Commission Vice-President Günter Verheugen: Towards a knowledge-based European economy -- European Investment Bank Forum

October 28, 2005

Helsinki, October 2005

Mr. President,

Mr. Minister,

Ladies and Gentlemen,

Thank you for inviting me to this Forum. I am looking forward to an active exchange of views on the reform efforts needed in view of the challenges which EU countries are facing, and on our new partnership for growth and jobs – the renewed “Lisbon strategy” – which was reshaped and relaunched this year together by the Commission and the European Council, with the support of the European parliament and the social partners.

In the last decades, the EU has achieved remarkable successes in creating a single market, adopting a single currency and consolidating a political union of 25 nations. Notwithstanding these considerable achievements, the EU economic system is increasingly failing to deliver a satisfactory growth performance. Growth rates have remained lower than the projections, the gap with the US in terms of competitiveness and growth is widening, and economies like India and China are growing much faster than the EU. The number of new jobs that have been created is not sufficient to reach the desired employment rates, and there are clouds in the horizon concerning the sustainability of the European Social Model under the pressures of population ageing.

Confronted with challenges like global competition, technological change and changing demographic structures, the European Union needs to show its determination to fulfil the aspirations of its citizens: more growth, more and better jobs.

The globalization challenge

Globalization is speeding up the rate of structural change in the European economies. Rapid technological change – in particular in the area of information and communication technologies (ICT) – is increasing dramatically increasing the speed and volume of flows of information, goods and services, thus breaking down geographical barriers to economic activity and driving the integration of world markets.

At the same time, more and more countries are opening up their economies, implementing market-based reforms, offering greater stability and seizing the opportunities that come from closer integration into the global economy. Most notable are the large emerging market economies such as China and India which are rapidly increasing their share of global economic activity. Currently, the EU25 accounts for just over 20% of global output. China and India combined account for 19%. By 2015, forecasts are that China alone will account for 19%, India 8% while the EU25 will represent 17%.

The combination of technological advance and liberalisation policies is allowing economic activity to become increasingly specialised and dispersed across countries and continents. This increases the ease with which goods and services can be traded between countries, and enhances the emergence of international production networks.

The EU has been rigid in responding to the new challenges, and the EU economy remains vulnerable to shocks related to globalisation. Recent trends suggest that EU’s weaknesses in terms of productivity and competitiveness are related to weak innovation and entrepreneurial performance. Moreover, although the EU’s trade balance in high-tech sectors is improving, Europe’s trade performance depends critically on sectors that are characterized by intermediate skills and upmarket products. High-tech industries account for about 20% of total EU manufacturing exports, while they represent more than 25% of total manufacturing exports in Japan and the US.

While we know that R&D and innovation are the way forward, the EU might be losing its attractiveness relative to the US and other third countries as a location for R&D investment. For example, US outward R&D investment has grown over recent years in all the major regions. However, growth has been fastest outside EU-15, particularly in emerging countries such as China, where US outward R&D investment has increased by 25% per year since the mid-1990s (against 8% per year in EU-15). Europe needs to rise to these challenges.

The demographic challenge

Europe is also confronted with a major demographic challenge. Population growth is negative in many European countries which soon will have to deal with the effects of ageing societies. If current trends continue, in a few decades the active population will equal the number of pensioners in some European countries. The working age population is projected to decline by 40 million or 18% by 2050.

Other things equal, a shrinking labour force translates into a fall of potential growth, decreasing the attractiveness of Europe as a place to invest and run business. European Commission projections estimate that the impact of ageing populations will reduce the potential growth rate of the EU by nearly half by 2040 (from just above 2% to 1 ¼%). And an ageing population has a direct impact on the financing of health care and pensions, putting pressure on the sustainability of the European Social Model. Uncertainties surrounding the capacity to finance social and healthcare policies influence consumer and business confidence and hence the economic outlook.

The vast majority of possible actions to address the sustainability issue – related to the labour market, social protection and taxation are central ingredients of the renewed Lisbon strategy for growth and jobs. Implementing this renewed strategy is urgent and crucial at this juncture.

New partnership for growth and jobs: Lisbon re-launch

In 2000, EU’s leaders endorsed the Lisbon strategy, with the ambitious goal of making the EU the most competitive knowledge based economy in the world by 2010. However, five years later, the EU was still far from its objectives. The mid-term review of the Lisbon strategy earlier this year refocused the strategy on the key actions to create growth and jobs and relaunched it as a new partnership for growth and jobs. At the same time, the responsibilities of the different actors at the EU, national and local levels were defined in a more explicit way to enhance the ownership of the reform process and to pass a partnership with the Member States.

EU level actions are outlined in the Community Lisbon Programme, which the Commission presented in July. The Member States have identified national level challenges and have presented their policy responses in the National Reform Programmes for 2005-2008, or they will do very soon. [on 26 October, we had received 16 programmes (FIN, EE, LT, LV, NL, UK, CZ, HU, SK, IT, EL, MT, ES, AT, SW et PT). 6 more programmes should be received by the end of this week (BE, FR, IE, DK, SI and CY). The remaining ones should come before end of November (LU mid November and Germany and Poland later, due to the recent elections).] A strong involvement of national stakeholders, including parliaments and the social partners, will create a strong partnership for growth and jobs.

This new partnership identifies three strands of priority action to enhance growth and job creation in the EU:

  • Raising our capacity to grow through knowledge, research and innovation.
  • Making Europe a more attractive place to invest and work;
  • Creating more and better jobs; and
First, raising our capacity to grow through knowledge, research and innovation.

Investing in knowledge and research must be the European model for growth, and innovation the source of our future prosperity and I will immediately come back to it.

Secondly, making Europe a more attractive place to invest and work.

To make Europe a more attractive place for investors and for workers we have to ensure that its markets are sufficiently large and open. At the same time, we have to invest in a favourable regulatory environment and high quality infrastructure. This is why this Commission has recently launched important initiatives regarding better regulation. Making Europe a more attractive place to invest also involves continued efforts to complete the internal market and promote competition. Finally, this requires a strong industrial basis, a challenge which the Commission addressed specifically at the beginning of October through a Communication proposing a more integrated approach to industrial policy.

Thirdly, creating more and better jobs.

Raising employment is the most effective way to generate growth and promote social inclusion. The challenges posed by an ageing population make the modernisation of social protection systems and the promotion of a life cycle approach to work all the more important. To enhance access to employment for all ages and raise productivity the EU needs higher and more effective investment in human capital and lifelong learning.

Let me now concentrate on innovation challenges for the EU.

Innovation dynamics in Europe are not sufficient

The EU invests about a third less in research than the US, largely due to less private sector research. The 2002 Barcelona European Council set the goal of raising overall research investment in the EU from 1.9% of GDP to around 3% by 2010. Nearly all Member States have responded to this objective and set national targets. However, instead of rising, the level of EU research is currently more or less stagnant.

More research is a necessary factor for the creation of new jobs and more competitiveness in Europe, but it is not sufficient. To turn new ideas into new products and services, innovative spirit matters. The innovation dynamics in Europe are not strong enough to make substantial progress. The innovation gap between the EU und the US has not narrowed in recent years.

The innovation challenge in Europe is twofold: on the one hand, in most Member States that are lagging behind in terms of innovation performance, the catch-up progress is too slow. In some cases, growth rates are quite impressive but it takes much more time to create strong innovation systems that will ensure competitiveness over time. On the other hand, also the European innovation leaders, such as Finland, face an innovation challenge, namely how to better convert good innovation performance into higher GDP and growth.

The Finnish government has taken many good steps to improve the efficiency of its innovation system. In particular, the Finnish incubator system of promoting young technology start-ups is a role model for Europe. What can be learned from Finland is that innovation is not an art but a craft that can be developed by strengthening the links between science, industry and finance. Finnish cluster policies, such as those in Helsinki and Oulu, can serve as best practice examples for other European policy-makers.

What role can public policy play in making Europe as innovative as it could be?

After all, it is enterprises that innovate, not policy-makers. But the right policy can create conditions to stimulate innovation and research, in which all firms, however big or small, can make the most of their entrepreneurial flair and know-how.

Good policy enables enterprises to find the technology, knowledge and finance they need. It encourages business efforts to identify and develop new market opportunities. And in particular, it must foster links between science and industry and facilitate technology transfer.

However, there is more to innovation than technology. We need to place a stronger emphasis on non-technological innovation, such as design, business process management and marketing. And above all, we must better cultivate entrepreneurship in Europe. Small is beautiful. At the same time, more emphasis has to be placed on the internationalisation and growth of innovative companies if more jobs are to be created in Europe.

Research and innovation have been confirmed as key challenges in the new Lisbon Partnership for Growth and Jobs

Research and innovation have been identified for many Member States as key challenges, which they are addressing in their National Reform Programmes. More and better investments in research and innovation are needed. The Structural Funds should be also be used to strengthen immaterial investments and to build strong innovation systems, facilitating technology transfer and entrepreneurship.

To strengthen the political commitment for more research and innovation, the Commission has recently adopted a Communication that proposes a common approach for research and innovation. Only if the Member States and the Commission join their efforts can substantial improvements be achieved.

Most of the key competences relating to innovation policy are exercised by the Member States, often at regional or local level, but the Commission is working to complement and support their efforts by putting innovation and research at the heart of EU and national policies, at the heart of EU funding and at the centre of business activities. The aims include:

  • providing a better understanding of the drivers of innovation;
  • stimulating policy learning;
  • facilitating networking and technology transfer;
  • improving co-ordination and co-operation of national policies; and
  • triggering public and private investment in innovation.
The Commission is actively reaching out to innovation communities to learn how to fine-tune policy – for instance to tailor innovation to sectoral needs - and looking closely at the wider policy context to ensure that innovation strategies are as effective as possible.

Many instruments are already in place. These are the Framework Programme for Research and Technological Development, the European Structural Funds, instruments to facilitate access to finance for SMEs, the Innovation Relay Centres and Innovating Regions in Europe network.

Commission’s proposal for the coming 7th Framework Programme for R&D includes large-scale public private partnerships in fields of major interest for European competitiveness - in particular through Joint European Technology Initiatives which are currently envisaged in the fields of innovative medicine, nanoelectronics, embedded systems, aeronautics and air transport, hydrogen and fuel cells, and global monitoring for environment and security. They would allow the pooling of resources on a scale that reaches the critical mass and would assist in shifting the EU’s industrial specialisation further towards high technology intensive production.

The new Competitiveness and Innovation Programme will, as of 2007, add new financial instruments to facilitate the access of innovative SMEs to risk and equity capital. These instruments will be implemented in cooperation with the EIF and will go hand in hand with the EIB’s Innovation 2010 Initiative and the new risk sharing facility for Community research projects under the next Research Framework Programme.

Member States must give high priority to research and innovation in their national reform programmes. But this may not be enough. For most Member States, the innovation challenges cannot be shouldered alone. National markets are too small and international cooperation is needed to reach the critical mass, not only for enterprises but also for policies to have a real impact.

Transnational synergy must be fully exploited. The proposed common approach offers new ways to learn from each other – in particular from the best – and to prepare for joint research and innovation actions among several Member States, while taking into account their specific needs and interests.

The Community will only take action in areas where it can make a real difference. But to make such a difference, the funding must match the scale of the problem. And the problems to be addressed at European level are of a significant size.

To make a substantial difference, the Member States and the Commission must pull in the same direction.

Thank you for your attention.

Item source: SPEECH/05/647 Date: /10/2005 Previous Item Back to Titles Print Item

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