European Innovation

Franco-German plans for a Competitiveness pact, which were put forward at the last EU summit have been met with great skepticism but done right, they could help address key areas of structural weaknesses.

After all, European leaders have wasted almost a year in getting to the root causes of the current crisis. Instead of addressing the underlying disease – be it a dramatic loss of competitiveness in Greece or Portugal or unsustainable economic imbalances in Ireland and Spain – they have fought economic decline with procedures. By focusing on the minutiae of how to reconcile the Lisbon Treaty with a permanent bail-out mechanism, the merits of European bonds, or the right size of the European Financial Stability Facility, they have neglected the truly important questions: how to sustain innovation, generate future growth, and drive job creation.

True, some would argue that the austerity measures implemented in some of the hardest-hit countries demonstrate that urgent action was taken. But austerity in itself is hardly a viable medium- to long-term strategy. Fiscal consolidation may be a prerequisite to getting one’s economic house in order, but the pain will be for naught in the absence of deep structural reforms aimed at generating future growth.

This is, of course, not the first time that European leaders have devised a strategy to increase their countries’ competitiveness. Back in 2000, they vowed to use the so-called Lisbon Agenda to turn the European Union into “the most competitive and dynamic knowledge-based economy in the world.”

Before issuing yet another new plan, they should learn the lessons of past failure. Above all, the conditions for “competitiveness” cannot be dictated from above. In democracies, the effort requires strong commitment among the public; otherwise, organized interests are likely to topple reform efforts.

Indeed, organized opposition can come from corners where one least expects it: businesses that do not want to give up subsidies and preferential treatment; protected professions, like doctors, lawyers, and engineers, who do not want more competition or transparent pricing; educational institutions that do not want to be subject to measurement and comparison.

What has gone wrong in Europe in the past decade hardly reflects a lack of analysis of what needs to be done, or a dearth of pompous proclamations about the need to improve. Rather, it is a profound mishandling of the political economy of reform, an unruly and often vicious process that is essentially a power struggle against incumbent interests. That is why one of the litmus tests for European leaders will not be their proclamation of yet another so-called competitiveness pact, but their willingness to alter dramatically the EU budget, shifting subsidies from agriculture to areas that support innovation, growth, and job creation.

Another lesson of the Lisbon Agenda is that in the absence of binding commitments and enforcement of sanctions – conditions that apparently will hold true for the new pact – rigorous monitoring and naming and shaming are indispensible. Countries must feel the pressure and embarrassment of underperformance, much like the OECD’s PISA study on education compelled countries into reforming school systems.

In addition, rather than waiting for all countries to sign up to a given measure, there should be more instances of “enhanced cooperation,” a hitherto seldom-used procedure that allows a minimum of nine countries to cooperate without requiring the other members’ approval. This mechanism was used recently to conclude a three-decade battle to establish a community patent, overcoming objections to translation requirements voiced by Spain and Italy.

Some observers will worry that greater use of “enhanced cooperation” might lead to a two-speed Europe. But the alternative to a two-speed Europe is a low-speed Europe, where every decision is sure to be blocked by some country or incumbent interest that stands to lose from a given reform. It is preferable to have at least some countries subscribing to ambitious, far-reaching policy goals, rather than reprise the usual lowest-common-denominator consensus that has bred mediocrity and economic decline.

One of the lessons of history is that there has never been a successful monetary union without economic union. A solid competitiveness pact can therefore be a step in the right direction. But it can only be the beginning of a continuous process of striving for excellence, benchmarking with the best in the world, and turning pious ideas into concrete actions.

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