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Storytelling In The News: #103

Europe and the story of its goal of economic supremacy

March 29, 2004

While the US presidential election campaign is focused on concern about the US economy, in Europe, even more serious concerns about the European economy are widespread. Thus the Financial Times this week reviewed the story of the economic progress that Europe has made in the four years since its political leaders met in Lisbon on March 24, 2000 and proclaimed their ambition of turning the EU into the "most competitive and dynamic knowledge-based economy in the world by the year 2010".

In 2000 in Lisbon, they told a set of future stories in the form o feconomic targets and promised greater co-operation and new legislation to modernise Europe's economy. The aim was explicit: Europe was finally going to challenge the US for global economic supremacy.

The content of the future stories was clear. The EU's rate of economic growth would be lifted to 3 per cent per year; the Union's employment rate would be raised to 70 per cent; EU member states would spend an average 3 per cent of their gross domestic product on research and development; the gas, electricity, postal services and transport sectors would be fully liberalised; and Europe's highly fragmented financial markets would integrate.

Yet the Financial Times says that in the four years that have passed, hope has given way to despondency. Instead of catching up with the US, the EU has fallen even further behind. A report by the European Commission in January this year says that in the three most important categories - economic growth, productivity and employment - the EU is far from meeting its goals.

* Gross domestic product per head is stuck at 72 per cent of the US level.

* Productivity has slipped, as well. The growth rate in productivity per employed person in Europe is now fluctuating between 0.5 per cent and 1 per cent (as against 2 per cent in the US). One of Europe's problems since 1995 has been a slowdown in productivity growth in the "old economy" industries such as low-technology manufacturing. This happened in the US, too, but there it was more than compensated for by a pick-up in productivity in industries that use information and communications technology (ICT), such as retailing and distribution. In the EU, those ICT-using service industries have seen no such improvement.

* Employment in the EU has risen from 62.5 per cent in 1999 to 64.3 per cent in 2002 - but this will not be enough to reach the Union's interim target of 67 per cent next year. The target of 70 per cent in 2010 looks increasingly improbable.

While some argue that Europe's performance is distinctly mediocre, others say that the problem is overstated. "Europe as such does not have a competitiveness problem," Frits Bolkestein, EU single market Commissioner, said in a speech this month. "Some member states have." He points out that independent rankings consistently place Finland as the world's most competitive economy, ahead of the US. He also says that US businessesare more heavily regulated than is widely believed and subject to formidable litigation costs.

There is growing evidence that the Union is having a hard time reconciling its twin ambitions of becoming an economic powerhouse while imposing strong environmental and social protection. Some say that Brussels' regulatory zeal is hurting competitiveness. "The number of regulations has grown exponentially, and it continues to grow," says Bernd Dittmann, an EU expert at BDI, the German Industry Federation.

Another obstacle to a European economic renaissance lies not in Brussels, but in the national capitals. Many EU governments - and especially those in the large member states - have not delivered their side of the bargain. This can be seen in the reluctance to carry out large-scale economic reforms in countries such as Italy, France and Germany, as well as in governments' failure to implement many of the Lisbon-related EU laws at home.

Not everyone is discouraged. Olivier Blanchard, an expatriate Frenchman now a professor at Massachusetts Institute of Technology, argues in a recent paper that things are not so bad. True, he concedes, output per head in Europe lags well behind that of the US. But output per hour worked is much closer: it is about 90 per cent of US levels on average across the EU, and in some countries, such as France, it is higher. The difference is that Americans work more hours.

Prof Blanchard argues that Europeans have chosen to use the benefits of progress to spend more time with family and friends rather than to buy another car, and who can blame them?

Moreoever the optimists for Europe note that the US recovery has been powered by the biggest monetary and fiscal stimulus in history, and is accompanied by a massive current account deficit. Given the risk that those imbalances will unwind in ways that make the US less an object lesson than a cautionary tale, the optimists believe that the race is not over yet.

Bottom line

Based on the evidence to date, the evidence of the will to implement the future story of economic supremacy in Europe over the US isn't obvious either at the political level (in terms of passing the laws necessary to achieve the goal) or at the individual level (in terms of working long and hard enough to achieve productivity improvements). Implicitly, there is a decision to give priority to other matters. Rightly or wrongly, in Europe, an obsession to give priority to economic objectives over all other human goals is not -- or at least, not yet -- present.

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