ENENCOMMISSION OF THE EUROPEAN COMMUNITIESBrussels, xxxANNEX to COM(2006) yyy finalANNEX TO THECOMMUNICATION FROM THE COMMISSION TO THE SPRING EUROPEAN COUNCILTIME TO MOVE UP A GEAR
EN2ENTABLE OF CONTENTSIntroduction .........................................4Part I Macroeconomic part.........................................51.Summary and conclusions ............................................................52.Macroeconomic developments in the EU.................................... 52.1.Macroeconomic conditions..........................................................52.2.Budgetary policy developments ...................................................63.Path towards achieving the main Lisbon objectives ....................................................84.Macroeconomic policy challenges ...............................................94.1.Challenges from a EU-wide perspective ...................................... 94.2.Challenges identified by the Member States..............................................................105.Assessment of Member States’ strategies in response to macroeconomic policy challenges ................................ ...................................................126.Promoting coherent macroeconomic, structural and employment policies ............... 13Part II Microeconomic part...................................... 151.Summary and conclusions ..........................................................152.Knowledge and innovation —................................... 162.1.Research ................................ .....................................................162.2.Innovation..................................................182.3.Information society.................................... 192.4.Industry ................................ ......................................................202.5.Sustainable use of resources .......................................................223.Making Europe a more attractive place to invest and work.......................................233.1.Internal Market...........................................233.2.Competitive markets.................................. 243.3.Business environment and better regulation ..............................................................253.4.Entrepreneurship and SMEs .......................................................273.5.European infrastructure ..............................................................28Part III Draft Joint Employment Report 2005/2006 ................................. 30
EN3ENMore and Better Jobs : Delivering the Priorities of the European Employment Strategy ....... 301.Summary and conclusions ..........................................................302.Achieving the objectives............................................................323.Implementing the priorities for action ........................................353.1.Attract and retain more people in employment, increase labour supply and modernise social protection systems ............................................................353.2.Improve the adaptability of workers and enterprises .................................................383.3.Increase investment in human capital through better education and skills................ 41
EN4ENIntroductionThis annex complements the communication from the Commission to the 2006 Spring European Council “Time to move up a gear” presented after the renewal of the Lisbon Strategy. It draws on the Commission’s assessment of the national reform programmes (NRP)drafted by Member States on the basis of the new integrated guidelines for growth and jobs endorsed by the European Council in June 20051. It also takes into account action taken at the European level, particularly, in the framework of the Community Lisbon programme2. While the key findings of the Commission’s analysis are presented in the communication “Time to move up a gear” , this annex, an integral part of the communication, provides a more detailed picture within the three broad strands of the integrated guidelines: macroeconomic, microeconomic and employment. The latter section constitutes at the same time the draft joint employment report 2005/2006 of the Commission, in accordance with article 128 of the Treaty. A more detailed assessment of the individual national reform programmes can be found in Part II of the communication “Time to move up a gear” containing country chapters as well as a chapter on the euro area.1Brussels European Council, Presidency Conclusions, point 10 (http://ue.eu.int/ueDocs/cms_Data/docs/pressData/en/ec/85349.pdf).2Common Actions for Growth and Employment: The Community Lisbon Programme, COM(2005) 330 of 20.7.2005.
EN5ENPart IMacroeconomic part1.SUMMARY AND CONCLUSIONSThis part of the Annex assesses the progress made towards achieving the Lisbon growth and job objectives, and it evaluates the macroeconomic policy strategies of the Member States as set out in their National Reform Programmes (NRPs).During the first five years of the Lisbon strategy over 6.5 million new jobs were created in the Union. Nevertheless, the 70% Lisbon employment rate target is not expected to be reached by 2010. Labour productivity growth in the EU has been below that of the US, which explains why – in spite of the substantial number of new jobs created – EU GDP per capita has failed to catch up with that of the US.The EU economy has started to recover following the global downturn at the beginning of the decade. In spite of this, the average EU budget deficit is expected to remain at 2.7% of GDP up until 2007.An investigation of the NRPs shows that budgetary discipline stands out as the most important macroeconomic challenge identified by Member States. It is typically formulated in terms of public finance sustainability, including pension, health and labour market reforms as well as short-term budgetary consolidation as tools to ensure the long-term sustainability of public finances in an ageing society. However, the specific measures to achieve short-term budgetary consolidation are not spelled out in enough detail in several countries, particularly within the euro area. Most Member States express the intention to improve the quality of public finances by increasing the efficiency of the public administration and by setting aside public resources for strengthening infrastructure, human capital and R&D investment. However, few NRPs are explicit about the budgetary implications of proposed measures. Over the coming decades, ageing populations in Europe will put increasing pressure on public finances. Member States appear to recognise that a thorough overhaul of retirement and pension systems is an essential prerequisite for ensuring public finance sustainability. However, in most countries the measures already taken or envisaged are insufficient to negate to the effects of ageing populations. The majority of Member States have put forward NRPs which show broad coherence between macroeconomic, microeconomic and employment policies, even if synergies between policy actions in different domains could be further developed. 2. MACROECONOMIC DEVELOPMENTS IN THE EU2.1.Macroeconomic conditionsEU growth performance since 2000
EN6ENSince the launch of the Lisbon strategy in 2000, the annual growth rate for the EU-15 has averaged 1.9% per year compared to 2.8% on average for the period 1995-2000. In comparison, the US grew at a rate of 2.7% between 2000 and 2005. In per capita terms, EU-15 growth (1.4%) has been only slightly below that in the US (1.7%). Growth in the recently-acceded Member States has been considerably more dynamic (around 4.6%), although their small economic weight means that this is not apparent in the 1.9% growth rate observed in the EU as a whole.The pattern of EU growth reflects a combination of cyclical and structural factors, which led to a sluggish and protracted recovery following the global downturn at the beginning of the decade. The potential growth rate of the European economy is currently estimated to be around 2.0%. GDP grew by 1.5% on average in the EU in 2005, encompassing a rebound of economic activity in the second half of the year.Structural factors have become the main force behind the relative growth performance of the euro-area countries: those with a strong/weak growth performance in recent years have by and large maintained this position since the 1990s. On the other hand, growth differences linked to different positions in the cycle have diminished in the last decade.In 2005, GDP growth in the EU accelerated from a quarterly rate of 0.3% (q-o-q) in the first quarter to 0.6% in the third quarter. This coincided with a similar acceleration in final domestic demand. The contribution of private consumption to domestic demand growth was subdued, since consumer confidence remained weak. This is mainly due to pessimism about employment prospects and a limited rise in the purchasing power of households. On the other hand, the pick-up in investment in the second and third quarters of 2005 reflected improvements in profits and corporate balance-sheets. Net exports – supported by a h ealthy external environment and by a depreciation of the nominal effective exchange rate of the euro – made a positive but small contribution to GDP growth.Growth prospects for 2006 and 2007In line with the positive signals from business survey indicators, it is anticipated that growth will be close to potential during 2006, at 2.1%, and will accelerate further, to 2.4%, in 2007. The recovery expected in 2006-2007 is underpinned by a further strengthening of domestic demand. Investment, in particular, is projected to pick up considerably, followed by a more gradual recovery of private consumption.Labour market conditions are also set to improve, with an expected 6 million new jobs in the EU in 2005-2007 resulting from the projected rise in economic growth. It is also expected that the unemployment rate will diminish from 8.7% in 2005 to 8.1% in 2007.2.2.Budgetary policy developmentsBudgetary positionsSince 2000, the situation in public finances in the euro area and the Union as a whole has deteriorated, reflecting to a large extent the impact of the economic cycle. In several Member States, part of the deterioration also stemmed from a discretionary loosening of fiscal policy. Despite a slight improvement in the budgetary position of
EN7ENthe euro area and the EU in 2004, budgetary consolidation did not advance any further. Due to the lacklustre growth, net borrowing in 2005 is expected to increase slightly to 2.9% of GDP in the euro area and 2.7% of GDP in the EU.Excessive deficitsThe Commission’s autumn 2005 economic forecasts project that the average EU budget deficit will remain at 2.7% of GDP in 2006-2007. For the euro area, a marginal decline in the general government deficit in 2006 and 2007 is anticipated, in the context of a moderate economic recovery. However, current polices are expected to be insufficient to bring the deficit below the 3% reference value by 2007 in any of the euro-area Member States currently under excessive deficit procedure (DE,EL , FR, IT and PT).Outside the euro area, the fiscal outlook across countries is relatively heterogeneous. The budget deficit in three of the six non-euro-area countries currently under excessive deficit procedure (CZ, HU and PL) is expected to stay above 3% of GDP. The same is true for the UK. Cyprus, Malta and Slovakia, on the other hand, are projected to correct their excessive deficits.Debt ratiosThe deterioration in budgetary positions since 2000 has led to an increase in gross debt within both the euro area and the EU as a whole. Debt ratios in 2005 were well above the 60% of GDP threshold in Belgium, Germany, Greece, France, Italy, Austria, Portugal, Cyprus and Malta.Budgetary impact of ageing populationsOver the coming decades, ageing populations in Europe will put increasing pressure on public finances. The old-age dependency ratio, that is, the number of people aged 65 years and above relative to those in the 15 to 64 age group, is projected to double, reaching 51% in 2050. This sharp increase is expected to result in a substantial burden of public spending on age-related items, in particular on pensions, health care and long-term care. The 2005 Council Opinions on the Stability and Convergence Programmes identified serious risks to the long-term sustainability of public finances in ten countries (BE, CZ, DE, EL, FR, IT, CY, HU, MT and SI). Seven countries (DK, IE, LU, AT, FI, SE and ES) appear to face relatively limited risks associated with population ageing, while the remaining EU Member States are somewhere in between.Quality of public financesWhile the current EU economic policy framework considers budgetary discipline and fiscal sustainability to be essential elements of a sound and growth-supportive economic environment, the quality of public finances has gradually been gaining importance in the policy debate. An investigation of the composition of public expenditures in the Member States shows that many of the countries that benefited from large decreases in interest payments since the late 1990s used this room for manoeuvre to raise government consumption and current transfers, rather thanconsolidating their public finances. Other Member States, however, have managed to reallocate public resources more effectively towards longer-term targets such as
EN8ENknowledge and innovation, while maintaining fiscal discipline. Denmark and Sweden, for example, have been able to redirect public spending by introducing national expenditure rules and performance budgeting schemes within a medium-term framework.3. PATH TOWARDS ACHIEVING THE MAIN LISBON OBJECTIVESChange in GDP per capitaConsidering the enlarged EU of 25 Member States, GDP per capita stands at around 65% of the US level with no significant improvement since the launch of the Lisbon strategy. In the first half of the decade, it has not been possible to complement the relatively positive developments in terms of employment creation with the required acceleration of productivity growth (see graph 1).Graph 1:European Union performance 1999-2004 (US=100)(4)64,286,380,792,164,690,681,587,5020406080100GDP per capitaEmployment rate (1)Hours worked per worker (2) (3)Hourly labour productivity (3)199920041) Calculated - Employment rate = 100 * (GDP per capita / Labour productivity per person employed)2) Calculated - Hours worked per worker =100 * (Labour productivity per person employed / Hourly labour productivity)3) EU15 values for Hours worked per worker and Hourly labour productivity4) 2004: forecasts
EN9ENLabour productivity growthThe Commission’s analysis indicates that the deteriorating labour productivity performance can be attributed to lower investment per employee and a slowdown in the rate of technological progress. More recently, however, EU labour productivity growth appears to be accelerating. This may be due to the upturn in the business cycle but it is also likely to be attributable to more structural factors such as the delayed impact of investments in ICT and possibly outsourcing, which has been shown to provide a productivity boost if the outsourced activities are well integrated in international networks (as is the case in the German motor vehicle industry, for example). Productivity increases, combined with wage moderation, should help tomaintain the EU’s competitive position in an increasingly integrated world economy.Job creation and the effects of ageing populationsDespite some progress in job creation (see draft Joint Employment Report), the Lisbon employment targets will be difficult to reach. During the first five years of the Lisbon strategy, over 6.5 million new jobs were created in the Union, bringing the employment rate up from 61.9% in 1999 to 63.3% in 2004. Recent work by the Economic Policy Committee and the European Commission (see graph 2) projects a further rise in the overall employment rate to 67% in 2010, with the 70% Lisbon employment rate target being reached in 2020. Meeting the Lisbon employment target, albeit with a delay, will cushion the economic effects of ageing. However, after 2017, total employment will start to contract as a result of the decline of the working age population. This means that, all things being equal, the contribution of employment to growth will turn significantly negative and that Europe’s economic growth will increasingly depend on productivity increases in the longer run.Graph 2:Projected (annual average) potential growth rates in the EU15 and EU10 and their determinants (employment/productivity)EU15-10123452004-102011-302031-50-1012345Labour productivity growthEmployment growthGDP growthGDP per capita growthEU10-10123452004-102011-302031-50-1012345Labour productivity growthEmployment growthGDP growthGDP per capita growthSource: EPC and European Commission (2005), “The 2005 EPC projections of age-related expenditure (2004-2050) for the EU25 Member States: underlying assumptions and projection methodologies” in European Economy Reports and Studies, No. 4, Brussels(http://europa.eu.int/comm/economy_finance/publications/european_economy/reportsandstudies0405_en.htm)4. MACROECONOMIC POLICY CHALLENGES4.1.Challenges from a EU-wide perspectiveMacroeconomic policy challenges
EN10ENEurope faces the twin challenges of raising the level of potential growth and of fully realising its growth potential through well-balanced economic expansion. Sound macroeconomic policies are essential to meet these challenges. They are vital for establishing framework conditions that will promote adequate levels of savings and investment, together with a stronger focus of the latter on knowledge and innovation. Securing a sound budgetary position will allow full and symmetric operation of the automatic budgetary stabilisers over the cycle with a view to stabilising output around a higher and sustainable growth trend. On the other hand, structural reforms may widen the room for manoeuvre for macroeconomic policy-makers. Better functioning product and labour markets, for example, will help limit inflationary pressures in the event of a positive demand shock. This illustrates the importance of developing a coherent overall strategy, which takes full account of the interrelationships between macroeconomic, microeconomic and employment policies (see Section 5).Budgetary policy challengesThe weakening of policies aimed at budgetary consolidation is an issue for concern, because it will limit the margin for manoeuvre at times when the economy requires a true stimulus. Moreover, the deterioration of budgetary positions has led to an increase in debt levels, which is not good news from a longer-term perspective, especially in the light of Europe’s ageing population. With the projected increase of age-related expenditures, such as health, social security and pensions, it will be increasingly challenging for the Member States to safeguard the long-term sustainability of public finances, while ensuring the social adequacy of social protection systems. Finally, meeting the needs for increased spending on education and research within a tighter budgetary environment requires a greater effort to improve the overall quality of public spending.4.2.Challenges identified by the Member StatesMost Member States identify the stimulation of (potential) economic growth as an overarching challenge. The other challenges, including the more specific macroeconomic challenges, are seen as tools for achieving this single challenge. Broadly speaking, there is a convergence of views between Member States and theCommission on the macroeconomic challenges identified.Macroeconomic policy challengesAll but three National Reform Programmes have identified macroeconomic policy challenges. Two of the three exceptions, namely, Netherlands and Sweden, outline in their Programmes broad strategies that appear adequate to maintain the current overall satisfactory macroeconomic stance. Italy’s Programme, by contrast, makes reference to other government policy documents, notably the annual Economic and Financial Planning Document, which typically provides the basis for the update of the Stability and Convergence Programme and which, according to the Italian authorities, should be seen as an integral part of the National Reform Programme. The macroeconomic policy challenges identified in the Programmes are broadly in line with those highlighted by the Commission in its contributions to multilateral surveillance.
EN11ENBudgetary policy challengesAccording to the Programmes, by far the most important macroeconomic challenge facing the EU Member States concerns the achievement and/or maintenance of budgetary discipline, the latter being typically formulated in terms of public finance sustainability. Only three countries (EL, ES and LV) have identified short-term budgetary consolidation as a separate challenge, and this despite the fact that no less than eleven countries (not including ES and LV) are currently in a situation of excessive deficit. The related challenge of improving the quality of public finances, which is mostly formulated in terms of increasing the efficiency of the public administration, is considered to be important in seven Programmes.The identification of fiscal discipline as the key national macroeconomic policy priority reflects widespread recognition of its advantages in terms of maintaining macroeconomic stability and promoting long-term growth, as well as creating the capacity to respond to future fiscal policy challenges, such as those stemming from population ageing. This recognition is strongly embodied in the EMU policy framework, where fiscal rules are seen as necessary to ensure the smooth co-existence of a common monetary policy geared to price stability with the maintenance of fiscal policy in the hands of national governments.External balances and inflation convergenceChallenges identified in the Programmes, other than those related to public finances, are more difficult to categorise. The external account deficit is explicitly recognised as a challenge – in the context of the broader goa l of securing a stable macroeconomic environment – only in one case (E E), although in the view of the Commission other countries (LV, LT, PT) may face challenges on this front. In taking a relatively sanguine view of external imbalances, national authorities presumably reason that current account deficits are the result of investment and saving decisions by rational economic agents and, hence, are consistent with economic fundamentals and likely to have a welfare and growth-enhancing effect, for example by supporting an economic catching-up process. By otherwise emphasising the challenge of fiscal discipline, the national authorities may still recognise that budgetary policy has a role to play in addressing external imbalances, through its impact on savings and, more generally, on the confidence of investors.Inflation convergence is considered a challenge in a number of countries (LV, LT, SI) in connection with their plans to join the euro area. Interestingly, neither external imbalances nor inflation divergence seem to be considered as significant challenges by any country in the euro area, with the exception of Ireland, which recognises moderating inflation as part of a broader challenge of maintaining macroeconomic stability. However, it may also betray an excessively benign view of the eventual unwinding of external imbalances in these countries.
EN12EN5. ASSESSMENT OF MEMBER STATES’ STRATEGIES IN RESPONSE TO MACROECONOMIC POLICY CHALLENGESBy and large, the priorities identified in the National Reform Programmes are in line with the principles underlying the recent revision of the Stability and Growth Pact, one aspect of which is the increasing weight assigned to considerations of durability of the correction of fiscal imbalances and long-term sustainability of public finances. The key Treaty provisions on fiscal discipline and their detailed implementation by the Stability and Growth Pact are explicitly indicated in a number of Programmes as providing the framework for the conduct of fiscal policy.Fiscal consolidation strategiesThe fiscal consolidation strategies highlighted in the Programmes are typically expenditure-based (the German Programme is an exception in this respect) and embedded in the broader structural reform plan. Measures to achieve short-term budgetary consolidation are insufficiently explicit in several countries, including FR, IT and PT. Another potential weakness of the Programmes is that the budgetary implications of the actions envisaged in other policy areas, such as employment and social policies, are seldom spelled out.Only the German Programme envisages increases in taxation, although improvements in revenue collection are explicitly mentioned in some other cases. By contrast, tax cuts are envisaged by several Programmes; in some cases, notably Hungary, even in the presence of significant budgetary imbalances. Measures include tax incentives for enterprises to invest more in R&D and training, the introduction of new energy and/or environmental taxes and measures to reduce the tax burden on labour. While many specific measures seem appropriate, a more systematic approach to reviewing the impact of tax systems on growth and jobs often seems to be missing.Budgetary consequences of anageing populationIn response to the projected increase in age-related public expenditure, further pension and/or health care reforms figure prominently in the public finance agenda of several Member States. In fact, about half of the Programmes highlight reform measures in these two areas. Coping with the budgetary consequences of ageing is seen as a key challenge also in countries such as DK, IE, LU and FI, which from a cross-country perspective are generally seen to carry a low risk in terms of public finance sustainability. Although not necessarily involving changes in the pension or health care system, the policy responses to ageing in these countries take into account the need to increase the efficiency of public services as well as, in some cases, to guard against the possible erosion of tax bases.At the opposite end of the spectrum, EL, PT and, among the recently-acceded Member States, CZ - where the need for a thorough overhaul of the pension system has been highlighted as a pre-requisite for ensuring public finance sustainability -generally recognise the need for such a reform. Nevertheless, the comprehensiveness and the concreteness of the measures envisaged remain somewhat limited.Countries where the projected increase in age-related public expenditure is contained by already-enacted pension reforms may, nevertheless, find themselves at serious risk through failure to achieve a lasting correction of the present budgetary
EN13ENimbalances, especially if these are coupled with relatively high debt levels. This is the case for most of the countries currently subject to the excessive deficit procedure, including IT and FR and, among the recently-acceded Member States, HU and PL. In general, the need to consolidate quickly is recognised in these cases, although there is a notable lack of clarity in the measures envisaged in the case of Hungary, while Italy, as already noted, does not directly address macroeconomic policy issues,including fiscal consolidation, in its Programme.Quality of public financesConcerning policies for improving the quality of public finances, Programmes typically refer to national strategies for strengthening infrastructure, human capital and R&D investment. In addition, some Programmes single out across-the-board improvements in public sector productivity, inter alia, through administrative reform, as an objective on its own. The quality of public finances seems more likely to be recognised as a challenge in its own right by countries experiencing better-than-average growth performance (for example, IE, FI, UK and, among the recently-acceded Member States, EE).6. PROMOTING COHERENT MACROECONOMIC, STRUCTURAL AND EMPLOYMENTPOLICIESIn addition to Member States putting in place macroeconomic policies that can provide conditions conducive to job creation and growth, alongside structural reforms more directly aimed at raising productivity and employment, it is important for the overall reform strategy to be coherent, with reforms in one area supporting those in another. For example, labour market reforms such as those which increase incentives to work through changes in the tax and benefit system can increase the adaptability of the EU economy, particularly in the light of increasing globalisation, and thus allow a more supportive role for macroeconomic policies. Similarly, without policies to safeguard macroeconomic stability, the lower cost and price pressures from structural reforms will not translate into permanently lower prices. The National Reform Programmes also provide the opportunity for Member States to consider the most advantageous way of sequencing reforms. Liberalising product markets early on in the reform process, for example, may help to spur labour market reform, given that in a more competitive product market there will be less excess profit to distribute between employers and workers, thus increasing the incentives for labour market reform. Coherence of the National Reform Programmes The majority of Member States have put forward National Reform Programmes which show broad coherence between macroeconomic, microeconomic and employment policies. Only a small minority of Programmes appear to be the result of a departmental rather than a strategic approach (HU and, to a lesser extent, IT). Most National Reform Programmes also avoid having a large number of macroeconomic priorities, allowing the focus to be on key structural challenges (PT, SI and FI being notable exceptions). In some cases (notably EE and, to a lesser extent, ES and LV), the Programmes make cross-references between the different policy areas and elaborate upon the synergies resulting from such policy links. However, for the
EN14ENmajority of Member States, this is an area in which National Reform Programmes could be further developed. Future National Reform Programmes could also provide more indication of how consideration has been given to the appropriate sequencing of reforms.Budgetary implications of reform measures proposedA number of Member States have presented reform measures which will, at least in the short term, increase public expenditure. The budgetary implications of such measures need to be considered in the light of their impact on macroeconomic policy. While some National Reform Programmes provide information on the budgetary implications of reform proposals (e.g. CY, MT, LV), this information is missing from most Programmes. Moreover, it is not always clear how high public investment can be reconciled with budgetary consolidation (e.g. in the case of BE).Similarly, information on the intended use and expected growth and employment impact of structural and cohesion funds is often missing. While a small number of countries (LV, NL and FI) are relatively explicit regarding their planned use of structural funds, the majority of countries (particularly EE, ES, IE, IT, LT, PT, SI, SK and UK) provide less detail.
EN15ENPart IIMicroeconomic part1.SUMMARY AND CONCLUSIONSThis part of the Annex assesses the microeconomic policy reforms reported by Member States in their National Reform Programmes (NRPs) and links them to the action at Community level.The main themes of the microeconomic part of the revised Lisbon strategy –knowledge and innovation, and making Europe a more attractive place to invest and work in – are clearly reflected in the NRPs. Microeconomic reforms take the largest share in the reform efforts in the Member States; most of the key challenges identified in the Member States’ programmes fall into the microeconomic area. For example, all Member States address research and innovation policies as one of their key priorities. Most Member States also identify the business environment, entrepreneurship, sustainable development and selected competition issues among the key challenges to be tackled.While the choice of priorities is in general appropriate to the current situation in the Member States, competition issues will require further attention. Often the beneficial effect of competition for European citizens is not sufficiently anchored in the NRPs. In particular, ensuring competition in services – especially professional and financial services – and in network industries is often not addressed to the extent that the situation on those markets would require. Liberalisation of the energy markets is advancing but will take a long time to complete, especially for gas. Postal and railway services are often not considered priorities. In the field of research and innovation, the main challenge for the Member States is to put in place the right framework conditions, instruments and incentives. While the commitments taken on by Member States imply significant progress towards the R&D target, it remains unlikely that the 3% objective for total R&D spending will be reached by 2010. Further action by Member States will be needed, such as defining national R&D targets to bring the Union closer to the 3% objective and building better coordinated innovation strategies aiming at entrepreneurial innovation. The goal of promoting a stronger entrepreneurial culture and creating a supportive environment for SMEs is being pursued by increased R&D investment, intensified competition and better regulation. A proactive strategy to foster entrepreneurial mindsets through education is still missing in most countries.While the large potential benefits for consumers and entrepreneurs from extending and deepening the Internal Market are recognised, particularly in the areas of services and network industries and in Member States with weak transposition and implementation records at present, few Member States have put forward specific action to reduce the transposition backlog or to improve enforcement. Substantial positive potential could also be unlocked in the area of public procurement.
EN16ENExpansion and improvement of European infrastructure should contribute to improving the business environment and enhancing competition. Most NRPs focus on transport and ICT (e.g. broadband availability) infrastructure; cross-border links are addressed less frequently. Many Member States are taking measures to use ICT to modernise public services.Most Member States seek to exploit the synergies between economic growth and environmental protection; measures to support environmental technologies as well as energy efficiency and renewable energy or the introduction of environmental tax reform, for instance, can yield both economic and environmental benefits.The integrated microeconomic guidelines constitute an interdependent set of goals to strengthen the European knowledge economy. The gains from progress on one objective depend on progress on the others. For instance, the gains from increased investment in R&D will be higher when new technologies are swiftly adopted by the market, which in turn depends on the competitive situation on the markets. During the implementation phase, attention needs to be paid to the synergies between extending and deepening the Internal Market, greater competition, enhancing infrastructure, and the business environment.The governance reforms introduced in the revised Lisbon strategy included a streamlining of existing reporting requirements. The March 2005 European Councilconcluded that the reports on the follow-up to the Lisbon strategy sent to the Commission by Member States each year, including the application of the open method of coordination, would be combined in a single document. Subsequently, the Commission invited the Member States to cover in their NRPs the measures taken to implement four processes: the European Charter for Small Enterprises; the Environmental Technologies Action Plan; eEurope/i2010; and the 3% investment in R&D Action Plan. Such reporting would replace separate reports on each of the four processes. Four Member States (CZ, EE, FI, MT) have presented such information in a separate annex to the NRP, while others often provide relevant information in the main text of the programme. The degree of detail in reporting varies across the NRPs.The following sections give more detail on the reform measures, following the structure of the microeconomic guidelines. While the emphasis is on overall trends, individual measures are frequently singled out as interesting examples.2.KNOWLEDGE AND INNOVATION —ENGINES OF SUSTAINABLE GROWTH2.1.ResearchRelatively low levels of private R&D investment in the EU are an impediment to knowledge accumulation and long-run growth. In 2004 the EU spent 1.9% of its GDP on R&D, of which 55% was financed by business. Twelve Member States reported explicit R&D spending targets for 2010 in their NRPs, and six Member States provided sub-targets or targets for a different year. Seven Member States provided no target at all. Assuming that all the R&D expenditure targets which 18 Member States provided in their NRPs were met, R&D expenditure in these 18 Member States would increase significantly to an approximate average of 2.6% of
EN17ENGDP in 20103. Despite the expected increase, the EU-25 would however remain substantially below the 3% target in 2010. Graph 3:Gross domestic expenditure on R&D (GERD) as % of GDP** 0,00,51,01,52,02,53,03,54,04,5BECZDKDEEEGRESFRIEITCYLVLTLUHUMTNLATPLPTSISKFISEUKEU-25Situation 2004 (ES, IT, LU, PT, UK 2003)Target 2010 (CY 2008, IE 2013, UK 2014) (*)Source: Eurostat, Structural Indicators, Innovation & Research - OECD(*) DK>3% - IE as % of GNP - NL aim at a 'top 5' position**: The Irish target is 2.5% of GNP (not GDP)Increasing the leverage effect of public R&D investment on private R&D investment is key to increase private R&D investment. Several Member States (ES, LV, AT, FI) have taken specific action to increase public expenditure on R&D. In order to make public R&D expenditure more effective, a number of Member States (SK, ES, FR) plan to introduce systems for monitoring and evaluating public R&D. About half of the Member States already use fiscal measures to leverage private R&D and several others are considering such measures. Spain is planning to introduce a scheme that would reduce wage taxes for firms which invest in R&D, similar to the scheme in the Netherlands. Hungary has decided to simplify its tax allowance scheme for R&D. In France the “Crédit d’Impôt de Recherche” tax break is set to triple in volume by 2010.Developing and strengthening centres of excellence in educational and research institutions, promoting public-private partnerships and improving cooperation and transfer of knowledge between public research institutes and private enterprises are keys to competitiveness in all Member States. Several Member States plan to reform or improve the mechanisms for transferring knowledge. Germany intends to introduce a “grace period” to allow researchers to publish their research results without losing the possibility to patent them. Spain will include knowledge transfer aspects in the career appraisal and incentive structures for public research staff and will transform large public research organisations into public agencies to increase their autonomy.3The R&D intensity for 2010 was calculated on the basis of the estimated GDP weightings for 2007 for Member States having presented targets for 2010. Targets were not available for FR, IT, HU, MT, NL, PL and SK.
EN18ENMost Member States see a need to ensure a sufficient supply of qualified researchers. In Spain the Torres Quevedo programme aims at quadrupling the number of PhD holders taken on by enterprises, by co-financing contracts. In Denmark the industrial PhD programme has proved to be successful in placing researchers in enterprises and will be stepped up. Estonia aims to increase R&D staff in enterprises by more than 50% between 2003 and 2008.In conclusion, Member States have generally presented a well-founded analysis of the strengths and weaknesses of their R&D systems and put forward a variety of measures to address them. Overall the NRPs reflect a greater awareness of the need to have a coherent policy mix to support R&D. However, a stronger commitment from those Member States that have set no R&D spending target for 2010 combined with a determined emphasis on implementation and mutual learning by all Member States would lead to a quantum leap in R&D. The Commission believes that there is a real opportunity for a break-through in this area.2.2.InnovationA far-reaching reform of Europe’s innovation system is needed. The innovation gap between the European Union and its main competitors, the United States and Japan, persists, mainly in the number of patent applications, the share of the population with tertiary education and ICT investment4. Big differences remain between the new Member States and leading countries with world-class innovation systems such as Sweden, Finland or Germany. A majority of Member States have identified innovation as a key priority in their NRPs. Most Member States address the strategic importance of innovation poles, networks and incubators bringing together universities, research institutions and enterprises at regional and local level in order to bridge the technology gap between regions. Action is mainly focusing on high-tech sectors, while other sectors which might also hold considerable innovation potential often seem neglected. France has identified 67 promising “Pôles de compétitivité” which will receive strong public support. A recent law in Greece established “regional innovation poles”, with the aim of promoting regional development by creating centres of technological skill and excellence in peripheral areas. Italy is aiming at further developing, consolidating and linking the 24 existing technological districts. Ireland is working on developing applied research centres in universities and has established new incubation and innovation centres.Measures to encourage cross-border knowledge transfer are included in a small number of NRPs. For example, in Sweden the “Visanu” initiative is aiming at increasing international awareness of the competitiveness of regions and attracting foreign investors. Very few Member States present plans to use public procurement to promote innovation; Portugal, for instance, plans to allocate 20% of large public contracts to R&D and innovation projects.4The 2005 European Innovation Scoreboard is available at http://www.trendchart.org/scoreboards/scoreboard2005/index.cfm
EN19ENSeveral Member States are seeking to improve access to finance by reforming the rules on venture capital and foreign direct investment or by establishing funds to this effect. Member States are generally focusing on start-up companies, while paying less attention to financing conditions for more mature innovative enterprises. For example, Spain has established a risk-capital fund for seed and start-up capital and has expanded the participative loans scheme for innovative and high-tech companies. Sweden’s “ Innovation bridge” initiative establishes a regional structure providing seed capital at seven university locations for commercialising research results. In Hungary a reform of the law should increase the availability of venture capital, while Lithuania is planning to set up an Innovation Foundation aimed at specifying measures to promote private capital investment.Italy is addressing shortcomings in the area of intellectual property rights (IPR) through a set of measures aimed at improving companies’ patenting capabilities and protection, e.g. reduction of patenting costs. In Germany the patent exploitation agencies will be further developed and expanded. In Belgium the federal government, the European Patent Office, the Patlib-centres, research centres and universities are collaborating in an initiative to support SMEs in using the IPR system. Latvia has developed a public support programme to protect and enforce IPR and raise awareness, in the business community, of their importance.In conclusion, Member States have generally presented a coherent analysis of the strengths and weaknesses of their innovation system. Many of the measures proposed in the NRPs would, however, need to be strengthened in order to make a substantial contribution to bolstering national innovation systems. Several Member States would in particular benefit from a better coordinated national innovation strategy that builds on identified strengths and improves entrepreneurial innovation.2.3.Information societyProduction and use of ICT have a significant impact on productivity growth of modern economies. However, the share of the ICT industry in the economy as a whole is smaller in the EU than, for example, in the United States. Europe is also lagging behind several of its competitors in terms of investment in ICT and in ICT R&D.ICT issues are declared as challenges in many NRPs (most prominently by CY, EE, ES, FI, PT). The main tools proposed to achieve the goals of the NRP are legislation and public funding. Other instruments, such as creation of new institutional frameworks, cooperation networks between ICT players or promotion of standardisation efforts, are also considered. NRPs most commonly address the issues of e-government, broadband and e-skills/e-literacy. Uptake by firms and households, implementation of the electronic communications regulatory framework and network security are addressed in around half of the NRPs. Most do not address promotion of the ICT industry, except as far as the regulatory framework is concerned.Many NRPs present e-government as a way to cut red tape, reorganise the public administration and improve its efficiency (CZ, DK, LT, LV, PL, SI, ES, IE, EE, PT, FR, SK, MT). A number of countries have made facilitation of companies’ access to government services a priority (NL, FI, FR, CY, EE, LV). Other measures put
EN20ENforward include: communication with society; e-procurement; e-signature; e-health; and the introduction of innovative electronic means of identification. Finland is one of the leading countries in terms of availability of online public services. Nonetheless, a major reorganisation of the public administration’s information management system is envisaged. The use of government online services will be stimulated through investment in identification methods. Meanwhile, electronic ID cards and PIN codes issued by banks may be used to access public services. Requirements for e-administration are taken into account in the Act on Electronic Signature and the Act on Electronic Services. Promotion of electronic public procurement facilitates electronic exchanges of information with businesses. In health care, progress is being made with the introduction of electronic patient records.Issues of broadband coverage and take up have been addressed by all NRPs. Competition is considered the primary driver of broadband developments. However, in the less developed areas of the Union, public support is used to accelerate deployment. Significant broadband programmes have been put forward in several NRPs (AT, IE, EE, FI, FR, HU, IT, LU, LT, PT, SI, ES). France for example is aiming at making broadband available to 80% of households in every municipality by 2007. Small municipalities will be equipped with at least two public internet access points. The main industrial areas will benefit from affordable high-speed offers (around 100 MBps). The objectives will be achieved through upgrades of the existing infrastructure by commercial operators, while local authorities may stimulate broadband roll-out in under-served areas from national and structural funds. Deployment will be further stimulated by support to emerging broadband technologies.e-literacy and e-skills programmes are proposed in many NRPs to improve human capital (AT, BE, CY CZ, IT, LT, LU, SK, IE, EL, EE, ES, UK, FR, PT, PL). The topical issues in this area include the introduction of ICT knowledge into school curricula, provision of on-line libraries and on-line knowledge resources, and addressing the digital divide, in particular between better and less educated and between urban and rural residents.In conclusion, all NRPs are addressing ICT, and in some of them ICTs play a prominent role. The main areas for action are e-government, broadband and digital literacy. Many NRPs refer to the EU i2010 framework, therefore recognising common objectives.2.4.IndustryEuropean industrial performance varies from high growth sectors such as ICT and automobiles to negative growth sectors such as textiles, clothing and footwear5. Competitiveness is hampered by Europe’s relatively low specialisation in high technology sectors. The share of high-tech industries in manufacturing value-added 5Implementing the Community Lisbon Programme: A policy framework to strengthen EU manufacturing - towards a more integrated approach for industrial policy, SEC(2005) 1215 of 5.10.2005.
EN21ENin EU-25 in 2002 was 16.0%, whereas it stood at 23.3% in the US6.In the context of mounting competition from countries such as China, there is a need to look carefully at sectoral competitiveness.A large number of Member States (FR, IE, LT, LV, MT, NL, PT, SL, SK, SE) propose to monitor the competitiveness of sectors and to promote high value-added sectors. Technology policy measures include the promotion of technological upgrading in SMEs (AT, CY), support to European industrial research projects (FI, NL) or promotion of private-public partnerships. Most NRPs stress the need to support clusters (in particular BE, FR, FI, LT). To reap the benefits of internationalisation, many Member States propose measures to support exports (AT, BE, EE, EL, ES, FR, LT, PT, SL, SK) or to attract foreign direct investment (FDI) (BE, CY, ES, HU, IE, LT, LV, MA, PT, SL). Cyprus plans to set up an agency to promote the country as an industrial base and to attract FDI. Spain and Portugal presented programmes to support the internationalisation of businesses.Many Member States display regional specialisation in sectors at risk of being hit by international competition. This is the case, for example, with the southern European countries with their strong specialisation in fashion industries (textile, clothing, footwear, leather, furniture). Six Member States (CY, EL, HU, IE, LT and PT) explicitly mention the need to foster structural changes. The Portuguese NRP proposes a programme to accelerate the industrial transition and restructuring processes. New Member States are generally aiming at reorienting their economies towards high value-added activities. In conclusion, many NRPs address ways to strengthen the industrial base. The approaches range from horizontal policies to sectoral measures. Many NRPs propose measures to foster the internationalisation of business, but measures to facilitate structural change are seldom discussed.One promising development in many Member States is the formation of clusters and innovation polesaimed at furthering innovation, strengthening the industrial fabric and facilitating the setting-up and subsequent growth of SMEs. Cluster development therefore brings together several important strands of the microeconomic guidelines. Public support for such clusters is justified since they typically generate significantly wider benefits for society, through technology spill-overs, the opening of new markets, and the possibility to upgrade the value chain and to improve the way the market works. However, the approach taken varies considerably across Member States and thereby hampers the potential exploitation of synergies that are so crucial for clusters. This makes the case for a cluster policy at the European level, aiming at complementing and supporting national and regional clusters policies and the development of trans-national cooperation. 6Report on European Technology Platforms and Joint Technology Initiatives: Fostering public-private R&D partnerships to boost Europe’s industrial competitiveness, SEC(2005) 800 of 10.6.2005.
EN22EN2.5.Sustainable use of resourcesThe EU economy consumes a relatively high level of resources: its material intensity is slightly better than that of the US, but twice as high as Japan’s. The integrated guidelines invite Member States to encourage the sustainable use of resources and strengthen the synergies between environmental protection and growth. Growth should be decoupled from environmental degradation and as far as possible environment policy should be designed in a way that supports growth and job creation.Environmental sustainability is addressed in all NRPs and many Member States have chosen to include environmental sustainability issues among their key priorities or key challenges.All of the NRPs address the promotion of renewable energy sources.Wind energy seems to have the greatest support, but several Member States are also increasing the promotion of biofuels (AT, CY, DE, ES, IE, LV, LT, MT, SE). Measures to promote energy saving and energy efficiency in buildings are included in several programmes, with varying levels of detail. The vast majority of the Member States (AT, BE, CY, CZ, DE, DK, ES, FI, FR, GR, IE, IT, LV, LT, LU, MT, NL, PT, SK, SI, SE, UK) refer to climate change or the Kyoto protocol and have either already started implementing climate change programmes or plan to do so. Measures that are being considered to contribute to combating climate change include: promotion of climate-friendly technologies (e.g. AT), environmental taxes on cars (e.g. SE, CY, FR) use of biofuels and capture of methane from waste disposal and treatment (e.g. MT, LV).The majority of Member States have highlighted the importance of strengthening the synergies between environmental protection and growth, as environmental investments can generate jobs, reduce resource dependence and also increase competitiveness, provided they are cost-effective. Most Member States (AT, CY, CZ, DE, DK, EE, FI, GR, LU, NL, PT, SK, SI, ES, SE, UK) report that they have taken or will take steps towards internalising external environmental costs via economic instruments – notably in the area of transport and energy taxation. Some plan to achieve the Lisbon goals by shifting the tax burden away from labour towards resource use and pollution (e.g. EE, SI, CZ).Environmental technologies play an important role in e.g. Austria, where support will be given to improve the market conditions for environmental technologies via green public procurement and an export initiative geared to SMEs in particular. In the Czech Republic environmental technologies are supported through environment-friendly public contracts. Malta will develop green criteria for inclusion in public purchasing procedures. Cyprus proposes greening the public procurement process by making energy performance one of the selection criteria.Two thirds of the Member States (BE, CY, DK, EE, FR, GR, IE, LV, LT, LU, MT, NL, PT, SK, SI, SE, UK) refer to biodiversity or nature protection in their NRPs. Some of them consider biodiversity a particularly crucial resource due to the important economic contribution from nature tourism, notably in Cyprus, Malta, Slovenia and the three Baltic countries.
EN23ENIn conclusion, the issues of resource pressures and global problems like climate change and biodiversity loss are recognised by most Member States which attach high importance to protecting the environment in their NRPs. Most Member States want to foster growth and at the same time preserve a high-quality environment. This is leading them to try to harness the synergies between the economy and the environment, notably through measures to stimulate the development and uptake of eco-innovations (e.g. research and the Environmental Technologies Action Plan) and by advancing the use of economic instruments.3.MAKING EUROPE A MORE ATTRACTIVE PLACE TO INVEST AND WORK3.1.Internal MarketInternal Market policy is by nature a Community responsibility. Correct transposition, implementation and enforcement of Community law in all related policy areas is, however, the responsibility of individual Member States. In 2005 the transposition record of Member States improved considerably. The average transposition backlog stood at 1.9 percent in 2005 compared to 7.1 percent in 2004. This significant improvement is due in good part to the accession of the ten new Member States. Further progress has been made since the re-launch of the Lisbon strategy. Many NRPs recognise the importance of a competitive marketplace and while many Member States concede that their national goods, services and energy markets are not yet fully competitive, only a few have identified extending and deepening the Internal Market as a key challenge at national level. Although many NRPs mention the importance of transposition of Internal Market legislation, they only rarely suggest concrete operational improvements. Improving the transposition record is particularly important for those Member States which are lagging behind. The Latvian and Irish NRPs are good examples of how to speed up the transposition of Internal Market Directives. The Latvian NRP combines a political commitment to improving implementation of EU law with firm targets and a timetable for transposition of the Internal Market Directives. The Irish NRP provides detailed information on how the internal mechanisms and procedures for monitoring the transposition of Directives have been reviewed and strengthened.Most Member States recognise the importance of the completion of the Internal Market in services. Measures such as the simplification of the regulatory environment and the increased use of information technology also contribute to this aim. To further integrate the financial services markets, the implementation and enforcement of the related Directives are addressed as key issues in the Financial Services Policy paper for 2005-2010. Liberalisation of the railways has been driven largely by European initiatives and developments differ widely across Member States. Not all the Member States have transposed the railway acquis that aims at opening and technically de-fragmenting rail markets. NRPs rarely refer to opening the rail market even though a common European rail market, especially in freight, would contribute to a smoother flow of goods in intra-Community and international trade. It will also be important to press ahead with reforms in the postal sector, in preparation for the further opening of the
