Meeting the challenges of innovation and its diffusion as well as ensuring the labour force’s employability and flexibility, requires that human capital is continuously adjusted to labour market needs through improved education and training, as well as lifelong learning. The last decades have already brought about an enormous increase in the level of educational attainment. However, so far investment in human capital in Europe is still clearly inadequate for a “knowledge-intensive” economy. In 2003, the US annual expenditure on higher education institutions represented 2.9% of GDP, while in the euro area it only represented 1.2% 16 . The gap is mainly a result of greater private funding. European universities should be allowed and encouraged for instance to seek complementary private sources of funding and legal, and other barriers to public-private partnerships between universities and businesses should be removed. A better and more effective education system, as estimated by some research of the European Commission, might add as much as 0.3 to 0.5 percentage points to the annual EU GDP growth rate 17 . Macroeconomic stability to support higher and sustainable growth As mentioned earlier, the supply-side determinants of long-term growth that I have emphasised should not be understood as an exhaustive explanation for the growth performance of the European economy. We should also look beyond the microeconomics of the supply-side and ensure an appropriate macroeconomic framework in Europe. First of all, sound national fiscal policies in Europe are of the essence because they ultimately are supporting growth and stability.

7  See, for example, Genre, V., R. Gomez-Salvador and A. Lamo (2005): “European Women: Why do(n’t) they work”, ECB Working Paper Series, No 454, March 2005. 8  See Anthony Annett (2006) “Lessons from successful labour market reformers in Europe” IMF euro area policies: selected issues, August 2006. 4  BIS Review 82/2007  Increasing competition What all these countries also have in common is a significant reduction of product market regulation. This leads to the second prerequisite for higher medium to long-term growth: increasing competition towards establishing efficient and well-functioning product markets. Most studies point to the potential that improving competition has to increase employment in the medium and long run, and to boost productivity trends by improving production efficiency and by enhancing the incentive to invest and innovate 9 . In the EU, some progress has been made in this regard. For example, several network industries, like telecommunications, are now fully or largely open to competition and the hourly labour productivity in this particular sector significantly accelerated from 4.9% to 8.4% over the periods 1980-1995 and 1996-2004 By comparison in the US, hourly labour productivity grew by 3.4% and 4.4% over the same periods in the telecommunication sectors. A lot remains to be done, however: the extension and deepening of the EU internal market remains a priority in particular as regards further financial market integration, the pursuit of effective competition in the energy market and the implementation of the Services Directive. Member States have the primary responsibility for these tasks.