The failure of the Lisbon strategy

Charles Wyplosz, 12 January 2010

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The Union has today set itself a new strategic goal for the next decade: to become the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion.” – Lisbon declaration, 24 March 2000

Well, here we are a decade later.

I cannot imagine anyone believes that that mission has been accomplished. Indeed, Fredrik Reinfeldt, the Swedish Prime Minister who held the rotating EU Presidency until recently, declared the strategy a failure (EurActiv 2009). Failure, in fact, was predictable and predicted (see Tabellini and Wyplosz 2004, 2006). Now is time to assess the strategy and its consequences. Here is a (critical) contribution.

When they met in Lisbon ten years ago, the Heads of State and Government of the EU unanimously endorsed the strategy. The aim was uncontroversial. The EU was lagging behind the US in most technical and scientific fields. As a consequence, the per capita income gap had remained undiminished for a quarter of a century. The diagnosis was also well put. Too many policy objectives and institutions are not wed to excellence. Too many people are jobless and therefore do not produce any value added. The declaration focused on the knowledge society and lamented undersized R&D efforts, both public and private. The Heads of State and Government dedicated themselves to eliminating these roadblocks by 2010.

By 2004, it was clear that Europe was not on its way to meet the Lisbon objectives, as a report commissioned to European luminaries under the Chairmanship of Wim Kok, a former Dutch Minister, pointed out. The report identified the lack of political will as the main culprit. The official appraisal is due for the next European Summit, aka the European Council, in March 2010. It would be a great service to appraise the EU failure in a straightforward manner so that appropriate lessons can be drawn.
Europe’s problems

Europe’s ailments are well known – the Lisbon declaration listed them, and the Kok Report analysed them along with a pile of private and public reports. To one degree or another, European countries support large bureaucracies that stifle risk-taking, their public sectors are often inefficient, and social policies usually protect jobs rather than people. At the EU level, national interests prevent the creation of a unified research space and countless protectionist measures hinder competition in the services sector, which account for far more than half of value added. In short, Europe needed structural reforms.

The open method of coordination

The Lisbon answer has been the “open method of coordination”. Up until the launch of this approach, Europe operated by designating policy areas as either EU or national competence. The new idea was to aim at the middle ground, where key policy domains remain a national competence but are recognised as being of common interest.The operating principle was to be peer pressure at the annual spring meeting of the European Council. Each country committed to produce annually, ahead of the summit, a document setting its progress against pre-set objectives. Each document was commented upon by the Commission. Armed with this information, the leaders were expected to critically examine their respective performances. The strategy thus rests on two dubious principles – that structural reform is of common interest and that peer pressure can work at the level of Heads of State and Government.

Obviously, each member country needs to undertake structural reforms, as no country is perfect. But why at the European level? Two main arguments have been produced, one economic, one political.

  • The economic argument is the existence of an externality.

When one country becomes more productive, it benefits (through demand) the whole EU. Given this externality, a country is likely to undertake insufficient structural reform from the collective viewpoint. But another externality goes the other way. A country that is more competitive provides incentive to all others to also raise their productivity. Unless the first effect dominates the second one, the case for coordination is weak. It is more plausible that competitive pressure encourages reforms.

  • The political argument is that reforms are painful.

By definition, structural reforms hurt private interests for the common good. Governments are, in principle, in charge of the common good, but they face powerful and highly motivated lobbies while support for reforms is usually diffuse.

Peer pressure turned into mutual congratulations

Peer pressure is seen as a counterweight to domestic pressure groups. It is interesting that the Commission took the idea to heart. Its very first reports were pretty pointed and precise. It soon transpired that these reports were seen by the Heads of State and Government as a public embarrassment. Pretty soon, the Commission was invited to be more diplomatic.

Summits of leaders are brief occasions that attract intense media scrutiny. This is not where one should expect humility or contrition. Political leaders are not raised to encourage critical comments from each other. More importantly, perhaps, while even polished exercises of apparent mutual admiration could still exercise some pressure, political leaders never forget that they are accountable to domestic voters. It was always an illusion to believe that they would commit political suicide by going again their electoral interests.

Advocates of the Lisbon strategy still argue that the process provides the Heads of State and Government with useful information about what the others do in terms of structural reforms and also about what may be wrong in their own countries. Given the abundance of reports on these issues, this argument assumes that the leaders are ill-informed or poorly focused on matters of strategic importance. It is hard to figure out what leaders know and what they tell each other as they chat during their frequent encounters. Lisbon strategy advocates must still produce tangible evidence that the Heads of State and Government have received useful information through this channel over the last decade.

One could argue that the Lisbon strategy may not be that helpful but, at least, that it does no harm. Even that is too kind an interpretation. First, the process has led to the build up of a new bureaucracy, both within each country’s administration and within the Commission. If the strategy is useless, this is a clear waste of resources. More worrisome is that putting the strategy at the heart of EU cooperation may have distracted leaders from concentrating on narrower and more specific common efforts. The overall unreachable objective, backed by tens of detailed commitments painfully listed in the annual reports, has a Soviet-style flavour to it.

Conclusion

I hope that in two months the Heads of State and Government let the Lisbon strategy die a peaceful death. This is not the most likely outcome of the final review process, however. Bureaucracies are not known for self-indictment and self-destruction. Already the Commission is busily working on a continuation of the process. This is worrisome, especially at a time when public support for Europe is waning, to say the least.

References

Guido Tabellini and Charles Wyplosz (2004) Réformes structurelles et coordination en Europe, Report to the Prime Minister of France, La Documentation Française.

Guido Tabellini and Charles Wyplosz (2006) “Supply-side Reforms in Europe: Can the Lisbon Strategy be Repaired?”, Swedish Economic Policy Review 13 (1): 101-56.

EurActiv (2009). “Sweden admits Lisbon Agenda 'failure'”, 3 June.

Topics: EU policies
Tags: growth, Lisbon strategy, reform

Professor of International Economics, Graduate Institute, Geneva; Director, International Centre for Money and Banking Studies; CEPR Research Fellow

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