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01 Apr 2005

Is the European Economy a Patient and the Union its Doctor?

On Jobs and Growth in Europe

Sjef Ederveen / Albert van der Horst / Paul Tang

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European Network of Economic Policy Research Institutes (ENEPRI) Working Paper No. 35, 48 pages

A stronger focus on jobs and growth is part of an effort to renew the Lisbon strategy. Yet the view that economic expansion contributes to maintaining Lisbon’s other goals of social cohesion as well as the environment is somewhat optimistic. First, there are structural trade-offs among the central elements of the Lisbon strategy. Escaping these trade-offs temporarily is sometimes possible but requires policy changes. Second, higher productivity (growth) may not provide more structural room for governments to manoeuvre. It leads to higher tax receipts but also to higher public expenditures since public sector wages and social security benefits are linked to productivity. In contrast, more employment (jobs) is associated with a smaller public sector. But to engineer the increase in employment, changes in welfare state arrangements are needed. In other words, focussing solely on the sick child will probably harm the other children. Looking back, employment has kept expanding in the European Union whereas the productivity growth rate has been falling. The latter is not easily explained by (falling) investment in knowledge. Instead, the current relatively low productivity growth rate largely reflects success in the past: many European countries have caught up with the United States, having seen comparatively fast employment growth in the late 1990s. Looking forward, we argue that the combination of the Open Method of Coordination (OMC) with national action plans, the way the EU wants to achieve its goals, is both too little and too much: European interference with national employment polices has a weak basis, while the OMC may not provide member states with a strong enough commitment to pursue an innovation agenda.