COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT - Sustaining the commitments, increasing the pace

1. Introduction

The present Report reviews progress made by Member States in the period following the Lisbon European Council to date concerning the implementation of the specific provisions of the Lisbon strategy in the field of entrepreneurship. The Report, which draws upon the evidence gathered by the Commission from the experience of the Member States, is prepared for the attention of the Council and European Parliament. The sources of the evidence are a series of reports of the Commission services aimed at monitoring this progress.

The evidence suggests that, while progress has undeniably been made in the eighteen months since the Lisbon European Council, the pace of progress has been slower than might have been hoped. Against the backdrop of the deteriorating economic situation, there is also the risk that Member States will give way to short-term considerations and turn their backs on their medium and long term objectives established at Lisbon. This means that they may postpone the commitments made there or delay the implementation of the structural reforms. Those commitments and reforms are central to sustainable economic growth and competitiveness. They hold the key to the rise in the standards of living and the creation of jobs in the EU.

2. Lisbon and beyond

In spring 2000 the European Union was enjoying the best economic situation and prospects for a decade. The introduction of the euro, supported by strong international economic growth and by good financial and fiscal prospects across the Member States, had created a climate of stability and optimism. This optimism was particularly reflected in rising confidence among consumers and businesses.

In this favourable macroeconomic and international environment the EU was projected to see a continuing increase in employment and in its standards of living. At the same time, however, it became apparent that in order to ensure that a durable increase in employment and a matching fall in unemployment, as well as the modernisation of the EU economy, was achieved fundamental structural changes were also necessary. Clearly, a good economic environment is best for the implementation of structural changes. The opportunity was not lost. The Lisbon European Council set out a strategy for modernisation and reform in which the dynamism of an entrepreneurial Europe had a central position.

Since the second half of 2001, the economic outlook has looked increasingly uncertain reflecting, amongst other things, the US slowdown and a sharp decrease in global trade. Consumer and business confidence had already started to deteriorate and the attacks on the US on 11 September and subsequent events have only knocked that confidence further. Unemployment across the Union had stopped falling and in some Member States has started to rise.

On current data, it seems likely that a recovery may be underway by the second half of next year [1], but that is highly dependent on the evolution of the economic and political situation and the situation is being kept under close review pending more definitive data. It is therefore difficult to tell when good economic growth will resume the path projected at the Lisbon Council. However, the goals and reforms established in Lisbon are not tied to a particular stage in the economic cycle; those reforms make sense when the economy is doing well and become even more important in the face of the current downturn.

[1] See Report from the Commission, Overview of EU action in response to the events of the 11 September 2001 and assessment of their likely economic impact, COM(2001) 611 final, 17.10.2001.

The deterioration in economic conditions raises the risk that the Lisbon strategy itself might be diluted and the commitment to the Lisbon goals weakened. However, restoring and supporting confidence and entrepreneurial dynamism is a fundamental pre-condition to securing good economic prospects.

This requires a renewed resolve to achieve the Lisbon goals. This was recognised in the Declaration of Heads of State and Government and President Prodi on the economic situation made at the meeting in Gent [2]. However, political declarations must be backed up by action.

[2] "Review of the Economic Situation", Declaration of the Heads of State and Government of the European Union and the President of the European Commission, Council of the European union, SN 4298/2/01 REV. 2, 19.10.2001.

Progress in raising standards of living, creating new jobs and reducing the rate of unemployment in the EU as a whole has continued to be modest when compared with progress made in other leading nations. Relative to the US, GDP per capita in the EU has been declining throughout the past decade. From a peak of around 70 % in 1982, and again in 1991-92 [3], the ratio of EU GDP per capita relative to the US fell to around 65 % in 2001, the lowest for thirty years. The need to reverse this under-performance and by strong and sustainable economic growth is more urgent than ever.

[3] For a discussion of these issues see forthcoming Commission Staff Working Paper "Competitiveness Report 2001".

The Lisbon requirements

The conclusions of the Lisbon European Council balanced the need to make the transition towards a competitive, dynamic and knowledge-based economy and the need to modernise the European social model. The conclusions articulated the message that these two objectives need not be incompatible but they require a more coherent and systematic approach than pursued in the past. To the Lisbon agenda's economic and social chapter, and following the Göteborg European Council, a sustainable development dimension has now been added.

The modernisation of enterprise policy is central to the goal of becoming the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion within the present decade.

Steps to fulfil all the Lisbon requests in the area of enterprise policy had been taken by the end of the year 2000. In particular,

- Member States and the Commission launched a benchmarking exercise on important factors affecting the business conditions, such as the length of time and the costs involved in setting up a company. Work on structural indicators and on business demographics is already under way. Moreover, the 2001 Innovation Scoreboard was released in September 2001 [4].

[4] See Commission Staff Working Paper "2001 Innovation Scoreboard", SEC(2001) 1414, 14.9.2001.

- The Multiannual Programme for Enterprise and Entrepreneurship, in particular SMEs (2001-2005) was adopted.

- The Best Procedure for the identification and exchange of best practices across the Member States was established.

- The Feira European Council endorsed the European Charter for Small Enterprises.

3. The Commission's instruments in enterprise policy

A series of instruments enable the Commission to follow progress in enterprise policy.

- The Competitiveness Report [5] is the vehicle to monitor and analyse medium- and long-term progress in the factors that determine performance in productivity and in standards of living in the EU.

[5] See forthcoming Commission Staff Working Paper "Competitiveness Report 2001".

- The Scoreboards are descriptive tools, helping to highlight key issues and to focus attention on short-term progress. They provide recent information on a set of indicators central to enterprise policy and performance. These cover access to finance, the regulatory and administrative environment, the openness and the functioning of markets, innovation and knowledge diffusion, entrepreneurship and access to human resources and new technologies.

- The Commission also undertakes Benchmarking exercises on aspects of importance to enterprise policy. The latest Enterprise Policy Benchmarking project was completed in the autumn 2001 and others are in hand. These exercises have a normative character and point the Member States towards improvements in their performance.

- The Best Procedure Report is a common annual exercise by Member States and the Commission through which best practices are identified and their exchange and implementation monitored.

- The annual Report on the Implementation of the European Charter for Small Enterprises assesses progress by Member States and the Commission in ten areas of key importance for the promotion of entrepreneurship and competitiveness.

- The Observatory of European SMEs, which reviews and studies developments of crucial importance for SMEs in Europe, was re-structured in autumn 2000. Results of the latest Observatory have begun to arrive.

- In response to the request of the Stockholm European Council of March 2001, the Commission is working to implement quantitative targets in enterprise policy, with the help of Member States' experts.

4. Progress achieved in the field of enterprise policy

From the start of the Lisbon process, it has been clear that the initiatives would only produce their full impact over a medium-term horizon. After only 18 months, it may, therefore, be too early to detect signs that the initiatives are bearing fruit.

Nevertheless, considerable progress in the implementation of these initiatives was made in the course of 2001 in the area of enterprise policy. This area was identified in Lisbon as a crucial contributor to achieving the strategy's goals.

Entrepreneurship

While it will take some time to change general attitudes towards entrepreneurship, those of national administrations are already showing signs of change [6]. All Member States are engaged in efforts to promote entrepreneurship, both within the education system - through courses, business games and visits to companies - and among other groups of potential entrepreneurs. In the Netherlands, a consultative commission on entrepreneurship and education has been established, with representatives from the business community, various education sectors and social organisations. France and the United Kingdom have set up a joint club to promote inter-university co-operation in entrepreneurship, while in Spain the government offers grants for university students to follow a six-month program of practical training in a business.

[6] See forthcoming Commission Staff Working Paper "Best Procedure Report".

In addition to raising awareness, several Member States have turned their attention to the issues of risk-taking and business failure, and are examining possible changes to their insolvency laws to assist entrepreneurs who have failed "honestly" to try again. A Seminar on Business Failure in May 2001, organised jointly by the Dutch government and the European Commission, concluded that bankrupt entrepreneurs are confronted with legal and financial barriers and stigma, which work as a deterrent to a fresh start. To overcome this, there needs to be a clear and predictable framework for creditors and debtors [7], awareness of measures for prevention of failure and greater provision for informal settlements between creditors and debtors.

[7] Regarding cross-border aspects, this issue is also addressed by the Council Regulation (EC) 1346/2000 of 29 May 2000 on insolvency proceedings, OJ L 160 of 30.6.2000, p. 1.

Progress is also supported by the European Employment Strategy, which includes a pillar on Entrepreneurship. It contributes through an open method of co-ordination to a gradual convergence of employment related policies. Since 1997 EU wide guidelines, National Action Plans, recommendations and peer reviews have been pursued and contribute to coherent employment and enterprise policies at national level. The annual Joint Employment Report presents the progress made by Member States on all employment related matters, including entrepreneurship, as a response to the Guidelines agreed annually at EU level. The 2001 Report [8] notes Member States' emphasis on simplifying the regulatory and administrative environment, observes the slow but steady progress reducing the tax burden on labour and reports on all matters which concern employment as well as enterprise policy.

[8] Draft Joint Employment Report 2001, COM(2001) 438, 12.9.2001.

Competitiveness, innovation and research and technological development

The innovation scoreboards [9] as well as the exercise on benchmarking national research and development policies [10] suggest that all Member States saw an improvement in their scientific and innovation performance over the second half of the 1990s. However, experiences have been very diverse. While some countries, such as Ireland, Spain and Portugal, are clearly catching up, those who had already been leading, such as Finland and Denmark, continue to register further improvements in innovation performance. In other Member States, research and technological development and innovation are clearly losing momentum. Although the situation in the four largest EU economies (France, Germany, UK and Italy) is improving, it is doing so at rates below the EU average.

[9] Commission Staff Working Paper "2001, Innovation Scoreboard", SEC(2001) 1414, 14.9.2001.

[10] Commission Staff Working Paper "Progress Report on Benchmarking of National Research Policies", SEC(2001)°1002, 20.6.2001 and the indicators reported in European Commission (2001): Towards a European Research Area, Key Figures 2001, DG Research, Special Edition: Indicators for Benchmarking of National Research Policies, Brussels.

The 2001 Report on Competitiveness [11] draws attention to the disappointing innovation performance in the EU in general. The theme of this Report is the role of ICT and the role of innovation in productivity growth. Taking as a starting point the deterioration in relative innovation in the EU, compared to the US, the Report suggests that poor ICT and innovation performance could be inhibiting the realisation of the EU's economic potential. In contrast, the diffusion of ICT throughout the US economy has led to significant changes in the organisation of firms and to new methods of work that have resulted in an increase in productivity growth.

[11] See forthcoming Commission Staff Working Paper "Competitiveness Report 2001".

The 2001 Report on Competitiveness found that productivity growth has been most marked in those EU nations and in those industries where innovation is important. However, the 2001 Innovation Scoreboard as well as the exercise on benchmarking of national research policies, suggest that the EU trails significantly in spending by the private sector on research and development and rapid spending increases in the US and Japan since 1994 have widened the gap alarmingly. US business expenditure on research and development in the late 1990s corresponded to 1,98 % of GDP; in Japan, this was 2,18 % of GDP while in the EU this was 1,19 % of GDP. Although in some EU nations [12] business spending on research and development has been higher than the US and Japan, the overall EU performance is worrying. The Innovation Scoreboard and the benchmarking exercise also confirm the Commission's view that not only firms, but public sector also, need to increase R&D spending. Further, Member States should act to facilitate the use of patents, to invest more in education and training and to strengthen industry-science relations.

[12] See, in particular, European Commission (2001): Towards a European Research Area, Key Figures 2001, Theme 2, DG Research, Special Edition: Indicators for Benchmarking of National Research Policies, Brussels.

The experience of those EU Member States that have performed very well in productivity growth, research and technological development and innovation, and even better in some cases than the US is consistent with these ideas. Despite the current slump in ICT valuations, economic activities in all countries are being reorganised, and will continue to do so, to take advantage of ICT opportunities and to improve competitiveness. Policies in the Member States that support innovation research and technological development and facilitate their diffusion are necessary in order to reap the full benefits of ICT and to increase productivity growth.

An area where innovation and research and development is crucial, and where potential benefits could be very significant, is biotechnology. The Competitiveness Report reviews Europe's performance and suggests that fundamental reforms are needed so that European biotechnology becomes more entrepreneurial and ultimately improves its international competitiveness. This contribution is part of the Commission's reflection on the subject. In the environmental field, the Commission is to present a paper to the Barcelona Council describing how environmental technology can contribute to growth and employment, and recommending how barriers to technical innovation can be overcome.

Regulatory concerns and administrative burdens

The regulatory and administrative environment can be an important obstacle to successful entrepreneurship. In recent years, there has been a growing awareness of the importance of improving the regulatory environment in the EU.

A high quality regulatory environment is a key factor for supporting economic growth, competitiveness and innovation. Regulatory quality, which relates to issues such as efficiency, effectiveness and transparency of regulations and to related government formalities, has been high on the EU agenda since the 1980s. That is why it has featured on the agenda of a succession of European Councils, since the request at Lisbon for the Commission, the Council and Member States to "set out by 2001 a strategy for further co-ordinated action to simplify the regulatory environment". The Commission presented a first interim report [13] to the Stockholm Summit. At the Gothenburg Summit (as a part of the proposed strategy for sustainable development), the Commission stated that the action plan would include "mechanisms to ensure that all major proposals include a sustainability impact assessment covering their potential economic, social and environmental consequences". The ideas to be presented at the Laeken European Council will also take account of the recommendations of the White Paper on European Governance, and the discussions of the Mandelkern Group [14].

[13] This Report outlined some key principles for a regulatory strategy, addressing the whole life-cycle of a Community act - from its preparation (thorough impact analysis and consultation, choice of right instrument) to its application (ensuring rapid transposition and effective application) and, if needed, any changes (e.g. ex-post evaluation and simplification and codification).

[14] High Level Consultative Group with representatives from Member States and the Commission.

Several Member States have launched initiatives to simplify and reduce the volume of legislation through such approaches as systematic reviews or sunset clauses [15]. In its own area, the Commission has continued work on developing a business impact assessment framework to evaluate legislation under its responsibility in important areas. An impact assessment of regulatory proposals on chemicals, for example, is in preparation. Further, a pilot project [16] which includes wider external consultations for legislative proposals on detergents, electromagnetic compatibility, electric and electronic equipment and pre-packing, will produce first Business Impact Assessment results in early 2002. This will contribute to the objective of establishing a general sustainability impact assessment for important proposals, looking at their economic, social and environmental impact as part of the Commission's sustainable development strategy.

[15] See forthcoming Commission Staff Working Paper "Best Procedure Report".

[16] http://europa.eu.int/comm/enterprise/regulation/bia/ppbia_en.htm.

Administrative complexity is perceived as an obstacle to the creation of new enterprises in the EU, and more so than in the US [17]. In recent years, several Member States have taken measures towards a streamlining of the administrative procedures related to the setting up of new businesses. Data from a forthcoming study [18] confirm a trend towards shorter procedures, especially in Member States where the procedures had been the longest. Some improvements, for example in Ireland, have been dramatic. Yet, there remains important scope for progress, by convergence on best practice. The spread of time taken to register a new private limited company in the EU is still from less than one week in the best to close to four months, depending on the Member State.

[17] See "Entrepreneurial Attitudes in Europe and the US Eurobarometer Survey No 83: Entrepreneurship", survey conducted on behalf of the European Commission, Directorate-General Enterprise, by EOS Gallup Europe, 2000.

[18] The forthcoming study by CSES for the European Commission is part of the Best Procedure project on Benchmarking the Administration of Start-Ups.

New evidence about the state of SMEs in the EU [19] complements evidence about entrepreneurial attitudes derived from surveys [20]. This shows that around a quarter of SMEs in the EU encounter difficulties in surviving. The worst problems seem to arise in Greece and in Portugal. However, in several Member States - Belgium, Ireland and the Netherlands and, to a lesser extent, Austria, Finland, Sweden and the United Kingdom - SMEs emerge as much more confident, focusing their activities on improving quality, innovation and profitability. While most SMEs reported no constraints on business performance over the past two years, several reported difficulties with administrative regulations, while other pointed to problems of access to finance.

[19] The evidence is based on data from the forthcoming "Observatory of European SMEs".

[20] "Entrepreneurial Attitudes in Europe and the US Eurobarometer Survey No 83: Entrepreneurship", survey conducted on behalf of the European Commission, Directorate-General Enterprise, by EOS Gallup Europe, 2000.

At the same time, Member States continue to introduce regulations at a worrying pace. This is made clear by the notifications of draft technical regulations by the Member States [21]. The number of notifications has grown from 591 in 1999 to 751 in 2000. The figures for the first half of 2001 indicate that the numbers may be slightly lower for the current year, but nevertheless remaining high. While the Commission's and the Member States' reactions to these notified regulations indicates that the overall quality of legislation, in the sense of not creating barriers to the free movement of goods, has improved and that its compatibility with the European regulatory framework has been better ensured, there is still a trend towards a growing number of new technical regulations (notably in the area of telecommunications and food safety). It is difficult to tell whether this reflects a response to increasing demands for greater regulation on the part of citizens or difficulties that Member State governments are encountering in addressing increasingly complex issues, or both.

[21] Directive 98/34/EC of 22 June 1998, as amended by Directive 98/48/EC of 20 July 1998, laying down a procedure for the provision of information in the field of technical standards and regulations, and of rules on Information Society Services, OJ L 204, 21.7.1998, p. 37, and OJ L 217, 5.8.1998, p. 18. It obliges Member States to notify technical regulations concerning products and Information Society services to the Commission in draft form. While the aim is to avoid creation of technical barriers, notifications also provide a barometer of the propensity to regulate.

Demands from European citizens for legislation aimed at improving the quality of life are clearly important. This is in part a natural consequence of rising incomes. But it may also reflect a decline in confidence in goods and services provided by unregulated markets, to which some high-profile cases have undoubtedly contributed. In any case, if regulation is needed to ensure a high level of consumer protection, it is also important for producers, too, who depends on confidence for an orderly market. Consumer protection as an important condition for dynamic, smooth functioning markets, has been addressed in a Green Paper on consumer protection [22], which aims at identifying the best possible strategy at the European level, in order to boost consumer confidence and achieve a fully functioning internal market.

[22] Green Paper on European Union Consumer Protection (COM(2001) 531 final, 2.10.2001).

Balancing these demands against the need for simplification and less regulation is a challenge for all Member States and the Commission. In the end, the success of the Commission's actions to simplify and improve the regulatory environment will depend on the involvement and active commitment of all the players throughout the "legislative chain". This means not only the Community institutions and the Member States, but also other stakeholders. Thus, co-ordinated action is needed.

E-business and e-government

Considerable progress has been made in placing businesses and public authorities online [23]. In particular, throughout the EU, efforts to bring governments online are also committed and progress in this area is monitored through a benchmarking project in the framework of the e-Europe initiative (e-Europe 2002 Action Plan). In Greece, the government has developed an online access programme to link ministries and prefectures with remote areas, as a way of overcoming communication problems caused by these areas' geographical isolation. More and more, one-stop shops and portals facilitate access to information for entrepreneurs and the general public while the exchange of information between administrations is improving and accelerating procedures. The development of fully interactive systems that allow businesses to complete procedures online is a priority. Important progress in this respect has already been registered, notably in Ireland.

[23] See forthcoming Commission Staff Working Paper "Best Procedure Report".

Enterprises are increasingly perceiving e-business as a strategic tool to achieve efficiency, through a better integration with suppliers and to better configure business processes and relationships, both within and outside the organisation [24]. E-business also provides an opportunity to support SME growth through the provision of key growth drivers: information, contacts and cost savings. In Denmark, Finland and the UK recent estimates show that already over 90 % of enterprises use a PC, about 70 % have web access, over 50 % have their own web page and over 30 % are making purchases online. More and more European enterprises are implementing e-business solutions with a corresponding impact on productivity, cost saving and effectiveness. There are currently 2 000 e-marketplaces world-wide [25], 650 of which are in Europe. These numbers will increase dramatically to 2 700 estimated to be existence in Europe by the end of 2002.

[24] See forthcoming document "The impact of the e-economy on European enterprises: Economic analysis and enterprise policy implications".

[25] The term e-marketplace refers to an Internet-based broker of goods and services in a market where a multitude of buyers and sellers participate. An e-marketplace is characterised by open rules of participation - those who meet the criteria are free to participate - and no physical possession by the e-market of the objects of exchange - the e-marketplace simply facilitates an exchange by matching the demand and supply sides of the market. E-marketplaces are used predominantly in B2B commerce.

Business angels and start-ups of enterprises

Prospective small businesses encounter a variety of logistical and financing problems in getting going. Business angels (informal private investors) can play a crucial role in helping them. While business angels have been active in Europe, it is only in recent years that networks of business angels (BANs) have been formed. Evidence from a benchmarking project [26] shows that between 1999 and 2001 there has been a 25 % increase in the number of BANs across the EU, to 130. The largest number of networks is the UK (53), followed by Germany (29) and France (25). In the remaining Member States the number of BANs is generally less than 10 except in Greece and Portugal where none is present.

[26] Best Procedure project "Business Angels".

The importance of BANs in supporting and sustaining growth of SMEs lies in their contribution to resolving financial, managerial and information problems. Lack of finance is one of the most common barriers to SME growth. Lack of managerial and logistic aptitudes have also contributed to the early death of enterprises. However, several important barriers that inhibit the further development of BANs remain. This includes poor quality of business plans, unfavourable tax treatment, an unfavourable administrative and regulatory environment or problems matching angels' objectives with those of entrepreneurs. Providing an environment conducive to the formation of BANs or similar sources of guidance for small firms and entrepreneurs is one of the key challenges to the Member States. Once again, although significant progress has been registered, there is scope for much, much more.

5. The challenge ahead

This review of progress in the area of enterprise policy shows that, despite important achievements, the pace of implementing the Lisbon commitments on the part of the Member States is too slow. Important steps have been missed or have been advanced too timidly. The evidence from the 2001 Competitiveness Report and the Scoreboards indicates that those Member States that have seen an acceleration in productivity growth in recent years are also those that rank high in innovation and research and development activities. These, of course, should provide lessons about best practices and insights into the process of modernisation and its benefits.

Whether the slow pace of realising the Lisbon programme is due to a lack of commitment by Member States to deliver the progress agreed only eighteen months after the Lisbon European Council, or whether it is because progress has been slow to get going, is hard to say. Yet, the economic conjuncture is such that there is a risk that the Lisbon priorities could lose ground as other short-term economic and political considerations and, in particular, the likely halt in employment growth and a possible increase in unemployment, begin to dominate the policy agenda. The challenge ahead is to maintain the medium- and long-term objectives for the Union and to back up the Lisbon commitments with action and decisions. This means giving concrete shape to the renewed commitment of Heads of State and Government set out in the declaration of the Gent European Council.

It is important to ensure that the downturn does not become an obstacle to making progress in the Lisbon programme. Implementation of such structural reform cannot be allowed to become dependent on the business cycle. Reforms intended to support entrepreneurial dynamism are central to restoring healthy economic and productivity growth in the EU and ensuring that over the medium term growth in the standards of living is sustained. In view of the fact that the enterprise policy conditions in the Member States were not, in the first place, ideal, the need for improvements has now become particularly urgent.

For these changes to be sustainable, social, health and environmental objectives, and simplification and structural reform objectives set at Lisbon must be pursued in a mutually compatible and reinforcing manner. The Lisbon reform objectives themselves contribute to the economic growth and employment which, in turn, provide the means to meet health and environmental concerns and advance social cohesion. The latter will, of course, improve the environment where firms operate and will contribute to economic growth. At the same time the public and consumers must feel confident that companies within a reformed economy are not going to undermine health and the environment and adhere to good standards of fairness in commercial transactions. This is a pre-condition for vibrant markets. Lisbon, by balancing these objectives, pointed to the conditions in which they could all be achieved while Göteborg introduced the importance of sustainability. If this balance is lost, the risk is that none of the targets will be hit.

Renewing and strengthening commitment to good enterprise polices and practices, through faster implementation of the Lisbon programme, must become and remain a policy priority, if businesses confidence is to be helped recover. It is that confident business dynamic that will cushion the downswing in which the EU (like the rest of the world) seems set. It is also a condition for the EU to spring back into strong and sustainable upswing.