Can Europe compete?
At this year's Economic Forum in Krynica, the region's biggest political and economic brains set their focus on making Europe more competitive - and found that if member states want to prosper, they will have to adopt politically unpopular reforms.
The competitiveness of the European Union in the global economy took center stage for the politicians and economists attending this year's 16th Economic Forum in Krynica. Only five years ago the authors of the EU's Lisbon agenda were dreaming of turning the bloc into the world's strongest economic superpower, but now the question is how to maintain stable economic growth and keep up with Asia's rising stars.
The Lisbon Strategy - adopted by the EU in 2000 - focused on four main issues: investing in R&D and education, liberalizing the market, enhancing entrepreneurship, and creating a new social model. The plan was supposed to help Europe's economy outpace that of the US by 2010. But in 2004, when a special team was set up to assess the achievements of the strategy, it turned out that instead of catching up with the US, EU member states were falling even further behind.
In March 2005, the Lisbon agenda was revised. The deadlines were scrapped and the main target became increasing R&D spending to three percent of GDP, with a longer-term aim of turning the EU into a knowledge-based economy. At the forum in Krynica, the biggest brains of the political and business scene were wondering how to rescue the strategy and enhance Europe's competitiveness.
Focus on education
"India is becoming a real challenge in services and China in production. But they are now shifting from merely copying to inventing. They are quickly catching up with educating high-level professionals, and without a focus on education and innovation we can't win that battle," said Viviane Reding, EU Commissioner for Information Society and Media, during a panel discussion.
Steven Fries, chief economist at Shell International, stressed that it is in Europe's best interest to opt for education. "One area I'd emphasize for the EU's future is to reinvigorate investment in skills, particularly in tertiary education. The second area that should get more focus is in basic research. Having access to high-edge technology is absolutely crucial for competitiveness," he said.
New priorities
Mikulas Dzurinda, Slovakia's former Prime Minister, went even further and said that the EU needs to totally change its spending targets. "In order for Europe to become more competitive, we need to spend more money on the Lisbon Strategy than on subsidies for farmers. We need to think in terms of creating more money and not how to spend it. We will win if the taxation system puts production before consumption," he said.
Currently, the EU's 25 member states invest roughly $230 (zł.718) billion a year in R&D, compared with more than $400 (zł.1,249) billion spent by the US. This disparity in research funding is already feeding a brain drain of scientists from Europe to the US.
Yet increased spending on research in countries such as Poland is a problematic issue in practice. Poland is at the bottom of the list of countries when it comes to R&D expenditure, and in its National Development Plan Poland even had to adjust the ambitious Lisbon target to its modest possibilities. Indeed, while the EU is aiming to spend three percent of its GDP on innovation, Poland will be happy to reach a level of 1.5 percent by 2008.
"In order to reach the Lisbon target, Poland would have to multiply its spending on R&D by five. We neither have enough money for that in the budget nor social consent to do that. So we have to adopt a different approach and try to activate the private sector on the one hand and try to attract the right kind of foreign investment," explained Andrzej Kaczmarek, Undersecretary of State in the Ministry of Economy.
Lisbon not enough
However, experts argue that achieving the Lisbon targets will not be enough to win the global economic race. The EU will also have to tackle the recurring problems presented by the good old 'welfare state'.
"What clearly differentiates Europe from the US and Asia is its high level of social protection. Politicians keep up the status quo in order to be re-elected. They not only promise that they won't cut social-welfare spending but that they will increase it. Going against this trend requires a great amount of political courage but it's absolutely crucial," says Civic Platform deputy Hanna Gronkiewicz-Waltz.
Professor Witold Orłowski, chief economist at PricewaterhouseCoopers, agrees that the welfare state should be reined in, but he also stresses that society in Europe is used to the welfare model and that it will take years to implement the required reforms.
"European states are very attached to their social model. Still, in the majority of European countries there exists the belief that in order for it to be competitive on the global scale the model has to undergo a deep modernization, and it is a serious dilemma." Orłowski told WBJ.
"It's very difficult to obtain social consent to modernize, but I believe it is possible to modernize the welfare state in such a way as to make it less costly and burdensome and at the same time to perform its functions," he added.
Flamboyant declarations
While almost all politicians know what reforms are needed to foster competitiveness - lower taxes, making social spending more efficient, streamlining bureaucracy - the problem is to obtain the necessary political consensus.
"During the many years I have spent working in EcoFin [The Economic and Financial Affairs Council at the Council of the European Union] we had billions of discussions on the Lisbon Strategy and improving the EU's competitiveness. It's tiring to hear that we need innovation, structural reforms and social-system change. When it came to implementation, on the local level many countries withdrew from their flamboyant declarations. The most important precondition is to have honesty, responsibility and the courage to look beyond the next electoral campaign," says Ivan Miklos, a Slovak MP.
The results of the recent elections in the CEE region prove that implementing unpopular reforms, even though they clearly foster GDP growth, usually costs their authors Ministerial posts. One does not have to look too far afield for examples - in neighboring Slovakia, the reform-minded government of Mikulas Dzurinda lost the elections to the currently governing populist cabinet of Robert Fico. Reform fatigue also makes politicians look for a scapegoat and Brussels seems a perfect target.
"Some politicians use the shield of Brussels to hide their inability to make reforms. The mood is dropping for the EU in general and the perception of Europe is very much damaged." says Dalia Grybauskaite, EU Commissioner for Financial Programming and Budget.
Former Prime Minister Marek Belka pointed out that while member states are loath to implement reforms required by the EU, they continually look to Brussels to prop up their costly programs.
"When in fear, God is dear. When we are in trouble we are looking for the EU's support - we have to make up our minds eventually," he says.
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