Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee, the Committee of the Regions and the European Central Bank - The EU Economy: 2007 Review - Moving Europe's productivity frontier {SEC(2007) 1507}
Date: 2007-11-21
Institutions: European Commission
Subjects: EU employment policy, European Union, competition, economic policy, productivity, research and development, research policy

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 21.11.2007 
COM(2007) 721 final 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE 
EUROPEAN PARLIAMENT, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN 
CENTRAL BANK 

The EU Economy: 2007 Review 

Moving Europe's productivity frontier 

{SEC(2007) 1507} 

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COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE 
EUROPEAN PARLIAMENT, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN 
CENTRAL BANK 

The EU Economy: 2007 Review 

MOVING EUROPE'S PRODUCTIVITY FRONTIER 

In  all  its  diversity,  the  European  Union  is  one  of  the  most  advanced  and  productive 
economies  in  the  world.  The  Union  scores  high  in  global  rankings  in  terms  of  output  per 
worker and real income per capita. Even if the Member States that have recently joined the 
Union  have  still  some  way  to  go  with  respect  to  the  more  mature  market  economies  of  the 
other EU members, they are catching up rapidly – spurred by the continuous inflow of foreign 
direct investment, as well as by the EU cohesion policy, and supported by the adoption of the 
sound  legal,  regulatory  and  institutional  infrastructures  that  are  the  hallmark  of  well-
functioning market economies. 

However, a sizeable gap in living standards between the European Union and the most 
advanced  economy  in  the  world  –  the  United  States  –  has  remained.  After  a  period  of 
rapid catching-up  during  the 1950s and 1960s, this process came to halt in the early 1970s. 
Today, the standard of living in the EU, measured, by per capita GDP is still 1/3 below that of 
the US – despite a welcome surge in the number of people of working age participating in the 
EU labour market in recent years.  

The root cause lies in a divergence in productivity developments. While experience clearly 
differs  across  EU  Member  States,  productivity  growth  –  by  any  measure,  be  it  per  hour 
worked, per person employed or relative to a composite of inputs including labour and capital 
– has actually slowed down since the mid-1990s in the European Union, while it has sharply 
accelerated in the United States. For example, EU-15 growth in labour productivity per hour 
dropped from 2% in 1981-1995 to 1½ % in the 1995-2000 period and then to 1% in 2000-05. 
In contrast, the US has witnessed a marked improvement in its productivity performance, with 
annual average growth rising over the same periods from 1¼%, to 2% and then close to 2½%. 

By  adopting  the  Lisbon  Strategy  in  March  2000,  European  leaders  attributed  the 
highest  importance  to  improving  the  EU's  productivity  performance  along  with 
achieving robust employment growth. This can be summed up by the keywords of moving 
towards  a  "knowledge-based  economy"  and  creating  "more  and  better  jobs".  To  date, 
employment  developments  have  indeed  been  promising.  The  EU-15's  employment  rate  has 
soared from 60 to 66% since 1995, while the unemployment rate plummeted from over 10% 
to  close  to  7%  –  a  level  not  witnessed  in  many  years.  There  is  evidence  that  labour  market 
policies in pursuit of stronger job growth have been paying off, while policies geared towards 
better  productivity  performance  –  including  measures  to  promote  investment  in  human 
capital,  encourage  regulatory  reform  and  stimulate  entrepreneurship  and  innovation  –  have 
been less effective to date or perhaps need longer to deliver results.  

Improving productivity and increasing employment can go hand in hand. Obviously it is 
tempting to assume the recent jobs 'miracle' itself has caused the productivity slowdown, with 
the  latter  being  the  price  to  pay  for  the  former.  A  trade-off  between  more  jobs  and  higher 
productivity may indeed emerge if faster employment entails a lower capital use per worker 

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and if greater numbers of low-skilled workers are employed. But this combined effect is small 
and is dwarfed by the impact of the development and diffusion of new technologies and best 
work practices – provided that they are in fact rapidly developed and diffused, which remains 
a  challenge,  notably  in  the  most  advanced  Member  States  which  are  operating  near  the 
technology  frontier  but  are  slow  to  adopt  new  developments  at  the  frontier.  If  labour  and 
product markets function well and technological progress advances, high employment growth 
is compatible with high productivity growth. 

Since mid-2005, productivity growth in the EU has picked up. It is hoped that part of this 
improvement  is  of  a  structural  rather  than  cyclical  nature,  i.e.  that  it  cannot  solely  be 
attributed  to  the  recovery  having  gained  pace.  It  is  indeed  possible  that  past  reforms  that 
aimed to boost productivity have finally begun to pay off, in which case the recently observed 
pick-up  in  productivity  may  in  part  be  structural  and  associated  with  better  efficiency. 
However,  according  to  the  2007  EU  Economy  Review  published  jointly  with  this 
Communication, a cautious interpretation appears warranted: to date, evidence of a structural 
productivity pick-up remains scant. 

There  is  considerable  scope  to  boost  Europe's  productivity,  by  promoting  innovation, 
enhancing  investment  in  human  and  ICT-related  capital,  fostering  competition  and 
streamlining  the  regulation  of  product,  labour  and  financial  markets.  This  was 
emphasised in 2005 with the revision of the Lisbon Growth and Jobs Strategy, with its greater 
focus  on  comprehensive  integrated  reform  packages,  "national  ownership"  of  reform 
commitments  and  greater  complementarity  between  reforms  undertaken  at  EU  and  national 
level.  The  trend  since  the  mid-1990s  would  appear  to  indicate  that  the  European  Union  has 
yet  to  reap  the  full  benefits  of  the  information  technology  revolution  and  the  spurt  in  the 
global  division  of  labour  associated  with  international  economic  integration.  Assessments 
carried out by the Commission and the Council show that there has been progress on reforms 
but that the pace and intensity differs between Member States. The European Union can no 
longer afford to forgo the opportunities of higher productivity growth that structural reforms 
bring. With the population ageing and global competition heightening, boosting productivity 
is vital to secure sustained economic growth over the medium to long term.1 

1. 

MAIN FINDINGS OF THE REVIEW 

The  European  Union  experienced  a  productivity  slowdown  in  the  second  half  of  the 
1990s. This is in clear contrast with developments in the United States. The trend in Europe is 
principally a reflection of the slowdown which hit two large Member States of the euro area, 
Spain and Italy, particularly hard, while the other major economies were less affected. In fact, 
unlike Spain and Italy, manufacturing in Germany and France escaped the overall pattern of a 
declining  trend  in  the  1990s.  Since  the  turn  of  the  century  no  further  declines  in  trend 
productivity  growth  have  been  recorded  in  the  EU  and  since  mid-2005  productivity  has 
actually  picked  up.  Part  of  this  pick-up,  however,  must  be  assumed  to  be  cyclical  amid  an 
accelerating recovery as there is not enough data at present to confirm that it is of a structural 
nature.  

The  bulk  of  the  EU-US  productivity  growth  differential  since  1995  stems  from  the 
diverging  trends  in  total  factor  productivity  (TFP)  –  a  measure  of  the  efficiency  with 
which  all  factor  inputs,  including  labour,  information  and  communication  equipment  (ICT 
capital) and conventional capital (equipment and structures), are utilised. Differences between 

1 See in this context also the communication from the Commission "Raising productivity growth: key messages 

from the European Competitiveness Report 2007". COM (2007) final. 

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the two economies in the growth of capital per worker play much less of a role in shaping the 
productivity gap. Even so, a further breakdown of the contribution of capital services shows 
that  a  shift  from  conventional  to  ICT-related  capital  can  be  observed  in  the  United  States, 
especially in the private services sector, whereas a similar trend is not discernible in Europe. 
To  the  extent  that  ICT-related  capital  is  productivity-enhancing  this  shift  may  also  help 
explain the growing productivity gap between the two economies. 

Almost  all  the  TFP  growth  differential  with  the  US  is  attributable  to  sluggish 
developments in only a handful of industries, with economic structures, comparative size 
of  the  industries  and  regulatory  issues  playing  a  key  role.  A  detailed  sector-by-sector 
analysis  reveals  that  this  relates  mainly  to  wholesale  and  retail  trade,  real  estate  and  other 
business services, electrical and optical equipment (which includes semiconductors, the main 
ICT producer industry) and to a lesser extent financial services. The low level of private ICT 
R&D  expenditure  in  Europe  in  comparison  with  the  US  is  mostly  due  to  differences  in 
industrial structure, notably the smaller size of the high-tech industry in the EU. Regulatory 
issues,  especially  entry  and  exit  rules,  appear  to  be  playing  a  role  in  business  and  financial 
services, while the weak productivity performance of the EU's retail and wholesale industries 
is in part explained by constraints to the use of scale economies. On a more positive note, the 
EU  has  done  significantly  better  than  the  US  in  the  so-called  network  industries,  helped  by 
efficiency gains associated with the deregulation drive over the last two decades. 

The  EU  productivity  slowdown  has  been  accompanied  by  unprecedented  growth  in 
employment.  The  question  may  legitimately  be  asked  whether  the  two  phenomena  are 
related.  Claims  of  a  possible  trade-off  between  productivity  and  employment  seem  to  find 
some  support  in  post-war  economic  history.  In  the  1970s  and  1980s,  the  European  Union 
combined  relatively  fast  productivity  growth  with  sluggish  employment  growth  –  while  the 
United States conversely experienced fast job growth amid a productivity slowdown. During 
that episode the sharp rises in oil prices and the associated surge in real wage costs in many 
EU  countries  (as  workers  shifted  higher  energy  prices  forward  onto  employers  via  wage 
demands)  triggered  a  substitution  of  capital  for  labour,  which  meant  that  fast  labour 
productivity  growth  came  with  massive  labour  shedding.  However,  interpreting  this 
phenomenon as a productivity-employment trade-off is correct in some sense but can also be 
misleading.  Indeed,  the  US  experience  since  the  mid-1990s  appears  to  be  at  odds  with  the 
notion of a trade-off between employment and productivity given that it performed strongly 
on  both  counts.  The  strong  rises  in  productivity  stemming  from  innovation  and  better  work 
practices, which have been a feature of US economic performance over the past decade or so, 
have made both labour and capital more productive and thus stimulated the demand for both. 
Hence innovation has not harmed employment at all and will normally not do so – except if 
labour market institutions resist change and firms face weak market incentives to adjust. 

Employment  growth  can  be  associated  with  some  productivity  losses,  but  the  effect  on 
the overall trend is small. Some labour market reforms, such as the introduction of flexible 
employment contracts and working-hours arrangements alongside more employment-friendly 
wage bargaining practices, can lead to some productivity losses as less productive strands of 
the labour force are employed and the capital use per worker falls. This is broadly confirmed 
by  empirical  analysis  although  this  effect  appears  to  be  fairly  small.  Econometric  research 
estimates the trade-off to be in the range of a 10-40% relative loss in productivity for a given 
employment  gain,  while  simulations  with  DG  ECFIN's  macro-econometric  model  QUEST 
show a fall in productivity growth of around 20% for a given employment gain. Econometric 
estimates show that policies that boost the job prospects of ‘marginal’ workers – such as fiscal 
incentives  for  temporary  and  part-time  work,  targeted  tax  cuts  for  low-skilled/low-income 
workers, employment subsidies, direct job creation schemes and in-work benefits – may have 

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raised  employment  by  slightly  over  1%  over  the  2001-06  period  in  countries  where  such 
policies  were  implemented;  there  would  also  have  been  a  limited  negative  impact  on 
productivity  growth  in  the  range  of  ¼  to  ½%,  or  around  25%  of  the  employment  gain. 
Moreover,  in  some  countries,  such  as  Italy  and  Spain,  the  regularisation  of  illegal  workers 
may have negatively affected labour productivity statistics. 

Recent employment and productivity developments have their own root causes, but can 
mutually  benefit  from  a  comprehensive  strategy  to  increase  jobs  and  growth.  This  can 
best be achieved by policies in pursuit of a 'knowledge society', which figures prominently on 
the  European  Union's  policy  agenda  as  exemplified  by  the  Lisbon  Strategy  for  Growth  and 
Jobs.  In  this  framework,  Member  States  have  included  a  host  of  policy  measures  aimed  at 
strengthening  TFP  growth  in  their  National  Reform  Programmes.  Policies  to  promote 
productivity  while  supporting  employment  can  be  grouped  under  three  main  headings:  (i) 
knowledge building; (ii) strengthening competition forces; and (iii) enhancing flexibility. 

i) Knowledge building requires more and better investment in R&D and human capital. 
Policies  have  been  aiming  to  narrow  the  gap  between  the  United  States  and  the  European 
Union as regards investment in R&D and human capital. The US invests almost 3% of GDP 
in R&D and over 7% in education, as compared to close to 2% and 5½% respectively in the 
EU. Efforts in the EU to tackle this date back to before the adoption of the Lisbon Strategy in 
2000, with the Bologna Process for example pursuing the creation of the European Education 
Area  and  harmonised  academic  qualifications.  The  European  Research  Area  aims  at 
overcoming fragmentation and at increasing spill-over effects of R&D investments. Under the 
Lisbon  Strategy,  moreover,  Member  States  have  committed  themselves  to  raising  R&D 
spending (most of which will have to come from private sources which is the main source of 
the gap in R&D spending between the EU and the US), formal educational attainment and the 
skill level of the labour force. 

Public  support  for  R&D  investment  and  education  is  motivated  by  the  positive  effects 
such  activities  have  on  welfare  and  growth.  Simulations  with  the  QUEST  model  indeed 
provide evidence that actions to support R&D investment could significantly raise economic 
and productivity growth. Specifically, if R&D intensity were to increase from1.8% of GDP in 
2005  to  the  expected  EU  level  of  2.6%  of  GDP  by  2010  (based  on  Member  States’  own 
targets, included in their national reform programmes), growth in both GDP and productivity 
would be raised by 0.2 of a percentage point per annum. And this effect might be as much as 
twice  as  high  if  favourable  cross-border  effects  are  taken  into  account.  Although  aggregate 
employment would barely be affected, there would be a shift in demand from low- to high-
skilled  workers  and  an  associated  relative  pay  increase  for  the  latter  owing  to  the  inelastic 
supply of high-skilled workers in the short to medium run. 

To  make  R&D  policies  effective,  some  preconditions  need  to  be  met.  The  above-
mentioned  favourable  effects  may  not  materialise  if  certain  preconditions  are  not  met.  For 
example,  substitution  may  occur,  with  the  private  sector  using  the  fiscal  windfall  to  cut  its 
own funding. It is also not obvious that the government will be able to more accurately select 
R&D projects that are worth developing than the private sector does, although this problem is 
less pertinent if support takes the form of tax incentives (as opposed to targeted grants). But in 
the case of tax incentives there is a greater risk of ‘deadweight losses’, with the government 
subsidising  R&D  investment  that  would  have  been  carried  out  anyway.  These  institutional 
risks  may  be  less  relevant  if  the  setting  in  which  private  and  public  actors  operate  is 
supportive – including an effective protection of intellectual property rights, a well-educated 
and skilled labour force, well-functioning competition and strong linkages between public and 
private research. 

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The effectiveness and cost-efficiency of education also need to be secured throughout the 
European  Union.  Inefficiency  in  education  systems  appears  to  be  high  in  some  Member 
States  as  evidence  shows  that  other  Member  States  achieve  the  same  outputs  with 
considerably fewer resources – or, put differently, that better results could be achieved with 
similar resources. This is particularly worrying since human capital is not only an important 
determinant  of  the  quality  of  the  labour  force  and  productivity  in  its  own  right,  but  also 
because it may enhance the capacity of economies to innovate. In particular, countries that are 
close  to  the  technology  frontier  –  as  many  EU  Member  States  are  –  need  to  enhance  their 
capacity  to  adopt  new  technologies,  and  this  requires  major  efforts  to  maintain,  and  where 
possible improve, the quality of education, particularly higher education. 

ii)  Competition  is  crucial  for  both  the  level  and  growth  rate  of  productivity.  Market 
contestability  puts  pressure  on  firms  to  innovate  and  favours  the  turnover  of  firms  by 
prompting  competitive  businesses  to  enter  the  market  and  less  competitive  ones  to  exit. 
Concerns  that  intense  competition  would  deter  firms  from  innovating  because  pressure  on 
profit margins would make it difficult to generate the required funds appear to be unfounded, 
even  though  the  evidence  suggests  that  the  most  innovative  firm  in  a  market  is  usually  the 
dominant one. EU policies in the pursuit of stronger competition are three-pronged and while 
their primary objective may not be to raise productivity, they are clearly helpful in this regard. 
Specifically,  a  fully  functioning  single  market  stimulates  productivity  by  increasing  the 
exposure of firms to foreign competition, by allowing economies of scale (including in R&D 
activities), and by making the cross-border transfer of technology and managerial skills easier. 
As  noted,  moreover,  the  liberalisation  and  regulation  of  network  industries  such  as 
telecommunications,  electricity,  gas  postal  services,  rail,  road  and  air  transport  have 
contributed to productivity. Finally, competition policy proper has helped lower entry barriers 
and has raised the costs of anticompetitive practices. 

Empirical  research  confirms  the  expected  positive  effects  of  opening  markets  to 
competition  on  productivity  and  growth,  but  also  on  employment.  Simulations  with 
QUEST to estimate the impact of each of these policy areas, either in isolation or combined, 
confirm the need to ensure competition across the economy. Computing the macroeconomic 
impact of the product market reforms that took place in 1995-2003, the simulations suggest a 
positive effect on GDP amounting to almost 1½%, consisting of a 1% increase in employment 
and a ½% increase in labour productivity. Again this confirms that policies targeted at raising 
productivity also can have a positive impact on employment, i.e. that the sometimes presumed 
employment/productivity trade-off is a fallacy. 

iii)  Enhanced  flexibility  is  needed  to  smoothly  adjust  production  structures  towards 
further  specialisation  and  diversification  into  new  areas  of  relative  comparative 
advantage. The expansion of the technology frontier that is necessary to remain competitive 
on  a  global  scale  is  not  a  costless  operation  since  it  will  expose  the  economy  to  structural 
change.  The  adjustment  capacity  of  the  economy  is  thus  crucial,  not  only  to  ensure  that 
adverse 'shocks' are absorbed smoothly without generating persistent slack, but also to ensure 
that  maximum  benefit  is  drawn  from  technological  change.  However,  many  EU  Member 
States  appear  to  have  limited  adjustment  capacity,  unlike  the  United  States  where  it  is 
estimated that up to half of the observed aggregate productivity growth is due to reallocation 
of resources towards innovative activities. The adjustment capacity of the EU in the face of 
technological change is also hampered by the limited flexibility allowed for by labour market 
institutions and rule books. In particular, overly tight employment protection  regulation and 
too  high  minimum  wages  can  act  as  a  deterrent  to  labour  mobility.  Overall,  structural 
impediments to firm entry and expansion are contributing to the EU-US productivity gap. 

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Measures  have  been  undertaken  by  EU  Member  States  over  recent  years  to  facilitate 
firm  and  labour  mobility,  but  more  and  broader  action  is  warranted.  Measures  have 
focused  in  particular  on  reducing  the  administrative  costs  for  market  entrants  and  on 
improving the access of small and medium-sized enterprises (SMEs) to funding. In addition, 
several Member States have reviewed their bankruptcy laws to encourage risk-taking. Some 
reservation  is  warranted  to  the  extent  that  policies  targeted  at  companies  of  a  certain  size 
(typically SMEs), such as reduced social security contributions below a certain employment-
threshold,  for  example,  might  discourage  them  to  grow  beyond  the  eligibility  thresholds  – 
which  is  all  the  more  costly  since  new  firms'  productivity  performance  is  found  to  improve 
markedly when they grow. On aggregate, cutting the administrative cost burden imposed on 
all European firms, which is estimated in the range of 3 to 4% of GDP, by a quarter, could 
yield  a  1%  increase  in  GDP.  Removing  obstacles  to  geographical  and  occupational  labour 
mobility  will  also  promote  a  more  efficient  allocation  of  resources  and  increase  potential 
growth;  and  a  move  towards  life-long  learning  must  accompany  a  successful  transition  to  a 
knowledge-based economy. 

2. 

CONCLUSIONS AND KEY POLICY IMPLICATIONS 

A change in mindset is called for. Globalisation and the ICT revolution have discredited a 
number of widely held beliefs, such as that only large countries and large companies can be 
technology leaders and that trade is the main vehicle for technology diffusion. In fact it now 
appears  that  small  countries  can  be  technology  leaders  in  specialised  fields,  that  new 
technologies  are  often  developed  and  introduced  by  small  start-up  firms  and  that  the 
international  mobility  of  researchers  and  financial  capital  –  rather  than  trade  –  are  the  main 
vehicles for diffusion.  

A broad consensus is now emerging on what is constraining productivity growth and the 
measures needed to increase it. Restrictions concerning labour and product markets, lack of 
openness  to  foreign  direct  investment  and  barriers  to  access  or  the  creation  of  new 
technologies  and  their  diffusion  can  act  as  key  impediments  to  productivity  growth  over 
longer  periods  of  time.  The  competition-friendliness  of  product  market  regulation,  R&D 
activity and the quality of human capital all help to raise TFP growth. Meanwhile, the wider 
objectives  and  benefits  of  legislation  and  regulation  need  to  be  safeguarded;  and  indeed, 
regulation may even spur innovation (for instance in eco-innovation, or by setting standards 
through  top-runner  programmes,  thus  promoting  renewable  energies  or  energy-saving 
products). 

Tackling the root causes of slow productivity growth remains one of the most pressing 
and  complex  economic  policy  challenges  facing  the  Union.  Policies  to  promote  higher 
productivity  growth  must  be  implemented  in  a  comprehensive  manner  to  facilitate  the 
adjustment  to  a  rapidly  changing  global  economic  environment  and  to  meet  the  associated 
calls for greater competitiveness. At the same time, policies to encourage higher productivity 
growth  can  ease  the  social,  economic  and  budgetary  challenges  for  European  welfare  states 
stemming  from  ageing  populations.  They  will  also  help  to  smooth  adjustment  to  adverse 
competitiveness developments within the euro area. 

The focus of the revised Lisbon Growth and Jobs Strategy remains valid and should be 
vigorously  pursued  into  the  next  cycle.  Maintaining  its  emphasis  on  more  R&D  and 
innovation,  a  more  dynamic  business  environment,  greater  employability  and  investment  in 
people, energy and climate change is all the more crucial now that the fruits of past reforms 
are becoming apparent. 

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A number of key policies can make an important contribution to stronger productivity 
growth in the European Union. The analysis underpinning this Communication shows that 
they must aim at: 

•  Promoting  higher  levels  of  R&D  investment.  This  should  include  notably  private 
investments,  supported  by  more  market-based  financing  systems  such  as  risk-capital 
funding. Tax incentives can be an important element of such a policy but efforts should be 
made  to  minimise  deadweight  losses  and  ensure  additionality.  Strong  linkages  between 
public  and  private  research  are  needed  in  combination  with  more  effective  protection  of 
intellectual property rights. 

•  Developing  world-class  research  and  educational  establishments.  The  pursuit  of  top 
managerial  and  research  skills  will  lead  the  economy  to  high  rates  of  innovation  and 
diffusion  of  new  technologies.  More  skilled  researchers  are  needed  if  R&D  activity  is  to 
expand, otherwise the increase in demand for these skills will merely raise wage costs and 
squeeze  other  investment  activities.  The  initiatives  in  the  framework  of  the  Bologna 
Process  towards  harmonised  academic  qualifications  and  the  creation  of  the  European 
Research  Area  should  help  boost  the  urgently  needed  international  mobility  of  skilled 
researchers. Outside the specific field of research initiatives to introduce the EU 'blue card' 
(following  the  example  of  the  US  Green  Card)  may  also  have  a  positive  effect  on  the 
attractiveness of the EU for skilled migrants. Inefficiencies in education systems need to be 
addressed  in some countries and better  results  achieved.  Adapting education and training 
systems is necessary to increase their responsiveness to the needs of the knowledge-based 
economy and society. 

•  Establishing a fully functioning, open and competitive single market. Actively improving 
the contestability of markets, notably with the liberalisation of services where the scope for 
productivity  growth  appears  greatest,  is  key  to  foster  innovation.  More  flexible  and  less 
burdensome  regulatory  and  institutional  frameworks,  allowing  easy  entry  and  exit  from 
activity, are able to deliver a dynamic and competitive business environment. This is most 
necessary in the services industry, notably in retail trade. The efficiency gains associated 
with  the  deregulation  of  network  industries  over  the  last  two  decades  may  serve  as  an 
example in this regard. Indeed, it is a general objective of the Growth and Jobs Strategy to 
ensure a regulatory framework that is transparent, effective and proportionate to its needs 
and  to  remove  unnecessary  administrative  burdens  that  hamper  growth  and  inhibit 
innovation. 

•  Promoting an integrated approach to enhance both flexibility and security in the labour 
market. Modernised social and labour-market policies can match the pursuit of efficiency 
with considerations of fairness. Flexicurity strategies should be designed and implemented 
to support employment and facilitate labour mobility through the four mutually reinforcing 
components of: (i) flexible and reliable contractual arrangements, (ii) comprehensive life-
long  learning  strategies,  (iii)  effective  active  labour  market  policies,  and,  (iv)  adequate 
income support systems. 

•  Improving the quality of public finances. The need to improve competitiveness, concerns 
about fiscal sustainability and growing demands by taxpayers to get more value for public 
money as well as the need to reconsider the scope for state intervention in the economy has 
prompted efforts to increase the focus of budgets on more growth-enhancing activities and 
gear  the  tax  mix  and  the  allocation  of  resources  within  the  public  sector  towards  better 
efficiency  and  effectiveness.  This  includes,  inter  alia,  the  modernisation  of  public 
administration  which  can  be  a  key  element  to  ensure  control  over  expenditure  and 
budgetary  consolidation.  Achieving  and  maintaining  sound  public  finance  positions,  by 

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avoiding  the  crowding  out  of  private  savings  to  finance  public  deficits,  is  in  itself  an 
essential condition to support strong and sustained capital investment by the private sector.  

Whilst many aspects of this approach have been announced in recent years in individual EU 
countries' reform programmes, and in several cases introduced, the "mindset" shift needed 
to make an overall success of the process has still further to go at both the country and 
the European levels. A comprehensive strategy matching efficiency with fairness should 
help to equip citizens with the skills, the support and incentives they need to succeed in a 
changing world. 

The Lisbon Strategy for Growth and Jobs can provide an effective vehicle for managing 
this  transition  process,  a  transition  that  is  essential  to  drive  Europe's  productivity 
frontier forward.  

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