Opinion of the European Economic and Social Committee on The EU Economy: 2007 Review — Moving Europe's productivity frontier
Date: 2008-09-18
Institutions: European Economic and Social Committee
Subjects: ESC opinion, EU employment policy, European Union, competition, economic policy, productivity, research and development, research policy

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Opinion of the European Economic and Social Committee on ‘The EU Economy: 2007 Review —
Moving Europe's productivity frontier’

(2009/C 77/28)

On 17 January 2008 the European Economic and Social Committee decided, under Rule 29(2) of its Rules
of Procedure, to draw up an own-initiative opinion on

The EU Economy: 2007 Review — Moving Europe's productivity frontier.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was responsible
for preparing the Committee's work on the subject, adopted its opinion on 3 June 2008. The rapporteur
was Mr Morgan.

At its 447th plenary session, held on 17 and 18 September 2008 (meeting of 18 September 2008), the
European Economic and Social Committee adopted the following opinion by 108 votes to 4 with
5 abstentions.

1. Conclusions and recommendations

1.1
This opinion is the latest in the series prepared by the
EESC dealing with issues of economic governance in the EU. It
is based on the Communication from the Commission
COM(2007) 721 final entitled The EU Economy: 2007 Review —
Moving Europe's Productivity Frontier.

The 2007 Review starts from the fact that while the
1.2
European Union is one of the most advanced and productive
economies in the world, a sizeable gap still exists in living stan-
dards, as measured by GDP, between the EU and the most
advanced economy in the world — the United States. The root
cause lies in a divergence in productivity developments in
various industry sectors and Member States.

1.3 While data on the USA provide a useful yardstick by
which to measure relative Member State performance, the focus
of the opinion is on inter country comparisons in the EU.
Factors such as social models, working hours and workplace
participation rates affect transatlantic comparisons, but those
issues are not the point of this opinion. This opinion is simply
about why some EU countries create more wealth and more
jobs than others.

1.4
The central idea of the Commission Report is that imple-
mentation of the Lisbon agenda will at the same time help
Member States to increase both employment and wealth. A
number of key policies can make an important contribution.
These must aim at:

— Promoting higher levels of R&D investment,

— Developing world-class research and educational establish-

ments working in close partnership with industry,

— Establishing a fully functioning open and competitive single

market,

— Promoting an integrated approach to enhance both security
and flexibility in the labour market
(whereby the EESC
would point out that this approach must be negotiated by
the social partners),

— Improving the quality of public finances.

1.5
These policies become even more relevant in the light of
the changes to the global economy which have emerged since
the Lisbon EU Council in 2000. The new challenges include not
only the present financial crisis but the supply-demand balance
for fossil fuels, the evidence of climate change, the growing
shortages of food and the soaring demand for commodities
generally. These issues make R&D investment and world-class
research even more vital. They highlight the need for a competi-
tive Single Market underpinned by effective flexicurity provi-
sions in the labour market and high-quality public finances.

1.6 Macroeconomic factors on both the demand and supply
side were discussed in depth in the earlier EESC opinions on EU
economic governance detailed in the Introduction in which the
Committee stressed that
to improve
competitiveness must be accompanied by a macroeconomic
policy mix that promotes incomes, demand and jobs. The focus
this opinion is to show that, demand factors not with-
of
standing, there is a significant correlation between the supply
side reforms in the Lisbon agenda and GDP growth.

supply-side measures

In the recently published Lisbon Scorecard for 2007 (1)
1.7
the top seven countries were,
in order, Denmark*, Sweden*,
Austria*, Netherlands*, Finland*, Ireland* and the UK* followed
by Germany and France (2). The leading New Member States
were Slovenia* and Estonia*. The lowest ranked of the EU 15
were Spain, Greece, Portugal and Italy. Overall, Netherlands,

(1) Centre for European Reform: The Lisbon Scorecard VIII, Is Europe ready for

an economic storm, (Feb. 2008).

(2) Member States denoted with an asterisk form part of a ‘Watch List’ of

best-performing countries as explained in point 4.9.

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Austria and Estonia were awarded the accolade for the most
effective Lisbon implementation. Greece and Italy were judged
to be the least effective. How does leadership in implementing
the Lisbon programme affect productivity and employment?

EU Economy: 2007 Review — Moving Europe's Productivity Frontier.
The previous opinion, in September 2007, dealt with the 2006
Review — Strengthening the Euro Area: Key Policy Priorities.

factors,

Although there are many other relevant

1.8
the
conclusion to be drawn from the analysis in this opinion is that
there is indeed a close correlation between the Lisbon imple-
mentation and progress in the growth of employment and GDP
per capita. In general, the reverse is also true, with countries
failing to implement
the Lisbon reforms tending to under
perform. On the basis of this conclusion, the EESC encourages
Member States to implement the full Lisbon programme as
soon as possible.

1.9
The importance of each element in the programme must
be emphasised. The Committee is particularly anxious to see
greater investment in knowledge, education and R&D. There is
no doubt that competition stimulates innovation, so EU econo-
mies need to face competition to meet the challenges of globali-
sation. The redeployment of the factors of production from
failing industries and sectors to emerging and thriving industries
and sectors is required in order to maximise the productivity of
Member States' economies. In turn, this means a Member State
commitment of resources to flexicurity. Finally, it is clear that
Member States' economic performance is heavily dependant on
the good management of public finances.

In the opinion submitted by the EESC to the Lisbon
1.10
Council in March 2000 (3), we said:
‘It is our conviction that in
Europe we do have the necessary innovation, creativity, knowledge and
enterprise to excel in the new paradigm (i.e. the information society).
But we must release these capabilities. Obstacles must be replaced by
opportunities. Penalties must be replaced by incentives. The last decade
saw the liberalisation of European industries. Now we have to liberate
the energies of European men and women’. In 2008 there is still a
great deal left to do, but the Lisbon agenda is the way forward.

2. Introduction

In this present opinion the EESC sought

2.2
to relate
Member State employment growth and GDP per capita to the
various policy recommendations contained in the Communica-
tion from the Commission. In this respect it is rather different
from the conclusions of the previous opinion on the 2006
Review which explained the domestic socio-economic circum-
stances and divergent political objectives which govern Member
State actions.

and

Earlier

opinions, October 2006 (4)
2.3
February
2006 (5), dealt with the Broad Economic Policy Guidelines
(BEPG) 2005-2008, while in March 2004 we gave our opinion
on The Broad Economic Policy Guidelines 2003-2005 (6).
Although the EESC has received the Commission recommenda-
it notes that they are unchanged
tion for BEPG 2008-2010,
from those for 2005-2008. In view of its previous work on the
BEPG, the EESC has decided to use the Review of
the EU
Economy in 2007 as the basis for this present opinion.

2.4
In October 2006 the EESC examined the rules which
affect the overarching objectives of price stability, growth and
employment. In this opinion we concentrate on the policies
rather than the rules. In February 2006 the EESC published its
opinion on the 2005-2008 BEPG. Although this opinion was
wide ranging in its scope, it generally endorsed the same policy
agenda for growth of employment and productivity that forms
the basis of the present opinion. In both of these opinions the
EESC considered the economic factors affecting demand. In this
opinion we deal with the Commission's proposals for supply
side reforms.

Even so,

the Committee

2.5
supply-side
measures to improve competitiveness must be accompanied by
a macroeconomic policy mix that promotes incomes, demand
and jobs. The Committee addressed the question of an appro-
priate policy mix in its still-topical March 2004 opinion.

stresses

that

The Commission

2.6
Economy’
No 8/2007 includes the Communication ‘Moving Europe's
Productivity Frontier’ together with four chapters amounting to
149 pages in all:

document

‘European

1. Productivity trends in Europe: finally turning the corner?

This opinion is the latest in the series prepared by the
2.1
EESC related dealing with issues of economic governance in the
EU. It has been prepared in response to the Communication
from the Commission COM(2007) 721 final entitled The

(3) Opinion of the Economic and Social Committee on Employment,
Economic Reform and Social Cohesion — Towards a Europe of Innovation and
Knowledge (Lisbon Summit — March 2000), OJ C 117 of 26.4.2000,
p. 62, point 2.16.

2. Assessing productivity at the industry level.

(4) Opinion of the Economic and Social Committee on The Broad economic
policy guidelines and economic governance — The conditions for more coher-
ence in economic policy-making in Europe, OJ C 324 of 30.12.2006, p. 49.
(5) Opinion of the Economic and Social Committee on The Broad Economic

Policy Guidelines (2005-2008), OJ C 88 of 11.4.2006, p. 76.

(6) Opinion of

the Economic and Social Committee on The Broad
Economic Policy Guidelines (2003-2005), OJ C 80, 30.3.2004, p.120.

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3. Is there a trade off between productivity and employment?

4. Policies in pursuit of higher productivity: another look.

The Committee regrets that the Commission's recommendations
for bolstering competitiveness are confined to the supply side

3.7 Many widely held beliefs have been discredited: not only
large countries and large companies can be technology leaders;
trade is not the main vehicle for technology diffusion; small
countries can lead in specialised fields; small companies often
introduce innovative new technologies; international mobility of
workers and financial capital are the main vehicles for tech-
nology diffusion.

This opinion evaluates the policies advocated in chapter 4.

3. Gist of the Communication from the Commission

3.1
The 2007 review starts from the fact that while the
European Union is one of the most advanced and productive
economies in the world, a sizeable gap still exists in living stan-
dards, as measured by GDP between the EU and the most
advanced economy in the world — the United States —
remains. The root cause lies in a divergence in productivity
developments in various industry sectors and Member States.

By adopting the Lisbon Strategy in 2000, the EU attrib-
3.2
uted the highest
importance to improving its productivity
performance along with achieving robust employment growth.
The main elements of this strategy were building knowledge,
strengthening competitive forces and enhancing flexibility.

Knowledge building requires more and better investment
3.3
in R&D and human capital. The effectiveness and cost-efficiency
of education needs to be secured throughout
the European
Union.

A broad consensus

is now emerging on what

3.8
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.

3.9
Since the realisation of productivity gain is influenced by
the exit of the least productive entities from the market, policies
that foster resource reallocation are important. If productivity
gains lead to higher income, consumer demand can be expected
to shift towards services. While many service industries have
high added value and productivity, the economy can then also
afford to create new jobs
in sectors with genuinely low
productivity.

4. Productivity and Employment

3.4
Stimulating competition is crucial for both the level and
growth rate of productivity. Empirical research confirms that
opening markets to competition not only has a positive effect
on productivity and growth, but also on employment.

3.5
Enhanced flexibility is needed to smoothly adjust produc-
tion structures towards further specialisation and diversification
into new areas of relative comparative advantage. Measures have
been taken by Member States over recent years to facilitate firm
and labour mobility, but more and broader action is warranted.

4.1
GDP per Capita depends on more than the Lisbon
agenda. GDP depends on factors such as the development of
emerging markets, Eastern Europe and Russia, trends in energy
and commodity prices and markets, technological change and
globalisation generally. Domestic demand is influenced by wage
and employment levels as well as purchasing power. Control of
demand is very much a function of fiscal and monetary policy
while credit
to fuel both business and consumer demand
depends ultimately on central banks. While financial markets
remain in crisis, credit is likely to be in short supply, demand
will suffer and GDP will be affected.

3.6
The conclusions are that a change in ‘mindset’ is called
for. A number of key policies can make an important contribu-
tion. These must aim at:

— Promoting higher levels of R&D investment

— Developing world-class research and educational establish-

ments working in close partnership with industry

— Establishing a fully functioning open and competitive single

market

— Promoting an integrated approach to enhance both security
and flexibility in the labour market
(whereby the EESC
would point out that this approach must be negotiated by
the social partners)

— Improving the quality of public finances.

4.2 Macroeconomic factors were discussed in depth in the
earlier EESC opinions on EU economic governance detailed in
the Introduction. The focus of this opinion is to show that,
demand factors not withstanding, there is a significant correla-
tion between the supply side reforms in the Lisbon agenda and
GDP growth.

Relative GDP per Capita data is provided in Table 1. Two
4.3
time periods have been chosen: 1999, the year that the euro
was introduced, and 2007. For the New Member States (NMS)
this period brackets their accession to the EU. During the period
the USA has declined from 161.8 % to 150.9 % relative to
EU27. Even so, the so-called old Member States have been
unable to take advantage of this relative decline in the USA,
with EU15 declining from 115.3 to 111.7 and the Eurozone
declining from 114.5 to 109.8 relative to EU27.

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4.4
Given this GDP data, what do the employment statistics
tell us? Table 2 shows employment data for the years 1998 (the
year that the first accession negotiations were started with the
NMS) to 2006 (the last available data). Unemployment data is
shown for the period to 2007. Employment in the USA declined
from 73.8 % to 72 % of the workforce in this period while
unemployment rose from 4.5 % to 4.6 %. At the same time the
Eurozone started to catch up with employment rising from
59.2 % to 64.8 % and unemployment falling from 10.1 % to
7.4 %. Data for the EU15 is slightly better than the Eurozone
while for the EU25 it is slightly worse.

policies relating to knowledge, competition,
innovation, and
public finances have contributed to the relative success of these
countries. By way of contrast, the policies of Spain, Greece,
Portugal and Italy will be monitored as a ‘Control Group’. In
addition, policy initiatives in the heavy-weight French and
German economies remain very important for the EU. Both
countries are characterised by polarised politics which have
made reform difficult although, to an extent, the results are now
coming through.

4.5
In the recently published Lisbon Scorecard for 2007 the
top seven countries were Denmark*, Sweden*, Austria*,
Ireland* and the UK* followed by
Netherlands*, Finland*,
Germany and France. The leading NMS were Slovenia* and
Estonia*. The lowest ranked of the EU 15 were Spain, Greece,
Portugal and Italy. Overall, Netherlands, Austria and Estonia
were awarded the accolade for the most effective Lisbon imple-
mentation. Greece and Italy were judged to be the least effective.
How does leadership in implementing the Lisbon programme
affect productivity and employment?

5. Investment in Knowledge

5.1
The OECD programme for international student assess-
ment is called PISA. Table 3 is a composite taken from the
2006 survey of the reading, mathematics and science competen-
cies of 15-year-old children in OECD and other states.

In relative GDP per Capita, Luxemburg and Norway are
4.6
the USA are
ahead of the USA. Countries within 20 % of
Sweden*,
(outstanding), Netherlands*, Austria*,
Ireland*
Denmark*, Belgium and (just) UK* and Finland*. Outside of the
EU, Iceland, Switzerland and Japan are all within 20 % of the
USA. Amongst the NMS, Cyprus and Slovenia* are closest to
the EU27 average, while Estonia* has made the most dramatic
progress, followed by Latvia, Lithuania, Hungary and Slovakia.

Apart from Korea, Japan and Switzerland, the countries
5.2
with straight ‘A’s are Finland* (the clear winner), Netherlands*,
Belgium and Estonia*, Countries with two ‘A’s are Czech Rep.,
Austria*, Slovenia* and Ireland*. Countries with one ‘A’ on the
list are Denmark*, Sweden*, the UK*, Germany and Poland.
Germany and the UK gain their ‘A’s in science. The UK* has the
third highest competency in science at level 6 after Slovenia*
and Finland*. All the countries on the watch list achieve ‘A’
grades. The countries in the control group are clustered with the
USA at the bottom of the ranking.

On the employment front there are many parallels to the
4.7
GDP picture. US employment is just over 70 % of the work-
force. In the Table, all the non EU countries, including Japan
and all
three non Eurozone countries (Denmark*, Sweden*,
UK*) have employment levels over 70 %. In the Eurozone only
the Netherlands* and Austria* are over 70 %, while Ireland* and
Finland* are close. Amongst the NMS, Cyprus and Estonia* lead
with totals close to 70 %.

is 4.6 %.

US unemployment

4.8
Ireland*, Netherlands*,
Austria*, Denmark*, Cyprus and Lithuania are better than the
USA, as is Norway. Luxemburg, UK*, Czech Rep, Estonia* and
Slovenia* are all within one point of the USA. Sweden*, Latvia
and Malta are within two points of the USA.

Lisbon Scorecard — Denmark*,

4.9
From the above analysis, it is clear that we should be
looking at the policies and trends in the leading countries from
the
Sweden*, Austria*,
Netherlands*, Finland*, Ireland* and the UK* — and the leading
NMS — Estonia* and Slovenia*. For
this
opinion, these countries will constitute a ‘Watch List’ and are
denoted with an asterisk. We will examine the extent to which

the purpose of

5.3
Given the considerable correlation between the perfor-
mance of the education system and the performance of Member
State economies,
the Commission is
certainly correct to make the quality of education a flagship
policy for the EU.

the EESC believes that

5.4
The Jiao Tong University in Shanghai has developed a
methodology for ranking universities. There are other methodol-
ogies in use to rank universities, but the Jiao Tong is in line with
the EU focus on science and research.

The performance of the US School system as measured
5.5
by PISA is very ordinary. It is in higher education that the USA
maintains its competitive edge. Table 4 is extracted from the
Jiao Tong rankings. There are 17 American universities in the
top 20, two British and one Japanese. The UK, with ten entries
in the top 100, is on the watch list. Outside of the EU, Japan
(6 entries), Canada (4), Australia (2), Switzerland (3), Norway (1)
and Israel (1) also feature. Five of the watch list appear in the
top 100: the UK*, the Netherlands* (2), Denmark* (1), Sweden*
(4) and Finland* (1). None of the control group appears. It is
time for Bologna, Salamanca and Coimbra to regain their
former glory. In addition there are 6 entries for Germany and
4 for France.

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5.6
Outside the UK, only six Member States are represented
in the top 100 universities; twenty EU countries are unrepre-
sented. The policy of the Commission appears to be to fill this
gap with an EU Institute of Technology. Despite EESC support
for this project, it is difficult to see how it can flourish without
weakening the EU presence in the top 100. An alternative
strategy would be to review and revise Member State policies for
the development of their leading universities. The biggest need
is a closer partnership between universities and industry to
develop the knowledge and skills to harness 21st century
science and technology for wealth creation and employment.

A further measure of Member State university education
5.7
is the Eurostat data on the number of tertiary graduates in
science and technology per thousand of population in the
20-29 age bracket. The figure for the USA is 10.6. Member
States within a percentage point of
the USA are Belgium,
Italy, Latvia, Austria*, Poland, Romania,
Germany, Greece,
Slovenia* and Slovakia. Member States with a much greater
output are Denmark* (14.7),
Ireland* (24.5), France (22.5),
Lithuania (18.9), Finland* (17.7), Sweden* (14.4) and UK*
(18.4). All countries flagged with an asterisk (*) are on the
watch list.
Italy and Greece are the control group countries
which qualify here. Developing graduates in science and tech-
nology must be a focus for Member State secondary and tertiary
education systems.

5.8
One of the goals of the Lisbon project is to raise EU
R&D spending to 3 % of GDP. Of this 2 % should come from
the private sector. Two of the watch list, Sweden* and Finland*,
spend more than 3 %. Two more, Denmark* and Austria*,
spend between 2 % and 3 %, as do Germany and France. Those
spending between 1 % and 2 % are Belgium, Czech Rep.,
Estonia*, Ireland*, Netherlands* Slovenia*, Spain and the UK*,
most of which are on the watch list. All other Member States
spend less than 1 % with the exception of Hungary and Italy,
both at 1 %), Italy and Spain feature in the control group. To
close the gap it does not seem unreasonable to expect govern-
ments to contribute a full 1 % of GDP to R&D. Ideally, this
would be channelled into universities and research institutes to
help build their reputations and presence in the global scientific
community. At the moment EU15 governments spend in the
range 0.30 % to 0.40 % while NMS governments spend in the
range 0.50 % to 0.60 %. More could and should be done, not
least to develop the science needed to tackle climate change and
pollution.

5.9 With regard to tax relief for private sector R&D, the
EESC has already presented its Opinion to the Commission (7).
In the view of the EESC, all Member States should adopt best

(7) See EESC Opinion Towards a more effective use of tax incentives in favour of

R&D, OJ C 10 of 15.1.2008 p. 83.

practice and introduce tax incentives to encourage more private
sector R&D investment, especially by SMEs.

innovation,

There is a circular

relationship between education,
5.10
research,
technical knowledge and employment
trends. In a virtuous circle, the national knowledge and skill
base attracts inward investment, knowledge transfer and immi-
gration. Without that base, skilled people are tempted to look
for a knowledge environment where their skills are at a
premium. This can lead to a vicious circle of emigration and a
brain-drain.

5.11
The policy conclusions for research and education are
that many Member State secondary and tertiary education
systems need to be overhauled and that Governments should
increase their spending on R&D. There is clearly a correlation
between effectiveness of policies and employment and produc-
tivity, as has been demonstrated by the record of both the
watch list and the control group.

6. Competition and Innovation

6.1
The Communication from the Commission outlines
three policies to foster competition. These are the liberalisation
and regulation of network industries, competition policy and
gains from the positive effects of the Internal Market

economies of

6.2
The Internal Market benefits include the stimulus to
innovate which results from exposure to foreign competition,
the
in production, distribution and
marketing which are available in the larger market and the tech-
nology transfers which follow from openness to foreign invest-
ment.

scale

6.3
EU Member States have not been uniformly attractive to
and open to FDI (Foreign Direct Investment). In terms of tech-
nology transfer, management methods, market presence and
capital
investment this will have been a handicap for those
Member States which have not benefited from FDI. Ernst &
Young data on FDI show that for the period 1997-2006 the top
10 FDI recipients in Europe by number of projects were:

UK

5 539

France

3 867

Germany

1 818

Spain

1 315

Belgium

1 190

Poland

1 046

Hungary

1 026

Ireland

Czech Republic

849

Russia

884

843

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FDI has been of great

6.4
importance for the economic
growth of the NMS. As competition for FDI grows from coun-
tries all over the world, including India and China, the NMS are
going to have to embrace the knowledge economy to guarantee
growth and jobs. Asian countries excel in the PISA competency
tests and hundreds of thousands of graduates with ordinary and
master's degrees in science and technology are graduating from
their universities.

6.5
Liberalisation and regulation of network industries has
considerable potential to reduce costs and improve productivity
throughout the economy. There are three phases to this policy:
First privatisation, then regulation to allow new entrants to chal-
lenge incumbents and finally an ownership split between
networks and network services.
In its Report on progress in
creating the internal gas and electricity market (8) the Commission
used switching by customers between suppliers as a measure of
effective competition. The following table is illustrative:

6.6
The implementation of Competition Policy is designed to
favour efficiency and productivity where the consumer benefits.
This policy is very much in line with the balance the EESC seeks
to maintain between the interests of its component constituen-
cies.

that

The Communication concludes

6.7
competition is
crucial for both the level and growth rate of productivity. It is
striking that the watch list economies are the most open in the
EU. They have the highest productivity, the highest levels of
employment and the greatest capacity to absorb migrant
workers. It is a mistake for Member State governments to try to
put barriers around their economies out of fear of competition.

Percentage Switching

7. Reallocation Policies

Germany

Big Business

SMEs

Households

France

Big Business

Households

Spain

Big Business

SMEs

Households

Electricity

41

7

5

15

0

25

22

19

Gas

(*)

(*)

(*)

14

0

60

60

2

By Reallocation the Commission means the redeploy-
7.1
ment of the factors of production from failing industries and
sectors to emerging and thriving industries and sectors.

7.2
The core thesis of the Communication is that to the
extent that economic growth is driven by an expansion of the
technology frontier, the economy will be exposed to structural
change. New high technology sectors may gain market share at
the expense of shrinking sectors. New firms may become impor-
tant players and well established firms may be forced to adapt
or disappear.

7.3
Since the economy will anyway be exposed to structural
change, the adjustment capacity of the economy is crucial to
ensure that maximum benefit
is derived from technological
change and knowledge mobility. However, the Commission feels
that Member States have limited capacity to make the necessary
adjustments due to the limited flexibility allowed for by labour
market institutions and rule books.

UK

Big Business

50+

85+

SMEs

50+

75+

Households

48

47

7.4
The Communication proposes four key policy measures
to improve resource reallocation: facilitating market entry, redu-
labour market regulation and
cing the administrative burden,
financial market integration.

(*) Data on the gas market is not available from Germany.

Competition is generally most advanced in some of the watch
list countries although Italy and Spain have also made progress

(8) Communication from the Commission to the Council and the
European Parliament Report on progress in creating the internal gas and elec-
tricity market — COM(2005) 568 final of 15.11.2005.

the

7.5
Policies to facilitate market entry include a number on
which the EESC has already written Opinions. These involve
reductions of
administrative burden associated with
company formation, a variety of support schemes for new SMEs
and changes to the laws governing bankruptcy. Access to
finance and a competition policy to ensure contestable markets
are important elements in any strategy for reallocation via new
company formation.

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7.6 While big and small firms alike may face administrative
costs, the burden is much greater for smaller firms, given their
smaller size. The reduction of administrative burden is one of
the five most important goals on the EU agenda but as the
Communication acknowledges, the reduction of regulation and
administrative costs is difficult because most of the measures
were introduced for specific reasons.
‘They serve to correct
market failures, to protect market participants, or to provide
policy makers with information’ (9). Many EU constituencies
would argue that the social protection underpinned by these
regulations is a key element of the acquis. Even so, the cumula-
tive impact of such regulation imposes substantial economic
costs.

The UK-based Better Regulation Task Force, corroborated
7.7
by work of the Dutch Central Planning Bureau (CPB), suggests
that the costs could be 3-4 % of GDP (10). It has been estimated
that a 25 % reduction in the administrative cost burden in the
EU would initially result in a 1 % increase in real GDP. The long
run effects would be even larger. Reduction of this cost burden
is highly desirable, but there has been no evidence to suggest
that anything will come of this initiative. Since the EU is institu-
tionally pre-occupied with the possibility of market failure, such
improvements are unlikely to be achieved. Furthermore the
EESC, with its concern to provide every protection to market
participants, is unlikely to support any significant reduction of
the administrative burden.

7.8
Labour market structures have an important impact on
labour redeployment. The impact of market reforms on produc-
tivity and employment is greater when labour markets are flex-
ible. While there are no reliable studies of labour market flex-
ibility, the employment levels of
the watch list countries is
certainly a measure of the capacity of their employment laws to
accommodate change.

Employment protection legislation in the EU is under-
7.9
standably controversial. Rather than amend the protection given
in permanent contracts, many Member States have introduced
temporary contracts in parallel. It is these temporary contracts
which have accounted for much of the increase in employment
discussed in point 4 above. While the data does not give the
actual full-time employment measure, the scale of employment
growth is
is
reducing.

and structural unemployment

encouraging

7.10
It is, of course, necessary to mitigate the disruption
caused when labour regulations are sufficiently flexible to opti-
mise reallocation. Therefore Member States are urged to intro-
duce flanking policies in parallel. Flexicurity is critical in this

(9) Moving Europe's Productivity Frontier — the EU Economy 2007
Review, European Commission, Directorate General for Economic &
Financial Affairs, p. 136.

(10) Moving Europe's Productivity Frontier — the EU Economy 2007
Review, European Commission, Directorate General for Economic &
Financial Affairs, p. 137.

process. Resources need to be made available so that life-long
learning can reinforce adaptability and employability, social
security systems can provide incentives to participate in the
labour force and facilitate redeployment while labour market
policies should help people to deal with change and the unem-
ployment involved in the transition to new, secure employment.
Such policies are indispensable when employment protection is
relaxed.

Financial market integration is the last of the realloca-
7.11
tion policies.
In general, the degree of fragmentation in the
financial system in the EU could be seen as an impediment to
productivity and employment especially in respect of start-up
companies. These shortcomings are being addressed by the
Financial Services Directives. In parallel with this Opinion the
EESC is preparing an Opinion on cross-border venture capital
activity (11). The role of an efficient financial system in structural
change is most evident in the financing of start-up companies.

8. Improving Public Finances

in many cases,

8.1
Table 5 contains Eurostat data on Member State finances.
The average government debt of the Eurozone 12 at 68.8 % of
GDP exceeds both the EMU convergence goal of 60 % and the
averages for EU15 (63.0) and the EU25 (61.9).
In general,
government debt in the watch list states is below 50 % of GDP
and,
far below. The exception is Austria*
(61.7 %). Furthermore, all the watch list states have reduced
government debt over the period 1999 to 2006. The reduction
in Ireland*, Netherlands* and Sweden* has been particularly
dramatic. Of the control group, only Spain has government
debt at under 50 % of GDP, following a dramatic reduction
during the period. Italy (106.8 %) and Greece (95.3) are at the
bottom of the league.

In the EU 15, Belgium,

8.2
Ireland*, Spain, Luxemburg,
Netherlands*, Finland*, Denmark* and Sweden* had positive
budget balances. The remaining countries had negative balances
of less than 3 % except for Italy (– 4.4 %) and Portugal (– 3.9 %).
Amongst the NMS, Bulgaria and Estonia* have positive balances
while Hungary, Poland and Slovakia are more than 3 % negative.
At only 1.2 % negative, Cyprus and Slovenia* stand out.
Amongst the watch list the UK, at 2.7 % negative, has lost its
way.
favourable
economic activity so that its position amongst the leaders is
now in jeopardy. In the control group, the Spanish performance
stands out while Italy and Portugal confirm their generally low
standing in the league.

failed to balance its budget

in years of

It

(11) Removing obstacles to cross-border investments by venture capital funds,

(INT/404).

C 77/138

EN

Official Journal of the European Union

31.3.2009

8.3
In its annual Opinions on the EU economy the EESC has
argued for sound public finances. The relative record of the
countries on the watch list and the control group shows that
sound public finances are an important component of employ-
ment and productivity performance in Member States.

8.4
In examining the relative performance of the watch list
and the control group a question arose about the impact of
taxes. The Eurostat report on EU tax in 2005 shows that the
average tax rate as a % of GDP in the EU 27 was 39.6 %. This is
about thirteen percentage points more than the rates for the
USA and Japan. Amongst all the non-EU OECD countries, only
New Zealand has an effective tax rate greater than 35 %. After
an attempt by Member States to reduce the burden of tax, the
trend has been reversed and the average tax rate is now back to
the 1995 level.

8.5
In terms of tax burden, Sweden*, Denmark* and Finland*
are in the top 5, together with Belgium and France. Austria*

are

and Slovenia*
together with Italy.
in the next 5,
The Netherlands* and UK* stand at 12th and 13th respectively.
Only Estonia* (22nd) and Ireland* (23rd), numbers 22 and 23,
enjoy a significantly low level of tax. In the control group, the
Italian tax burden is lower than or equal to five of the watch list
countries. Spain, Portugal and Greece have tax burdens lower
than all the watch list except for Ireland and Estonia. There is
no prima facie argument that the control group countries are
over taxed.

8.6
The EU is more highly taxed than competitor regions.
Specific Member State tax regimes are heavily influenced by the
amount of money spent on social protection. Taking a purely
EU view, it is difficult to make the case for tax reductions while
the leading EU economies have the highest tax rates. However,
taking a global view, competitor regions have lower tax levels
and it is likely that this contributes to their high levels of inno-
vation and enterprise.

Brussels, 18 September 2008.

The President of the

European Economic and Social Committee

Dimitris DIMITRIADIS