Communication from the Commission to the Council and the European Parliament - Productivity: The Key to Competitiveness of European Economies and Enterprises [SEC(2002) 528]
Date: 2002-05-21
Institutions: European Commission
Subjects: EU Member State, European industrial area, United States, business policy, competitiveness, industrial policy, information technology, innovation, new technology, productivity, secondary sector, tertiary sector

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 21.5.2002
COM(2002) 262 final

COMMUNICATION FROM THE COMMISSION
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT

Productivity: The Key to Competitiveness of European Economies and Enterprises

[SEC(2002) 528]

COMMUNICATION FROM THE COMMISSION
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT

Productivity: The Key to Competitiveness of European Economies and Enterprises

Table of content

1.

2.

3.

4.

5.

6.

7.

8.

9.

Introduction.................................................................................................................. 3

Productivity and the standards of living in the EU ...................................................... 6

The role of ICT and of innovation in productivity growth .......................................... 7

Productivity growth in European manufacturing in recent years................................. 9

Productivity growth in the European service sector in recent years .......................... 10

Human capital and productivity growth..................................................................... 12

Enterprise policy, competition policy and productivity growth................................. 14

Enterprise policy and sustainable development in manufacturing............................. 16

Conclusions................................................................................................................ 18

2

1.

INTRODUCTION

This  Communication,  which  is  based  on  two  recent  Commission  reports1,  aims  to
alert policy makers to the recent under-performance of the EU in labour productivity
growth, its causes and its implications for the goals set by the European Council in
Lisbon in March 2000 – the Lisbon strategy. It reviews productivity growth against a
background  of  policies  that  are  already  in  place.  It  points  to  the  political
determination that will be required if the objectives of the Lisbon strategy are to be
met.

The  Communication  does  not  cover  the  entire  set  of  factors  that  contribute  to
productivity  growth.  Consistent  with  recent  Competitiveness  Reports,  its  focus  is
narrower:  it  reviews  the  particular  role  of  new  technologies  and  of  innovation  and
central  issues  related  to  these.  The  Communication  constitutes  a  supplementary
reflection on the productivity  circumstances that  underpin  the  Lisbon  strategy.  It  is
also intended to provide an opportunity for the European Parliament, the Council, the
Economic and Social Committee and the Committee of the  Regions,  as  well as the
stakeholders,  to  express  their  opinion  on  and  debate  the  EU’s  productivity
performance  and  prospects,  and  the  policies  that  are  required  to  raise  its  rate  of
growth in a sustainable manner.

Recent  trends  in  EU  productivity  growth  are  not  sufficient  to  attain  the  economic,
social and environmental objectives set in the Lisbon strategy in the remaining years
to 2010. The Member States and the Commission must take the political initiative to
ensure that the structural reforms needed to correct this situation are now carried out
rapidly. These reforms have already been identified. Unless this happens, the Lisbon
goal will be missed.

The  Communication  discusses  factors  determining  productivity  growth  within  the
framework  of  the  Lisbon  strategy  and  provides  the  grounds  to  raise  some  central
questions.  The  rapid  technological  developments  being  experienced  by  the  EU
require  economic  life  to  be  organised  in  new  ways  to  exploit  the  emerging
opportunities. Although steps within the Lisbon strategy have already been taken, it
is  crucial  to  ask  whether  these  steps  are  sufficient  and  whether  they  are  being
implemented  with  the  necessary  urgency.  Without  them,  the  new  technological
environment will not emerge and producers and consumers will not be able to take
advantage of their benefits. Piecemeal implementation of the Lisbon strategy will not
raise  productivity  and  economic  growth  sufficiently.  Only  a  comprehensive
approach, where all steps are implemented in a co-ordinated fashion, will succeed.

Economic  growth  depends  on  the  accumulation  of  human  and  physical  capital,  the
growth of the active labour force and on the efficiency with which they are used. The
ability to obtain more output from given inputs of labour and capital corresponds to

1

The  reports  in  question  are  the  European  Competitiveness  Report  2001,  Commission  Staff  Working
Paper, SEC(2001) 1705, 29.10.2001 and the European Competitiveness Report 2002, Commission Staff
Working Paper, forthcoming. These reports are narrower in focus and inevitably do not examine other
crucially  important  aspects  of  economic  growth  in  the  EU  such  as  the  role  of  economic  policies,  of
skills, of R&D, of specific employment initiatives such as labour mobility or of the role of education. A
review  of  the  Commission’s  activities  in  these  important  areas  deserves  clearly  more  than  just  the
reference made here.

3

                                                
growth  in  productivity.  Productivity  growth  depends  on  the  quality  of  physical
capital,  improvements  in  the  skills  of  the  labour  force,  technological  advances  and
new ways of organising these inputs. Historically, productivity growth has been the
principal source of economic  growth.  It has made  possible  an  expansion  of  output,
not  just  without  concomitant  increases  in  inputs,  but  with  important  reductions  in
hours worked over the medium term. In doing so, it has made a sustained rise in real
incomes possible.

The  recent  slowdown  in  productivity  growth  in  the  EU  is  synonymous  with
deteriorating  competitiveness2.  Enterprises  will  be  competitive  when  they  can
achieve sustainable growth in labour and total factor productivity that permit them to
beat the costs per unit of output, and the non–cost characteristics, of other firms. This
is so both on the domestic and on the international  level. Such  productivity  growth
may  make  it  possible  to  finance  a  firm’s  expansion  plans.  But  it  also  offers  the
possibility to a firm to sustain real wage increases. Similarly, the standard of living
of a country rises when it achieves sustained productivity growth.

By strengthening the competitive position of innovative firms, productivity gains can
not  only  reduce  costs  per  unit  of  output,  but  also  expand  the  market  for  their
products. Citizens benefit through better products at lower product prices and, in the
medium term, through increased employment. Even if productivity gains are initially
restricted  to  specific  sectors  of  an  economy,  ultimately  they  are  diffused  beyond
these  sectors  through  changes  in  relative  prices  and  associated  increases  in  real
incomes. In general, a country that realises strong and sustained productivity growth
also sees its standards  of  living  rising  rapidly3. Europe’s golden age of  growth  and
convergence  in  the  years  following  World  War  II,  until  at  least  the  first  oil  shock,
demonstrates this.

Despite  good  macroeconomic  performance  in  recent  years,  labour  productivity
growth  in  the  EU  in  the  second  half  of  the  1990s  failed  to  measure  up  to  its  past
record.  This  can  only  be  seen  as  a  particularly  adverse  development.  With
employment growth traditionally weak, income growth in the EU depends crucially
on growth in labour productivity. The failure in recent years of labour productivity to
grow  even  at  its  historical  pace  means  that  growth  in  national  incomes  and  in
standards of living cannot be sustained.

Productivity growth is determined by a variety of factors. The central message of this
Communication is  that  a  key determinant of  Europe’s  recent  under–performance in

2

3

Competitiveness  is  understood  to  mean  a  sustained  increase  in  real  incomes  and  in  the  standards  of
living of regions or nations, with jobs available for all those who wish to find employment. This is the
definition  used,  for  example,  in  the  European  Competitiveness  Report  2001,  op.  cit.  This  concept,
which is different from the narrower concept applying to the competitiveness of enterprises, implies that
domestic  factors  are  the  dominant  determinants  of  competitiveness;  see  P.  Krugman  (1994):
“Competitiveness:  A  Dangerous  Obsession”,  Foreign  Affairs,  March/April  for  a  discussion  of  these
concepts.
Output  growth  is,  by  definition,  the  sum  of  growth  in  the  labour  input  and  growth  in  labour
productivity.  Productivity  growth  and  growth  in  the  standards  of  living  are  closely  related  because
growth of real wages equals the growth in labour productivity. While short–term data might support this
weakly, over long periods of time the correlation between the growth of real per capita income and the
growth in labour productivity is robust and very high. For the EU as a whole, the correlation between
real  per  capita  income  growth  and  labour  productivity  growth  for  the  period  1980–1985  is  1.00  and
remains at this value when observations by five–year intervals are added up to and including 2001.

4

                                                
productivity growth is insufficient innovative activity as well as under–investment in,
and weak diffusion of, information and communication technologies (ICT). This has
had serious consequences in the comparative performances of the United States and
the  EU.  The  surge  in  productivity  growth  in  the  United  States  has  been  sustained,
even in the midst of the recent economic slowdown. Indeed, the sustained growth of
United  States  labour  productivity  during  2001,  a  year  of  recession,  is  in  sharp
contrast  to  the  conventional  pro–cyclical  pattern  of  productivity  growth4.  This
performance reflects the impact of the gains resulting from investments made in that
nation’s technological and innovation assets. In the United States, the ICT revolution
has stimulated enterprise re–organization and has altered the terms of competition. It
has  also  shifted  the  demand  for  labour  towards  skills  suitable  for  the  new
technologies. In the EU, knowledge-intensive sectors have been driving employment
creation but productivity developments have been far less favourable than in the US.

This highlights a number of characteristics associated with countries or regions that
experience  strong  and  sustainable  productivity  growth.  They  include  technological
change,  a  well-maintained  or  growing  stock  of  human  capital  and  a  vigorous
innovation environment. In such an environment, opportunities emerge for new firms
to develop and for existing firms to reform their work patterns and to modernise their
operations.  The  competition  framework,  in  turn,  is  critical  for  maintaining  such  an
environment, for intensive competition spurs innovation, fosters productivity growth
and contributes to competitiveness.

Further, productivity growth is an important part of the broad issue of environmental,
social  and  economic  sustainability.  For  productivity  growth  determines  eco-
efficiency,  industry’s  output  relative  to  resource  use  or  pollutant  emission.
Productivity  growth  is  therefore  part  of  both  economic  and  environmental
sustainability.

All these characteristics can be influenced by public policy, which therefore can have
an important influence on productivity performance. That is why it is important that
the  poor  productivity  performance  of  the  EU  is  understood,  as  are  its  causes  and
consequences. The chapters that follow seek to contribute to this understanding and
to an appreciation of the political issues at stake.

4

Productivity growth tends to decline during a recession and to recover during the recovery phase of the
economic cycle, a reflection of the fact that firms hoard labour. United States productivity growth has
continued at a robust rate despite the slowdown in economic activity during last  year.  The  Bureau  of
Labour  Statistics  estimates  that  non–farm  business  productivity  advanced  at  5.2 %  (year–on–year)  in
2001:Q4, bringing the annual average at 2.0 %. While lower than the average of 2.6 % growth during
the 1995–2000 period, it should be stressed that was registered during a year of recession.

5

                                                
2.

PRODUCTIVITY AND THE STANDARDS OF LIVING IN THE EU

Since  the  beginning  of  the  1970s,  the  convergence  process  of  the  EU  towards  the
United  States  standards  of  living,  measured  by  GDP  per  capita  has  fluctuated
between  65 %  and  70 %  relative  to  the  United  States  benchmark.  Although  during
the  late  1980s  the  convergence  process  appeared  to  have  resumed,  this  was  short
lived. By 2001 the ratio of EU to United States GDP per capita was 65 %, the lowest
in  more  than  a  quarter  century.  Graph 1  shows  trends  in  the  EU  and  United  States
GDP per capita since 1970 to the beginning of the new century.

During the second half of the 1990s, and following a period of substantial slowdown,
the  United  States  saw  an  acceleration  in  both  labour  productivity  growth  (from  an
average  of  1.2 %  in  the  period  1990-95  to  1.9 %  in  the  period  1995-2001)  and  in
employment growth (from 0.9 % to 1.3 %). In the EU, growth in labour productivity
slowed down (from an average of 1.9 % in the first half of the decade to 1.2 % in the
period 1995-2001)  but employment  growth  picked up  considerably  (from  a  decline
of  0.6 %  in  the  first  half  of  the  decade  to  1.2 %  in  the  period  1995-2001).
Employment expanded by 1.8% in 2000 despite the slowdown in the second half of
the year.

The overall EU performance masks important differences across the Member States.
Austria, Greece, Finland, Ireland, Luxembourg, Portugal and Sweden have recorded
productivity growth in the second half of the 1990s close to or in excess of that of the
US, and in the case of Austria, Greece and Ireland, this has continued into 2001. It is
possible  that  this  reflects  the  possibilities  offered  by  the  Internal  Market,  and  the
consequent  increased  competition,  to  smaller  Member  States  that  stimulated  their
commitment to develop strategies for taking advantage of ICT in the wider European
market.

The  crucial  challenge  for  the  EU  is  to  achieve  such  conditions  where  both  strong
productivity and employment growth contribute to growth in national incomes and to
ensure that this is sustainable over the medium term. The Lisbon strategy has already
recognised  the  significance  of  raising  the  employment  rate  in  the  EU  and,  to  fulfil
this ambition, a wide variety of initiatives have been undertaken or are being pursued
(especially  through  the  Luxembourg  process)  at  the  level  of  the  EU  and  in  the
Member States5. But achievement of the Lisbon  goals hinges crucially on restoring
durable growth in productivity in the EU.

5

For a review of progress made along the Lisbon objectives see The Lisbon Strategy – Making Change
Happen,  Communication  from  the  Commission  to  the  Spring  European  Council  in  Barcelona,
COM(2002) 14 final, 15.1.2002.

6

                                                
Graph 1: GDP at 1995 market prices per head of population
(left scale in 1995 PPP; 2001 est., 2002-2003 forecasts; right scale EU/US ratio)

30

20

P
P
P
0
0
0
1

10

0

100

91

82

73

%

64

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

EU-15

US

EU-15/US ratio (right scale)

Series4

Source: Commission services (AMECO databank update 25.2.2002)

3.

THE ROLE OF ICT AND OF INNOVATION IN PRODUCTIVITY GROWTH

ICT  is  a  core  element  of  the  knowledge  society  and  an  important  complement  to
R&D activities.  ICT can be seen both as innovation per se and,  due  to its  general–
purpose  character,  a  vehicle  for  further  innovations  in  various  other  sectors  and
fields.  Unlike  traditional  types  of  capital  investment,  however,  ICT  represents
general–purpose  technology  whose  contribution  to  productivity  and  economic
growth is greater than the direct effect of ICT producing sectors. ICT is also a central
element in the innovation success of modern economies6.

A common characteristic across those  Member States  that  have  strong  productivity
growth comparable to or better than the United States in recent years is the pervasive
use  of  ICT.  A  consensus  has  now  developed  that  the  resurgence  of  productivity
growth in the second half of the 1990s in the United States and in some EU Member
States  is  closely  related  to  the  use  and  diffusion  of  ICT  that  permeate  a  wide  and
ever–increasing set of economic activities. This resurgence is confirmed by industry-
level  data  where  ICT  production  and  the  intensity  of  ICT  use  have  become  key
explanations  of  productivity  leadership.  In  fact,  United  States  data  suggest  that  the
productivity  revival  during  the  second  half  of  the  1990s  has  been  very  broad
affecting a large number of industrial classes.

6

The performance of the EU and the Member States in innovation is reviewed in a variety of indicators
presented  in  the  European  Innovation  Scoreboard  2001,  SEC(2001) 1414,  14.9.2001.  While  these
indicators offer a mixed picture concerning the underlying parameters that influence innovation across
the Member States (some  signalling improvements, others not), the point remains that the EU under–
performs, especially when compared to the United States, in the economic and commercial exploitation
of innovations and in innovation drive measured, for example, by patenting data.

7

 
                                                
The productivity gap between the EU and the United States in recent years is in part
a  reflection  of  the  lower  levels  of  ICT  spending  here.  In  the  period  1992-99  ICT
expenditure  amounted  to  5.6 %  of  EU  GDP  while  in  the  United  States  it
corresponded  to  8.1 %.  Indeed,  in  1999  the  ratio  of  ICT  expenditure  in  the  EU
relative to  ICT  expenditure in  the  United  States  had  declined  to  75 %  compared  to
90 % in 19927.

Empirical estimates suggest that the contribution of ICT to economic growth in the
EU during the second half of the 1990s is around 0.4 to 0.5 percentage points but in
the  United  States  the  estimates  range  from  0.8  to  1  percentage  points.  It  can  be
argued  that  the  EU  forewent  on  average  between  0.3  to  0.5  percentage  points  of
economic growth during the 1990s due to its lower investment in ICT8.

The  benefits  from  ICT  production  and  use  materialise  through  various  possibilities
and through changes in a variety of business practices. Essentially, the role of ICT in
enterprises is one of processing information and, thus, reducing  co-ordination costs
(for example, inventory management) that are endemic in a decentralised economy.
Firms  clearly  benefit  from  improvements  in  the  organisation  of  production  and
distribution, from better inventory management and from cost reductions associated
with substitution of more efficient and powerful computers for certain categories of
white–collar  labour.  Firms  can  thus  respond  more  effectively  to  changes  in  the
demand of their products. The use of ICT could also make possible an improvement
in  competitive  conditions,  thus  increasing  efficiency  and  reducing  prices9.  Finally,
the emergence of  new  industries and  sectors  has been  only  possible  because  of  the
intensive use of ICT.

Productivity growth in mature economies is determined less by capital accumulation
and  more  by  innovation  originating  in  private  and  public  institutions  and  within
firms.  Therefore,  the  conditions  that  make  innovation  possible  are  very  important,
especially  when  combined  with  the  conditions  facilitating  the  use  of  ICT.  A  good
example is the dramatic growth in biotechnology and life sciences in recent years, a
growth that would be inconceivable without the diffusion and innovations associated
with  ICT10.  ICT  in  biotechnology  has  been  crucial  to  stimulating  and  supporting
complementary innovations as well as strengthening the growth of this industry11.

7

8

9

10

11

For these estimates, see European Competitiveness Report 2001, op. cit., Table III.1 and Graph III.1.
See  European  Competitiveness  Report  2001, op.  cit.,  chapter III,  where  also  some  problems  with  the
ICT data are mentioned; note, further, that there is  uncertainty  about the exact contribution of ICT to
productivity growth.
Although  it  is  possible  that  it  might  facilitate  price  discrimination  or  product  differentiation  by
providing  firms  with  information  about  consumer  preferences;  see  “The  Microeconomic  Impact  of
Information and Communication Technologies in Europe”, chapter 6 in The EU Economy: 2001 Review
Investing in the Future, European Economy, no. 73, 2001.
The  role  of  ICT  and  innovation  in  the  growth  of  biotechnology  and  the  obstacles  encountered  is
discussed  extensively  in  the  European  Competitiveness  Report  2001,  op.  cit.,  chapter V  and  in  A.
Allansdottir  et.  al.  (2002):  Innovation  and  Competitiveness  in  European  Biotechnology,  Enterprise
Papers No 7, Enterprise DG, European Commission.
The  importance  of  biotechnology  for  Europe’s  future  has  now  been  widely  recognised  and  the
Commission adopted in January 2002 an Action Plan to support it; see Life Sciences and Biotechnology
–  A  Strategy  for  Europe,  Communication  from  the  Commission  to  the  Council,  the  European
Parliament,  the  Economic  and  Social  Committee  and  the  Committee  of  the  Regions,  COM(2002) 27,
23.1.2002.

8

                                                
With ICT now playing  a crucial role in the  modernisation  of  our economies and in
fostering  innovation,  it  is  essential  to  create  conditions  so  that  its  diffusion  is  the
widest  possible.  Some  of  these  conditions,  to  some  extend,  have  already  been
addressed  in  the  Lisbon  strategy,  others  have  not.  In  particular,  the  issue  of  the
Community  patent  has  yet  to  be  resolved.  In  addition,  barriers  to  firm  creation
remain,  industry/science  relations  in  the  Member  States  do  not  stimulate  enough
innovation, skilled labour shortages become acute at crucial stages of technological
modernisation  and  the  transition  from  the  conception  of  an  innovation  to  its
commercial  exploitation  is  often  very  difficult.  These  obstacles  should  be  of
particular  concern  in  those  Member  States  where  productivity  and  employment
growth has been notably weak in recent years. Clearly, much can be learned from the
experience  of  the  smaller  EU  Member  States  that  have  performed  admirably  well
through the 1990s.

4.

PRODUCTIVITY GROWTH IN EUROPEAN MANUFACTURING IN RECENT YEARS

Both  in  the  EU  and  in  the  United  States,  productivity  growth  in  manufacturing  is
highly correlated with those variables that reflect the firms’ capabilities, their use and
exploitation  of  knowledge  inputs,  their  use  of  ICT  and  their  engagement  in  R&D
activities.  These  factors  are,  of  course,  closely  intertwined  with  the  forces  that
manifest themselves in the process of innovation. In general, the evidence from EU
and United States data indicates that high R&D intensity is never associated with low
productivity  growth  while  low  research  intensity  is  usually  associated  with  low
productivity growth12.

During  the  1990s,  and  in  contrast  to  the  second  half  of  the  1980s,  productivity
growth  in  manufacturing  in  the  EU  was  lower  than  that  in  the  United  States.
Furthermore,  the  acceleration  in  productivity  growth  in  manufacturing  between  the
first and the second half of the 1990s to 3.2 % was only 0.1 percentage points while
in  the  United  States,  at  5.5 %,  it  was  2.3  percentage  points.  Thus,  the  pattern
observed for the economy as a whole is also confirmed in the manufacturing sector.

In  the  1990s  in  the  EU,  technology–driven  industries  (pharmaceuticals,  chemical
products, office machinery and computers, electronic and TV and radio transmitters,
medical  equipment, etc.) saw the highest  productivity  growth, followed  by  capital–
intensive  industries  (textile  fibbers,  pulp  and  paper,  man–made  fibbers,  iron  and
steel,  non–ferrous  metals,  etc.).  The  latter,  however,  experienced  the  highest
productivity growth during the first half of the decade.

At the same time, in the United States, technology–driven industries have taken the
lead  in  productivity  growth  throughout  the  decade.  These  industries  have  had  a
higher  share  in  total  manufacturing  in  the  United  States  compared  to  the  EU
throughout  the  period  since  1985  and  this  divergence  has  risen  considerably  over
time. By 1998,  for example,  technology–driven industries  represented  around  35 %
of manufacturing value added in the United States compared to around 24 % in the
EU. The United States share has risen by almost 9 percentage points over the period
1985–1998 while the EU share has increased by only 1.5 percentage points.

12

See European Competitiveness Report 2001, op. cit., chapter IV.

9

                                                
Clearly, the low share in technology–driven industries in the EU is symptomatic of
some  potentially  serious  problems.  It  is  not  simply  that  these  industries  invariably
lead in innovation and industrial efficiency but also that, by having a larger presence
in value added, they contribute correspondingly more to aggregate productivity and
real  incomes  growth  in  an  economy.  Furthermore,  as  vehicles  for  applied  new
technologies,  these  industries contribute  to the wider diffusion  of  new  technologies
and  to  technological  modernisation.  Finally,  the  size  of  the  technology–driven
industry in an economy plays an important role in the transmission and adoption of
technological  advances  across  borders.  The  evidence  from  EU  data  suggests  that,
while  the  relationship  between  R&D  and  economic  performance  is  weak  within
Member  States,  it  is  in  fact  substantially  stronger  across  Member  States,  implying
that  there  are  significant  international  technology  spillovers.  These,  of  course,  are
dependent upon the size of the sector that propagates these spillovers but also due to
the openness of the economies to trade.

Partly  as  a  result  of  such  international  technology  and  innovation  spillovers,  the
pattern  of  productivity  growth  in  manufacturing  across  countries  has  become  more
similar over time. There has been an increasing convergence across industries in the
EU and the United States in productivity growth in recent years, unlike in the 1980s
when United States productivity growth across industries was significantly different
from  the  pattern  in  the  EU.  Nonetheless,  the  low  share  of  technology–driven
industries in the EU is a worrying feature at the background of the weak productivity
and innovation record of recent years.

The  Lisbon  Council  emphasised  the  importance  of  new  technologies  and,  in
particular,  ICT  and  innovation  as  well  as  the  role  of  R&D  in  building  Europe’s
future. The Barcelona Council endorsed a target of 3 % of GDP in private and public
R&D  spending  by  the  end  of  the  decade,  two  thirds  of  which  should  be  private
R&D13.

5.

PRODUCTIVITY GROWTH IN THE EUROPEAN SERVICE SECTOR IN RECENT YEARS

The  problem  of  weak  productivity  growth  in  the  EU  in  recent  years  is  particularly
acute in the service sector.  However, productivity  in this sector  is  more  difficult to
estimate  and,  despite  the  fact  that  many  ICT  applications  have  been  introduced
vigorously  in  services,  this  apparently  has  not  contributed  to  rapid  measured
productivity  growth,  or  its  acceleration,  here.  Indeed,  the  slowdown  in  aggregate
productivity  growth  in  the  EU  during  the  second  half  of  the  1990s  compared  to
earlier years, and the small acceleration in productivity growth in the manufacturing
sector,  suggest that the service sector  will  have  seen  a  notable  slowdown  in  labour
productivity  growth  during  this  period.  The  problem  is,  of  course,  compounded  by
the fact that the share of services in EU GDP has been rising over time even though it
remains considerably lower than in the United States economy14.

13

14

See Presidency Conclusions – Barcelona European Council, 15 and 16 March 2002, point 47.
Data on the service sector is not available on a comparable basis across the Member States and the EU.
For  those  where  such  data  exist,  the  share  of  the  non-agricultural  business  sector  services  in  GDP  in
1999 was 51.3 % (excluding real estate 41.2 %) in the United States and between 42.6 % (31.1 %) in
Denmark and 49.0 % (39.1 %) in the United Kingdom; see European Competitiveness Report 2002, op.
cit.

10

                                                
Productivity growth in business sector services in the United States accelerated from
an  average  of  1.3 %  in  the  period  1990–95  to  an  average  of  3.1 %  in  the  period
1995–99. In contrast, with the exception of two (France and the United Kingdom) of
the  seven  Member  States  for  which  comparable  data  are  available,  service  sector
productivity growth in fact declined during the second half of the decade, and where
it rose it did so by a modest 0.1 to 0.3 percentage points15. At the same time, while
the United States saw a parallel increase in employment growth in the service sector,
the  general  weakness  in  service  sector  productivity  growth  in  the  EU  has  been
accompanied by an acceleration in employment growth.

It  is  possible  that  measurement  errors  conceal  the  underlying  productivity
performance  of  the  service  sector.  Measuring  accurately  the  output  of  this  sector,
especially  in  a  period  of  rapid  technological  change,  is  extremely  difficult.  If  the
inflation  in  the  service  sector  is  overstated  (invariably  because  of  difficulties  in
accounting  for  quality  improvements  following  innovations  and  organisational
changes)  then  the  implicit  productivity  growth  is  understated.  Extended  to  the
economy as a whole, this suggests that European productivity growth may not have
been as weak as prima facie the data suggest.

Sectoral data indicate that productivity growth in wholesale and retail trade, financial
intermediation  and  in  renting  and  other  services  in  the  United  States  outdid  the
corresponding EU performance in the second half of the 1990s. The EU, on the other
hand,  recorded  strong  productivity  growth  in  transport  and  storage,  in  post  and
telecommunications and in electricity, gas and water supply. The comparatively low
GDP  share  of  each  of  these  sectors  in  the  EU  tends  to  reduce  their  impact  on
aggregate productivity growth16.

The service sector is an important user of ICT and, as mentioned earlier, lower levels
of ICT expenditure are at the source of the recent slowdown in productivity growth
in  the  EU.  However,  typically  innovations  in  this  sector  are  introduced  through
acquired technology – ICT, organisational changes and human capital – rather than
through direct R&D spending by service firms themselves. Institutional factors could
play a crucial role in this process.

The service sector is generally characterised by below average productivity growth.
Yet, because its share in GDP is increasing, the implied greater employment growth
has not materialised sufficiently in the EU to make a decisive difference to Europe’s
employment  performance.  Because  of  the  rising  demand  for  services  as  incomes
grow,  the  EU  must  ensure  that  the  potential  employment  gains  associated  with  the
growth of the service sector are realised. This requires that obstacles to the growth of
the service sector be removed.

Recent  initiatives  already,  or  to  be,  undertaken  within  the  Lisbon/Barcelona
framework  ought  to  contribute  to  raising  productivity  growth  and  employment
growth in the service sector. For example, there is some evidence that those Member

15

16

See European Competitiveness Report 2002, op. cit.
See  for  a  detailed  discussion  of  sectoral  developments  Employment  in  Europe  2001,  European
Commission,  2001,  especially  chapter  3.  In  particular,  it  was  argued  here  that  enterprise  and
competition  policies  would  have  the  same  effect  in  boosting  productivity  growth  as  employment
policies since aggregate productivity growth reflected productivity improvements within sectors rather
than changes in the sectoral composition of employment; see also the discussion in section 7 below.

11

                                                
States which liberalised and deregulated service sectors early had faster productivity
growth  than  other  Member  States.  For  example  Finland  and  the  UK  experienced
higher  growth in labour productivity in total business services during 1995-99  than
the other EU Member States for which data are available. Thus, market liberalisation
measures  as  well  as  steps  towards  a  single  market  in  financial  services  must  be
pursued  vigorously.  It  is  also  essential  to  support  incentives  for  innovation  in  the
service  sector.  And,  finally,  the  environment  determining  the  performance  of  the
distribution and of the retail sectors, including rules that govern the setting up of new
firms should be eased especially without introducing new restrictions on the scale of
operations of these outlets.

6.

HUMAN CAPITAL AND PRODUCTIVITY GROWTH

A skilled labour force plays a fundamental role in economic and productivity growth.
Investment in human capital (as well as the stock of human capital) in an economy is
accompanied by significant externalities as the benefits accruing to the economy as a
whole  exceed  the  gains  accruing  to  private  individuals.  These  social  benefits  are
associated with the complementarity of skills and knowledge in the development of
new  technologies,  with  the  rate  of  innovation  and  with  the  creation  of  further
knowledge that expands the range of technological and economic opportunities. It is
crucial  that  the  labour  force  in  the  EU  possesses  the  skills  that  are  necessary  to
realise Europe’s economic, social and employment ambitions.

Clearly, human capital covers a broad range of skills, from those highly intensive in
science and education to those developed through training and upgraded through life-
long learning. Productivity growth and economic prosperity clearly depend on skills
and  competencies  that  concern  the  whole  of  the  labour  force,  and  this  is  why  it  is
essential in the EU that such competencies be developed across all skill categories.

However,  special  concerns  have  appeared in  recent  years.  In  particular,  the  modest
share  of  ICT  in  the  EU  has  coincided  with  reported  shortages  of  ICT  skills  in  the
second half of the 1990s which, in turn, has likely accentuated the problems of rapid
ICT  diffusion  across  the  EU  economies17,  affecting  adversely  productivity  and
income growth.

Human  capital,  especially  in  technology–driven  sectors,  contributes  to  productivity
growth  both  through  the  accumulation  of  knowledge  and  its  diffusion  and  through
the  smooth  matching  of  the  demand  for  skills  and  their  supply.  As  noted  earlier,
technology–driven  sectors  in  the  EU  have  led  productivity  gains  and  this  is  highly
correlated with the fact that employment growth in these sectors, undoubtedly more
human  capital  intensive  than  elsewhere  in  the  economy,  has  been  strong  for  a
number of years now18. Overall, the demand for labour in the EU in recent years has

17

18

This issue was briefly examined in European Competitiveness Report 2001, op. cit., Annex III.1. The
problem of skill imbalances is particularly worrying since it has occurred in a period of chronically high
(albeit declining) unemployment. See also European Central Bank (2002): “Labour Market Mismatches
in  Euro  Area  Countries”,  March,  for  a  more  detailed  discussion;  the  ECB  finds  that  educational
mismatch, in particular, was worse in 2000 compared to 1992.
See Employment in Europe 2001, op. cit., especially chapter 2. The strong employment growth in the
technology–driven service and in high–education sectors in recent years (and the robust growth in high–
skilled  non–manual  professionals)  is  clearly  at  variance  with  the  weak  labour  productivity  growth
registered  by  the  service  sector  as  a  whole.  This  signals  the  possible  presence  of  the  measurement

12

                                                
shifted away from traditional skills towards modern and high–skilled human capital
labour and it reflects changes in the content of jobs themselves rather than changes in
the sectoral allocation of employment.

Between  1995  and  2000  1.5 million  jobs  were  created  in  the  high-tech  sector  and
5.5 million in high-education sectors, with high-skill non-manual jobs accounting for
over  60 %  of  them.  Job  creation  in  fast-growing,  knowledge-intensive,  sectors
accounted  for  more  than  two  thirds  of  new  high-  and  medium-skill  jobs,  and  for
practically all the employment growth of low-skilled employees.

However, this increase in the employment of high–skilled labour (and a parallel and
widespread decline in low–skilled labour) has not been matched by a corresponding
increase  in  educational  attainment.  The  growth  rate  of  the  latter  has  fallen  short  of
the growth in the former, suggesting that between 1995 and 2000 labour markets in
the EU became tighter19. At the same time, however, there is evidence that the supply
of skilled workers in the EU will undoubtedly improve in coming years. In younger
age cohorts, in particular, educational attainment is closer to the skill characteristics
of the demand for labour than it is in the adult population as a whole. Nevertheless,
an uneven distribution of such characteristics across the Member States suggests that
policies  that  support  development  of  human  capital  are  also  different  across  the
Member States; clearly, Member States that lag behind ought to catch up. However,
in the short term labour mobility is an essential complement of matching demand for
and the supply of skilled labour.

Sustained income and productivity growth depends crucially on smooth adjustments
in the labour market20. Skill imbalances are invariably very disruptive of this process
and preventing them is becoming an important challenge in an environment of rapid
technological  change  associated  principally  with  the  expanding  diffusion  of  ICT
across  industries  and  economies.  During  the  current  period  of  slow  growth,  and
following  the  burst  of  the  so-called  dot.com  bubble,  it  appears  that  the  problem  of
skill imbalances may, in the short term, lose some of its urgency. However, given the
on–going  technological  transformation,  the  skill  intensity  of  our  economies  will
increase.  It  is  essential,  therefore,  that  a  network  of  coherent  policies  –  education,
science,  training,  mobility,  etc.  –  reinforce  each  other  to  ensure  that  the  emerging
demand  for  skills  is  met  on  a  durable  basis  without  obstacles21.  These  issues  are
central to the Lisbon agenda and the Commission has emphatically stressed the need
for the Member States to make progress in the area of human capital development22.

Knowledge (and the capacity to use it effectively) is a key to the competitiveness of
our economies. To ensure that the people of Europe have the required knowledge and

problems  mentioned  earlier.  It  could  also  reflect  a  lag  between  human  capital  accumulation  and
measured productivity growth very much in the same vein as when the initial surge in ICT investment
did not translate into measured productivity growth until some years later.
See European Competitiveness Report 2002, op. cit. While similar trends occurred in the United States
as well, increased immigration provided a partial solution to labour market tightness.
See European Central Bank (2002): op. cit., for a discussion of the importance of an efficient matching
process in the labour market in the Euro area in particular.
With particular reference to science and technology, there are already  worrying trends concerning the
supply of these professionals in coming years; see Benchmarking National RTD Policies: First Results,
Commission Staff Working Paper, SEC(2002) 129, 31.1.2002, and also European Central Bank (2002):
op. cit., section 4 for a discussion of measures aimed at improving the functioning of the labour market.
See The Lisbon Strategy – Making Change Happen, op. cit.

19

20

21

22

13

                                                                                                                                                        
skills,  coherent  strategies  and  practical  measures  fostering  lifelong  learning  for  all
are to be developed and implemented23. New ways of education and training have to
be explored,  and the use of technology  for  learning  must be reinforced  to  facilitate
access to and to increase quality of learning.

The  Commission  has  also  recognised  that  mobility  of  researchers  and  skilled
professionals  is  crucial  to  enhancing  the  transfer  of  knowledge  and  of  technology
across  different  actors  in  the  European  research  and  innovation  system,  including
industry24. Clearly, an extension of European Research Area to the rest of the world,
and  taking  greater  account  of  its  international  dimension,  will  undoubtedly  benefit
EU enterprises and will foster the entrepreneurial propensity of researchers, through
the  exchange  of  experiences  and  knowledge.  These  will  also  enrich  Europe’s
research capabilities.

7.

ENTERPRISE POLICY, COMPETITION POLICY AND PRODUCTIVITY GROWTH

The complementary nature of enterprise and competition policies is recognised in the
EC Treaty.25 They are both cornerstones of the EU policy  framework for achieving
high  and  sustainable  productivity  growth,  for  that  growth  depends  on  a  regulatory
environment  that  enables  enterprises  to  access  new  markets  and  to  turn  inventions
into  innovations.  Thus  the  Lisbon  goal  calls  for  policies  that  establish  an
environment conducive to enterprise growth and innovation while ensuring that the
market  players  are  subject  to  uniform  rules.  Enterprise  policy  focuses  on  the  first
objective,  while  competition  policy  emphasises  the  second.  But  both  policies
contribute to high and sustainable productivity growth. Effective competition does so
by  inducing  firms  to  search  for  efficiency-enhancing  solutions  that  lead  to  product
and process innovation. Enterprise policy does so by  correcting market failures  and
enabling more firms to engage in market transactions, thus increasing the population
of potentially innovative firms.

The objective of making the  EU a  globally competitive knowledge–based economy
implies that measures to support economic growth should not lead to centralisation,
increased  concentration  or  increasing  state  aids.  Productivity  growth  is  determined
by  improvements  in  the  quality  of  inter–firm  interaction,  by  the  accumulation  of
knowledge and by market–based choice of best solutions. Competitive firms are the
carriers of change, providing the link between abstract ideas and innovation–driven,
growth–generating  market  evolution.  Within  this  process,  technical  progress  and
organisational  change  are  inseparably  entwined.  Innovative  firms  prosper  in  broad
knowledge pools from which they draw inputs and into which they in turn contribute
new knowledge.

23

24

25

See Making a European Area of Lifelong Learning a Reality, Communication from the Commission to
the European Parliament and the Council, COM (2001)°678 final, 21.11.2001.
See  Mobility  Strategy  for  the  European  Research  Area,  Communication  from  the  Commission,
COM(2001) 331 final, June 2001; the Commission’s interest in issues of mobility of professionals and
researchers is long-standing, with an increasing emphasis in recent years, as can be seen in the various
initiatives surrounding the 6th Framework Programme.
For a more extended discussion of this issue, see European Competitiveness Report 2002, op. cit.

14

                                                
Even  though  enterprise  and  competition  policies  share  a  basic  view  of  market–led
growth and are mutually reinforcing each policy has its own emphasis. They need to
be balanced, as the following examples make clear.

(1)

Proper  product  and  geographic  market  delineation  is  crucial  for  competition
decisions. This is so because the assessment of market power requires precisely
defined markets. While market definition is not required for enterprise policy,
its  instruments  –  such  as,  the  Internal  Market  legislation,  standardisation  and
benchmarking  –  affect  market  structures  which  then  are  analysed  for
competition purposes.

(2) Co–operation  between  firms  in  the  field  of  innovation  and  the  creation  of
knowledge  networks  contributes  to  productivity  growth.  Such  co-operation  is
mostly unproblematic for competition. However in some cases it can result in
foreclosure of markets or prevent innovation by competitors. The challenge to
the  regulator  (for  example  in  the  review  of  the  technology  transfer  block
exemption  regulation  and  in  modernising  antitrust  procedures)  is  to  create  a
regulatory  environment  that  fosters  R&D  co-operation  and  innovation  while
preventing  anti-competitive  practices  that  may  reduce  consumer  welfare.  In
merger  cases  in  innovative  sectors,  the  balance  must  be  struck  between  the
need  to  reap  economies  of  scale  in  R&D  and  the  need  to  preserve  sufficient
competition between R&D knowledge pools.

(3) A  competitive  environment  naturally  drives  firms  to  restructure  or  merge  in
order  to  gain productive efficiency.  Efficient  firms  compete  more  vigorously,
further reinforcing  their  competitiveness.  This  can  lead  to  a  virtuous  cycle  of
increasing productivity. Competition policy has recognised this  in the  Merger
Regulation,  which  offers  a  one-stop  shop  to  facilitate  industrial  restructuring.
The  current  Merger  Review  offers  an  opportunity  to  assess  whether  the
existing  tools  could  be  improved.  In  particular,  it  offers  an  opportunity  to
decide whether the Merger Regulation should permit verifiable merger-specific
efficiency gains to offset negative effects such as price increases caused by the
creation or strengthening of a dominant position.

(4) Technological  development  and 

increased
productivity,  are  by  their  nature  uncertain.  Assessing  their  effects  for  future
market  dynamics  and  for  future  competitive  conditions  is  a  permanent
challenge.  Competition decisions can take  such  developments  into  account  to
the extent that their consequences are predicted with sufficient certainty.

the  drivers  of 

innovation, 

(5) The Commission recognises the legitimacy of using state aid to address market
failures. Areas such as R&D and access to risk-capital for new and innovative
businesses  are  cases  in  point.  However,  the  need  to  close  productivity  gaps
between  the  EU  and  its  competitors  should  not  detract  from  the  need  for
overall reduction in the volume of state aid or from to the need for continuing
administrative simplification.

Balancing enterprise and competition policy objectives is a concern of Commission
policy,  whose  success  will  contribute  to  an  environment  supportive  of  economic
growth.

15

8.

ENTERPRISE POLICY AND SUSTAINABLE DEVELOPMENT IN MANUFACTURING

Enterprises play a key role in generating income and employment, contributing to the
economic  and  social  dimensions  of  sustainable  development.  At  the  same  time
however, in common  with  other  activities, enterprises  inevitably  exert  pressures  on
the  environment.  Realising  the  Lisbon  prospect  of  an  EU  GDP  growth  rate  of  3 %
per annum might therefore at first sight be seen as further increasing environmental
pressures.  Indeed,  the  Stockholm  European  Council  recognised  that  the  pursuit  of
economic growth and environmental protection should advance in parallel.

The experience of the EU manufacturing sector shows that it is possible to combine
higher  economic  growth  rates  with  reducing  environmental  pressures.  The  Single
Market programme and the progressive deregulation of markets through the Lisbon
process  have  improved  the  economic  performance  of  manufacturing,  allowing  the
avoidance  of  a  trade-off  between  economic  growth  and  environmental  impact.  The
additional  resources  thus  provided  for  environmental  protection  have  made  it
possible to meet the inevitably greater demands for environmental quality as society
becomes  richer.  Environmental  policies  have,  at  the  same  time,  set  standards  and
provided  incentives  for  industry  to  improve  its  environmental  performance.
Manufacturing  has  thus  been  able  to  achieve  the  phenomenon  of  the  so-called
environmental Kuznets curve, that as real output increases, emissions of pollutants at
first increase but subsequently peak and begin to decline at higher output levels.

Indeed,  perhaps  contrary  to  common  belief,  on  the  basis  of  best  knowledge  and
available statistics, it appears that far from increasing, there has in fact been a decline
in  some  of  the  environmental  pressures  from  manufacturing  over  the  last  twenty
years26. In these cases, EU manufacturing industry has therefore largely managed to
decouple higher manufacturing growth from increased environmental pressure.

A  striking  example  of  the  progress  made  by  manufacturing  is  the  substantial
reduction over the last twenty years in its emissions of the gases that cause acid rain,
such  as  sulphur  dioxide  and  nitrogen  dioxide.  Graph 2  shows  that,  despite  over  a
30 %  rise  in  manufacturing  production  over  the  period  1980-99,  emissions  of
acidifying  gases  declined  by  some  two-thirds27.  Similarly,  over  the  same  period,
industrial  emissions  of  ozone-precursors  have  been  reduced  in  absolute  terms  by  a
quarter.  Production  of  ozone-depleting  gases  in  the  EU  has  now  almost  ceased.
Meanwhile energy consumption has remained broadly constant since the mid-1980s
despite  the  increase  in  manufacturing  output.  This  has  contributed  to  the  reduction
that  has  occurred  in  industrial  emissions  of  greenhouse  gases  since  the  Kyoto
baseline date of 1990.

Between  1990  and  2000  EU  manufacturing  industry  saw  a  10,5 %  reduction  in
greenhouse  gas  emissions,  making  a  major  contribution  to  achieving  the  Kyoto
objective. This progress resulted from a mixture of developments, some of which are
unlikely  to  be  repeated,  in  various  sectors28.  Recent  years  have  also  seen  some

26

27

28

These and related issues are discussed in European Competitiveness Report 2002, op. cit.
See European Competitiveness Report 2002, op. cit., Graph V.8. The figures are adjusted for the one-
off effects of German re-unification.
The Kyoto objective is an 8 % reduction in greenhouse gas emissions in 2008-2012 compared to 1990.
Trends in emission reductions could change swiftly; current estimates suggest that the EU will not meet
the Kyoto challenges without greater efforts.

16

                                                
stabilisation in industrial consumption of minerals and ores. Overall, the performance
of  EU  industry  compares  favourably  with  that  of  United  States  industry.  In  the
extreme  case  of  acidifying  emissions,  the  eco-efficiency  of  EU  industry  has
increased almost twice as quickly as in the United States.

Graph 2: Eco-efficiency of EU manufacturing industry: Acidifying emissions
(eco-efficiency, production, emissions; index 1980 = 100)

450

400

350

300

250

200

150

100

50

0

Eco-efficiency

Production

Emissions

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

Source: Commission services

The  gradual  introduction  of  environmental  policies  has  had  a  clear  role  in  these
developments. For example, the most significant decoupling of acidifying gases from
economic growth was the result of staged national reduction programmes under the
Large Combustion Plants directive of 1988. Environmental policy also played a key
role  in  the  phasing  out  of  CFC  ozone-depleters.  Gradual  policy  progress  has  also
been  made  in  other  areas.  Manufacturing  industry  has  responded  to  the  increased
intensification  of  environmental  regulation  by  developing  new  technologies,
improving its management practices, and greater investment in pollution prevention
technologies.

Nevertheless  the  environmental  improvements  have  come  at  an  important  financial
cost to manufacturing industry. Environmental expenditures by EU industry stood in
1998  at  EUR 32 thousand  million,  some  0.4 %  of  GDP  or  2 %  of  industrial  value-
added. A drift upwards in environmental protection expenditures has occurred since
the early 1980s. It is clear that the additional resources made available by increased
productivity, resulting from the economic reform process, have been essential for the
successful 
financing  of  environmental  progress  combined  with  continued
manufacturing growth.

Further  implementation  of  structural  economic  reforms  and  further  environmental
policies are needed to ensure the continuation of the avoidance of a trade-off between
economic  growth  and  environmental  progress  in  manufacturing.  Careful  attention
needs  to  be  paid  to  the  proper  balance  between  further  legislative  requirements  for
environmental  improvements  and  their  costs  to  ensure  that  economic  growth  and
environmental improvements are allowed to progress alongside one another. At the
same time, the economic costs of non-action in terms of, for example, reduced public

17

health or damages to buildings have to be taken into account. To facilitate this, the
Commission  has  committed  that  all  major  new  proposals  be  submitted  to  impact
assessments,  which  take  full  account  of  their  environmental,  economic,  and  social
consequences. Environmental policies should also utilise as far as possible the most
efficient  market-based  instruments,  such  as  emissions  trading.  Finally,  in  order  to
attempt  to loosen potential  trade-offs  between  economic  growth  and  environmental
pressures,  the  Commission’s  Action  Plan  on  Environmental  Technology  will
stimulate  the  innovation  and  diffusion  of  environmental  technology.  This  will
increase  the  benefits  of  high  environmental  standards  for  competitiveness.  Indeed,
besides  imposing  costs  to  industry,  environmental  policies  can  also  contribute  to
competitiveness and economic growth by inducing greater production efficiency and
by creating new markets. To ensure the attainment of sustainable development in the
economy as a whole, the lessons learnt from the good performance of manufacturing
industry need to be learnt and replicated in other sectors.

9.

CONCLUSIONS

Economic  growth  in  the  EU  is  unlikely  to  return  to  a  sustainable  strong  path  until
productivity growth increases. Employment growth in the EU has traditionally been
sluggish and although measures to stimulate its growth are being taken in accordance
with  the  Lisbon  agenda,  economic  growth  in  the  near  term  will  be  determined  by
productivity growth. This means enhancing EU competitiveness.

At  Lisbon  and  subsequent  meetings,  the  European  Council  has  already  called  for
initiatives to enhance EU competitiveness. Selective and ad hoc policies will not do.
The  set  of  policies  called  for  under  the  Lisbon  strategy  needs  to  be  fully
implemented.  As  the  Commission  contribution  to  the  spring  European  Council
indicated, much greater commitment to implement the Lisbon strategy is necessary.
Without such commitment, the objectives of the strategy will not be realised.

It  is  difficult  to  attribute  the  poor  performance  of  productivity  growth  to  any
particular factor. But there is wide consensus that ICT and innovation have played a
crucial role in the acceleration of productivity growth in certain Member States and
in the US.

It is essential, therefore, to identify the policies that have been responsible for good
productivity growth in certain smaller EU economies in recent years. It is also crucial
to identify policy and other obstacles that have delayed the adoption and diffusion of
ICT,  innovation  and  research  and  development.  This  is  especially  necessary  in  the
service  sector  as  regards  the  diffusion  of  electronic  commerce  and  the  use  of  e-
business. This will inevitably require  reforms in the telecommunications sector that
will permit cost reductions and enlarge access across consumers and businesses.

The  quality  of  the  labour  force  and  the  availability  of  skilled  labour  must  be
improved so that new technologies, innovation and research and development can be
more readily exploited. Labour market institutions and policies must meet the needs
of new technologies.

The  conditions  that  enable  the  expansion  of  the  service  sector  must  be  completed.
Full  integration  of  service  markets  will  encourage  investment  and  strengthen
incentives for the adoption of new technologies.

18

All  policies  must  be  implemented  in  a  way  that  supports  a  dynamic,  knowledge-
based  society.  Competition  and  enterprise  policies,  in  particular,  need  to  be
permanently  balanced  in  all  fields  of  application.  Their  synergy  must  be  fully
exploited to improve the global competitiveness of European enterprises.

Environmental sustainability must be achieved, extending the manufacturing sector’s
recent  environmental  performance  across  other  sectors  of  the  economy.  These
initiatives require co-ordination and consultation across all EU economic policies.

Only the modernisation of our economies will enable the EU to meet the economic,
social  and  environmental  goals  of  the  Lisbon  strategy.  The  EU’s  performance  on
productivity growth during the period since 1995 will not do. If the Lisbon goal is to
be achieved, the pace of modernisation must accelerate.

19