring to assess progress. It is up to the major EU institutions - the European Parliament, the Council and the Commission - to ensure its delivery. For its part, the Commission intends to press ahead with the measures agreed with the utmost urgency, with the help of all the instruments at its disposal, including the Internal Market Strategy and the Financial Services and Risk Capital Action Plans.

The Summit, in short, is a quantum leap in commitment and sets dates for delivering the boldest economic and social agenda for a decade. It is an agenda designed to accelerate growth and so boost job-creation and strenghten European integration.

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