Ahead of the European Council Spring Meeting on March 22 and 23, the Allianz Group and Dresdner Bank economists today presented their study "Lisbon II – Opportunities for Europe". In the light of recent economic forecasts their conclusion comes as a surprise: "The prospects for the second half-time of the Lisbon process look better than for the first," Michael Heise, chief economist of the Allianz Group and Dresdner Bank, said.

National governments are now more open to reform, and the European Commission also intends focusing its efforts on growth and employment. "The Commission has recognized that failure to implement the Lisbon strategy would put Europe’s workability at risk," Heise added.

In the analysts’ opinion, more transparency with regard to the current situation is pivotal to the success of the strategy. To measure progress on achievement of the Lisbon objectives over time, the economists have therefore developed an indicator of their own. This takes into account five macroeconomic variables that, first, permit meaningful assessment of the momentum of growth and employment and, second, are available on at least a quarterly basis, so as to be able to capture the current status quo at any given time.

The result: The indicator has fallen continuously since 2002. A reading of at least 1 shows that the set target has been met; at a low of 0.61 end-2003, the indicator highlights a clear gap. The most recent figures from the third quarter of 2004 show a reading of 0.64.

"The EU’s poor performance in terms of the targets it has set itself is due mainly to the weak economic growth and labor productivity trend," Heise stressed.

One reason why the Union lags the United States is that investment activity has been slow to take off, with comparatively low levels of capital expenditure on IT and communications technology. "This sends out a clear signal to economic policymakers to improve the conditions for investment and, above all, for technological progress in Europe," Heise continued.

He added that low productivity was acceptable only if low-skilled unemployment could be reduced appreciably through labor market reforms. "The ideal way for the European economy would be to step up both employment and the productivity of labor input," Heise concluded.

He concurs with the Kok report in placing most of the responsibility with national governments. A promising start was made in some countries, even on painful reform agendas, he notes; but some of these stalled in the face of critical reaction from the public.

Turning to the Stability and Growth Pact, the Allianz and Dresdner Bank study concludes that watering down the pact would be the wrong way to step up growth in Europe. "The debt situation is so precarious at present that consolidation must take priority," Heise insisted.

Changes to the pact should be kept to a minimum, should not throw consolidation into doubt and should be economically appropriate beyond the present moment alone. Fine-tuning of this kind would include improving the pact’s preventive function, making a greater distinction in the existing level of public debt for the purposes of deficit tolerance, and possibly formulating a less strict definition of recession.

"On the whole, the stability pact is not too restrictive. Even the current three percent deficit-to-GDP ratio is far more than Europe can afford, given low trend growth and mounting debt in recent years," Heise cautioned.

Fiscal leeway was already severely restricted, he said. It was imperative that no further time be lost in increasing the scope for action again through budget consolidation, particularly in view of the demographic trends already foreseeable in many European countries.

The euro could emerge as a growth catalyst. The study by Allianz and Dresdner Bank cites progressive integration of the capital and money markets, the growing part played by the euro in international trade and its increasing attraction as an international investment and financing currency as some of the factors strengthening economic growth.

"In many areas, the euro has encouraged the pace of economic integration," Heise said. Agreement on a draft European Constitution shows that political integration is also making headway, he believes.

The Allianz and Dresdner Bank economists conclude that in terms of both realization of the Lisbon strategy and implementation of the Stability and Growth Pact the chances for the second half of the course are good. The political will to reform has risen in many countries, and within a gratifyingly short space of time restructuring and cost cutting has made many companies fit for competition again.

Heise came out clearly in favor of "sporting" competition between countries in the form of national action programs. "We should offer people greater motivation to boost their countries’ economic performance and take Europe ahead in the process. Our Lisbon Indicator could act as a benchmark, showing the EU countries where they stand comparatively and how they have improved."

In this context, Heise pointed to the European Commission’s role as a critical attendant of national economic policy. He said it was vital for the Commission to follow up its words with actions and
- gear its own policy to growth and employment,
- follow actively through on integration and completion of the internal market, notably in respect of financial market integration and the liberalization of services, and
- specifically restructure the EU budget as a control instrument for the priorities of the Lisbon strategy instead of simply raising it.

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