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Martin Wolf on Lisbon

In with a chance in Lisbon

This week's EU summit has the potential to make real progress on structural reform, writes Martin Wolf - 21 Mar 2000

It is déja vu all over again. In late 1993, under its redoubtable president Jacques Delors, the European Commission produced a white paper on "competitiveness, growth and employment". In early 1995, the Commission produced a plan to create 15m jobs by 2000 and halve the European Union's unemployment rate, then at 10.9 per cent. Yet only last month, the Commission admitted that "the European Union's growth rates have consistently been less than those of the US, unemployment remains unacceptably high and too many people are excluded from society".

Where does one find such candour? In the Commission's submission to the EU's special summit in Lisbon later this week. After so long a record of admitted failure, why should one take this new attempt seriously?

Moaning about the EU's failure to match US performance is just one similarity between today and the early 1990s. So is the UK's attempt to persuade its partners that it has the answers. In the early 1990s, the Conservative government tried to persuade the rest of the EU of the merits of "Anglo-Saxon" deregulation. It failed. Now the government of Tony Blair is mounting a not altogether dissimilar crusade for reform, this time to put the EU on his "third way". Other member states, notably France, do not see things exactly the same way.

Plus ça change, plus c'est la même chose. The most visible difference this time is that the Commission's paper is shorter than in 1993. For that, one offers thanks. Yet it is possible to be more positive than that. There are at least two reasons for greater optimism this time.

The first is that the EU's grand project of the 1990s - economic and monetary union - has been completed. That allows policymakers to turn their attention to the structural questions they ignored when convergence was the goal. It also makes that shift essential.

A monetary union will work well only if there is also micro-economic flexibility.

The second is the long-term improvement in inflation and fiscal performance that underlies the upswing throughout the euro-zone. The Commission forecasts 3 per cent growth this year and in 2001. Already, the rate of unemployment in the euro-zone has fallen from 11.7 per cent of the labour force in the summer of 1997 to 9.6 per cent in January.

Nevertheless, one should not discard scepticism too readily. The EU's leaders may enjoy a favourable opportunity. But that could make them complacent, rather than energetic. Why, they may wonder, should they risk unpopularity when economies are becoming healthier on their own?

The wise answer is that the need is great. As the Commission's paper shows, the EU's performance has been lagging behind that of the US on two crucial dimensions: innovation and employment. Both are long-term, not cyclical, phenomena.

Internet penetration is, for example, less than half that in the US. And not only is the unemployment rate more than twice as high, but the proportion of the working age population in work is only 61 per cent, compared with 74 per cent in the US. Four decades ago employment rates were some five percentage points higher in the EU than in the US.

Recognition of both opportunity and need is necessary for success. But it is insufficient. Also required are workable proposals. The summit is focused on two topics: accelerated growth, and returning to "full employment". The Commission's ideas are far more persuasive on the former than on the latter.

The EU has done much to push liberalisation of telecommunications. It can now further increase competition in public procurement, energy and civil aviation; it can eradicate distorting state aids; and it can eliminate restrictions on the investment activities of pension funds. More broadly, it can work harder to integrate financial services across the EU.

Unfortunately, the Commission's discussion of the labour market shows all the old inhibitions about confronting Europe's real problems - overpricing and immobility of unskilled labour. No sensible person can oppose recommendations for better education. But in education of unskilled workers the EU is already well up to US standards and, in many members, ahead of them.

A far more satisfactory - if contentious - agenda is advanced in a paper commissioned by the British and Italian prime ministers.* Its core point is that: "European unemployment is mainly a problem of long-term unemployment. Short-term unemployment is roughly the same as in the US, but in addition 5 per cent of our workforce has been out of work for over a year, compared with almost none in the US. . . . On top of this, millions of people of working age are not even looking for work."

This report makes four central suggestions:

  • There need to be active policies to ensure that everyone receives offers of work or training within a year of becoming unemployed.
  • Individuals who receive job offers must not have the alternative of living indefinitely on benefit.
  • Regional unemployment must be reduced by allowing differentiated wage setting and promoting mobility.
  • Massaging the unemployment statistics by encouraging early retirement and other ways of lowering labour supply are counter-productive.

All these ideas are commendable. Underlying them is the correct idea that the way to increase employment and lower unemployment is not to reduce labour supply, but to increase it, using both carrots and sticks. While the labour market and welfare policies of member states differ enormously, the underlying logic of the recommended approach is relevant for all. Because it cannot be presented as just the Anglo-Saxon "hire-and-fire" approach, maybe Mr Blair will have more success in selling his ideas than the Conservatives.

It may not matter all that much if he fails. While the EU does possess collective instruments for enhancing competition and market integration, labour market and welfare policies are national. So let a thousand flowers bloom. In the end, even the most recalcitrant member state will choose the most beautiful.

This summit is an opportunity. In some areas, it can give a push to further liberalisation. In others, it should at least open minds. But let nobody be under an illusion. If full employment is the goal, there will need to be far more labour market liberalisation and welfare state reform than the Commission is, as yet, prepared to admit.

* T. Boeri, R. Layard and S. Nickell, Welfare-to-Work and the Fight against Long-Term Unemployment. - http://cep.lse.ac.uk/

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