‘Pentathlon for growth is key to economic success’

By Dana Spinant

Date: 17/03/05

The Belgian prime minister, a passionate cyclist, chooses a sporting metaphor to describe his plan for a new growth strategy for the European economy: the pentathlon.

re five structural weaknesses in the European economy - and five solutions: a code of convergence between the member states' economies, tax reform, completion of the single market, increased research and development spending, and fresh political guidance.

In an interview on the eve of the Spring Summit, which will take place on 22-23 March in Brussels, Verhofstadt calls into question the present EU strategy for competitiveness - the Lisbon Agenda - and proposes a fresh approach to revive the European economy.

He complains that the method currently used to achieve the Lisbon Agenda goals - the so-called open method of co-ordination - has failed to produce any tangible results, because it is "far too informal".

His study, 'A European Pentathlon', which he sent to his colleagues, the EU heads of state and government, contains a damning analysis of this method: "Simply compiling the results tables and reports, comparing the methods used and results achieved by different member states, has little effect other than making the European Union resemble an economic think-tank."

In addition to using the wrong method, the EU also has the wrong approach, by "focusing almost exclusively on national measures by individual member states". He calls instead for an "ambitious and collective community approach to bringing about a competitive European economy".

He claims that by favouring a national rather than a "Community-based approach, we risk seeing the uniqueness of the European social model being overshadowed and undermined by a battle between the national measures implemented by individual member states". Focusing on national action develops competition between member states which leads to "social and fiscal dumping in national plans [that] threatens to overpower a coherent community approach to problems - a threat that is all the more real following the recent enlargement of the European Union".

Dumping is a keyword in Verhofstadt's analysis. He warns that "neither doing nothing nor a frantic race between member states to push down the price of social protection or the public infrastructure are acceptable, since in both cases we are threatening to destroy the social model on which the European Union is based".

The five elements of his plan are:

Convergence

More convergence between member states' economies should be sought by establishing a range within which they must act in order to form a more integrated and competitive European economy. While insisting that "convergence does not mean harmonisation but paving the way for standardisation", the paper indicates that minimum and maximum levels should be established for socio-economic indicators, which member states should respect.

"The maximum limits of this range indicate the values which must not be exceeded if the economy is to remain strong. The minimum limits indicate the values which must be achieved in order to guarantee a basis for social protection and sustainable development."

These values would apply to such elements as the flexibility of the labour markets, the duration of an individual's working life or corporate taxation.

Such minimum and maximum levels for key socio-economic indicators would constitute "a practical convergence code which could be applied throughout the European Union". At any rate they would ensure that some action is taken and would prevent member states rushing blindly into forcing social costs down, resulting in "an endless downward spiral of social dumping". In the interview, the Belgian prime minister admitted that a certain degree of competition between member states must be allowed. "I do not deny that the new member states, in particular, need some adaptation time. This is why I emphasise that this must be done within the eurozone, while in the eurozone we already have a single currency and a truly integrated economy."

Tax reform

The paper states that "a substantial overhaul of the taxation system is needed in Europe to boost the European economy in relation to the rest of the world". It asserts that "today we are undermining the productive forces in our society" and urges a shift from "direct taxation and social contributions to indirect taxation", or from taxation of income to taxation of consumption. It states that such a shift would lead to a significant increase of real growth in Europe.

Verhofstadt insists he does not suggest a harmonisation of tax rates, but increasing the share of indirect taxation in the tax base.

Completion of the internal market

The priority would be the creation of an internal market in the services sector, "which is far too fragmented".

Deploring the delay in the transposition of directives pertaining to the internal market, he urges a more frequent use of regulations, which enter into force directly, without the need to be transposed into national legislation. He also calls for aspects of important directives to enter into force automatically once the time in which they were supposed to be transposed by member states in their national laws has elapsed.

Increase in R&D spending

Noting that Europe's R&D spending (1.93% of GDP) lags badly behind that of the US (2.76%) and Japan (3.12%), he calls for 18% of the EU's budget for 2007-13 to be spent on R&D. Such a figure could be obtained by allocating half of the spending on competitiveness and a quarter of the budget for regional spending by member states to R&D.

New political guidance

The European Commission should be responsible for implementing the new growth strategy and monitoring compliance with the convergence code. It should conduct a growth-test to determine how each national measure taken by a member state is in conformity with this convergence code.

In addition, each country should set up a special parliamentary committee consisting of members from both its national parliament and the European Parliament to oversee its decisions.

Verhofstadt himself calls his European pentathlon "an ambitious project", but adds that his colleagues, the government leaders, have a choice between "either contenting themselves with comparing tables and action plans or [launching] a new Community project following in the footsteps of the euro and the internal market".

According to the Lisbon implementation scorebord published on 17 March by the Centre for European Reform, Belgium ranks 13 in overall competitiveness performance, with only one of 17 Lisbon targets met.

In an interview on the eve of the Spring European Council, 22-23 March 2005, Belgian Prime Minister, Guy Verhofstadt, called into question the present EU strategy for competitiveness - the Lisbon Agenda - and proposed a fresh approach to revive the European economy. His five point plan included suggestions on 1. Convergence, 2. Tax reform, 3. Completion of the internal market, 4. Increase in R&D spending, 5. New political guidance.