European Innovation

Plans for a Pact for Competitiveness, which will guide the economic governance of the Eurozone, are long-overdue and present at last a promising resolution to the debt crisis. To date, European leaders have wasted almost a year in getting to the root causes of the current crisis. Instead of tackling the underlying disease – be it a dramatic loss of competitiveness in Greece or Portugal or unsustainable economic imbalances in Ireland and Spain – they have used their frequent summits to fight economic decline with process. Focusing on the minutia of how to open up the Lisbon Treaty to ensure a permanent bail-out mechanism, intense deliberations on the merits of eurobonds or endless discussions on the right size of the European Financial Stability Facility, the truly important questions – namely how to generate future growth, sustain our leading edge in innovation and drive job creation – have been neglected. 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. Budgetary consolidation may be a prerequisite to get one’s fiscal and economic house in order but these painful efforts will prove futile in the absence of deep structural reforms that have the potential to generate future growth.

This is of course not the first time that European leaders have plans to dramatically raise their competitiveness. As early as in the year 2000, they vowed to use the so-called Lisbon Agenda to turn the EU into ‘the most competitive and dynamic knowledge-based economy in the world.’ Before issuing yet another new plan, they should learn the lessons of failure from the past. Above all, countries cannot dictate the conditions for ‘competitiveness’ from the top. In democracies, it requires the commitment of society at large, otherwise organised interests are likely to topple reform efforts. It is important to realise that organised opposition can come from corners where one least expects it: from businesses that do not want to give up subsidies and preferential treatments; from protected professions, like doctors, lawyers and engineers, which do not want more competition or transparent pricing; from educational institutions, which do not want to be measured by excellence and be made subject to comparisons with high performers. Looking at what has gone wrong in Europe in the past decade, it is hardly a lack of analysis of what needs to be done, nor a dearth of pompous proclamations about wanting to improve. Rather, it is a profound mishandling of what one might call the ‘political economy of reform,’ an unruly and often vicious process which is essentially a political wrestling match with incumbent interests. That is why one of the real litmus tests for European leaders will not be the proclamation of yet another so-called competitiveness pact but their willingness to dramatically alter the EU budget, away from agricultural subsidies to causes that support growth, innovation and jobs.

Another lesson from the Lisbon Agenda is that in the absence of binding commitments and enforcement of sanctions – conditions that apparently will hold true for the Competitiveness Pact – rigorous monitoring and naming and shaming are indispensable. Countries must feel the pressure and embarrassment of underperformance, much like the OECD PISA study on education compelled countries into reforming school systems. In addition, rather than waiting for all countries to sign up to a given action, there should be more instances of ‘enhanced cooperation’, a hitherto seldom used procedure which allows a minimum of nine countries to cooperate without needing the approval of the other members. This mechanism was used recently to finally bring to conclusion a three-decade old battle to establish a community patent, overcoming the objections over translation requirements voiced by Spain and Italy. Some observers will worry that this might lead to a two-speed Europe, and they are right. But the alternative 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 vastly preferable to have at least some countries subscribing to ambitious, far-reaching policy goals rather than have the usual lowest-common denominator consensus that is the breeding ground for 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 is therefore a step in the right direction but 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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