Reform, or the Euro will reform for you

Written by Chris Huhne MEP and published in the Evening Standard on Fri 15th Mar 2002

When the EU heads of government meet in Barcelona tomorrow Friday), their ostensible purpose will be to push economic reform. They had better get a move on or the markets will do it for them. The latest Eurostat figures show a dramatic leap in cross-border trade thanks to the Euro. That means more competition, more pressure on profits, and the need for more cost-saving and efficiency. For Euro-area countries, the single market has arrived.

Normally, the share of trade in national output is one of the most slow-moving economic figures. But goods exports and imports with other EU countries in Germany have risen from 27.2 per cent of gdp in 1998 - the last year before the Euro - to 32.2 per cent in 2001. The French share is up from 28 per cent to 32.2 per cent. By contrast, the British trade share with the rest of the EU has fallen back from 23.4 per cent of gdp to 22 per cent.

This extraordinary trade creation should in itself spur growth, perhaps adding a third of a percent to national income for every 1 per centage point rise in trade share. But economic reform can both accelerate the process, and spread its benefits. It will stimulate investment, raise living standards, and ease the fiscal strains of coping with Europe's ageing populations.

The key summit papers show that employment has been growing at a similar rate over the last five years in Europe as in the United States - 1.2 per cent a year versus 1.3 per cent. Moreover, the relative european performance continues to improve. The main reason why overall growth has lagged behind the US is because the growth of EU productivity -output per person - is lower. Just raising EU productivity growth from an average 1.3 per cent to the 2.2 per cent recorded in the USA would revolutionise Europe's business environment.

This is the objective of the so-called 'Lisbon process', begun two years ago at the Lisbon summit. Like trade liberalisation, economic reform tends to hit hard at vested interests, while its benefits are spread widely and therefore less appreciated. So the idea was to benchmark EU and member state progress against best practice, and encourage member states to reform more quickly through a process of comparison, discussion and review by one's peers.

So far, the results are mixed. For the European Round-table of industrialists, the process is moving far too slowly. There is still negligible progress on a community patent (blocked because of insistence on different languages), a single sky, and full energy liberalisation including domestic markets. The European Parliament blocked the takeover directive, which would have established common rules to protect minority investors. And the Council of Ministers has failed to agree on common rules for the management of pension funds.

However, there have also been successes. This week the European Parliament voted for a compromise with the Council of Ministers on the adoption of international accounting standards in the EU by 2005, ending years of haggling. The Parliament also completed its first reading of the directives on share and bond issue prospectuses and on insider dealing, the first two fast-track measures to incorporate the delegated decision-making suggested by Baron Lamfalussy's wise men. There may also be some progress at the summit allowing liberalisation of business markets for energy.

At national level, there has been progress on labour market reform although mainly in the peripheral member states. The overall decline of unemployment from its peak rates in the eighties is now impressive in Spain (down 10.5 per cent of the labour force), Finland (down 7.2 per cent), Ireland (down 12.6 per cent), and the Netherlands (down 7 per cent). All these countries have outperformed Britain (down 6.1 per cent). Six other EU countries now have lower unemployment rates than we do.

Progress is less impressive in the three big Euro-area member states of France, Germany and Italy. Italy may be changing under Silvio Berlusconi, but the appetite of either the French or the German governments for serious reform will not be tested until after their elections in May and September. Given the competitive pressures of the Euro, they will not be able to hide. If they do not reform, their businesses will compete with one hand tied behind their backs.