Charlemagne. The Lisbon lament

Europeans indulge in a spot of self-flagellation

IN A single week the baggage train of European leaders has moved from ancient Rome to modern Brussels: from the sublime to the depressing. It is not just the change of surroundings. When the leaders of the European Union's 25 member countries met near the Roman forum on October 29th, they signed a new constitution for the EU, amidst soaring rhetoric and stirring music. It is easy to feel optimistic when focusing on distant prospects of European brotherhood. But when the same leaders reassemble in an office block in Brussels on November 4th-5th, it will be to confront gloomier news from the here-and-now.

The main item on the agenda is a paper drawn up by a team led by Wim Kok, a former Dutch prime minister with a reputation as a reformer. Mr Kok's brief was to produce a progress report on the “Lisbon agenda”: the ambition to turn the EU into “the world's most competitive, knowledge-based economy by 2010”, set at an EU summit in Lisbon in 2000. Mr Kok's view of how things are going at the halfway stage is not encouraging. A draft of his report argues bleakly that “Europe has lost ground to both the US and Asia; its societies are under strain; and some ugly political forces are beginning to manifest themselves.”

The picture is not unrelentingly gloomy. Over the past five years, the EU has increased its employment rate (the proportion of the working-age population actually in work). It has highly competitive companies in civil aerospace, engineering and mobile telephones. The Kok report claims that the growth in the value of European high-tech exports has recently surpassed that of both America and Japan. Some smaller European countries, such as Sweden and Finland, have combined high growth and low unemployment with the commodious welfare state that is regarded as the embodiment of the European ideal. But the report's overall tone is glum: unemployment remains high, growth is slow, researchers are moving to America, manufacturers to China - and Europe's burgeoning army of pensioners makes it hard to see who will pay for generous welfare in the future.

Under the circumstances all that Mr Kok and his not-terribly-merry men can do is urge the EU to redouble its efforts. The Kok paper is, in short, like a prolonged school report, ending with the verdict “B-minus. Must try harder.” But who exactly must try harder? As Mr Kok accepts, it is unfair to lay the blame for the “failure” of the Lisbon agenda at the doors of EU. The structural reforms that are widely seen as crucial to the revitalisation of the European economy - lower taxes, the reform of pension systems, more labour-market flexibility, stronger incentives to work - are, above all, the responsibility of national governments. All that Brussels can do is to chivvy them along. Even when the EU does have legislative powers, its reforms are often stymied by recalcitrant members. Thus the goal of creating a common patent has been blocked by an interminable linguistic dispute. (Mr Kok suggests taking “the courageous decision of choosing English as the sole language” for patents. Fat chance, as they say in Paris.)

Some in Brussels might dream of acquiring the power to force through structural reforms. But that is not going to happen - and for good reason. Besides the technical complexity of harmonising social-security reforms across the European continent, experience suggests that the EU is ill-suited to imposing reforms. Brussels works by compromise. Thus any liberalising measures tend to be offset by bows in the direction of “social Europe”. The “Lisbon process” itself exemplifies the blunting effects of compromise. Although it was conceived originally as a spur to liberalisation, it has since become larded with a complete set of additional goals, such as environmental protection, sustainable development and the protection of the European “social model”. You name it, it can all be done in the name of “Lisbon”.

Hope from the east

If real reform is to happen in Europe, it is unlikely to be inspired by lectures from Brussels. Instead it will be hard necessity and the power of example that create the pressure for change. Fortunately, both are being provided by the ten countries that joined the EU in May, particularly the eight from central Europe.

The new boys bring refreshing new attitudes to the table. Communism has inoculated them against the joys of central planning and made them sceptical about welfare states. As poor countries that are determined to catch up, most are keen above all on growth and free enterprise. They are not afraid of change; on the contrary, they relish it. (“It must be so boring being prime minister of a country like Denmark,” mused one central European prime minister. “We do more reform in a single session of parliament than they do in five years.”) Countries such as Slovakia and Estonia have slashed taxes and red tape. Slovakia now enjoys a flat tax of 19% on corporate profits and personal income. Across the region, many economies are enjoying rapid growth. Slovakia, Hungary and the Czech Republic may all grow at over 4% this year; Poland and Estonia should beat 6%.

The effect on western Europe should be salutary. One of Germany's leading businessmen argues that “this country needs a shock to get it going, and maybe competition from our neighbours will provide it. Many mid-cap businesses in Germany are looking aggressively at opportunities in new member states.” Already workers at several German companies have reacted by accepting longer working hours for the same pay.

The pressure of competition from hungry central Europeans carries risks. It could spark a backlash against the single market; some older members are already asking why they should make big budget transfers to central European countries if such payments make it easier for them to hold down tax rates. But in general, if pressure from the east encourages western Europeans to push through long overdue reforms, the result will be faster growth everywhere. And the stimulus will have come not from Lisbon, but from Bratislava, Tallinn and Warsaw.

Commentary feature suggests that exhortations from Brussels will not be enough, probably real competition from the new EU Member States will be the more effective impetus for 'old' Europe to become more competitive.

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