01 Jul 2005

Prospects for the Lisbon Strategy: How to increase the competitiveness of the European economy?

Daniel Gros

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The main message of this contribution by CEPS Director Daniel Gros is that lean times are here to stay for the old member states. The principal reasons are deep seated: Deteriorating demographics continue with the ratio of working age population to total population falling. There are thus fewer and fewer producers for every consumer and recipient of transfers. On top of this, productivity growth is declining as labour quality is dropping and investment growth is slowing. In the new member countries the demographic trends are also unfavourable, but they are (more than) compensated for by catch-up growth as a relatively well educated work force is finding its place in the internal market.
What does this diagnosis imply for the role of structural policies? No Lisbon agenda can change demographic trends, nor can it change the declining capital/labour ratio due to insufficient investment growth. But structural reforms might counteract the impact of these two negative trends. Moreover, the performance gap between big and small member countries suggests that policy can make a difference. Nevertheless, Gros despairs that EU policy-makers will likely continue to follow policies that emphasise short-term expediency at the expense of longer-run gains, as reflected in the reform of the Stability and Growth Pact agreed earlier this year.