Communication from the Commission - Economic reforms and competitiveness: key messages from the European Competitiveness Report 2006 {SEC(2006) 1467}
Date: 2006-11-14
Institutions: European Commission
Subjects: competitiveness, economic growth, energy policy, innovation, liberalisation of the market, pharmaceutical industry, productivity, report, simplification of legislation, type of business

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 14.11.2006 
COM(2006) 697 final 

COMMUNICATION FROM THE COMMISSION 

Economic reforms and competitiveness: key messages from the European 
Competitiveness Report 2006 

{SEC(2006) 1467} 

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COMMUNICATION FROM THE COMMISSION 

Economic reforms and competitiveness: key messages from the European 
Competitiveness Report 2006 

1. 

INTRODUCTION:  A  NEW  REPORT  IN  SUPPORT  OF  THE  EUROPEAN  STRATEGY  FOR 
GROWTH AND JOBS 

This  Communication  presents  findings  and  messages  from  the  Commission’s  European 
Competitiveness Report 20061. 

The  Competitiveness  Report  focuses  mainly  on  analysing  issues  related  to  developments  of 
productivity, as a key indicator for competitiveness over the long term. Competitiveness here 
is understood to mean a sustained rise in the standards of living of a nation or region and a 
level  of  involuntary  unemployment  as  low  as  possible.  At  the  level  of  an  industrial  sector, 
competitiveness is understood as maintaining and improving its position in the global market. 

With  the  relaunched  Lisbon  Strategy  for  Growth  and  Jobs  distinguishing  between 
macroeconomic, microeconomic and employment challenges, the Competitiveness Report has 
been redesigned to contribute to a solid analytical underpinning of the microeconomic pillar 
of  Lisbon  strategy.  From  this  also  flows  that  the  analysis  of  issues  in  this  report  has  been 
brought closer to the policy agenda. 

The present Communication does not aim at concluding with concrete proposals or an action 
plan.  Its  ambition  is  to  support  decision  making  by  putting  forward  a  number  of  policy 
relevant findings and recommendations resulting from economic analysis. 

After  a  review  of  recent  developments  concerning  growth,  productivity  and  employment  in 
Europe, the Report addresses various aspects relating to three of the four priority actions of 
the  reform  agenda  that  the  Spring  European  Council  of  2006  put  forward:  knowledge  and 
innovation,  unlocking  the  business  potential  and  towards  an  efficient  and  integrated  energy 
policy. Four chapters deal with, successively, the liberalisation of European energy markets, 
the Regulatory environment in the context of the Strategy for Growth and jobs, the financing 
of  innovation,  the  concept  of  “Lead  Markets”  in  innovation  policy.  In  addition,  the  Report 
examines  the  competitive  position  of  two  high  technology  European  industrial  sectors,  the 
production  of  Information  and  Communication  Technology  goods  and  services  and  the 
pharmaceutical industry. Finally, a statistical annex presents indicators of competitiveness at 
sectoral level. 

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Commission  Staff  Working  Paper  SEC(2006)  1467,  14.11.2006:  European  Competitiveness  Report 
2006. 

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2. 

OVERALL  COMPETITIVENESS  PERFORMANCE:  ENCOURAGING  SIGNS  THAT  THE 
DISAPPOINTING  PERFORMANCE  IN  IMPROVING  COMPETITIVENESS  OVER  THE  PAST 
YEARS IS BEING ADDRESSED 

In the past decade, GDP per capita growth in the EU-25 has been lower than in the US and the 
growth  rate  of  real  GDP,  labour  productivity  and  total  factor  productivity  in  the  European 
Union  have  been  slowing  down  or  remained  stagnant  during  the  1990-2004  period.  These 
trends  have  structural  features  and  this  awareness,  shared  among  European  policy  makers, 
demands  adequate  policy  responses.  In  2000,  the  European  Council  agreed  in  Lisbon  to  re-
launch European competitiveness. In 2005, the Lisbon strategy was revamped, with increased 
focus on policies aimed at delivering growth as well as more and better employment. In fact, 
the key areas of the “Growth and Jobs” strategy are concerned, among others, with boosting 
productivity  growth  by  investing  in  Research  &  Development,  improving  European 
infrastructure, enhancing human capital and promoting competition. This would contribute to 
better take advantage of globalisation. This strategy is also to be seen in the wider context of 
the  sustainable  development  requirement  that  present  needs  have  to  be  met  without 
compromising the ability of future generations to meet their own needs. 

A  first  encouraging  sign  is  the  tendency  towards  higher  employment  rates  in  many  EU 
Member  States.  This  is  to  some  extent  the  result  of  labour  market  reforms  enacted  in  past 
years. Nevertheless, employment rates in most countries remain below the Lisbon targets. 

However,  the  recent  progress  in  employment  rates  in  the  EU  came  along  with  only  small 
increases  in  labour  productivity.  This  disappointing  performance  of  EU  labour  productivity 
growth  can  be  explained  by  both  weak  investment  and  by  an  overall  slow  total  factor 
productivity growth rate. Total factor productivity growth remains low since the slowdown in 
the mid nineties. This demonstrates the need not to delay any further the reforms in line with 
the priorities agreed in the Strategy for Jobs and Growth. Productivity gains stemming from 
re-organization  and  reallocation  of  production,  from  improved  labour  skills,  from  the 
introduction  of  new  products  and  processes,  in  particular  through  ICT,  would  contribute  to 
increased  investment  demand  and  further  progress in labour productivity in terms  of capital 
deepening. 

More  recent  developments  point  to  an  acceleration  of  economic  growth  for  the  EU,  from 
1.7% in 2005 to 2.8% in 2006. This would be the best EU-25 growth performance since 2000 
and  is  accompanied  by  higher  employment  and  productivity  growth  and  a  reduction  of 
unemployment.  The  rise  of  oil  prices  has  clearly  had  a  negative,  if  limited,  impact  on 
European  growth.  Model  simulations  help  quantify  the  effects  of  energy  price  variations  in 
the long term and illustrate their wide variety over different countries and sectors. In spite of 
the increase of energy prices this year, the EU economy is clearly recovering very robustly. 
Together  with  the  new  governance  of  the  partnership  for  Growth  and  Jobs,  this  provides  a 
unique opportunity to vigorously pursue the necessary structural reforms. 

3. 

DRIVERS OF COMPETITIVENESS 

Energy  market  liberalisation:  strong  response  to  incentives  makes  careful  policy  design 
ever more necessary 

The  European  energy  markets  have  been  going through  a  process  of  liberalisation  since  the 
early  1990s.  The  Report  presents  an  assessment  of  some  of  the  effects  of  liberalising  the 

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European  electricity  and  gas  markets  and  discusses  issues  arising  from  liberalisation  in 
general, including experiences outside the EU. 

The findings suggest that the introduction of competition has generally resulted in more cost-
efficient operations with part of the benefits accruing to the consumers. However, electricity 
and  gas  wholesale  markets  have  turned  out  to  be  particularly  vulnerable  to  market  power 
resulting from both legacy industry structure and the specific characteristics of these markets. 
Incumbents  continue  to  have  a  strong  grip  on  production,  imports  and  key  infrastructure. 
Efficient  regulators,  in  particular,  are  needed  to  address  this  concern.  Competition  on  retail 
markets is yet to function properly in the majority of cases. This said, the energy Directives 
provide  for  universal  and  public service  obligations  as  well  as  specific  consumer  protection 
rules. 

Regarding R&D, evidence on effects on innovation indicates that, following liberalisation, a 
shift occurs in the composition of R&D efforts: the innovation focus of the companies moves 
away  from  (public-interest)  technology  innovation  towards  cost-reducing  technologies  and 
consumer services. While aggregate R&D spending appears to have diminished, the focus on 
efficiency-improving  innovation  seems  to  have  increased.  As  a  result,  additional  policy 
measures  may  be  necessary  to  encourage  fundamental  energy  research  to  recover  its  pre-
liberalisation situation. 

Both theory and evidence indicate that in liberalised markets, prices may fluctuate more in the 
short  run  and  demand  may  need  to  adjust  more  often  than  before  liberalisation  to  available 
capacity. While these price fluctuations are sometimes viewed as undesirable, the larger role 
of  demand  in  clearing  the  markets  is  consistent  with  an  increase  in  long-run  efficiency. 
Another  issue  is  that  inadequate  market  design  may  lead  to  inefficiently  low  investments2. 
This is especially the case if prices fail to reflect the real value of energy, resulting in lower 
rates of return or when inadequate unbundling leads network operators to favour their affiliate 
supply  businesses.  In  regulated  markets  (i.e.  infrastructure),  devising  mechanisms  to  foster 
efficient  investments  is  necessary,  especially  where  (cross-border)  transport  capacity  is 
concerned.  Factors  such  as  complicated  procedures  imposed  by  public  authorities  may  also 
contribute to lower investment. Insufficient investment in power generation risks resulting in 
electricity shortages and power cuts. 

Findings from economic analysis included in the Report indicate that policy responses should 
firstly  focus  on  clear  allocation  of  rights  and  responsibilities  of  market  players,  especially 
during  periods  of  scarcity.  In  addition,  the  promotion  of  more  liquid  wholesale  markets, 
especially for forward contracts, will assist consumers in insuring against price fluctuations. 
Efficient markets require a higher degree of transparency; a mechanism at EU level to better 
monitor  demand  and  supply  patterns  on  EU  energy  markets,  identifying  likely  shortfalls  in 
infrastructure, supply and storage would contribute to enhancing transparency on security of 
energy supply issues within the EU. 

Finally, according to both theoretical as well as empirical results, the impacts of liberalisation 
of the electricity markets on the environment are ambiguous. While reduction of prices would 
increase  consumption  of  energy,  increased  fuel  efficiency  and  shifts  in  technology  mix, 

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‘Market design’ covers several components: wholesale markets, retail  markets, fuel markets, capacity 
markets, congestion management mechanisms, balancing mechanisms. 

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caused  by  increased  competition,  can  reduce  emissions3.  In  general,  liberalisation  and 
environmental  objectives  are  compatible.  Liberalisation  can  also  strengthen  the  effect  of 
market based environmental instruments, such as the European Emission Trading Scheme. 

Regulatory  environment:  a  very  broad  adherence  to  the  principles  of  better  regulation  in 
spite of unequal commitments 

The  improvement  of  the  business  environment  through  applying  measures  fostering 
entrepreneurship  and  through  application  of  Better  Regulation  rules  is  today  a  shared  goal 
within  the  European  Union.  The  diffusion  of  Better  Regulation  instruments  is  therefore  a 
clearly  stated  priority  of  the  Strategy  for  Jobs  and  Growth.  It  is  thus  a  very  positive 
development that the National Reform Programmes (NRPs) that the Member States adopted 
in 2005 reflect the will to reform regulatory practices. These reforms are very complementary 
to  the  Better  Regulation  Initiative  launched  at  Community  level,  which  comprises  a 
simplification  programme  for  existing  legislation,  systematic  impact  assessments  for  new 
legislation, improved stakeholder consultation, as well as the measurement and reduction of 
administrative  burdens.  Work  on  setting  quantitative 
the  reduction  of 
administrative burdens is also under way. 

targets  for 

Isolating the effects of regulation on the economy is fraught with difficulty. Nevertheless, the 
-still  limited-  economic  literature  in  this  area  provides  evidence  that  regulation  can  have 
significant  positive  or  negative  (if  poorly  designed)  effects  on  economic  performance  and 
innovation. The Competitiveness Report analyses the multitude of measures which are being 
proposed  in  the  NRPs  and  elsewhere  across  all  EU-25  Member  States  in  the  area  of  Better 
Regulation.  While  these  measures  vary  considerably  in  terms  of  their  time-horizon,  depth, 
degree of institutionalisation and likely effectiveness, most Member States do envisage one or 
more  high-profile  activities  in  this  area.  In  addition,  Member  States  present  measures  with 
visible  short-term  beneficial  effects,  such  as  one-stop  shops  for  business  registration.  The 
NRPs and developments since their publication last year therefore represent a clear step in the 
right direction for the EU regulatory environment. The large differences observed between the 
measures proposed by individual Member States often reflect the fact that Member States are 
at different points in the development of a Better Regulation system. 

It  is  noteworthy  in  this  context  that  having  a  Better  Regulation  system  in  place  does  not 
necessarily  lead  to  substantially  less  regulation.  Among  those  seven  Member  States  which 
have  been  broadly  categorised  on  the  basis  of  existing  indicators  as  having  relatively 
restrictive regulatory environments, as defined by the OECD, two present a set of measures in 
their NRPs spanning all or almost all elements of the Better Regulation agenda, and that most 
others  take  measures  in  at  least  two  areas.  This  said,  a  number  of  the  eight  Member  States 
listed among those with less restrictive regulatory environments are also found among those 
countries with measures in all or almost all elements of the Better Regulation agenda. 

An  increasing  number  of  countries  (18)  are  implementing,  or  plan  to  implement,  their  own 
Impact Assessment (IA) systems, mirroring what is already taking place in the Commission 
and in a small number of Member States. This should help ensure a higher quality of future 
regulation  with  regard  to  issues  of  importance  for  national  and  European  competitiveness. 
Progress  so  far,  however,  has  been  somewhat  slow  and  one  should  bear  in  mind  that  the 
benefits of implementing  an IA  system take a few years to materialise. Moreover, there are 

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The latter effect is sensitive to the country-specific initial conditions. 

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concerns that in a number of cases resource constraints may be a serious obstacle. Unless this 
issue of resource redeployment is overcome, new legislation might be deprived of the quality 
improvement  that  results  from  IAs  that  systematically  assess  economic,  social  and 
environmental impacts as part of an integrated process. 

Establishing a fully fledged and integrated Better Regulation system should be the medium to 
long-term  objective  of  all  Member  States.  Clearly,  urgent  action  is  needed  to  lay  the 
foundations for the system. Doing so in a sustained fashion will help provide better conditions 
for  entrepreneurship,  reductions  in  administrative  burdens  –  which  are  particularly  high  in 
some sectors - and in barriers to market entry and contribute to increased competition, more 
innovations and ultimately higher economic growth. The general process of Better Regulation 
is  still  in  its  early  stages  and  its  ultimate  success  will  be  influenced  by  many  factors  that 
cannot  easily  be  accounted  for.  The  earnestness  with  which  existing  proposals  will  be 
implemented will also play an important role. 

This analysis suggests that progress has already been made across the EU and that all Member 
States  are  taking  action  regarding  Better  Regulation,  and  the  business  environment  more 
generally,  but  that  real  challenges  remain.  Naturally,  for  countries  with  less  emphasis  on 
Better Regulation policies up to now, both the urgency of and the potential benefits associated 
with  pushing  ahead  more  strongly  with  the  Better  Regulation  agenda  are  greater  than  for 
countries  that  have  already  attained  a  more  advanced  stage.  Those  Member  States  in  a  less 
positive starting position should make greater efforts towards establishing fully fledged Better 
Regulation systems. 

Financing of innovation receives the attention that it deserves, some policy gaps remain 

The  Report  focuses  first  on  particular  finance-related  problems  of  innovation  and  the 
appropriate policy tools to deal with them. Public support can come in various forms: direct 
measures such as grants and loans, indirect measures such as guarantees or fiscal incentives 
for  R&D,  and  risk  capital  measures.  The  Report  discusses  good  practice  of  government 
support,  as  supported  by  economic  theory,  and  presents  policy  relevant  conclusions.  These 
conclusions  are  then  complemented  by  reviewing  the  innovation  financing  measures  that 
Member States put forward in the National Reform Programmes issued in October 2005. 

Over the last years, an increasing number of  countries have  been using fiscal incentives for 
encouraging  R&D  and,  in  many  countries,  benefits  provided  by  R&D  tax  provisions  have 
been increased. The National Reform Programmes that Member States issued in October 2005 
confirm this trend. They also reflect the growing importance for public authorities of having a 
robust venture capital industry, by reporting ongoing; stepped up or new actions in almost all 
Member States, with a special focus on early stage investments. A notable group of countries 
announce  actions  also  for  business  angels.  This  said,  little  attention  is  paid,  overall,  to 
facilitating the cross-border mobility of venture capital. The same applies to debt financing of 
innovative projects, with only a small number of Member States announcing measures to this 
respect. 

The  broad  variety  of  schemes  and  instruments,  as  well  as  the  frequently  stated  intention  to 
overhaul  and  restructure  them  indicate  that  a  lot  of  experimentation  is  going  on.  There  is 
clearly scope for mutual learning and exchange of best practice, which would be much easier 
if  evaluations  of  existing  measures  were  more  frequent,  more  systematic  and  more 
comparable. Also, sometimes a wide variety of instruments exists within one country, making 

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necessary  more  systematic  efforts  to  inform  potential  users  but  also  to  make  existing 
instruments simpler and more accessible. 

In  conclusion,  it  would  appear  that  more  efforts  should  be  directed  towards  facilitating  the 
provision  of  cross-border  venture  capital  and  the  debt  financing  of  innovative  projects.  The 
provision  of  early  stage  risk  capital  is  being  addressed  in  many  countries;  however,  this 
clearly  remains  an  area  where  more  should  be  done.  Also,  evaluation  and  simplification  of 
existing schemes should be carried out more systematically and mutual policy learning should 
continue. 

It must be clear, though, that if these efforts are necessary, they are certainly not sufficient for 
achieving  the  more  general  objective  of  transforming  the  European  economy  into  a  more 
dynamic  and  knowledge-based  one.  Apart  from  setting  up  comprehensive  research, 
development and innovation policies, this will take also implementing those reforms that will 
tone  up  economic  activity  in  general,  particularly  in  the  areas  of  business  environment, 
competition, external trade, education and labour markets. 

The  lead  market  approach  can  contribute  to  innovation  policies  capable  of  anticipating 
global needs 

The  Report  undertook  a  literature  review  of  the  lead  market  approach,  a  useful  concept  to 
better understand the factors behind the global success of innovations and new technologies, 
especially in the case of competing innovation designs. 

While the lead markets approach is primarily relevant for firms, it can also help governments 
to design a more effective technology policy with respect to facilitating the potential global 
success  of  companies’  innovation  activities.  For  this  purpose,  some  generic  criteria  for 
designing  various  parts  of  innovation  policy  (from  funding  programmes  and  public 
procurement to regulation and standard setting) can be applied: incorporation of global market 
needs  and  preferences  of  customers  from  abroad,  transferring  domestic  market  preferences 
abroad,  putting  emphasis  on  lowering  costs  of  production,  allowing  competition  among 
different  innovation  designs,  and  addressing  global  trends  (though  the  latter  is  highly 
demanding since it is difficult to identify a particular change as being a global trend). 

It is thus a critical point for any policy that attempts to support the emergence of a lead market 
to  anticipate  global  markets,  develop  an  innovation  design  that  responds  to  these  upcoming 
global needs and introduce cost advantages high enough to persuade other countries to follow, 
without interfering with competitive forces. 

In order to make the lead markets concept operational at European level, the Commission has 
proposed  in  its  recent  Communication  on  Innovation4  to,  firstly  consult  stakeholders,  in 
particular  Technology  Platforms  and  the  Europe  INNOVA  Innovation  Panels,  to  identify 
possible  areas  where  a  combination  of  supply  and  demand  side  policies  may  help  the 
emergence  of  innovation-friendly  markets  and,  secondly,  to  launch  pilot  lead  markets 
initiatives  in  the  most  promising  areas  in  2007.  Based  on  this  experience,  the  Commission 
will prepare a comprehensive lead markets strategy. 

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Commission  Communication  COM(2006)  502,  13.9.2006/  Putting  knowledge  into  practice:  A  broad-
based innovation strategy for the EU. 

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4. 

COMPETITIVENESS IN SECTORS 

In addition to reviewing economic reform (energy liberalisation, regulatory environment) and 
policies to improve innovative performance, the Report examined the competitive position of 
two important, fast growing and high technology sectors, the industry producing Information 
and Communication Technology (ICT) goods and services and the pharmaceutical industry. 

ICT industries need more R&D and policies that make change easier 

Concerning  ICT,  the  Report  concludes  that  the  EU  has  comparative  advantages  in 
differentiated  goods  of  higher  quality,  commanding  higher  prices.  The  increased  trade  in 
intermediate  goods,  which  is  largely  intra-firm  trade,  indicates  that  some  of  the  imports  are 
used as intermediate products for more complex finished goods of higher value. 

Globalisation  has  multiplied  the  possibilities  to  fragment  the  production  process  and  locate 
the  production  of  components  according  to  the  comparative  advantages  of  the  different 
locations. As a consequence, chip design is made in Europe while mass production of chips 
takes place in South-East Asia; software development is carried out in European software labs 
while  the  coding  of  software  is  done  in  India.  Proximity  to  the  customers  of  specialised 
products  such  as  customised  software  is  yet  another  argument  for  location  in  the  EU.  The 
evidence  suggests  that  knowledge-intensive  production,  product  development  and  strategic 
R&D  are  still  located  in  Europe  while  labour-intensive  production  of  mature  standardised 
goods  has  been  located  to  Asia.  However,  increasing  R&D  investments  in  China  and  India 
may challenge this situation in the future. 

This said, ICT producers in the new Member States have shown that it is still possible to be 
competitive in EU with low-cost and scale-intensive production such as insulated wire, radio 
and TV receivers and other consumer electronics, as well as computers. It is however unlikely 
that this kind of production is competitive in the longer run. It is therefore necessary to further 
strengthen  the  links  between  systems  of  innovation  within  Europe  in  order  to  reap  the  full 
potential of the relatively high skilled labour force in EU-10. 

EU  is  specialised  particularly  in  the  production  of  communication  services  as  well  as  in  IT 
services  and  software  production.  For  ICT  manufacturing,  EU  comparative  advantages  are 
found in the production of scientific instruments, electronic products and telecommunications 
equipment of high quality. The answer to the challenge from low-cost producers lies in further 
climbing  up  the  quality  ladder  and  a  fast  flow  of  new  innovative  products  satisfying  the 
growing demand for advanced goods and services. Achieving this objective will be easier if 
the right sector-specific and more general microeconomic policies are in place. 

In comparison with other sectors, the EU ICT sector is R&D intensive. However, given the 
lags already existing vis-à-vis its main competitors, further raising its R&D investments will 
be  crucial  for  its  future  competitiveness.  This  is  not  so  much  a  necessity  for  the  larger  EU 
enterprises  of  the  sector  as  for  smaller  ones  and  start  ups.  This  points  to  the  existence  of  a 
more  systemic  weakness  in  generating  -  and  financing  -  research  in  small  innovative  firms 
which  cannot  be  addressed  by  sector  specific  measures  alone;  it  rather  necessitates  the 
horizontal policy responses reviewed in relation with the financing of innovation. Also, this is 
clearly a sector where the lead markets concept is relevant when considering specific policies. 

In sum, ICT markets can move very fast and innovation is a primary factor for longer term 
competitiveness.  Besides  the  sector  specific  policy  conditions  that  may  facilitate  the  further 

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development  of  the  sector,  the  more  general  business  environment  and,  especially,  market 
regulation  and  the  innovation  system  are  of  primary  importance  in  making  adaptation  to 
change easier. 

Pharmaceuticals: systemic weaknesses restrain a growing industry 

In terms of production and employment Europe’s pharmaceutical sector is growing, as well as 
its share in global exports. This good performance is partially due to a delocalisation of US 
production in Europe but also to an increase of its cost competitiveness. 

Nevertheless, the overall picture gives rise to concern. The European pharmaceutical industry 
has  a  considerable  gap  vis-à-vis  the  US  in  labour  productivity,  much  larger  than  in  overall 
manufacturing. Productivity growth in the US was mostly the outcome of capital deepening, 
while  the  most  important  component  in  Europe  was  total  factor  productivity  (TFP)  growth. 
Capital deepening in Europe increased at a modest rate. 

Since  2000,  the  US  has  consolidated  its  central  role  as  a  locus  of  innovation  in 
pharmaceuticals.  US  firms  hold  the  majority  of  biopharmaceutical  patents,  and  this 
dominance continues to expand. Also, US firms play a pivotal role in the global division of 
innovative  labour  in  pharmaceuticals,  as  shown  by  their  shares  of  co-invented  patents  at 
international  level.  These  trends  are  confirmed  by  data  on  patent  citations.  The  internal 
structure of the US national innovation system is a powerful source of competitive advantage 
and  industrial  leadership.  In  particular,  the  biotech  sector  plays  a  vital  role  in  integrating 
explorations of new research opportunities with clinical and market development. 

The US market for pharmaceuticals is both more concentrated and more volatile than markets 
in Europe. In other words, the higher concentration of the US market does not mean that it is 
less  competitive.  On  the  contrary,  the  US  market  is  highly  contestable;  product  turnover  is 
much  more  frequent  than  in  the  EU  and  Japan;  and  competition  from  generic  producers  is 
substantial.  US  market  behaviour  is  consistent  with  that  of  a  market  characterized  by 
Schumpeterian  competition,  where  innovators  can  gain  temporary  quasi-monopoly  profits, 
which  in  turn  spur  innovation  efforts  by  competitors  that  quickly  leads  to  more  innovative 
products and a high turnover of market shares. Dynamic competition is less evident in the EU 
as a whole, and especially in certain continental European countries. 

Europe  is  lagging  behind  the  US  in  its  ability  to  generate,  organise,  and  sustain  innovation 
processes and productivity growth in pharmaceuticals. Moreover, a disproportionate share of 
pharmaceutical  R&D  is  performed  in  the  US,  with  negative  consequences  in  terms  of  both 
high value-added employment and complementary investments in clinical research. 

Cost policies on behalf of European Social Security institutions can explain to a certain extent 
the  different  dynamics  characterising  the  EU  pharmaceutical  industry  vis-à-vis  the  US. 
However,  these  cannot  be  fully  explained  by  sector-specific  factors.  They  are  also  the 
consequence  of  Europe’s  relative  lack  of  dynamism  in  reforming  its  labour  and  capital 
markets,  education  systems,  public  spending,  and  regimes  of  market  regulation.  This  is,  for 
example, illustrated by the relative lack of dynamism of young technology-dedicated firms in 
generating and developing R&D projects. 

Given  the  shortcomings  in  European  competitiveness  attributed  at  least  partially  to  the 
distortions created by existing pricing and reimbursement policies, the Commission has taken 
the  initiative  to  address  some  of  the  pressing  issues  by  creating  the  Pharmaceutical  Forum. 

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Established in June 2005, the Forum brings together for the first time senior decision makers 
in  Member  States,  industry  and  other  stakeholders.  Based  on  previous  work,  the  G10 
Medicines  process,  it  will  take  forward  the  three  topics  “Information  to  Patients,  Relative 
Effectiveness of Medicines and Pricing/Reimbursement”. 

In  particular  the  two  latter  issues  have  been  the  source  of  market  distortions  in  the  Single 
Market  for  pharmaceuticals  in  the  EU  since  different  national  pricing/reimbursement 
decisions and the diverging requirements to measure relative effectiveness have had undesired 
consequences  on  other  Members  States  with  different  systems  and  have  often  caused 
unforeseen ramifications for the EU market as a whole. 

The objective of the Forum is to find a way forward which will strike a balance between the 
public health objective of patients’ access to new medicines at affordable costs and the need 
to  create  a  predictable  environment  for  business  with  economic  rewards  for  innovators. 
Finding the right balance and creating an environment conducive to innovation will foster the 
competitiveness  of  the  industry.  Based  on  the  deliberations  in  this  framework,  concrete 
actions  will  have  to  follow  at  EU  and  particularly  at  Member  States’  level  in  order  to 
regenerate Europe as a world centre of pharmaceutical innovation. 

5. 

SYNTHESIS 

Improving  the  competitiveness  of  European  economies  is  a  long  term  and  multifaceted 
endeavour.  The  European  Competitiveness  Report  2006  reviewed  a  number  of  reforms 
targeting  framework  conditions  (access  to  innovation  finance,  better  regulation)  and  a 
particularly important input market, energy. It also identified the contribution that the concept 
of lead markets could have in designing more anticipatory innovation policies. In addition, it 
discussed  recent  trends  and  challenges  regarding  the  competitiveness  of  two  growing,  high 
technology sectors, the ICT and the pharmaceutical industries. 

In  line  with  its  mission  in  support  of  the  microeconomic  pillar  of  the  Lisbon  strategy,  the 
Report documented areas where additional efforts may be necessary, for example, in the case 
of energy market reforms, as concerns consumer benefits from efficiency gains and efficient 
regulators,  investment  in  long  term  fundamental  research  and  infrastructure,  reliability  and 
environmental  effects.  In  the  area  of  business  environment,  the  Report  suggests  that  all 
Member  States  are  taking  some  action  regarding  Better  Regulation,  and  the  business 
environment more generally, but that those Member States in a less positive starting position 
should make greater efforts towards establishing fully fledged Better Regulation systems. 

In relation with Innovation policy, the Report pointed to the need for supporting early stage 
venture capital and making cross-border venture capital operations easier and highlighted the 
relative lack of attention to facilitating the financing of innovation through loans. In addition, 
it identified the factors that would help design a lead market oriented innovation policy, i.e. 
incorporation of global market needs and preferences of customers from abroad, transferring 
domestic  market  preferences  abroad,  putting  emphasis  on  lowering  costs  of  production, 
allowing competition among different innovation designs, and addressing global trends. 

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The  ICT  producing  industries  and  the  pharmaceutical  industry  have  little  in  common,  other 
than being both high technology sectors. Trends in the first are driven mainly by technology 
while in pharmaceuticals health cost policies play an important role. Yet, some weaknesses, 
as a marked deficit in R&D intensity and the relative lack of young innovative firms are the 
same.  It  is  also  clear  that  beyond  sector-specific  measures  -  which  are  necessary  and  are 
pursued  in  specific  fora  -  their  competitiveness  would  improve  substantially  by  the  more 
horizontal  reforms  prioritised  in  the  Lisbon  agenda,  such  as  those  regarding  innovation 
finance,  the  overall  business  environment,  research,  education  and  the  functioning  of  the 
labour markets. 

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