UNCLAS SECTION 01 OF 06 FRANKFURT 001373

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

E.O. 12958: N/A
TAGS: ECON EFIN EUN
SUBJECT: Lisbon Acton Program: Its All About Growth and
Jobs, or Is It?


T-IA-F-05-009

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


1. (SBU) Summary: On February 2 European Commission
President Barroso presented his proposal to make economic
growth and job creation the focus of EU activities for the
next five years. To move beyond slogans, Barroso has
proposed setting out who, the EC or member states, is
responsible for what reform, drawing up roadmaps for their
completion and establishing progress indicators to chart
progress. The tightly focused "Partnership for Growth and
Jobs" promises to generate higher real GDP growth of 3
percent and six million jobs by 2010. The Commission is
asking for member state endorsement at the March 22 Council.
Getting such an endorsement is a forgone conclusion. The
question is whether Barroso's efforts will fare better than
the Lisbon Agenda that promised to make Europe the most
dynamic economy in the world by 2010.


2. (SBU) Some trends favor Barroso's enterprise. Many EU
member states are undertaking serious reforms in labor
markets and social security systems, entertaining tax
reductions to spur investment and consumption, and stepping
up R&D activities. Barroso has staked his political
reputation and those of his fellow Commissioners on the
success of his program, calling his team the "Lisbon
Commission." His fellow Commissioners are speaking with one
voice on how they can promote jobs and growth in their own
areas of responsibility.


3. (SBU) Still, the risks of becoming another muddle are
already apparent. Adding on projects either because they
are favorites of member states or already in the
Commission's work plan risks diluting the effort. Allowing
member states to draw up their own national programs
increases the risk of unfocused effort. Protests that
important social and environmental aspects have not been
given adequate emphasis have not been quelled with Barroso's

logic that growth is needed precisely to retain Europe's
social cohesion and sustainable development. These risks,
however, could be overcome with skillful leadership,
thoughtful coordination between member states and the
Commission, and good fortune. One key is nurturing a
constituency for change. The other, as we were reminded by
a Luxembourg official, rests with member states. With
continued high unemployment, looming higher costs of ageing
populations, and more intense competition within the EU, it
is hard to imagine member states not doing anything over the
next five years. End Summary.

The Launch: Growth and Jobs Are the Next Great European
Project
-------------- --------------


4. On February 2 EC President Barroso presented his
detailed program for creating economic growth and jobs. The
proposal was in the form of a Communication to the Spring
European Council which will take place March 22. Barroso
asks the Council to launch a new Partnership for Growth and
Jobs, endorse an EC action program, call for member states
to establish their own action programs, and approve
streamlined arrangements to manage the process to ensure
effective results.


5. (SBU) Barroso's initiative stems from the mid-term
review of the Lisbon Agenda that was agreed in March 2000.
The objective of this Agenda was to make the EU the "most
dynamic and competitive knowledge-based economy of the
world." An assessment of progress by former Dutch Prime
Minster Kok reports that achievements to date are "very
mixed and much needs to be done in order to prevent Lisbon
from becoming a synonym for missed objective and failed
promises."


6. (SBU) The three themes of the Communication are to (a)
focus on policies with the greatest impact on economic
growth and jobs; (b) mobilize support for change thereby
ensuring national ownership of new measures; and (c)
simplify and streamline procedures to ensure a clear
delineation of responsibilities and regular assessments of
progress.


7. (SBU) Economic growth and job creation are the
immediate targets of the new action program. Quoting from
Kok's assessment, the Commission's paper states that: "The
promotion of growth and employment in Europe is the next
great European project." The Communication also states that
the Commission is fully committed to sustainable development
and modernizing and advancing Europe's social model.
Without growth and job creation, such objectives would not
be achievable, in the Commission's assessment.


8. (SBU) Mobilizing support for the program at the EU and
national levels is important for member state "buy in."
Commission and member state officials often afford little
public airing of programs emerging from Brussels. These
include the recommendations for national structural policy
reforms contained in the Broad Economic Policy Guidelines
that are duly endorsed every spring by the Council. Basing
national commitments on domestic political consensus would
help ensure ownership of the programs.

Contents: Central Policy Areas and EC and Member State
Responsibility
-------------- --------------


9. (SBU) The proposed "Lisbon Action Program" consists of
a European Community Action Plan and National Action Plans
to be drawn up by member states. Ten Central Policy Areas
to be given attention are: (1) the internal market; (2)
competition; (3) improved regulation; (4) infrastructure;
(5) R&D; (6) innovation; (7) industrial base; (8) employment
and modernization of social protection systems; (9)
adaptability of workers and flexible labor markets; and (10)
investment in human capital.


10. (SBU) For each Central Policy Area action either the EC
or member states are assigned action for specific policy
measures. Each policy measure would have a roadmap for its
completion, indicators for benchmarking progress, and an
indication how the measure would effect economic growth and
jobs. A selection of some of the proposals appears in the
last section of this message.

Governance: Deliverance is Achilles Heel
--------------


11. (SBU) Ensuring that the Commission, Parliament and
Member States deliver on their responsibilities has been the
"Achilles heel" of the Lisbon Agenda, in the words of the
Commission's paper. Assigning responsibilities and charting
progress against objective indicators would help ensure
accountability. Each member state would appoint a
government official ("Mr. or Ms. Lisbon") responsible for
coordinating the programs and reporting on progress.


12. (SBU) The Commission would (a) assist member states in
drawing up their national programs and (b) evaluate the
targets and measures. Each national program would have
three types of programs: macro and budget; labor market; and
structural reforms. The Commission will integrate its Broad
Economic Policy Guidelines and Employment Guidelines into
one document by the time of the Spring Council that would
help "frame" member state measures. According to a
Commission official, member states would be expected to draw
up their national programs by October.


13. (SBU) By January 2006 the Commission staff will assess
these programs in light of the Lisbon Action Program
objectives. In the fall 2006 and again in 2007 the
Commission would undertake a "light review" of progress and
issue a Progress Report to the Council. In 2008 the
Commission would perform an in-depth review that would start
off a second three-year review cycle. Commission
observations will become increasingly pointed if progress
were faltering.

Growth: Not Unreasonable Prospects
--------------


14. (SBU) The Commission states that it would "not be
unreasonable" to expect that full implementation of the
Lisbon Action Program that they are proposing would lift
current EU growth potential, which is probably around 2
percent, closer to 3 percent by 2010 and increase employment
by six million. It offers several examples.


15. (SBU) Completion of the single market in services would
boost GDP by 0.6 percent and employment by 0.3 percent.
Integration of EU financial markets would lower capital
costs for firms, increasing GDP by 1.1 percent and
employment by 0.5 percent in the long run. Increasing R&D
expenditures from 1.9 percent to 3 percent of GDP could
raise GDP by 1.7 percent. Better labor market policies and
tax and benefit systems could lift worker participation
rates and reduce unemployment by one percent. Finally,
Structural and Cohesion Funds could comprise a significant
share of GDP in some new member states, helping to boost
their growth substantially.

Observations: What Makes This Different
--------------


16. (SBU) While there is little question that the Council
will endorse something along the lines of the Barroso paper,
the more interesting question is whether Barroso's efforts
will result in anything more than the Lisbon Agenda.


17. (SBU) Rather than concentrating action, annual
discussions of the Lisbon Agenda became the occasion for the
current EU Presidency to gain agreement on its favorite
project, diluting focus in an ever-growing volume of EC
documentation. The Agenda began to resemble a heavily
ornamented Christmas tree rather than a sleek, goal-oriented
MBA's business plan. By last count there were 28 main
targets, 120 secondary targets and 117 indicators encased in
a cumbersome reporting process.


18. (SBU) The ideas in the Commission's recommendation are
not novel. Most were contained in a report by a group of
economic experts to Commission President Prodi in July 2003
chaired by Prodi's advisor Sapir. Regrettably, one idea did
not find its way into Barroso's paper: that EU budget be
directed away from agricultural supports as they do not
promote growth and employment.


19. (SBU) What is new is that the Commission President
would stake his political reputation and that of his fellow
commissioners, on a program focusing on economic growth and
employment. There are some favorable winds for doing so.
One is that many European countries are now embracing the
kinds of structural reforms long advocated by the Commission
(and IMF and OECD, for that matter). Pursuit of labor market
and social security reforms, lower tax burdens and better
functioning capital markets are now everyday news. For
example, France's National Assembly approved a bill February
8 allowing workers to work more that 35 hours a week.


20. (SBU) Another favorable wind is that his fellow
Commissioners are clearly on board, speaking with one voice
on how they can contribute to the growth and jobs goals.
Good people can make a difference, in the judgment of one
pro-reformer. Competition Commission Kroes is undertaking
her own review to promote competition in transport, energy
and financial markets. Commissioner Hubner wants to channel
structural and cohesion funds to promote investment, R&D and
SMEs. Commission Vice President Verheugen responsible for
Enterprise and Industry talks of "stringent action plans" by
member states and creating a business-friendly environment.
Commissioner McCreevy does not want to consider any more
financial market regulations without first seeing an impact
assessment.


21. (SBU) There also are headwinds. One is that the focus
becomes diluted. This is already happening in several ways.


22. (SBU) One dilution mode is including pet projects of
member states and the Commission. Moving from Kok's five
priorities (knowledge society, internal market, business
climate, labor market, environmental sustainability) to ten
in the Commission's Communication is a symptom of this
development. Including "infrastructure" as a Central Policy
Area is a bow to the "growth initiative" of the Italian
Presidency that experts concede will have little impact on
economic growth. As the Commission's recommendations makes
the rounds in various Councils and member state capitals,
relevant ministers are more likely to broaden the focus
rather than sharpen it.


23. (SBU) Widening the focus to encompass more on social
and environmental programs also is occurring. Even though
the Kok report called for having a limited number of
priorities, it included "environmental sustainability" over
the objections of those favoring a sharper focus. The
Commission's Communication contains several social and
environmental objectives, like equal opportunity employment,
"inclusive labor markets," and promoting environmental
friendly technologies.


24. (SBU) These are worthwhile objectives. Barroso's
logic, however, is that economic growth and job creation are
the foundations for ensuring retention and advancement of
Europe's model for social cohesion and environment. Kok and
Sapir espoused this logic that as found credence in some
member states. Some critics, however, complain that not
enough attention is given to these areas.


25. (SBU) On February 8 Luxembourg Labor and Employment
Minister Biltgen declared that "we must show that social
Europe still exists." On February 9 the Commission obliged,
issuing a Communication on the Social Agenda that
"complements and supports" the Lisbon Action Plan by
promoting the social dimension of economic growth. The
Social Agenda covers many of the same issues in the Action
plan, such as portability of pensions, generating jobs for
youths, and supporting member state pension and health care
reforms. Even so, rather than being viewed as complementary,
some interpret this Agenda as backing off from the primary
focus on economic growth and jobs.


26. (SBU) Allowing member states to draw up their own
programs risks weak national programs. The logic is that
allowing members to draft their own programs will increase
member state ownership. More to the point, they should
contain programs that may be realistic given local politics.
But will they be sufficiently ambitious? While the
Commission's assessment could reveal an unfocussed or
unambitious program for what it is, the Commission publicly
has not been too harsh on member state inaction, suggesting
that once off track a member state is likely to stay off
track.


27. (SBU) Still, with careful leadership, a constructive
cooperative relationship with member states and a bit of
good fortune, the new effort could turn out differently.
One key is to build a constituency for change. Luxembourg's
Prime Minister and President of the European Council who
intends to get the new program through the March Council
meet with leaders of industry, social non-governmental
organizations and EU environmental groups on February 10 to
help calm the waters. Reforms gathering support in member
states suggest that, for whatever reason, constituencies for
change exist, even if they are not as vocal as others.

28. (SBU) The second key, as a senior Luxembourg official
pointed out, rests with member states. They are responsible
for national economic reforms as well as implementing those
directives and regulations agreed at the EU level. Given
the continued high levels of unemployment, looming costs of
ageing populations, and more intense competition within the
EU, it is hard to imagine member states not doing anything
over the next five years.

Central Policy Areas for Lisbon Action Program
-------------- -


29. (SBU) The following are some brief examples from the
Commission's proposal for a Lisbon Action Program by Central
Policy Area, designating either the EC or member states (MS)
as having the lead for action:



I. Extend and Deepen Internal Market

EC Action: Free Market for Services by removing
barriers to trade and investment in services - adoption
of Services Directive by end 2005
EC Action: Free Capital Markets - propose directive for
payments system by June 2005; consultation papers on
financial services by May and on asset management and
mortgage credits by July; propose legislation on
clearing and settlement by early 2006; proposals for
single market in asset management by end 2006/early
2007
MS Action: Effective implementation and enforcement of
internal market directives

II. Open and Competitive Markets Inside and Outside the EU

EC Action: Completion of the Doha Round by end
2006/early 2007
EC Action: International Regulatory and Administrative
Convergence to reduce barriers as follow up to US-EU
Summit
EC Action: Selective sector screening for competition,
e.g. energy and transport
EC Action: Reform of State Aid Architecture, less and
better targeted - State Aid Action Plan by March 2005
MS Action: Reduction of state aids and redirection of
aids to Lisbon objectives

III. Improve European and National Regulation

EC Action: Impact Assessment of legislation -
Commission to issue Communication on Better Regulation
and Competitiveness by March 2005; adoption of
guidelines for assessments by March 2005; adopt an
internal mechanism to conduct such assessments by June
2005; external quality review of assessments by end
2005; progress report spring 2006.
MS Action: National programs for impact assessments and
reduction of administrative burdens.

IV. Expand and Improve European Infrastructure

EC Action: TransEuropean Network (TENs) program,
including 45 quick start projects to be undertaken by
2010 as agreed in 2004.
MS Action: Contributing to TENs projects in their
areas; transposition and application of liberalization
directives, e.g. energy services.


V. Increase and Improve R&D

EC Action: Double EU budget and improve effectiveness
and coordination - Commission proposal by April 2005;
channel state aids to R&D (revision of State Aid
Architecture)
MS Action: Increase R&D budgets to 3 percent of GDP
VI. Facilitate Innovation

EC Action: Adopt EU wide patent; facilitate financing
for innovative enterprises -revision of State Aid
Architecture and Communication on Venture Capital by
end 2005; foster regional innovation - strategic
guidelines for Cohesion Funds end 2005, operational
programs by end 2006; foster ICT use - Communication
on eEurope 2010 strategy paper by June 2005; Action
Plan on Innovation by second quarter 2005, proposed
Program on Competition and Innovation by April 2005;
promote environmental technologies via R&D; promote
"green procurement" by removing environmentally harmful
state subsidies.
MS Action: Reduce cost of patents, promote technology
via public procurement; implement the European Climate
Change Program

VII. Strengthen European Industrial Base

EC Action: Increase high-tech content of industry -
eEurope communication by June 2005
MS Action: Promote local and regional innovation
clusters; improve inter-face between industry and
research institutes; national strategy plans benefiting
from cohesion funds to be linked to national Lisbon
objectives.

VIII. Employment and Modernization of Social Protection
Systems

EC Action: Promote equal employment rights;
coordination of admission policy for immigrants - paper
by December 2005
MS Action: Set national employment targets; improve use
of active labor market policies, increase female
participation in labor force; reduce youth
unemployment, develop active aging strategies, reform
of pension and health programs.

IX. Adaptability of Workers and Enterprises and
Flexibility of Labor Markets

EC Action: Ensure portability of occupational pensions
- adopt legislation by 2007; Communication with key
initiatives towards meetings employment and social
goals of Lisbon by February 2005.
MS Action: Promote employment friendly wages and other
labor cost developments in line with productivity;
promote flexibility combined with security in labor
markets; reduce shadow economy.


X. Investment in Human Capital - Better Education and
Skills

EC Action: Promote geographic and occupational mobility
- adopt Directive on Recognition of Professional
Qualifications in first half 2005; proposal for
European Qualifications Framework in 2006; promote
employment, education and training objectives via EU
funds.
MS Action: National strategies for life-long learning;
improve quality of vocational training, increase
investment in human capital.



22. (U) This message coordinated with Embassy Berlin.


23. (U) POC: James Wallar, Treasury Representative, e-mail
wallarjg2@state.gov; tel. 49-(69)-7535-2431, fax 49-(69)-
7535-2238

Bodde