the drive for sustained innovation should become a strategic priority / July 28 2003 / Financial Times

Europe must spend its money more wisely
By Jean Pisani-Ferry, Andre Sapir and Helen Wallace
Published: July 28 2003 20:57 | Last Updated: July 28 2003 20:57

The European economy needs urgent reform to achieve sustainable growth. The European Union has to set priorities and see them through, especially in regard to its own budget. Within the current budgetary limits, growth-enhancing expenditures on research, higher education and infrastructure, as well as on institution-building in the new countries that will join the EU next year, can increase only if spending on traditional policies - chiefly, agriculture and regional aid - is cut. That is the bottom line of the report we co-authored for Romano Prodi, European Commission president.

First, the objectives. For three decades, the EU's gross domestic product per capita has stagnated at about 70 per cent of America's, despite fast growth in some member states. After 30 years of postwar catch-up, Europe has been unable to turn itself into an economy where innovation and technology drive faster growth. There is little time to lose.

Growth is not the only thing that matters. Maintaining economic stability and social cohesion across Europe is vital. But neither of these objectives can be sustained with a stagnating economy. The longer we have to wait for growth, the greater the danger that stability and cohesion will be put at risk and the more probable it is that European citizens will lose confidence in the EU to provide a better future.

There is no magic solution to the growth problem. It will take a great deal of hard work to improve macroeconomic performance; and we need better microeconomic tools to encourage growth and innovation. Moreover, since the European economy depends on parallel actions through EU institutions and national policies, hard work is needed on many different fronts simultaneously. After all, the EU does not have a "government". Instead, it depends on an intricate system of shared economic governance. So we need to improve economic governance as well.

Look next at policies. In March 2000 at the Lisbon summit EU leaders set the target of making Europe "the most competitive and dynamic knowledge-based economy with sustainable economic growth and greater social cohesion". These are fine words - but turning them into reality at national and EU levels has proved more elusive. The Lisbon target logically implies some redirection of expenditure both by the EU and by national governments.

In particular, the report argues that the drive for sustained innovation should become a strategic priority. In some parts of the European economy research and innovation are forging ahead but this capacity needs urgently to be increased and spread across the Union, in both old and new member states. This is why we argue for a three-track approach: the tax and fiscal systems should be better geared to facilitating investments in innovation; better funded and more flexible instruments are needed for investing in state-of-the art research; and European universities need to become much better at developing the human capital and skills for the knowledge economy.

The third area for reform is methods of governance. The Lisbon summit called for a more active process of comparing and contrasting national policies to improve performance. This has delivered sufficiently. Europe requires a better partnership among the various levels of government and centres of power. It cannot set ambitious goals while continuing to rely on weak instruments.

This means concentrating aid on the poorest members, rather than on individual regions; allocating money to the projects that do most to boost growth, irrespective of the nationality of their proponents; getting rid of the "I want my money back" approach to the EU budget, and hence financing it more from "own" resources (taxes and EU duties) rather than from national contributions; creating independent bodies to take charge of specific EU functions, such as competition policy; making sure that regulatory decisions are not distorted by national considerations; and more generally providing to national, regional and local governments the incentives to co-operate and contribute to the common goals.

We have been accused of political naivety. But our report is designed to provoke a thorough debate across Europe. The fact that EU policies were once appropriate for different circumstances should not mean that we simply maintain them for ever, least of all when the EU has to accommodate 10 new members as well as the 15 old ones - and all that in a global economy that will not give Europe a free ride.

The writers are, respectively, professor of economics at the University of Paris-Dauphine, professor of economics at Université Libre de Bruxelles and director of the Schuman Centre, European University Institute, Florence