The main social and economic challenges which the EU is confronting are

a.the accelerated pace of economic restructuring in the context of economic integration within the enlarged Union and worldwide. Economic change is affecting everybody but mostly those individuals, member states and regions which are least equipped to deal with it.

b.the ageing of Europe’s population. Even if the EU meets it target of having an employment rate of 70% by 2010, the fall in working age population during the subsequent 20 years will result in a sharp decline in employment. This will require either higher productivity gains and/or immigration flows.

Employment, Economic Reform and Social Cohesion

A Strategic Goal for the Next Decade

The Union has 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.

Achieving this goal requires an overall strategy aimed at:

•preparing the transition to a knowledge-based economy and society by better policies for the information society and R&D, as well as by stepping up the process of structural reform for competitiveness and innovation and by completing the internal market;

•modernising the European social model, investing in people and combating social exclusion;

•sustaining the healthy economic outlook and favourable growth prospects by applying an appropriate macro-economic policy mix.

To achieve this there would be a new open method of coordination

Preparing the Transition to a Competitive, Dynamic and Knowledge-based Economy

•An information society for all

•Establishing a European Area of Research and Innovation

•Creating a friendly environment for starting up and developing innovative businesses, especially SMEs

•Economic reforms for a complete and fully operational internal market

•Efficient and integrated financial markets

•Coordinating macro-economic policies: fiscal consolidation, quality and sustainability of public finances

Modernising the European Social Model by Investing in People and Building an Active Welfare State

•Education and training for living and working in the knowledge society

•More and better jobs for Europe: developing an active employment policy

•Modernising social protection

•Promoting social inclusion

Council in Gotenberg subsequently added the objective of sustainable economic growth.

In spite of the efforts made since 2000, and the fact that the mid-term review of the process is due to take place in 2005, there is a view that it has stalled. According to the Spring European Council of March 2004

the pace of reform needs to be significantly stepped up if the 2010 targets are to be achieved.

Chapter II

Issues raised

Governance

Open Method of Coordination

•a strategy to meet these objectives and

There are something of the order of 100 indicators in the present system. This means that even the research task involved in measuring compliance is huge: with 25 member states involved in the process, following 2,500 indicator becomes a task in its own right, let alone measuring success.

Better use must be made of the Open Method of Coordination. There should be fewer targets, and these should be clearer, and capable of being understood by a wider public.

Leadership

The locating of policy making for the Lisbon Strategy in the European Council has both advantages and disadvantages. The advantage is the political clout of the prime ministers and presidents who make up the Council and the focus which the Spring European Council (dedicated to this process) brings to the rest of the policy apparatus.

The disadvantages are

•prime ministers do not have domestic responsibility for the implementation of sectoral policies;

•the Spring European Council can easily be distracted by more immediate and more urgent policy issues, and there is a twelve month gap before the momentum can be recreated.

The role of the Competitiveness Council has already made the management of the Lisbon Agenda more transparent, and its role should be strengthened further. In particular, there should be a standing committee, reporting directly to the Council, as the Economic and Monetary Committee reports to Ecofin.

The European Commission needs reorganisation to enable it to service the policy needs of the Agenda more effectively. It is precisely the way in which the process cuts across the boundaries of traditional administrative areas, that gives it dynamism, but increases the difficulty in identifying the deliverables. The Committee supports the suggestion of the appointment of a Vice President of the incoming Commission with special responsibility for the Lisbon Agenda. The primary responsibility of this office should be to review the issues outlined above and to ensure that targets are clear, transparent and few.

The Lisbon Process has been very effective in highlighting the fading competitiveness of the European economy. However, there is a strong view that the identification of the problems and the composition of strategies has gone as far as it can

The success stories of a number of Member States show that apart from a clear vision about the path to sustainable growth and social cohesion, strong political will and co-ordinated efforts of all actors are crucial for increasing adaptability, activating labour supply and equipping people for jobs. Sustainable reform requires investment in “political capital” and efforts to develop intelligent and effective institutions.

There should be a debate in each National Parliament based on an Annual Report on the achievements and failures under a number of headings.

Demographics

Ageing of the population will accelerate in the coming years. The population structure of central and eastern Europe is even less favourable than in western Europe. It is expected that from 2010 to 2030 there will be a decrease of European workers of one million per annum, totally 20 million due to the ageing of the population. Higher immigration will make a contribution, but is not the solution.

Ageing populations create a number of additional difficulties, for example, lower consumer demand as older people do not demand consumer goods. There is also less dynamism, entrepreneurship and higher pension provision requirements etc

Scenario of future employment levels (EU-25, period 2000-2030)

Total employment (in millions) assuming an employment rate of 70 % in 2010 and for the following period until 2030.

The decline in the total volume of employment implies a negative contribution of employment to economic growth since the latter is the combined impact of employment and productivity growth. The negative contribution of employment to economic growth could be compensated by increases in productivity growth.

However, under the assumptions of the demographic scenario presented above, an average GDP growth rate at 2.5% (average EU growth since 1990) would imply that, between 2010 and 2020, productivity growth would have to reach 2.8% and between 2020 and 2030 it would have to climb beyond 3.0%, in order to compensate for the fall in employment. The increase would have to be even higher if a 3% growth rate were to be achieved, which would be an extrapolation of the performance envisaged at Lisbon. Under the assumptions that no adjustments in other variables affecting productivity and growth would take place, these results are indicative of the magnitude of the effects involved when the Lisbon target of a 70% employment rate by 2010 is achieved and maintained.

Can an ageing population commit itself to the change agenda of Lisbon, when their primary objective is security?

In spite of the fact that the drop in numbers employed in the next two decades has been at the basis of the Lisbon Agenda, no efforts appear to have been made to quantify imminent skill shortages. This has implications for education, training and immigration policy. A Europe wide review of skills needs should be undertaken urgently

Renewal v Cohesion

The Sapir report envisages an overhaul of the EU funds. (See p 29.). It advocates a convergence fund and a restructuring fund. The convergence fund should only be allocated to (low-income) countries, not regions. The arguments for this approach are convincing: richer countries having one ‘poor’ region obtain transfers due to juste retour considerations, the effectiveness of transfers is reduced by a lack of concentration and money (from net payers) is pumped around requiring a cohesion bureaucracy for no good reason.

The restructuring fund would serve as a complement to national funds for e.g. displaced workers. Instruments would include retraining, help with industrial relocation or assistance when setting up a new firm. But if developing (or lagging) countries wish to work towards the Lisbon Agenda, what is really essential is to have guiding national development strategies that are appropriate and coherent. This might be characterised as the second — or “European” — view on promoting economic success.

Ireland’s prioritisation of human skills and education from the ‘sixties were a crucial contributor to its subsequent economic success. In addition, starting in the late 1950s, wide areas of public policy in Ireland were increasingly integrated within encompassing industrial strategies that identified high quality manufacturing and its service sector spin-offs as the main driving force of national modernisation and growth. These strategies evolved organically, and were not always rigidly codified in the way they are today

National Development Plans (in the context of Structural Funds) need to be linked with industrial and service sector strategic policy thinking, and every effort made to ensure that they are mutually reinforcing. Growth and development strategies need to be carefully built around the EU-aided National Development Plans and Structural Funds. Ireland has shown that — given the right social and economic context - these provide a unique opportunity to produce a step-change in economic performance. Focus on getting the NDPs right, and success in meeting the Lisbon Agenda will almost certainly follow.

Within the smaller EU states there are dramatic differences between the approach adopted by the successful Nordic states (e.g., Finland, Denmark and Sweden) — based on building indigenous industrial strengths - and the path taken by Ireland — based mainly on success in attracting high quality foreign direct investment. Acceding countries like Estonia and Slovenia are drawing lessons from the Irish and Nordic success stories.

The EU mobilises considerable financial resources especially to promote the development and structural adjustment of Member States and regions that are lagging behind. The next generation of EU funding needs to be more closely targeted at addressing the Lisbon Agenda, and the employment guidelines and targets in particular. Increased emphasis should be given to promoting and improving public and private investment in research and human capital.

While the objectives of the Lisbon Agenda are crucial, they should be addressed as a by-product of a coherent national growth strategy.

Chapter III

Work of Joint Committee on European Affairs

At a meeting held on 4th December 2003, the Committee decided that it should undertake a review of the Lisbon Agenda and of its implementation. In planning its work, the Committee sought to parallel the work of the Irish Presidency. In a letter to the Heads of State and Government in November 2003, the Taoiseach wrote to his colleagues to propose that the Spring European Council (the normal forum for the consideration of the issues involved in the process) would concentrate on the following policy headings:

•Competitiveness

•More and Better Employment

•Sound Economic Policies

•Sustainable Growth

Internal analysis in the European Commission has drawn the conclusion that the Internal Market has created more than 2.5 million jobs, €900 billion in extra prosperity, which is almost €6,000 per family. However, the market is far from complete and some indicators are beginning to point in the wrong direction.

•Intra-EU manufacturing trade has begun to falter. It barely grew in 2001 and then actually shrank in 2002. Intra-EU trade in services as a percentage of GDP is less today than it was 10 years ago.

•Prices across the EU are since 1998 no longer converging despite the introduction of the euro.

•The EU is investing much more in the rest of the world than the rest of the world is investing in the EU. EU15 business investment as a percentage of GDP has been falling for the last three years. For example, in Germany investment has fallen steadily since 1994 when it accounted for 20.5% of GDP. In 2002 business investment accounted for only 16.9% of GDP.

Between 1990-95 Europe reduced the productivity gap with US but the “catching up” phase stopped after 1995 and the gap is now increasing

This means that :

•At 2002 growth rates, the time needed to double standards of living (i.e. GDP per capita) in the EU would be twice the time needed to double living standards in the US.

•For the standards of living in the EU to catch up with those in the US within the coming 20 years, the EU would have to experience, on average, an annual growth rate 1.7 points higher than the US growth rate.

•At 2002 growth rates, the gap in per capita income between the US and the EU would grow from the current 28% to 32% in 10 years.

Among the list of required actions to consolidate the Internal Market are to:

•Inject more competition into the field of services and facilitate freedom of establishment.

•further liberalisation of network industries (e.g. electricity, gas, transport, postal services),

•Remove remaining technical obstacles in the field of goods (e.g. duplicative testing, lack of European standards, denials of mutual recognition)

•Improve opportunities for business in public procurement and value for money for tax-payers.

•Promote labour and skills mobility inter alia by adopting Directive on recognition of professional qualifications;

•Deliver on intellectual property rights (IPR) issues particularly the Community Patent, but also on IPR enforcement to encourage R&D and innovation;

•Deliver on corporate governance issues in light of scandals in EU markets which would improve investor confidence and industries chances of obtaining finance; and tighten up on audit practices;

•Integrate financial markets in EU as foreseen by the Financial Services Action Plan. Most has been done but some difficult issues like Investment Services Directive and Transparency Directive remain. There is significant untapped growth from integrated financial markets in EU. Estimated EU wide GDP will increase by 1.1% - or 130 billion euros over 10 years. Employment could increase by 0.5%. Cost of equity capital to business reduced by 0.5%.

•Improve the regulatory framework at both EU and national level. Identify burdensome rules and dump or rewrite them. Avoid problems in future by carefully assessing impacts and consulting widely before adopting new legislation.

Public Procurement

Public procurement rules are not adequately applied. If government at all levels, national and local, were to apply competitive procurement procedures, there could be a saving of 30% on expenditure. In addition the power of the government in many markets countervails market power by suppliers and can have a knock-on effect on the private sector. (An example is insurance and whether public authorities have optimised their insurance contracts.) Public procurement can also be a driver for innovation and research as well as saving money.

An institutional structure is possible which could ensure that member state governments implement the procurement rules. Some of the acceding countries have had to establish domestic agencies, because the Commission’s competition authorities has had no responsibility for them up to now. These structures might be an interesting prototype if each country were to have a domestic agency working in collaboration with the Commission.

Competitiveness and Competition

The relationship between competition and competitiveness works through to productivity. Competition is not only bringing down prices or transferring money from producers to consumers, it should also act to encourage producers to find ways of bringing their costs down. Lower costs mean higher productivity per worker and hence competitiveness for the economy as a whole. This applies where companies are exporting or seeking to locate here, but even if goods and services are not internationally traded, their prices in the domestic market do affect terms of trade. A sophisticated domestic market also has a positive effect on competitiveness. Competition policy contributed a huge amount that is visible and positive to the Irish economy. As economies become richer, there is an increased role for domestic competition policy: increasingly, services that are important for consumers are domestically or locally produced eg childminding or restaurants.

It is important to tackle public and private restrictions on competition. Private restrictions are abuse of dominant position, cartels and other anti-competitive agreements. Public restrictions are regulations that restrict entry or competition, preventing pricing or advertising in a free way by firms.

Following a regulation which was agreed in early 2003, member states competition authorities now have joint competence with the European Commission’s competition directorate to enforce Articles 81 and 82 in national law. It will place a much greater emphasis on the role of domestic competition authorities in enforcing European competition rules.

Article 86 of the Treaty has been used by the Commission to enforce competition at a bigger level, but has not been adequately used in areas where the member states restrict competition. It does raise the question as to whether national competition authorities should be in a position to make national governments more accountable for laws and regulations that are contrary to EU law. At the moment, the European Commission is the only entity that can enforce that regulation, and it may hesitate to intervene so directly in locally supplied services.

It is important that the relationships of the other policies such as consumer policy, single market policy and state aid policy are managed in parallel. The Commission needs to work closely with member states on those issues and with the directorate general for competition. It is also valuable when there is synergy between the work of the Commission and of the national competition authorities.

Impact of Research and Development

Investment in Research and Development in the European Union is approximately 1.9% of GDP. It has been at that level for approximately the past decade while it has been increasing in major competing regions. It is 2.7% to 2.8% in the US and 3% in Japan. In Europe public investment is comparable but there is significantly lower business expenditure on research and development. Growth rates in investment are significantly lower in the EU compared to the US. Annual investment from the public sector in the US is growing at approximately 9% per annum while in the EU, it is approximately 1.4%.

The establishment of a European Research area is a key priority of the Lisbon Agenda, in order to reduce duplication between national research systems and increasing co-ordination effort among member states. Progress was reviewed at the Barcelona summit, and it was disappointing. Therefore the heads of state and government set a specific target for Europe to reach 3% of GDP in terms of gross expenditure on research and development by 2010. It now appears unlikely that Europe will reach this target. Two thirds of that increased investment should come from the business sector so the major challenge is to drive that investment.

There are currently approximately 400,000 EU born graduates in the science and engineering fields working in the US. In order for Europe to meet the Barcelona target of 3% of GDP invested in research and development by 2010 it will require an additional 700,000 researchers within the EU. Part of that deficit could be met by bringing back researchers from the US, but creating an attractive environment for researchers has to be a priority.

A crucial aspect is investment in basic research. Europe has invested €17.5 billion in research up to 2006 and the new Financial Perspectives published by the European Commission show a significant increase in investment in research and development up to 2010, which is very encouraging. Greater coordination of research policies across the EU is needed. Vast differences exist on matters such a human resources, recognition of researchers and their qualifications and areas such as intellectual property law.

Ireland

Ireland is currently below the EU average but has made significant progress over the past decade with growth rates in business an public expenditure in research and development among the highest in the OECD and policy measures are in train to meet the 3% target. Recent further policy changes, particularly the establishment of the Science Foundation of Ireland should ensure that the target will be met.

More and Better Employment

European Employment policy pre-dates Lisbon, and has been operating, using the Open Method of Coordination since the Luxembourg Jobs Summit of 1997, but quantitative targets were subsequently set as part of the Lisbon Process.

The European Employment Strategy has four elements:

•setting employment policy guidelines for Union and member states, with quantified targets where appropriate;

•translating these guidelines in annual national action plans, with specific targets and measures, taking into account national and regional differences;

•an annual monitoring, evaluation and peer review at European level, naming and shaming member states in a joint Commission and Council employment report which is tabled to the European Council ;

•specific recommendations on employment policy.

An evaluation in 2002 demonstrated a policy shift towards job creation — as opposed to managing unemployment — and policies have become much more wide ranging. A new monitoring and benchmarking culture has put emphasis on effective delivery of reforms and improved governance. Unemployment and long term unemployment have been significantly reduced in the early part of the strategy and the labour markets have been very resilient in the face of the economic slowdown.

With the revision of the European Employment Strategy carried out in 2003, it was given three aims:

•to increase its effectiveness;

•to align it more closely to the broader Lisbon objectives and targets; and

•to prepare for enlargement.

The objectives are full employment by 2010; an employment rate for 60% for women and 50% for older workers and to improve quality and productivity at work. To achieve this will require the creation of 22 million jobs in an enlarged Union by 2010. So far the employment rate for women has improved but not for older workers

2.1.remove the many obstacles which hinder the participation of women

2.2.implement comprehensive active ageing strategies

3.invest more effectively in human capital and lifelong learning.

4.effective implementation of reforms through better governance at EU and at national level

Irish Employment Policy

The Joint Employment Report takes stock of the progress made in implementing the employment strategy. The current report has incorporated the recommendations of the Kok Report. At national level a series of actions are agreed with the Commission, but also with the social partners. It is spread across a number of areas, and involves the Department of Social and Family Affairs, Education and Science, Justice, Equality and Law Reform. It also takes account of the National Development Plan, the Sustaining Progress agreement and the National Plan for Social Inclusion.

Ireland has shown some significant achievements and the labour market has held up well in spite of the economic slowdown. The average unemployment rate in 2003 was 4% which is well below the EU average of 8%.

The policy of the Department of Enterprise Trade and Employment is to continue to attract foreign direct investment and an increased commitment to investing in research and innovation, together with an increased commitment to invest in training and upskilling to improve the quality of the workforce.

•Foreign Direct Investment into Ireland still represents 9% of the total into Europe.

•There has been a significant increase in the allocation of funds to research and development, currently the figure is €2.5 billion. This includes publicly funded research and encouragement of private investment in r and d.

•FAS is putting a new emphasis on training for lower-skilled workers.

Lisbon sets a European female employment target of 60% by 2010. The current average is 55.6% and Ireland’s rate is 55.4%. Female participation rose by a third in the course of the 1990s.

Higher and Further Education in Ireland

The role of the Department of Education and Science is investment in human capital and support for the concept of lifelong learning. A cohesive policy on lifelong learning has been developed in conjunction with the Department of Enterprise Trade and Employment, which has primary responsibility for workplace learning.

Policies are being developed based on the White Paper on Adult Education and the report of the Task Force on Lifelong Learning. The establishment of the National Qualifications Authority and the two award councils — Further Education and Training Awards Council and the Higher Education and Training Awards Council — is contributing to the development and certification and accreditation of the totality of learning to support the enhancement of the skills of the workforce and of the unemployed.

The aspects of higher education which support sustainable growth and quality employment are;

•Skills Provision

A key requirement is to anticipate future skills needs and Ireland has established the Expert Group on Future Skills Needs. It has produced a series of sectoral reports which have resulted in a number of skills initiatives in the higher education sector. One of the more recent initiatives has been the establishment of an information technology investment fund.

Progress has been made in areas such as curriculum reform.

•Research and Development

A programme was begun in 1998 for research in third level institutions and included the establishment of two research councils — for Science, Engineering and Technology and for Humanities and Social Sciences. The Barcelona target has implications for the numbers of researchers here and recent initiatives have aimed to support international researcher mobility into Ireland. This will require review of career structures. Significant numbers of overseas researchers have been attracted into universities to date.

•Access to and participation in Higher Education

Enrolment in higher education has gone from 40,000 in the early ‘eighties to 130,000 now. This puts Ireland high in the OECD league, but there remain significant disparities in terms of access to higher education on the basis of socio economic background. Funding has been provided under the National Development Plan to tackle under representation among three target groups: students from backgrounds of socio-economic disadvantage, mature students and students with disabilities. The Higher Education Authority is also working to increase participation among the three target groups.

The current OECD review of higher education is also important in ensuring that the higher education system is appropriately positioned in terms of governance, structure, policies etc to be able to respond to all of the strategic challenges associated with its role in Ireland’s future economic development in the knowledge age.

Growth Oriented Economic Policies

The common understanding of structural reform is the removal of obstacles that impede an economy’s ability to produce goods and services efficiently. The emphasis has been on the productive or supply side of an economy eg high taxation which acts as a disincentive to produce, or propping up lame duck industries at the expense of overall efficiency.

The structural indicators which are used in the Commission’s analysis in the Report to the Spring European Council cover

•Employment

•Innovation and Research

•Economic Reform

•Social Cohesion

•Environment

•and General Economic Background.

The European Commission has recommended that Ireland perform on

•competition among professional groups

•wage moderation

•spending on research and development

From the point of view of the European Central Bank structural reform is important. By raising potential growth rates it would allow the euro area to grow faster without encountering inflationary pressures i.e. because European Central Bank would consider high inflation a greater evil than high interest rates, so would take appropriate steps to raise interest rates if that became necessary.

The recent difficulties affecting the Stability and Growth Pact are attributed by the European Central Bank to the unwillingness of member states to respect the rules of the Pact. The ECB regrets the failure of the Council of Ministers to act on the Commission recommendations; respects the Commission’s decision to seek legal clarity; and sees no need for a change in the Treaty or the Pact, while accepting that aspects of implementation could be improved.

Use of EU Budget

The Commission sets out the case for a significant shift in emphasis in the Community’s budgetary system in support of the Union’s political objectives. Arguing that the decisions to be made in the context of the financial perspectives relate essentially to political choices (rather than money), the Commission proposes a budgetary framework that goes beyond redistributing resources between Member States to one that more actively supports the needs and expectations of the Union’s citizens.

The Commission proposes that, rather than eight headings, as at present (eleven, if sub-headings are taken into account), the budget be structured instead into five main expenditure headings:

1.Competitiveness and cohesion for sustainable growth (with two sub-headings):

1 (a) competitiveness for growth and employment: encompassing expenditure for research and innovation; education and training; security and environmental sustainability of EU networks; support for the integrated market and the accompanying policies; and implementation of the social policy agenda.

1 (b) cohesion with growth and employment: expenditure to enhance convergence of the least developed Member States and regions, complement the EU strategy for sustainable development outside the less prosperous regions, and support for inter-regional cooperation.

2.Conservation and management of natural resources: CAP and Common Fisheries Policy, and expenditure related to the environment.

3.Citizenship, freedom, security and justice.

4.European Union as a global partner: including the EU’s neighbourhood policy.

5.Commission administrative expenditure.

The Commission proposes that the main effort must focus on the less developed Member States and regions of the enlarged Union.

Irish Experience

The amount of structural funding which Ireland received between 1989 and 2003 was about 1% of Gross National Product. The volume of funds available to the incoming countries will be at 4% of Gross National Product. These are the funds which would make the Lisbon Process more attainable for the acceding countries. Ireland’s success with the Social Fund was in integrating efforts to improve skills in human resources. Equally the Structural Funds and national development plans were closely integrated with the industrial strategy. It is essential that the Lisbon reforms should be in the context of a properly constituted National Development Plan and a Plan to end social exclusion in each of the acceding countries, rather than becoming a separate process.

Sustainable Development

The 2003 Environment Policy Review is the first of a series. It should also be placed within the context of the Lisbon Strategy on economic and social renewal launched in 2000. The Lisbon Strategy was supplemented by a third, environmental, pillar following the adoption of the EU Sustainable Development Strategy at the Gothenburg European Council in 2001. The Review will contribute to consolidating the environmental pillar of sustainable development in that context.

Over time, the Environment Policy Review will combine the examination of EU action with a review of main developments in Member States. To this end, one of the suggestions of the Review is to introduce the so-called “Open Method of Co-ordination” in the environmental field, with a view to mobilising EU institutions and Member States in a joint effort to better define common objectives to achieve common goals. Future editions of the Review will be instrumental in advancing this process.

An action plan for the development as environmental technology as a growth area is to be submitted to Spring European Council

Irish Policy

Ireland needs consistently to highlight

•the mutually re-enforcing character of economy, environment and social well being;

•the absolute need to use prices to signal that environmental endowments are scarce and need to be conserved;

•the need for high quality information on options;

•the requirement for world class research and development to keep moving up the value chain while improving environmental quality,

•the need for ‘joined up’ government to ensure maximum integration and delivery of economically, environmentally and socially efficient performance at least cost.