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The "Lisbon Agenda" Samuel Brittan: Remarks at Conference of Luxembourg Inst. for European and International Studies and Lux. Ministry of Economy 13/04/05 This Lisbon agenda has become a mantra. Indeed before this meeting I tried very hard to read the Lisbon summit communique from beginning to end. It was hard work. It was full of uplift and unexceptional exhortations without any suggestion that there could ever be any conflict between desirable policy goals. It had the characteristically inflated headline objective of making the European Union "the most dynamic and competitive knowledge based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion" by 2010. Is it not high time that some international civil servant or economist, perhaps one with a private income, explained to heads of government that greater competitiveness is a ridiculous goal for an area such as the EU or even the Eurozone, which enjoys a floating exchange rate against the rest of the world. A former secretary general of the OECD Emil van Lennep once asked: against whom should the world be more competitive: "against Mars or against the Moon?" We need another van Lennep to raise the question again. It is perhaps not an accident that the Lisbon communique was issued during the heyday of the international influence of the British prime minister Tony Blair, who warmly welcomed this agenda and claimed it as a British triumph. The basis of his Third Way is to embrace every possible objective replacing "either/or" with "both/and". What was basically wrong with the Lisbon agenda is that it covers matters which are still left to national governments and where summit type aspirations have little role. Even where policies are decided at an EU level, these high sounding declarations have little effect on decisions. The foreign ministry officials who draft these communiques live in one world; people like Chirac and others live in another. When it comes to the point, Chirac was allowed to water down to nothing a proposed services directive, which might have made a reality of the internal market for the greater part of EU output, in order to strengthen his hand in the forthcoming referendum on the EU constitution. Whether that constitution is worth all this effort and backtracking is questionable. There is nothing novel in the principle "If you scratch my back, I will scratch yours"; but let us not dress it up as a superior economic or social model. Since the year 200, "Lisbon" has become a code word for trying to make markets more flexible and competitive. There were subsequent attempts to extract definite policies and commitments. A notable example was the so called Barcelona Agenda in 2002, two years later. This consisted of five main items: strengthening European transport networks; liberalising energy markets; further financial market liberalisation; promoting education and research; and reforming labour markets. It was no Eurosceptic but Adair Turner, a former director of the Confederation of British Industry, a strong Europhile who undertakes much high profile work for Tony Blair, who said that the contribution of the first four items, however desirable in their own right, to promoting growth and employment was extremely slight. The all important item is of course labour market reform. It is not difficult to guess why governments always put this item at the end of the list instead of highlighting it. It is that an attack on union privileges or union backed legislation, is particularly sensitive, especially, but not only, to left of centre governments. They hope that they should get away with some freeing of labour markets if they bury this is a great many wordy declarations on other subjects, such as knowledge based economies and sustainable growth. Even then there is no recognition of any relation between the cost of labour and the amount employed. Output per hour in some European countries is fully up to US levels. The difference lies in labour force participation: unemployment rates, inactivity rates, retirement ages, working hours, length of holidays and so on. If these differences were entirely attributable to preference for a different work/life balance with more leisure and early retirement, generous unemployment pay, offset by less take home pay there would be nothing more to be said. But there are at least two problems associated with the European social model. The first is that it may not reflect genuine individual preferences. There are individuals who are priced out of work by pay rates, overheads and regulations ordained by the so called social partners who do not sufficiently take into account those who are marginalised by their centralised agreements. But secondly, even if the social model did reflect individual preferences at the present time, they would be extremely unlikely to do so in the years ahead when the dependency ratio - that is the ratio of pensioners to the working population - is expected to shoot upwards. If this is not to generate unbearable social tensions it will be necessary for European growth to accelerate, whether through improved productivity, greater labour force participation or a mixture of both. It would also help if the numerator of the dependency ratio, namely the population of working age, were improved by a more liberal policy towards immigration. But fortunately that is not my subject today so I might be able to escape alive. Even people who realise that labour costs are often too high still take refuge in wishful thinking. At one time it was fashionable to attack mainly high social security contributions. But as Turner pointed out if labour markets are reasonably flexible "workers receive a lower wage rate than they would if payroll taxes were lower". Today there is another fashion, especially in Germany and France. That is to let hours of work creep upwards without fully compensating adjustments in pay. The true liberal answer is to give as much scope to differing worker preferences in deciding between reduced social security benefits and cuts, longer hours and reduced gross pay. Several concrete aims can be found among the political fluff. One was to raise the average annual EU growth rate from two per cent to three per cent between 2000 and 2010. More important was the objective of raising the average employment rate from 61 per cent of the relevant population in 2000 to 70 per cent by 2010. It is uncontroversial to say at this halfway point we are nothing like halfway there. There have been some reforms. Examples include the Hartz measures in Germany, a more elastic interpretation of the 35 hour week in France and more flexible rules for hiring and firing part time workers in Italy. But nearly all the improvement has been at a national level and in response to pressures on national labour markets. There is little evidence that any of it has emanated from EU decisions or summit meetings. The main influence driving national governments to reform has been competition from the ten new EU states who enjoy much lower levels of pay and social protection. The so called pension crisis associated with higher dependency rates will also begin to impinge on national policies. But exactly how or when it is difficult to say. Bismark once said that the future of Europe would be determined not by majority votes and parliamentary resolutions but by blood and iron. Today’s equivalent of blood and iron consists of the realities of external low wage competition and the growing transfer burden to the old. EU institutions, along with independent thinktanks can help by impartial analysis employing as little Euro-speak as possible. But the main contribution of the Brussels institutions is unfortunately negative. While the trade policy, competition and single market directorates are valiantly trying to promote competitive markets, other directorates concerned with so called social policy and, to some extent, tax policy are doing the opposite: helping to price people out of work in the name of worthy social objectives. If economists working at a European level want to make a contribution to a better functioning of the union it should be by turning their analysis towards those aspects of union policy which do not have the words economic in front of them, which are graced by names such as social or technology.
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