Leadership in Economics

Europe 2020 – let’s not throw out the baby with the bath water

FLI Lars-Hendrik Röllerby Lars-Hendrik Röller
President of ESMT

At the summit of EU leaders on March 25-26, 2010,  in Brussels, the Europe 2020 strategy was on the agenda, with final approval envisaged for later this summer. Europe 2020 is the follow-up to the Lisbon strategy passed in 2000, which declared that Europe was “to become the most dynamic competitive knowledge-based economy in the world by 2010.”

In many ways, the new Europe 2020 strategy is almost identical in terms of substance. Sustainable – or as it is now called “intelligent” – growth, an emphasis on education, knowledge and research, as well as qualifications and employment and finally the environment are the core of the old and new strategy. Does this mean that it likely to work this time?

Now that the year 2010 has come, it is plain to see for everyone that the Lisbon 2010 strategy did not deliver the results it promised. The target of 3% of GDP of R&D expenditure increased from 1.82% to 1.9% between 2000 and 2008. This is dismal, given the goal of becoming the world’s most competitive economy. More fatally, most European citizens associate whatever improvements have been achieved – such as in employment – not with the EU Lisbon strategy. This is a not a good outcome for Europe, and we cannot afford another 10 years like that.

Why did it not work? The Lisbon strategy was flawed for two simple reasons. First, there were too many objectives, some of them in conflict with each other. This was partially rectified in the revamp of 2005, albeit too late. The second flaw was to define Europe’s strategy in terms of surpassing other countries. This view of competitiveness is misguided. Countries do not necessarily raise their living standard by passing others. Companies or football clubs do. In fact, European citizens typically benefit if other countries grow. In an interdependent world, this zero-sum view was unfortunate.

But the real reason why the Lisbon strategy had no bite was its lack of credible governance and as a result its lax implementation. The success of the Europe 2020 strategy will be decided by its implementation, which is why Europe 2020 needs proper governance, hard targets and sanction mechanisms, at least in those areas where it wants to be taken seriously. To be sure, subsidiarity and the need to avoid misspending at EU level continue to be important aspects of making Europe more credible. Yet, the future of sustainable growth in Europe will be significantly decided by effective policy coordination, both in Europe and globally: exit strategies, global imbalances, distortion of competition, climate change, and so on. It is hard to think of an economic or social problem that will not be decisively affected by international developments. Besides, companies are global too, a trend that is only to continue.

The experience with the Lisbon Strategy suggest a simple truth. The success of a European economic strategy crucially depends on the ability to put in place a credible sanction mechanism. In fact, in those policy areas where Europe does have such instruments – such as in the area of competition policy and state aid, as well as the Stability and Growth Pact – it works relatively well. Recent events surrounding Greece only support this point. What does all this imply for the Europe 2020 strategy?

There is a potential for significant collateral damage to a wrongly implemented Europe 2020 strategy, if it leads to a watering down of credible policy mechanisms that are already in place at a European level. The Stability and Growth Pact should not be watered down as a result of a new Europe 2020 strategy. Recently, Commissioner Almunia suggests that competition policy can make a contribution towards many of the Europe 2020 goals, such as green growth. Recall that the state aid rules have been relaxed significantly during the crisis, allowing an unprecedented amount of state aid in Europe. Recent reforms in EU competition policy already provide a credible framework for enforcing a level playing field. Further relaxation is not needed, and in fact would be counterproductive and make Europe less effective in achieving its goals.

In the post-crisis new world order we can not afford another unsuccessful European economic and social strategy. For Europe 2020 strategy to work better than the Lisbon Strategy we not only need a relatively small set of clear and consistent goals, but more importantly a credible implementation strategy. In this sense it would be step backwards to undermine policy areas, where that is already the case. If we want to move Europe forward, we should not throw out the baby with the bathwater.

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