An Agenda for a Growing Europe: The Sapir Report

235 Pages·2004·1.17 MB·English

by  Philippe Aghion

AN AGENDA FOR A GROWING EUROPE
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An Agenda for a Growing Europe
The Sapir Report
André Sapir, Philipe Aghion, Giuseppe Bertola, Martin Hellwig, Jean Pisani-Ferry, Dariusz Rosati, José Viñals, and
Helen Wallace, with Marco Buti, Mario Nava, and Peter Smith
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13579108642
Letter of Transmission to Romano Prodi, President
of the European Commission
Dear President,
In July 2002 you invited a High-LevelGroup of independentexperts to analyse theconsequences of thetwostrategic
economic goals set by theEuropean Union (EU) for thedecade ending in 2010: to become themost competitive and
dynamic knowledge-based economy with sustainable economic growth and greater social cohesion (the so-called
Lisbon Agenda); and to make a success of the pending enlargement by rapidly raising living standards in the new
Member States. The Group was asked to reviewtheentire system of EU economic policies and to propose a strategy
for delivering faster growth together with stability and cohesion in the enlarged Union.
The Group was invited to seek inspiration from a report by Tommaso Padoa-Schioppa and others, whom the
Commissionhadinvited in1986 toreflectontheeconomicconsequences oftheSingleMarketProgrammeandofthe
southern enlargement. The Padoa-Schioppa Report was extremely influential. It laid down the intellectual foundation
for the construction of a coherent economic edifice resting on three pillars: the Single Market, to improve economic
efficiency; an effectivemonetary arrangement, to ensure monetary stability; and an expanded Community budget, to
foster cohesion.
Allthree pillarsweregraduallyputinplace: theSingleMarketbecamea realityin1993, althoughproblemsofcoverage
andimplementationstillremain;theCommunitybudgetandtheshareallocatedtocohesionweresomewhatexpanded;
and, even more remarkably, a European Monetary Union was set up in 1999.
The present Report finds that, despite the considerable institutional achievements of the EU, its economic
performance is mixed. While macroeconomic stability has considerably improved during the 1990s and a strong
emphasisoncohesionhasbeenpreserved,theEUsystemhasfailedtodeliverasatisfactorygrowthperformance.This
underperformance is striking because it contrasts not only with expectations but also with past EU performance and
recent US accomplishment.In theEU, therehas beena steady decline of theaverage growth rate decade after decade
and per capita GDP has stagnated at about 70 per cent of the US level since the early 1980s.
Growth must become Europe's number one economic priority—not only in the declarations of its leaders, but first
and foremost, in their actions. A more dynamic EU will help the integration of new Member States and strongly
growing new members will contribute to more dynamism. A more
vi Letter of Transmission to Romano Prodi
dynamic EU will also be a better partner for other European and Mediterranean neighbouring countries, and in the
global system.
Faster growth is paramount for the sustainability of the European model, which puts a high premium on cohesion.
Sustainability is under threat from rapid developments in demography, technology, and globalisation, all of which
increase the demand for social protection. Failure to deliver on the commitments of the Lisbon Agenda would
endanger the present European contract and could lead to its fundamental revision, thereby threatening the very
process of European integration. Fortunately, however, technology and globalisation, like enlargement, also hold the
potential for faster growth throughout Europe.
The Group views Europe's unsatisfactory growth performance during the last decades as a symptom of its failure to
transform into an innovation-based economy. It has now become clear that the context in which economic policies
have been developed changed fundamentally over the past thirty years. A system built around the assimilation of
existing technologies, mass production generating economies of scale, and an industrial structure dominated by large
firms with stable markets and long-term employmentpatterns no longer delivers in the world of today, characterised
byeconomicglobalisationandstrongexternalcompetition.Whatisneedednowismoreopportunityfor newentrants,
greater mobility of employees within and across firms, more retraining, greater reliance on market financing, and
higherinvestmentinbothR&Dandhighereducation.Thisrequiresa massiveandurgentchangeineconomicpolicies
in Europe.
The Group considers thatthethree pillarsupon whichtheEuropean economic edifice is nowbuilt are fundamentally
sound. At the same time, it feels that the design of each of the pillars, which together constitute the EU system of
economic policies, must be improved. In particular, greater coherence—across instruments, across decision-makers
and jurisdictions, and over time—is absolutely essential to ensure that the system delivers on the objectives.
Expanding growth potential requires first reforms of microeconomic policies at both the EU and national levels.
However, there is also a needtorevisefeatures of thecurrentmacroeconomic policysetting and to redesigncohesion
policies at both the EU and national levels. Growth, stability, and cohesion must go together. Well-designed
macroeconomic and cohesion policies help to achieve sustainable growth. At the same time, significant growth is
necessary to maintain stability and cohesion.
Totrigger thosechanges,weshouldreconsider therelationshipbetweentheEUassuchandtheMemberStates.While
therole of EU institutions in enforcing commonly-agreed disciplines remains essential,they must increasingly take on
the role of a facilitator. Sticks must be used when needed, but a policy system that essentially relies on the threat of
sanctions is neither
Letter of Transmission to Romano Prodi vii
efficient nor sustainable. Nor is a system viable that leaves so much to depend on loose and uncertain agreements
from the Member States to deliveron commonly-agreed objectives. The Report therefore suggests moving towards a
more incentive-basedapproach that treats Member States as partners. It also recommends refocusing the EU budget
to make it consistent with this approach, while respecting the current budget ceiling of 1.27 per cent of GNP. And it
proposes a number of changes in methods of governance in order to make this partnership much more effective.
TheReportputsforwardasix-pointagendafocusingonwhereEUpoliciesandtheireconomicmanagementcanmake
the greatest contribution to achieving the declared objectives of sustainable growth with more and better jobs,
continuing price stability, and greater economic and social cohesion in the enlarged EU. This agenda calls on the EU
and its members:
(1) to make the Single Market more dynamic;
(2) to boost investment in knowledge;
(3) to improve the macroeconomic policy framework for EMU;
(4) to redesign policies for convergence and restructuring;
(5) to achieve effectiveness in decision-taking and regulation; and
(6) to refocus the EU budget.
For each of these six items, precise recommendations are spelled out in the Report. These recommendations address
solely EU policies, even though the Group strongly believes that reforming national policies, especially in the area of
social affairs, public investment, and taxation, is absolutely crucial to ensure that the EU economic system achieves
higher sustained growth. Equally, our recommendations address only the economic and social dimensions of
sustainability, althoughtheGrouprecognises theimportanceoftheenvironmentaldimension.Takingupthedetailsof
other national and environmental policies would have been outside the Group's area of competence.
Between the beginning and the end of our work, twoimportant developments have taken place in the EU. The
first is the draft Treaty establishing a Constitution for Europe submitted by the President of the Conventionto
the European Council meeting in Thessaloniki in June 2003. Most of our work had already been completed
whentheConventionreleaseditsfinalproposal.Our recommendations andtheConventionproposalsconverge
onsomeaspectsofeconomicgovernance,butonseveralotherour recommendations requiretreatychanges, on
which the draft constitutional treaty is silent.
The second is the current macroeconomic situation. In the span of one year, the economic situation has
deteriorated to a considerable extent. It was not within the mandate of the Group to offer responses to this
problem. Nor was ittoprovidea solutiontothedifficultyofseveralcountries, which,havingfailedtocreatethe
necessary room for manoeuvre during good years, now find their fiscal policy increasingly constrained by the 3
per cent of GDP
viii Letter of Transmission to Romano Prodi
deficit ceiling. The Group, however, suggests a possible way to combine, in the present juncture, the necessary
commitment to growth and to fiscal discipline. In particular, the Group proposes some measures to try and
reconcile the need to reduce budgetary deficits and to undertake growth-enhancing public expenditures.
ThemembersoftheGrouphavereachedacommondiagnosisontheseriousnessoftheeconomicsituationintheEU
and the risks involved in a continuation of current trends. Based upon this diagnosis, they have formulated common
proposals.WhileallmembersoftheGroupsharethethrustofthefullsetofproposals,individualmembersmayretain
their own particular perspective on some specific aspects of individual proposals.
In closing, I want to emphasise that this Report is the joint product of an extraordinary team, which comprises not
only themembers of theGroupand therapporteurs, but also Ricardo FrancoLevi, theDirector oftheCommission's
Group of Policy Advisors. All of us are grateful to you, Mr President, for the opportunity and the privilege to
work—withyour support and infull independence—onthevery complexand challenging matters thatlieat theheart
of the European economic integration process.
André Sapir
Chairman of the Group
Brussels, July 2003
Contents
List of Figures xi
List of Tables xii
List of Boxes xiii
Composition of the Group xiv
1. Overview 1
1.1. Assessment 2
1.2. Challenges 4
1.3. Recommendations 5
2. A conceptual framework 9
2.1. On policy coherence 10
2.2. A perspective on economic policies in the European Union 13
Part I. Assessment 17
3. Policy implementation 19
3.1. Growth 19
3.2. Macroeconomic stability 22
3.3. Cohesion 23
3.4. The budget 24
4. Economic performance: Growth, stability, and cohesion 27
4.1. Growth 27
4.2. Macroeconomic stability 50
4.3. Cohesion 68
5. Economic trade-offs 84
5.1. Trade-offs among objectives 84
5.2. Growth and the trade-offs 89
6. Economic governance in the EU 92
6.1. The issue 92
6.2. Current patterns of economic governance within the European Union 93
6.3. Economic governance: An evolving agenda 98
6.4. Where are the governance fault lines? 108
6.5. Conclusions 110