EU Competitiveness: Are we on the right track?

Remarks by Vice Prime Minister for EU Affairs Alexandr Vondra, LSE, May 19th, 2008

It is a great honour to be speaking at the LSE. I will not be doing so from the economic angle, but from the political one. Moreover as a politician who is sometimes blamed for letting his dissident nature to show more than the laws of political correctness allow. I would argue that some dissidence and icon-breaking is beneficial for today´s EU. Let me begin my speech by paraphrasing Lykke Friis, the Pro-Vice-Chancellor of the Copenhagen University: just as Britain hosts the world´s top tennis tournament but never wins it, so we Europeans risk to be in a similar situation with our competitiveness or with our current proposals on fighting the climate change.

Thanks to the enlargement, EU has become the largest single market in the world, serving 480 million people, with a joint GDP of more than 12 trillion EUR. We have the largest share of world export, we are the greatest industrial producer and attract most investment on this planet. Yet, we are not the most competitive ones and we are quickly losing our margin to emerging Asian economies. According to the 2007/08 Global Competitiveness Report, US remain the champion of world´s competitiveness. That does not come as a shock. However, the fact that Korea has climbed up from Nr.30 to Nr.11 in the list of most competitive countries in less than 2 years, is a little bit more worrying. China, Taiwan and other Asian countries are following the similar pattern. And this happens 8 years after the launch of the Lisbon strategy that sets the goal of making Europe the world´s most competitive knowledge-based economy in the world by 2010. Is the EU on the right track?

As the times are changing, not only the founding treaties of the EU need to be adapted, but especially the content of policies that are based on their provisions must be reformed. At times of change, the time is ripe for reforms. The demand for adaptability of the system increases. The success of each and every entity depends on its capacity to see problems from new perspectives, to formulate priorities anew and to set them into an adequate hierarchy. Isn´t this perhaps one of the weaknesses of our continent?

At the end of the first decade of the new millenium the shape of our future is looming. With globalisation new challenges emerge and doubt is being cast upon paradigms that used to be unshakeable. The long-term trends of economic performance and the distribution of richness in different parts of the world are changing to our detriment. The prominent place of Europe in both the world economy and politics is less self-understood than before. The demographic trends in Europe are causing serious concern. Impacts of both climate change as well as of our policies to tackle it are multiplying. With new technological and communication tools new security risks emerge, aggravated by new dangerous ideologies, hostile to the core values of the Euroatlantic civilisation. The increase in world prices of energy resources and food are making their accessibility in future less certain.

To sum it up, the world around us is not only different from the world at times of the dawn of the European integration. It is also very different from the world ten years ago. It brings about a new imperative: capacity to adapt. The price we will have to pay for rigidity and wasting opportunities in the new era will be far higher than we can afford.

The Czech Republic has been through a strongly instructive experience of a totalitarian „real socialism“. At times when the founding members of the EU were putting the European project together, Czechoslovakia not only could not participate but was violently separated from the dynamic economic development of the rest of the world. Czechoslovakia of the 1930´s belonged to the 15 strongest economies in the world. In 1989, after 40 years of communism, it was deeply lagging behind, lost the political respect of the world, devastated its own environment and failed to ensure proper living standards to its citizens. Thanks to our own painful experience we view and analyse the development of both economic and political potential of the EU precisely on the background of the metamorphosis of the ever more dynamic world. That is the very reason why we think that the problem of maintaining and increasing competitiveness of the EU is crucial. That´s why we believe that the solution is to make Europe open internally as well as externally rather than close it behind a new fence.

In the globalised world of the 21st century the competitive economic potential is not only a condition for maintaining our material and social standards and thus guaranteeing the internal political and social cohesion of the EU. It is also a precondition for solving emerging environmental problems, as well as for acquiring the restricted energy resources in the global economy. Global competitiveness is a prerequisite for ensuring a good position for both the EU and its member states on the political map of the world. Only an excellent economic potential can be a source of political authority of the EU. It determines the range of its global influence, enables to finance its security and defence. Economic performance determines our position vis a vis our suppliers of energy and other resources. Last but not least, it also enables us to bear the costs of protecting our environment.

What are the solutions?
1) Back to the basics
We do not have to reinvent anything. In most areas of economic life the market allocates the resources optimally, unless it is prevented from doing so by unnecessary regulatory restrictions. (I would like to underline that I am not referring to legitimate measures meant to correct externalities of the market, but to interventions that are driven by political interests rather than by the well-being of citizens.)
Internal market has all tools we need to boost EU´s competitiveness. We just need to make full use of its potential, which, alas, still is not the case. Restrictions of free movement of services are artificially strangling the main source of European growth, the same goes for the free movement of workers. Pockets of protectionism are preventing us from profiting fully of the opportunities of the single market.

It is for this reason that the Czech 2009 EU Presidency will strive to contribute to dismantling barriers of the four fundamental freedoms as its top priority and will try to market it to European citizens as a main recipe for increasing European competitiveness. We will try to drive the attention of the Europeans, maybe somewhat distracted by lots of euro-activities, back to where the idea of European integration had started. This might not seem too imaginative at first sight, but I believe that it will have a far greater value added than joining the race for more and more newer and newer priorities, as we often see it with rotating EU presidencies.
Two examples can be stated: First, the labour market still is not fully liberalised in the EU. All countries that have introduced restrictions on free movement of labour have announced they woud lift them as of 2009. However, Germany and Austria have decided to go the opposite way, despite the fact that there is no economic justification for this measure: our unemployment rates are hitting their historical lows and we are struggling with the lack of labour force. There are only 14000 Czechs working in Germany – a number which is unlikely to shake the German labour market.
Second, the services directive will enter into force in 2009 and I am sure that reality will show that the panic it unleished during the legislative process was not founded. If we want to have EU´s economic potential released, it will perhaps be a good idea to see, whether we can go any further with the liberalisation of services.

2) Horizontal approach
The revised Lisbon strategy is currently the main framework for solving the questions of competitiveness of the EU. We however have to realize that given the extent of regulatory powers of the EU, almost all areas of EU´s decision making have a direct or indirect impact on EU´s competitiveness. We will never succeed to boost our economic performance unless decisions across all EU policy areas, be it in the domain of energy and environment, protection of intellectual property, justice and home affairs or any other, are taken with due care for a streamlined decision-making.

Huge investments into science and research will not bring their fruit if they are not absorbed by a flexible and effective economic system, if educated people will have trouble finding jobs on a rigid labour market, if frustrated scientists will be leaving Europe to the US. Investment into the technical infrastructure of the single market will be useless if productive participants of the market will be suffocated by regulation that aims very often only at administrative or political comfort of the regulator.

The climate change package can serve as a typical example of how important it is to assess impacts of regulation from as many angles as possible. How important it is to reconcile ecological requirements with both the economic and security interests. How important it is to keep a balance between the three sides of this triangle. Czech Republic is an industrial country heavily dependent on fossile energy sources – and the same goes for Poland and to certain extent to Germany, too. At the same time, given our geographical position, we are highly dependent on Russian gas. To put it very bluntly, for us the climate change package, as it is formulated now, might mean a more expensive energy and a less competitive industry. It might mean also a choice between nuclear energy and gas. Domestically, our obligations towards our coalition partner – the green party – prevent us, for the time being, from building a new nuclear power plant. And gas means more political dependency on Russia, which has made it clear that it intends to use energy to strengthen its political clout in its periphery. Clearly, we have some hard decisions to make. Either we can try to modify slightly the course of the current EU climate policy, or we can return into the arms of the Russian bear, or we can let our government coalition fall.

By saying this I don´t mean to downplay the leading role that EU has decided to assume in tackling the climate change. I however believe that we should seek balanced solutions and try to reconcile the environmental approach and the Lisbon agenda perspective with our important security concerns. Jorgo Chatzimarkakis, member of the European parliament´s Internal market committee, expressed fear that an excessive focus on the sustainable dimension of growth risks leading to losses of EU-competitiveness on an international level. I subscribe to that view. If European regulations are too rigid, they are less likely to be adopted by the EU´s main competitors, especially emerging countries such as China or India. EU should not abandon its plans to tackle the climate change, but also try to reinforce its position especially in the light of the current US and global economic stagnation, and avoid formulating standards on a purely ethical basis.

To be a bit provocative perhaps: last week David Miliband spoke here about the climate change issue, and said that „green was the new red“. May I say, both as a member of a „non-left“ party and a former dissident: are we sure that new red is a good colour for Europe in a global world?

3) Other tools
There are several other tools that can help to boost EU´s competitiveness: let us review the EU-budget and adapt it to the challenges of the global economy. The question is, when is the White Book on the reform of the EU budget going to be published – we very much hope that President Barroso will have the courage to do it before the elections of the European parliament. Let us implement the better-regulation that is meant to unlock the business potential, especially of SME´s, let us reinforce the education-research-innovation triangle and build together the skills for the 21st century. All of these will belong to the topics of the Czech EU presidency.

Conclusion
In 2005 the French and Dutch „NO“ did not only refer to the text which was submitted to their decision. Their vote was also, to a certain extent, a protest against globalization. The two world wars and the Cold War shaped European integration as a project of peace and defense of Western values. The new generations however perceive peace already as acquired and ask for more to legitimize further development of the EU. New raison d´etre of the EU and its further deepening is indeed needed and I can´t think of anything better, than tackling successfully the modern challenges in front of us: new, insecure world, new environmental concerns, the process of globalization. We have to make sure that EU, based as before, on its founding principles, protects freedom of people and thus further develops the standard of living of all its citizens. Only this way will we earn support of our citizens for the European project.

Thank you for your attention.

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EU Competitiveness: Are we on the right track?