The Lisbon Agenda: targets missed

UNCLAS SECTION 01 OF 02 FRANKFURT 003351

SIPDIS

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STATE FOR EUR PDAS RIES, EB GREENWOOD, EUR/AGS, AND EUR/ERA
STATE PASS FEDERAL RESERVE BOARD
STATE PASS NSC
TREASURY FOR DAS SOBEL
TREASURY ALSO FOR ICN COX, STUART
PARIS ALSO FOR OECD
TREASURY FOR OCC RUTLEDGE, MCMAHON

E.O. 12958: N/A
TAGS: ECON EFIN EUN
SUBJECT: The Lisbon Agenda: targets missed

T-IA-F-03-0004

This cable is sensitive but unclassified. Not/not for
Internet distribution.



1. (SBU) Summary: The March 25/26 European Council
confirmed that there is little news regarding the so-called
Lisbon Agenda, which aims at making the EU the world's most
dynamic and competitive economy by 2010. Lack of progress
in meeting the Lisbon targets has been highlighted in
structural indicators compiled by the EU Commission, which
show that instead of catching up with the U.S., the EU has
fallen even further behind. To a large extent, this can be
ascribed to the member states, both with regard to slow
implementation of EU directives and to insufficient reforms
in areas that are exclusively their responsibility, such as
labor market, tax or pension reform. The outlook is not
encouraging. End summary.

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Little news at Spring Council due to limited progress
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2. (SBU) The March 25/26 European Council once again
highlighted the lack of progress that has been made in
meeting the targets of the Lisbon Agenda, which aims at
making the EU the world's most dynamic and competitive
economy by 2010. It is becoming increasingly clear that the
EU is unlikely to achieve this goal. Instead of catching up
with the U.S., it has fallen even further behind. The
Council found that in order to reach the Lisbon target "the
pace of reform needs to be significantly stepped up". It
agreed that the critical issue is better implementation of
commitments already made and identified "unacceptably high
deficits in transposing agreed measures into national law.
The credibility of the process requires stepping up the pace
of reform at member state level." The Council focused on
two key areas: Sustainable growth should be generated by
sound macroeconomic policies, and measures to enhance
competitiveness, such as the completion of the internal
market, better regulation and higher rates of R&D
investment. Measures suggested to create "more and better
jobs" include reduction of non-wage labor costs, the
promotion of flexible forms of work and higher investment in
education and training.


3. (SBU) However, there are considerable doubts whether such
statements will change much. Before the Council meeting,
Commission President Romano Prodi stated that nothing much
could be expected from this summit in terms of economic
policies. He said that he is "almost embarrassed" to
constantly repeat that it is high time to finally take the
Lisbon Agenda seriously. In a letter to Council President
Bertie Ahern, Prodi wrote that "We have to be honest and
admit that the reform process has slowed down considerably."
The President of the European Parliament, Pat Cox, commented
that "in some respects there is little news as there has
been such limited progress", and that the current lack of
"deliverability" on Lisbon reforms could lead to a
"credibility gap".

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Commission report reveals that EU is falling behind
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4. (SBU) In its progress report to the Spring Council, the
Commission found that the EU "is still far from achieving
the objectives set at the 2000 Lisbon European Council.
Employment and productivity do not make a sufficient
contribution to European growth." The main reasons for
this, according to the Commission are the low employment
rate of workers aged between 55 and 64, the inadequate take-
up and use of information and communication technologies and
the lack of investment in knowledge sectors (research
innovation, education, training). Moreover, the internal
market is still too fragmented in terms of both services and
intra-EU trade.


5. (SBU) The structural indicators compiled by the
Commission show that the EU has not managed to catch up with
the U.S. In 2003, GDP per capita was 39% higher in the U.S.
than in the EU. While the difference has been reduced by
three percentage points, the EU is still lagging far behind
the U.S. The EU has also fallen back with regard to labor
productivity growth, with an annual average of 1.8% in the
U.S. between 1999 and 2003 and only 0.7% in the EU. The gap
in labor productivity with the US has thus widened and
accounts for 40% of the difference in GDP per capita. In
2002, the participation rate in the EU was 64.3%, clearly
below the 67% target for 2005 and 70% in 2010 - and even
further below the U.S. employment rate of 71.9%.


6. (SBU) In its progress report, the Commission identified
three priorities for 2004: more investment in networks and
knowledge, the reinforcement of industrial competitiveness
and more measures to increase labor market participation, in
particular of older workers.

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Whose fault?
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7. (SBU) The lion's share of the problem lies at the member
state level. According to the Commission's progress report,
"the performance of the member States in transposing the
directives related to the Lisbon strategy area is .
mediocre." Currently the share of transposed directives
amounts to "an average of 58% across the Union".


8. (SBU) Moreover, there are many areas in which
responsibility for reforms lies exclusively with the member
states, such as labor market, pension or tax reform.
According to competition Commissioner Mario Monti, the
achievement of the Lisbon target "largely depends on factors
which are outside the Community control," i.e. at the member
state level. Clearly, member states' efforts have not been
sufficient: The Commission finds that labor market reforms
have been stepped up but appear insufficient to reach the
employment targets. Similarly, despite significant progress
in pension reforms, long-term sustainability of public
finances is not yet secure in about half of the member
states.

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Outlook
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9. (SBU) After the Spring summit, Council President Bertie
Ahern stated that "the climate for delivering the Lisbon
Agenda is better than at any time in the past four years".
Ahead of the Lisbon mid-term review in spring 2005, the
Council invited the Commission to establish a high-level
group headed by Wim Kok, the former Dutch Prime Minister, to
carry out an independent review (USEU septel). The group
should prepare a report identifying measures which together
form a consistent strategy to achieve the Lisbon objectives.


10. (SBU) Comment: It is unlikely that another report will
produce much value added. Everybody knows very well what
needs to be done, now it is high time to walk the talk. End
comment.


11. (U) This cable has been coordinated with USEU.


12. (U) POC: C. Ohly, Economic Specialist, e-mail
ohlyc@state.gov; tel. 49-(69)-7535-2367, fax 49-(69)-7535-

2238.

BODDE