Analysis
| by Paul Gosling 23 Apr 2003 |
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Will the European Economies Fail the Lisbon Test? We are now three years into the EU’s 10-year plan to make Europe the world’s most dynamic economy: it looks as if Europe will get nowhere near its goal. At the Lisbon Council of Ministers meeting three years ago, Europe’s leaders made an unprecedentedly bold specific policy objective. Europe was to become the world’s most dynamic knowledge-based economy within just 10 years. It is a pledge which is so far from being achieved that even now it looks like a source of potential collective humiliation. Europe’s economy is not merely stagnant, it is losing ground to competitors in terms of productivity. EU member states are simply failing to implement agreed steps to introduce a more flexible and dynamic economy. One example was the introduction of a Community patent, which was only approved last month after three years of conflicts between member states, with each protecting narrow national interests, despite being seen by researchers and industry as essential to the more effective working of the internal market. The European Round Table of Industrialists is clearly worried by the slow progress, saying that the Lisbon declaration was ‘admirable’, but that the test was its ‘implementation, not just declaration’. The key to progress, says the Round Table, is to invest in centres of excellence, backed by moves to raise the status and supply of scientists; to increase public spending, and in doing so to build in greater private R&D expenditure; and to increase legal protection for intellectual property, thereby reducing the bureaucratic hurdles which impede the launching of innovative products and technologies. Members of the Round Table point out that, at present, the objective of Europe outperforming the US is unrealistic. Movement over recent years has been in the direction of a widening productivity and performance gap, in favour of America. Whereas, in 1990, there was only a marginal advantage for the US over the EU in terms of GDP output per capita, there has subsequently been a dramatic improvement in the US, with almost straight line performance in the EU. On existing trends, it will not be long before US output per capita doubles that of the EU. Achieving a turnround rests on several factors, not least heavy investment in R&D and new productive facilities. But research by the Round Table shows that, while members are planning to invest, they intend to do so outside the EU. A big increase in investment in Europe is unlikely, suggests the Round Table’s report, while the EU has only 5.4 researchers per 1,000 people in the labour force, compared with 8.08 in the US. This, in turn, has led to markedly fewer centres of excellence in the EU compared with the US. Gerard Kleisterlee, President and chief executive of Royal Philips Electronics, explained: “Already a significant part of new hires at Philips Eindhoven comes from outside the EU. To get the best researchers we are recruiting worldwide for our research laboratories and, partly for the same reason, an increasing part of our R&D effort is based outside the EU.” He added: “Competence centres with ‘excellence’ potential in Europe are too scattered over the various countries to achieve the required economies of scale and develop into true centres of excellence.” Underlying these specific problems lie two general handicaps, argued the Round
Table: “the lack of any sense of urgency to complete the Single Market
and ineffective policies to achieve the Lisbon objective” and “the
cumbersome political decision-making process for business-related issues in
Europe”. “Three member states – Denmark, Sweden and Finland – already meet most of the Lisbon targets and can be described as world-class economies,” says Alasdair Murray, the CER’s director of the business and social policy unit. “A second tier of countries – including Britain, Ireland and the Netherlands – are making good progress. Spain and Portugal are working hard to catch-up with the frontrunners. Similarly, EU accession countries – such as Estonia and Slovenia – are endeavouring to fulfil their Lisbon commitments. “However, the eurozone’s three largest economies – France, Germany and Italy –have so far made little attempt to fulfil their Lisbon promises, particularly labour market and pension reforms. Unless they reinforce their reform efforts, they risk becoming a drag on the entire EU.” Murray said that Denmark and Finland could be regarded as Europe’s ‘heroes’
in trying to keep the EU on its Lisbon tracks – but that Germany and Italy
were the ‘villains’ for derailing the agenda. To be fair, Commission officials are equally aware of the reform deadlock. In its new Green Paper on Entrepreneurship, the Commission seeks to answer the question of why so few people start a business in the EU compared with the US. The secondary question is why so few of those who do start then go on to create dynamic and fast-growing businesses. Explanations put forward by the Commission cover both the cultural contrast between the EU and the US and the failure by member states to address structural hindrances to small firms. Entrepreneurship is still not as highly regarded in Europe as in America and failure is treated more critically. There is a strong belief in Europe that a new business should only be established if there is virtual certainty that it will be successful. It is far more acceptable in the US to ‘suck it and see’. Many structural barriers to small firms’ creation remain in place, varying in severity in different European countries, concludes the Green Paper. These include cost, support, skills, bureaucracy, tax and – echoing a point made by the Round Table – the lack of equity finance. The challenge of structural reform has split member states badly over recent years, giving the appearance that all are agreed in principle with the need for reform, but lack consensus as to what constitutes essential structural reform – as compared with differences in systems which might be regarded as important national cultural variations. Things have become so bad that Commission officials – notoriously delicate in their handling of members’ sensitivities – are increasingly showing their frustration in reports. In the Commission’s recent report Choosing to Grow, which examines progress towards the Lisbon goals, the best and worst are shown for all to see. Sweden, Finland and Denmark are praised as consistently the best in ‘structural indicators’, providing the basis for the framework conditions for achieving a more dynamic economy. Reference to the chart shows that the member states which are performing worst are Greece, Portugal, Spain and Italy. Perversely, the UK is both the fifth best and fifth worst member state for implementing structural reforms. In some instances it is an enthusiastic reformer, yet with other measures it has done little to introduce change. However, the Commission also makes the point that Greece, Portugal, Spain and Ireland have all made big steps forward in recent years in catching up with best practice and cannot, therefore, be regarded as the major stumbling blocks to progress. Nowhere illustrates the political fallout from structural reform better than does Germany, where, for months, the fragile administration of Gerhard Schröder and the social democrat / green coalition has destabilised. Most recently, Schröder has unveiled a new package of reform proposals which aim to create a more flexible and dynamic labour market, without upsetting too much the trade unions on which his party’s support relies. Schröder’s reforms would eliminate national pay bargaining; reduce redundancy protection for staff of small firms; simplify accounting rules for SMEs; cut taxes on SMEs; cut the size and duration of unemployment benefit that is paid; cut the cost of healthcare and the coverage provided by social insurance; and invest ¤15bn (£9.5bn) in regional infrastructure and housing. On the face of it, Schröder’s proposals were radical and progressive. However, they were far from well received. They were criticised by the opposition Christian Democrats as insufficient. They were less revolutionary than some of the minority coalition partners in the Green Party had called for. But the measures were strongly attacked by the trade unions and many members of the ruling SPD as undermining Germany’s distinctive welfare state and social market model. Employers complained the proposals were short of detail. And analysts pointed out that Schröder was proposing the abolition of some measures which his own administration had introduced. It seems likely that they will now be subject to bitter debate, possibly leading to even greater political uncertainty. Perhaps equally significant, Germany also called on the European Union to water down the stability and growth pact. Germany is finding the pact’s rules limiting budget deficits to 3% of GDP difficult to conform to. Meanwhile, the British Government is arguing that the twin issues of pressures on the stability pact, plus the failure of the eurozone economies to implement market reforms, make it increasingly difficult for the UK to go for early adoption of the euro currency. The 11 September attacks on New York were not only a terrible civilian disaster. They also illustrated how vulnerable financial systems were to disruption by an awful tragedy. Now the UK’s City regulator, the Financial Services Authority, has urged those working in the finance industry to recognise the real threat to financial systems and firms’ viability that is posed in times of war and political instability. Firms should take steps to ensure that, in the event of a terrorist attack on financial areas, they have back-up systems sufficiently effective to ensure ‘business continuity’, says the FSA. The guidance applies to all regulated providers, including about 700 accountancy and law firms providing investment advice in the UK. A spokesman for the FSA said it was not attempting to be prescriptive – for example, by saying that back-up computer facilities must be a minimum distance from the headquarters’ offices – but was telling firms they need to take steps to ensure that the financial markets were resilient to a major terrorist attack or other disaster. Ultimately, said the spokesman, it was largely up to commercial and reputational pressures to force large companies to adopt sensible protective measures. In support of this, the FSA, the Bank of England and the Treasury have launched a website, www.financialsectorcontinuity.gov.uk, to provide guidance for financial firms on what steps they should take, including measures for assessment, design, implementation, measurement and testing of continuity management. Michael Foot, managing director of the FSA, said: “Last year we undertook a review of the key 40 or so firms and markets which found that there had been considerable improvement in their business continuity and capability to recover from either a 11 September-type event or a local incident, such as flood or telephony / IT problems, which can have a major effect on individual firms.” He added: “Although our priority focus is on key firms and markets, our guidance applies to the other 12,000 firms we regulate.” Rick Cudworth, who leads KPMG’s Business Continuity Services which helped produce the guidance, commented: “Worries about war in Iraq and growing concerns over terrorist threats have led many organisations to re-examine their approach to business continuity. This has certainly been the case in the financial sector and, for many financial services organisations, the highest priority right now is to implement and maintain improvements in their resilience and recovery capabilities. This guide provides a step-by-step approach to help organisations address the challenges, supported by insights from leading specialists from financial institutions and their advisers.” The UK Treasury has launched its own plans to take over the running of key City institutions in the event of a major calamity, such as a biological, chemical or nuclear attack on commercial London. It is determined that an attack should not cause financial systems to collapse, for example by preventing salaries to be paid. Even fairly short-term disruption could have knock-on effects, pushing major companies into technical insolvency and destroying confidence in key institutions, fears the Treasury. Although the proposals are just at consultation stage, an indication of the urgency with which they are being treated is that the consultation period is lasting a mere eight weeks and will be completed later this month. There are many other signs of the way in which governments are now treating the threat of terrorism, coinciding with or following war with Iraq. Emergency planning has been strengthened in the UK, with the major fear being an attack launched on the London Underground. And the Metropolitan Police has revealed that it will use London’s new ring of cameras around the City – which enforce the congestion charge – as a means of monitoring potential terrorist activity. Even more alarmingly, US health secretary Tommy Thompson has predicted bio-terrorism attacks on the powerful Western nations and urged their governments to spend billions of dollars upgrading health systems to cope with such an event. In line with this, the US Federal Government plans to spend billions on what are termed ‘biodefense initiatives’. These include devices which detect the presence of anthrax, smallpox and other micro-organisms that could be released as part of a war on civilian populations. Parallel with this, the US administration is also spending heavily in fear of ‘cyberterrorism’ – antagonistic software viruses designed to wipe-out state and commercial computer systems. Many critics will claim that governments have entered a paranoid frame of mind, yet have only a limited capacity to counteract the range of potential threats. But it is legitimate to ask whether the private sector is taking the threat of civilian attack sufficiently seriously in the light of the commitment shown by governments. According to a new survey from PKF, small firms are in fact woefully underprepared. More than half have no operational disaster recovery plan at all, the research shows. Nick Winters, a partner at PKF, said: “It’s all too easy to focus on the day-to-day and short-term goals in business – but the uncertain economic climate and current threat of war and possible terrorist attacks are timely reminders that disaster can strike at any time. Every company should have a crisis management plan because once you’re hit by a problem you don’t have the luxury of time to think through the best options and ensure your systems are backed-up, your staff are trained and you have a route to recovery. “The more prepared you are to cope with it, the better your chances of getting through a disaster as quickly as possible and with the least disruption and trauma. It could be the difference between saving and losing your business.” |
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