Friday, March 09, 2007

What is wrong with Lisbon?
by Aurore Wanlin

The Lisbon agenda embodies a paradox. Progress made by the member-states has been slow and patchy. The German presidency in the first half of 2007 is playing down Lisbon, fearing that the process has been discredited by the EU’s failure to meet its targets. Commentators often cite Lisbon as an example of the mismatch between the EU’s grand ambitions and lack of delivery.

However, all national governments in the EU agree on the need to turn the EU into a competitive knowledge-based economy. They agree that to boost innovation will require not only more spending on research and higher education, but also more competition, flexible labour laws, and efficient financial markets.

Meanwhile, the rejection of the EU constitutional treaty in the Dutch and French referenda has made it clear that citizens will hold the Union responsible for member-states’ failure to deliver growth and jobs. Therefore delivery on Lisbon is also crucial to the future of the European Union.

So why is the pace of reform so slow? In 2005, the EU revamped the Lisbon agenda to address some of its weaknesses: it streamlined procedures and targets, clarified the respective roles of the Commission and national governments, and asked all EU governments to draw up national reform plans to increase ‘ownership’. However, according to many commentators, this institutional fix is unlikely to make it easier to do economic reform in Europe, for at least three main reasons: the difficulties of co-ordinating national reforms at the EU level, political obstacles to economic reform and new forms of poverty that feed popular resistance to change.

There are two main rationales behind the Lisbon agenda. The first is that co-ordinating reform at the EU level allows member-states to learn from each other and spreads best practice. The second is that economic reform in one country has a beneficial impact on other member-states’ economies. However, EU governments have over-estimated these two effects. It is not that easy to transpose economic reforms from one member-state to the other. A policy’s success depends on economic, political, and institutional factors that vary from country to country. The spill-over effect of structural changes, even within the monetary union, is often not visible or strong enough to create a real incentive for governments to co-ordinate national reform plans.

Economic reform is always politically difficult. The impact of policy changes can be unexpected and delayed, which makes it hard to explain and sell reforms to voters. Structural changes also create winners and losers, but while the losers are often small, well-defined and vocal groups, the potential winners are too numerous and amorphous to organise. This is a particular problem in countries like France or Germany where already strained public budgets make it difficult to compensate losers. Most importantly, national governments often lack clear strategies for economic reform. Their plans look more like a shopping list than a consistent programme. National governments should better prepare their reform programmes, prioritising the reforms on which they want to spend most of their political capital, starting with those that facilitate future changes and defining a clear timetable.

A third factor that makes economic reform difficult is the emergence of new forms of poverty and the absence of appropriate policies to address them. A lack of political leadership is often blamed for the failure to reform in Europe. But a Big Bang approach is not necessarily the best way to sort out a country’s economic problems. People resist change as they increasingly believe that their situation and that of their children is getting worse and political action has become inefficient. This resistance is fuelled by the emergence of new forms of poverty resulting both from globalisation and technological change and their impact on low-skilled workers and middle classes. The problem is that the welfare state was designed for the industrial society of the 70s that no longer exists. Social policies often fail to help today’s new poor. Unless national governments manage to find a way to address this issue popular resistance is unlikely to wane in the short-term.

Aurore Wanlin is a research fellow at the Centre for European Reform.

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