EU must act in a unified manner to catch U.S., keep lead over China and India

by Takashi Kitazume

The European Union needs to take a regionwide approach — in addition to independent efforts by member countries — as it tries to catch the United States in labor productivity and remain competitive vis-a-vis emerging powers like China and India, a top economic adviser to the French government told a recent symposium in Tokyo.

The EU is still “nowhere” near achieving the goal set out in the so-called Lisbon Agenda of March 2000, which was aimed at innovating the European economy, said Christian de Boissieu, executive chairman of the French Council of Economic Analysis.

The potential annual growth rate of the euro zone is around 2 percent today, and to raise that to 3 percent European economies need to invest more in research and development and information technology as set out in the agenda, Boissieu told a Dec. 7 symposium organized by the Keizai Koho Center.

Boissieu, who was speaking on the theme, “Time to get serious about reforms in Europe,” emphasized that Japan and European countries like France share many of the same challenges as they pursue structural reforms.

Japan and France have to accelerate structural reforms because they both need to deal with globalization, which involves greater competition with emerging economies, he said.

Reforms are also imperative in the euro zone because — as in Japan — key economies in the region have logged poor growth in recent years, he added.

“We have to try to come back to 3 percent growth — not just for one year but in the years to come . . . if we want to reduce mass unemployment,” Boissieu said.

He explained that the potential growth of an economy depends on three factors — demography, labor productivity gains, and the rate of worker participation.

Just like Japan, the euro zone cannot expect to depend on demography because many countries have rapidly aging populations, he said. This phenomena will expose European governments to potential imbalances in social security and limit their fiscal policy options, he added.

France may be in a better position than most European nations because its fertility rate of 1.9 is much higher than many in the region. Still, French working-age population is expected to start declining either in 2006 or 2007, he said.

That leaves productivity gains as the main avenue of growth, and Boissieu noted that Europe is trailing the U.S. “because we lag behind in incorporating the new economy and new technology.”

“Production of new information technologies amounts to 10 percent of the U.S. gross domestic product. In France, production of new technologies amounts to only 5 percent of our GDP,” he said.

Boissieu said the aim of Lisbon Agenda of 2000, to make the EU “the most competitive and dynamic knowledge-driven economy by 2010,” is “still very important and it must be our main ambition and goal.”

But while the agenda calls for greater investment in R&D, innovation, education and the fostering of small and medium-size enterprises, the EU is still “nowhere” on implementation, he said.

“For both political and financial reasons, European countries have not been able to make the Lisbon Agenda credible,” he said.

According to the agenda, the ratio of R&D to GDP in each EU country must be 3 percent in 2010. And this goal must be funded two-thirds by the private sector and one-third by the public sector.

“Five years before the 2010 deadline, the ratio of R&D to French GDP is 2.2 percent, but we have a big gap concerning private-sector R&D,” he said. “Currently the French private-sector R&D is only 1.2 percent of GDP. We are far from the target.”

Boissieu said a recent announcement by Prime Minister Dominique de Villepin about the upcoming establishment of the Paris School of Economics is part of France’s efforts to create a local center of technological excellence that can compete with the best American universities and contribute to productivity gains in the country.

If Europe is to have its own Harvard, MIT or Stanford, “we must try to bring European assets (together) to these challenges,” he said.

While there are many good economics schools scattered throughout Europe, “each country is too small to try to compete with the best American universities,” he noted.

The EU must also consider how much of the financial burden of achieving the Lisbon Agenda should be left to member countries and how much should be borne by Brussels — an issue that has not been clarified in the 2000 agenda, he said.

Naoaki Okabe, a senior executive officer of the Nihon Keizai Shimbun and moderator of the symposium, said many of the challenges France and the EU face can be applied almost exactly to Japan.

Guest speaker Bernard de Montferrand, the French ambassador to Japan, said the common challenges France shares with Japan “bring us together in the way we are reforming” the respective economies.