George Bernard Shaw once observed that: “The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.”
The problem with Shaw’s dictum is that, when a person faces the undesirable reality of his own creation, the only solution is to change thyself. This is precisely what the European Commission is failing to recognize when it comes to the issue of sluggish economic growth.
The Commission has re-launched the ‘Lisbon Agenda’, aimed at making the EU the world’s most competitive, knowledge-based economy by 2010.
The agenda includes: generating employment and increasing flexibility of the labor markets, increased emphasis on R&D, sponsoring stronger industrial base and completing internal markets unification. However, no EU discussion of the policy issues can exclude politically correct blah-blah about the need to promote sustainability and ‘ownership’ of the Lisbon process by the member states. The latter includes “the appointment in each state of a Mr/Mrs Jobs and Growth” in order to “coordinate the national reform efforts.”
This Euro-talk apparently comes at the expense of the issues of lowering taxes and the regulatory burdens across the EU, which are found nowhere in the Commission documentation. If anything, the re-birth of the Agenda appears to imply exactly the opposite—more harmonization and industrial base protection means more regulations and indirect state support. This, together with increased state financing of R&D, adds to higher spending and, given the fact that ten of the 25 EU states currently exceed the Stability and Growth Pact limits on deficit financing, means that taxes will remain high and may rise in real terms.
Despite the focus by the Barroso-led Commission on injecting new life into the Agenda, the new policy objectives are about as realistic as the original 2010 deadline for the EU’s planned economic world domination. Using the latest forecasts, the average gross domestic product growth in the Eurozone (2000-06), is expected to be around 1.48 percent. The unemployment rate has remained flat over the last 20 years, with the young workers’ category staying at around 17 percent average for the 1983-2003 period and 17.7percent for the last three years.
There is little that can be done to change this without directly tackling the main sources of growth underperformance: low domestic demand (caused by high income and consumption taxation), low supply of hours worked, and low entrepreneurship and labor force participation (all driven by the generous welfare systems and substantial labor markets’ rigidities) and low investment by the firms (caused, you guessed it, by high taxation of capital income).
All of these problems were identified in the European Competitiveness Report, 2004 (ECR), yet no policy proposal from the Commission addresses these bottlenecks. Labor income tax and welfare benefits reforms are a top priority in all of the ‘old’ EU-15 countries (including low-tax Ireland). Wage bargaining policies (that reflect the degree of unionization and minimum wage policies) are the second highest priority in ten out of 15 EU countries (again, including Ireland). Incidentally, according to the ECR, not a single country has policies in place aimed at such reforms. All other policies aimed at increased labor market flexibility are of importance in less than one third of the EU-15 countries. The Commission priorities largely ignore these facts.
Politics as usual prevails in Brussels. The failed policies of the past aimed at smaller, less painful reforms of the regulatory environment and ever heavier involvement of the EU in strategic sectors, remain at the top of the agenda. At the same time, the changes aimed at encouraging lower taxation of incomes, consumption and investment activity, and calling for reductions in government spending are no where to be heard. Neither rational nor irrational in its prescriptions, the Commission appears to be bent on administering the same medicine of half-solutions and loud proclamations that made the EU economy sick in the first place.