Policy Brief: Economic Survey of the European Union, 2007

The EU economy is enjoying a strong cyclical rebound. Employment has risen, and the decline in the EU’s sustainable growth rate seems to have halted. Reforms are paying off, especially in the countries that started early. But there is a sizeable gap in GDP per capita compared with the OECD’s best performers, and the gap has widened over the past decade. Moreover, growth and employment performance differs considerably within the EU itself. Europe’s laggards need to learn from its best performers. The relaunched Lisbon Strategy for Growth and Jobs provides an overarching framework that strives to keep up the pace of reforms, taking advantage of the current favourable economic circumstances and providing the conditions for stronger growth.

Europe faces challenges from technological change, globalisation and population ageing. Globalisation brings opportunities for adaptable economies but punishes rigid ones, while ageing populations will put welfare systems under pressure. There are several ways the Union can help meet these challenges.

• Pushing ahead with the internal market. A vibrant internal market is central to Europe’s long-term prosperity. The services directive will help achieve this, but it is only a step towards liberalisation and integration. A major effort is needed to eliminate the remaining barriers to trade. Quicker and cheaper remedies for individuals would help knock down some of the remaining obstacles. In financial services, wholesale markets are fairly well integrated, but market segmentation in retail banking and the investment fund industry needs to be reduced. The internal market needs to be supported by better regulation, strong enforcement of competition rules and less and better-targeted state aid.

• Opening up network industries to competition. Inefficient network industries raise costs for consumers and other firms. Greater competition is needed in electricity, gas, telecoms, transport, ports and postal services. In energy markets, the network needs to be effectively separated from the generation and supply activities and national markets should be linked together better to create regional or pan-European energy markets. The EU’s recent Energy Policy for Europe is an important step in the right direction.

• Removing barriers to labour mobility. A mobile workforce can be an economic safety valve and can make firms more productive and innovative by bringing new skills and ideas. Mobility could be improved by making pensions more portable, improving the recognition of qualifications and removing restrictions on workers from the new member states.

• Making regional cohesion policy more effective. Regional funding has to focus on projects that can spark sustainable growth. Recent reforms go in this direction but they could be even more focussed. More of the funding should be tied to results so that resources get reallocated to projects where the payoffs are highest.

• Europe’s global role. The EU is one of the key trade players. Trade barriers on manufactured goods are already relatively low, except for certain processed food products, while liberalisation of internal market in services will also provide new opportunities for service providers from outside the EU. The EU’s policies will influence, together with those of the other main trade powers, whether the Doha trade round succeeds or whether world trade will splinter into regional agreements. Farm subsidies should be reduced and market access improved. Reforms to the Common Agricultural Policy have made it less distorting but the reforms would be even more effective if all support were de-linked from production. The commitment to cut greenhouse gas emissions by 20% is welcome. This goal should be achieved through market mechanisms as far as this is feasible.