EU falls short of its economic goals

The economy of the world’s richest bloc is in trouble.

Authors of a comprehensive new study say the European Union has fallen far short of the goals announced at a March 2000 summit of EU leaders in Lisbon, raising new doubts about the Continent’s long-term ability to compete against the United States and rising Asian competitors.

The Lisbon European Council called for dramatic economic reforms, said analysts from the Institute for International Economics (IIE), a Washington-based think tank devoted to global economic policy issues.

The summit was convened to make the European Union “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” within 10 years.

But four years later, EU countries “continue to be mired in low economic growth, persistently high unemployment and large government deficits despite a strong global economy,” Martin Baily and Jacob Funk Kirkegaard wrote in a 300-page study, “Transforming the European Economy.”

Jose Manuel Barroso, incoming president of the European Commission, the EU’s executive arm, said the Lisbon targets will be a priority for the expanded 25-nation bloc after he starts work next month.

“The goal of becoming the most competitive economy in the world is one we can achieve and we should not feel discouraged,” he said.

“Is the Lisbon agenda dead?” Mr. Baily, a former top economic adviser in the Clinton administration, asked during the recent presentation on the report. “In terms of trying to improve employment and productivity performance, it is still very much alive, even if the goals will not be achieved in 2010.”

The study found that Europe’s sluggish economies can be improved substantially and that there is a potential for faster growth, but even the bloc’s own officials have taken the downbeat IIE analysis to heart.

“The commission shares most of its conclusions,” said Herve Carre, a spokesman in the EU’s Washington office.

Wide-ranging reforms are needed to increase productivity growth, the authors assert. Productivity improvements have slowed to a crawl since 1995, leaving EU countries facing budgetary and revenue shortfalls.

The IIE study found that EU countries also have failed to meet job growth targets set in Lisbon, underscoring the need for more labor market reforms. The Lisbon summit called for 21.5 million new jobs in the bloc’s 15 Western European members by 2010.

According to the report, the 15 EU states — excluding 10 mostly central and Eastern European countries that joined earlier this year — created only 740,000 jobs in 2002 and 412,000 in 2003, far short of the pace needed to meet the job target.

“What has been done so far doesn’t seem to be effective,” said Mr. Baily.

But the job figures are in dispute. An Organization of Economic Cooperation and Development study done for the European Commission recently found that employment in the EU-15 between 2000 and 2003 actually increased by 4.1 million, compared to just 1.5 million in the United States.

The OECD report said the European job growth resulted from more women in the work force, more part-time work and lower benefits and other hiring-related costs for employers.

Mr. Baily argued that government-mandated cuts in the work week in Europe, notably France’s 35-hour maximum on weekly work, also have cut into the Continent’s global competitiveness.

“I am not against leisure; I am not against vacations,” said Mr. Baily. “Even so, a minimum amount of work done in the economy is needed.”

The IIE authors said Europe needs better work incentives, as well.

The study found that taxes in EU countries on low- and mid-level workers continue to be relatively high, but jobless benefits tend to be high for those out of work. The United States in 1996 adopted its own welfare reform package designed to encourage those on welfare to seek work.

“People should be encouraged to take jobs instead of being on unemployment benefits,” Mr. Baily said.

Trade barriers also have protected inefficient industries, shielding them from international competition. Among the favored industries: small banks and retailers in Germany, electricity and engineering companies in France and Italian carmakers.

“Europe must build on successes,” Mr. Baily said. “It needs to remove remaining barriers to competition and restructuring.”

Some positive signs in meeting the 2010 goals include a debate on economic deregulation in Germany and payroll tax cuts in France, he said, “but there is still a long way to go.”

European Commissioner Guenter Verheugen recently admitted that achieving the Lisbon targets would be difficult, but “this does not mean that we should give up the effort.”

The success of the euro as an international currency has boosted macroeconomic stability but has not translated into “economic dynamism,” EU Economic and Monetary Affairs Commissioner Joaquin Almunia said earlier last week.

“Despite progress in structural reform, European product and labor markets are still not sufficiently flexible,” he said.

Despite “a plethora of goals set at the European level,” said Mr. Verheugen, there had been “weak implementation and delivery at the national level.” He called on national leaders to give more prominence to the process, to stop internal wrangling and to concentrate on promoting growth and innovation.

“We have to make sure that Europe is not a third-rate player but that it is going for the world championship as far as competitiveness is concerned,” he said.