The European economy: 2004 Review

This Communication reviews the EU economy in 2004, which saw the accession of ten new Member States. It forms part of the mid-term review of the Lisbon Strategy.

ACT

The EU Economy 2004 Review - Summary and main conclusions [COM(2004) 723 final - Not published in the Official Journal].

SUMMARY

The communication reviews economic progress in the European Union in 2004. It influences the mid-term review of the Lisbon Strategy by analysing first macroeconomic developments in the euro area and then four major topics: convergence, employment, productivity and the environment.

Belated recovery of the economy and its resilience to economic shocks

The Commission notes that economic prospects brightened in 2004 against the background of a favourable international environment. Growth was driven mainly by exports, while domestic demand in the euro area gathered pace. However, the two main components of domestic demand, investment and private consumption, remained too unsteady to speak of a secure recovery.

In spite of the improvement in economic prospects, the rebound of the EU economy is belated and sluggish compared with the other major economies such as the United States. The Commission wonders about the euro area's economic resilience. Is it more sensitive than other regions to economic shocks? Are its economic structures less favourable to economic resurgence?

Analysis shows that, although adverse economic events have impacted on economic confidence indicators, their effects on industrial production were short-lived and not particularly deep. Rather, structural rigidities have been a more significant factor in the late cyclical adjustment in the euro area. These rigidities impact mainly on investment activity. Thus, the speed of the return to potential output will be determined by how much these rigidities continue to weigh on investment once the cyclical impact of a lack of demand and financial constraints holding back investment growth have worn off.

The slow price adjustments in the euro area stem from wage rigidities and imperfect competition.

Making the Union competitive by 2010

In the communication the Commission focuses on the four areas that hold the key to making the Union competitive by 2010. These are:

Convergence: On 1 May 2004 ten new Member States joined the Union. The Commission examines the conditions that will enhance their capacity to catch up economically and in terms of convergence since they start from income levels significantly below the EU average. Admittedly, the new Member States have already embarked on a major economic convergence process, but this has been entirely driven by investment and productivity. The Commission takes the view that the fairly low employment rates in those countries will have to be increased and domestic savings progressively mobilised in order to complement foreign direct investment. Macroeconomic stability will have to be further entrenched and public deficits reduced. To this end, domestic reforms must continue. The Commission considers that the EU's Structural Funds can help to foster convergence provided that there is more targeted geographical and thematic concentration.

Employment: For the Commission it is difficult to see how the employment objectives of the Lisbon Strategy, namely the increase in employment rates envisaged by 2010, can be achieved. This is partly because of the economic slowdown but also because progress on structural reforms has been slow and insufficient. The Commission does though note progress in some areas, such as improving female employment. It takes the view that the strategy is clear but reminds Member States that much remains to be done as regards reforms: wage differentiation, labour market regulations, improvement in education and training, etc. These reforms must be country-specific, taking into account the mix of labour market and social protection regulations.

Productivity: The EU economy must not only achieve a higher labour input but also enhance productivity growth. The productivity slowdown is structural, reflecting low productivity growth in mid-tech industries, the relatively small size of the EU's information and communication technologies (ICT) production industry, etc. In addition, the higher returns which can be earned outside Europe on the back of globalisation and increased international capital mobility may exert pressure on capital productivity within the EU. These developments could be part of the explanation as to why labour productivity growth has declined. The Commission notes that total factor productivity is determined by the competences of workers and the technological level of capital equipment. It would like to see the knowledge-based economy better entrenched in Europe and the gap with the United States closed. The US economy has shifted towards high-productivity growth industries such as the ICT-producing and ICT-using sectors. Thanks to its superior innovation system and the larger amount of resources allocated to research, the United States is in a better position to cope with the globalisation-induced competitive and technological pressures evident since the mid-1980s. Reforms which would allow new and innovative firms to develop and the process of internal integration to be pursued are particularly needed.

Environment: Protection of the environment and economic growth are often seen as competing aims, but the demand for environmental protection has risen along with economic growth. Environmental policy aims to place these resources under a common-property regime by providing for restrictions on activity which is hazardous or damaging to the environment. Public action, market forces and the growth of the service sector have triggered a reduction in the pollution intensity of economic activity in the EU. The Commission notes that the increase in environmental protection has not taken place because pollution has been exported through large-scale relocation. Environmental policies cause an adjustment of economic structures, for example by adapting the property-rights regimes for natural resources to take account of their increased scarcity and new scientific insights. They must also take account of the health risks to which the public is exposed.

See also

For further information, please consult the following websites:

• The Lisbon Strategy;
• Economic policy: the Economic and Financial Affairs Directorate-General (DG) of the European Commission;
• Employment policy: - the Employment, Social Affairs and Equal Opportunities DG of the European Commission
• Enterprise policy: the Enterprise and Industry of the European Commission DG of the European Commission
• Environmental policy: European Commission - DG for Environment;
• Global governance; external relations and external trade, globalisation.

Last updated: 06.10.2005