ZEW-AEI Conference Economic growth in Europe Mannheim, 23 February Economic Growth in Europe: Pursuing the Lisbon Strategy

ZEW-AEI Conference Economic growth in Europe Mannheim, 23 February 2005 Economic Growth in Europe: Pursuing the Lisbon Strategy Fabienne Ilzkovitz European Commission, DG for Economic and Financial Affairs and Free University of Brussels 1

The Lisbon Strategy Overview of the presentation 1. Why the Lisbon Strategy? 2. What is the Lisbon Strategy? 3. Assessment of progress 4. The mid-term review and the New Lisbon Strategy 5. Challenges and open issues 2

Why the Lisbon strategy? EU 25 GDP per capita in PPS (US = 100) 100 90 80 70 60 50 40 30 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Annual % change of real GDP per capita EU 25 US 1961-1980 3,3 2,5 1981-1990 2,1 2,2 1991-1995 1,2 1,2 1996-2000 2,5 2,9 2001-2006 1,5 1,7 Source: Ameco (2005-2006 forecasts ; Eu 15 data before 1995) 4

Lisbon : Sources of poor growth European Union performance 1999-2004 (US=100) (3) 100 80 60 40 20 64.2 64.6 86.3 90.6 80.7 81.5 92.1 87.5 1999 2004 0 GDP per capita Employment rate (1) Hours worked per worker (2) Hourly labour productivity 1) Calculated - Employment rate = 100 * (GDP per capita / Labour productivity per person employed) 2) Calculated - Hours worked per worker =100 * (Labour productivity per person employed / Hourly labour productivity) 3) 2004: forecasts, Eu15 values for Hours worked per worker Source: Commission services. 5

Despite rising employment rates, employment levels eventually fall Projected working - age population and total employment, EU25 320 total employment working-age population employment rate (right scale) 72 300 280 260 240 220 period 2003-2011: rising employment but slow growth in working-age population period 2012-2017: rising employment despite the decline in working-age from 2018 onward: employment and working-age population both declining 70 68 66 64 62 200 60 180 2003 2008 2013 2018 2023 2028 2033 2038 2043 2048 58 ource: DG ECFIN 6

% 3,5 Potential growth in EU, US and Japan, 2000-2050 3 USA 2,5 2 EU 15 1,5 1 JAPAN 0,5 0 2000 2010 2020 2030 2040 2050 7

Productivity: Increasingly important source of growth 5 EU15 5 5 EU10 5 4 4 4 4 G ro w th ra te (in % ) 3 2 1 3 2 1 G ro w th ra te (in % ) 3 2 1 3 2 1 0 0 0 0-1 2004-10 2011-30 2031-50 Labour productivity growth GDP growth Employment growth GDP per capita growth -1-1 2004-10 2011-30 2031-50 Labour productivity growth GDP growth Employment growth GDP per capita growth -1 8

Average % change previous year However, there is a decline in productivity growth Labour productivity per hour Total hours worked GDP EU 15 US EU 15 US EU 15 US 1966-1970 5.3 2.5-0.8 1.4 4.5 3.9 1971-1980 3.8 1.5-0.8 1.5 3.0 3.0 1981-1990 2.4 1.3-0.1 1.8 2.3 3.1 1991-1995 2.1 1.7 0.1 1.4 2.2 3.1 1996-2000 1.8 2.2 0.4 1.1 2.2 3.3 2001-2005 1.6 2.4 0.5 0.8 2.1 3.2 6 5 4 3 2 US EU 15 1 0 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 Source : EU Commission, AMECO database 9

Typical time and cost required for setting up a company 2005 Time to start a business (days) Cost to start a business (% of GNI per capita) 47 40 38 38 ES PL CZ ES HU IT GR PT 16,5 15,7 13,4 22,2 35 EE NL 13,0 34 BE BE 11,1 31 Japan Japan 10,7 31 PL SI 10,1 29 AT CZ 9,5 28 EU25 EU25 8,9 26 LT EU15 8,1 25 SK EE 6,2 24 IE AT 5,7 24 DE IE 5,3 24 EU15 SK 5,1 18 UK DE 4,7 18 LV LV 4,2 16 SE LT 3,3 14 FI FR 1,2 13 IT FI 1,2 11 NL UK 0,7 8 FR SE 0,7 5 US US 0,5 5 DK DK 0,0 50 40 30 20 10 0 0,0 5,0 10,0 15,0 20,0 25,0 Source: World Bank 10

Contribution to total productivity growth (96-2000) 0,5 0,45 0,4 0,35 0,3 0,25 0,2 EU US 0,15 0,1 0,05 0 Semiconductors and other electronic equipment Post and telecommunications services Wholesale trade Retail trade Financial services 11

Hourly labour productivity growth rate (av annual growth rate % - 96-2000) 70 60 50 40 30 EU US 20 10 0 Semiconductors and other electronic equipment Post and telecommunications services Wholesale trade Retail trade Financial services 12

EU invests less in knowledge Knowledge investments 2002 8 7 6 5 % of GDP 4 3 Software Higher education R&D 2 1 0 EU13 Japan US Source: OECD 13

60 50 40 30 20 10 0 EU has fewer high tech patents EU-25 EU-15 USA Japan Source: Eurostat. 14 EPO high-tech patents / million population, 2002

Productivity : Causes of the decline in growth Inappropriate business environment: too high business set-up costs A more limited use of ICT in services Difficulty to reorient its industrial specialisation towards high-tech industries Insufficient investments in knowledge Lower capacity of innovation 15

Globalisation Shifting Shares in global output, 1980-2015 in purchasing power parity terms EU 25 26% US 20% EU 25 22% US 21% EU 25 17% US 19% Japan 5% Other 34% Russia 4% Japan 7% India 3% China 3% Brazil 3% Other 25% Russia 3% China Brazil 13% 3% Japan 7% India 6% Other 27% Russia 2% Brazil 3% China 19% India 8% 1980 2003 2015 Note: Areas indicate size of global economy Source: IMF, Consensus Forecast, HM Treasury 16

Shares in world trade in goods (excl. Intra-EU-25 trade) 25% 20% 15% 10% 5% 0% 1995 2004 1995 2004 EU 25 (excl. intra) 19.1% 18.5% US 16.5% 17.1% Japan 9.5% 7.4% China 3.4% 8.4% India 0.8% 1.2% EU 25 (excl. intra) US Japan China+India Source: WTO statistical database and IMF (DOTS) 17

Globalisation : Intensification of international competition China for manufacturing products India in particular for the service sector US in R&D and high value added activities 18

value millions Eur -34000-34500 -35000-35500 -36000-36500 -37000-37500 -38000-38500 -39000 Trade in goods with China (net flow) 2000 2001 2002 value millions Eur 0-50 -100-150 -200-250 -300-350 Trade in Computer and information services with India (net flow) 2000 2001 2002 value millions Eur -500-1000 -1500-2000 Trade in Research and development services with the US (net flow) 0 2000 2001 2002 value millions Eur 0-100 -200-300 -400-500 -600-700 -800 Trade in Computer services with the US (net flow) 2000 2001 2002 Source: Eurostat 19

Why the Lisbon Strategy? 1. EU unable to match the US performances in terms of GDP per capita, employment rate and productivity 2. Face the challenges of ageing, and globalisation 20

The Lisbon strategy Overview of the presentation 1. Why the Lisbon strategy? 2. What is the Lisbon strategy? 3. Assessment of progress 4. The mid-term review and the New Lisbon Strategy 5. Challenges and open issues 21

Lisbon reforms Welfare = f ( standard of living, economic and environmental sustainability, social cohesion) Standard of living = f ( productivity, employment rate, demographic changes) Lisbon is a comprehensive strategy of economic, social and environmental reforms aimed at: 1. Increasing the EU s growth potential 2. Maintaining the European Social Model 3. Ensuring environmental sustainability Since the 2005 Mid-Term Review increased focus on growth and jobs, but need to consider trade-offs and maximise synergies between different objectives 22

Economic impact of structural Labour market reforms reforms higher employment rates Product market reforms increased productivity and lower prices Reforms encouraging investment in knowledge and innovation positive impact on productivity growth Capital market reforms lower cost of capital and better access to finance 23

Product market reforms Product market reforms = Changes in product market regulation Product market reforms include measures that : Open up product markets from competition from abroad (IMP) Open up product markets to new entrants (liberalisation of network industries) Create a more business friendly environment (reduction in time and costs to set up a new business) Reduce state involvement in the economy (reduction in state aids) 24

Product market reforms Product market reforms Competition Reduction in the costs of doing business Allocative Efficiency Productive Efficiency Dynamic Efficiency 25

4,5 4 3,5 3 2,5 2 1,5 1 0,5 0 Product market regulation 1998 2003 26 United Kingdom United States Denmark Ireland Sweden Finland Luxembourg Japan Austria B e lg iu m Germany Netherlands Slovak Republic EU Spain Portugal Czech Republic France Greece Italy Hungary Poland

Empirical evidence in support of reforms (Example of liberalisation of network industries) Evolution of labour productivity per hour worked (average growth rate 1996-2003) Transport/ Communications Wholesale and retail trade; restaurants and hotels Total business services EU-12 4.9% 0.7% 1.1% US 3.2% 5.1% 3.0% 27

The costs of non-lisbon Product and labour market reforms Increase in GDP growth rate of almost ½ percentage point Increased knowledge investment another ¼ percentage point Over a ten-year period, this would imply an increase in the GDP level of up to 7 or 8% 28

Progress of Member States on the measurable targets of the Lisbon Strategy (Jan. 2005) Lisbon Strategy Target Target year Employment EU-15 target achieved Total employment rate 70% 2010 7 8 Female employment rate 60% 2010 7 8 Empl. rate of older workers 5% 2010 4 6 in average effective retirement age Childcare facilities for pre-school children over 3 Research, Innovation, ITC By 5 years to EU average 65 2010 0 0 90% 2004 4 n. a. R&D%GDP 3% 2010 2 2 Share of business R&D 2/3 2010 3 3 All schools with internet connection 100% 2002 1 n. a. Internet penetration in households 30% 2002 12 15 E-government : basic services on line 100% 2002 0 n. a. EU-25 target achieved 30

Progress of Member States on the measurable targets of the Lisbon Strategy (Jan. 2005) Lisbon Strategy Target Target year Economic Reform EU-15 target achieved Transposition rate of IM directive 98.5% 2002 1 2 Open electricity markets for customers 100% 2007 9 9 Open gas markets for customers 100% 2007 7 7 cross-border energy capacity relative to installed production capacity Sustainable development in greenhouse gas emissions Share of electricity produced from renewable energy sources 10% 2005 11 19 92% of the 1990 level 2008-2012 3 respect national targets 2/3 2010 0 respect national targets EU-25 target achieved 10 respect national targets 0 respect national targets 31

The mid-term review 2004 Spring European Council : Mid-term review of Lisbon carried in 2005 Objectives of the midterm review: Assess progress made Define priorities for the next 5 years Assess the instruments of governance Improve the communication 34

The mid-term review Positive elements of the Lisbon strategy: Greater emphasis on structural reforms A comprehensive reform agenda Better tools to monitor progress First steps towards a streamlining of EU economic policy coordination 35

Main achievements and failures Poor performance due to : Too many priorities and conflicting objectives Lack of credibility of the targets Lack of national ownership Lack of peer pressure at the level of the MS and insufficient incentives for reforms Too complex coordination Poor communication 36

The new Lisbon strategy Main elements of reforms 1. Focus on growth and jobs : The renewed Lisbon strategy focuses on growth and jobs as a means to preserve the EU social model and to ensure environmental sustainability 2. To improve the governance of the strategy : To streamline the process To increase the ownership of MS 37

Focus on growth and jobs Structural reforms aimed at increasing growth potential may have negative effects on the environment or on social cohesion But: Growth is pre-condition for progress elsewhere Place growth objective at centre of Lisbon strategy. Better exploit synergies between three pillars 38

The new Lisbon strategy A renewed Lisbon Action programme Three main priorities : 1. Support knowledge and innovation for growth 2. Make Europe a more attractive place to invest and work 3. Create more jobs for more social cohesion 39

How to do it better? 1. Simplified reporting : one single Lisbon Report both at the EU and national level 2. EU level Community Lisbon Programme New Integrated Guidelines 3. National Level National Reform Programmes Mr or Mrs Lisbon at the government level 40

The new policy co-ordination cycle YEAR 1 Spring European Council March 2005 Integrated Guidelines (2005-2008) June 2005 Community Lisbon Action Programme (2005-2008) June 2005 National Reform Programmes October 2005 Annual Progress Report + update of guidelines January 2006 Spring European Council October 2006 41

The Annual Progress Report Published on 25 January Analysis of the policy response to the Lisbon challenge - the Community Lisbon Programme and the National Reform Programmes (NRPs) Identifies 4 areas for urgent action: 1. Knowledge and innovation; 2. Business potential; 3. Employment and ageing; 4. Efficient, secure and sustainable energy Identifies the strengths and weaknesses of the NRPs and of the euro area 42

National reform programmes: a major novelty Presented in the autumn 2005 (mid-october) Identifying main challenges to achieve higher growth and employment and specific measures to be (or which have been) taken over the 3 next years (possibility to amend every year) Subject to a broad political debate at the national level (Parliament, social partners, broad public ) Annual national implementation reports 43

The National Reform Programmes Agreement on the key challenges : Sustainability of public finances Increase labour supply Increase R&D and innovation Improve the business environment Environmental sustainability But insufficient focus on competition and opening up of markets Targets, timetables and budgetary impact of the measures proposed often missing 44

The National Reform Programmes Good progress in : Pension reforms and measures to expand working life Implementing active labour market policies Improving the business climate by better regulation Creating fiscal incentives for R&D and innovation Reform shortages in : Improving the quality of public finance and reverting the upward trend in public debt Reform of benefit systems Removing barriers to entry (in services) and fostering the Internal Market Creating the right framework conditions for private R&D and increasing the efficiency of public R&D 45

Why do MS fail to implement structural reforms? Low public acceptability of reforms Short-term (concentrate) costs versus long-term (dispersed) benefits Influential interest groups succeed in influencing decision making process Beliefs and fallacies generate opposition against reforms Status quo bias 47

How to improve the implementation of structural reforms? 1. Carrot or/and stick? Stick = Peer pressure Carrot = Rewarding actions going in the right direction 2. Compensate or not the losers? Design of such a compensation scheme to avoid delaying reforms? Role of accommodative macroeconomic policies? (Aghion) Difficult to ignore this question in the present 48 political context

How to improve implementation of structural reforms? Be smart: 1. Exploit the synergies 2. Find the right sequencing Product market reforms make labour market reforms easier by reducing the bargaining power of trade unions? (Blanchard and Giavazzi, Boeri,..) 3. Find the proper timing Bad times : feeling of urgency but good times: more resources Period of recovery following a period an extended period of slow growth But difficult as the timing determined by legislative rules and the electoral cycle 49

Are these reforms sufficient? Success not guaranteed Need to convince the MS of the benefits of reforms Need to increase the incentives to implement reforms 50

List of Key references 1. Working together for growth and jobs. A new start for the Lisbon strategy, Communication from the Commission to the Spring European Council, 2 February 2004. http://europa.eu.int/growthandjobs/key/index_en.htmf 2. European Commission (2005), The economic costs of non-lisbon. A survey of the economic impact of Lisbon-type reforms, Directorate General for economic and Financial Affairs, European Economy, Occasional paper n 16, March http://europa.eu.int/comm/economy_finance/index_en.htm 3. Dierx A. and Ilzkovitz F. (2004), Economic growth in Europe: Pursuing the Lisbon Strategy, paper presented at the INFER/ZEI workskop. 3. Dierx A. and Ilzkovitz F. (2005), Potential benefits of structural reforms undertaken within the context of the Lisbon strategy, paper presented at the XVII Villa Mondragone International Economic Seminar Capitalism and Entrepreneurship Dynamics : Benchmarking Europe s Growth, University of Rome Tor Vergata, July. 4. EU Economy 2003 and 2004 Review http://europa.eu.int/comm/economy_finance/publications/europeaneconomy_en.htm 5. Time to move up a gear, Annual Progress Report on Growth and Jobs, Commission Communication to the Spring European Council, 25 January 2006. http://europa.eu.int/growthandjobs/annual-report_en.htm 51

Thank you for your attention 52