US embassy cable - 04FRANKFURT3351

UNCLAS SECTION 01 OF 02 FRANKFURT 003351 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EUR PDAS RIES, EB GREENWOOD, EUR/AGS, AND EUR/ERA 
STATE PASS FEDERAL RESERVE BOARD 
STATE PASS NSC 
TREASURY FOR DAS SOBEL 
TREASURY ALSO FOR ICN COX, STUART 
PARIS ALSO FOR OECD 
TREASURY FOR OCC RUTLEDGE, MCMAHON 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, EUN 
SUBJECT: The Lisbon Agenda: targets missed 
 
T-IA-F-03-0004 
 
This cable is sensitive but unclassified.  Not/not for 
Internet distribution. 
 
 
1. (SBU) Summary:  The March 25/26 European Council 
confirmed that there is little news regarding the so-called 
Lisbon Agenda, which aims at making the EU the world's most 
dynamic and competitive economy by 2010.  Lack of progress 
in meeting the Lisbon targets has been highlighted in 
structural indicators compiled by the EU Commission, which 
show that instead of catching up with the U.S., the EU has 
fallen even further behind.  To a large extent, this can be 
ascribed to the member states, both with regard to slow 
implementation of EU directives and to insufficient reforms 
in areas that are exclusively their responsibility, such as 
labor market, tax or pension reform.  The outlook is not 
encouraging.  End summary. 
 
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Little news at Spring Council due to limited progress 
--------------------------------------------- -------- 
 
2. (SBU) The March 25/26 European Council once again 
highlighted the lack of progress that has been made in 
meeting the targets of the Lisbon Agenda, which aims at 
making the EU the world's most dynamic and competitive 
economy by 2010.  It is becoming increasingly clear that the 
EU is unlikely to achieve this goal.  Instead of catching up 
with the U.S., it has fallen even further behind.  The 
Council found that in order to reach the Lisbon target "the 
pace of reform needs to be significantly stepped up".  It 
agreed that the critical issue is better implementation of 
commitments already made and identified "unacceptably high 
deficits in transposing agreed measures into national law. 
The credibility of the process requires stepping up the pace 
of reform at member state level."  The Council focused on 
two key areas:  Sustainable growth should be generated by 
sound macroeconomic policies, and measures to enhance 
competitiveness, such as the completion of the internal 
market, better regulation and higher rates of R&D 
investment.  Measures suggested to create "more and better 
jobs" include reduction of non-wage labor costs, the 
promotion of flexible forms of work and higher investment in 
education and training. 
 
3. (SBU) However, there are considerable doubts whether such 
statements will change much.  Before the Council meeting, 
Commission President Romano Prodi stated that nothing much 
could be expected from this summit in terms of economic 
policies.  He said that he is "almost embarrassed" to 
constantly repeat that it is high time to finally take the 
Lisbon Agenda seriously.  In a letter to Council President 
Bertie Ahern, Prodi wrote that "We have to be honest and 
admit that the reform process has slowed down considerably." 
The President of the European Parliament, Pat Cox, commented 
that "in some respects there is little news as there has 
been such limited progress", and that the current lack of 
"deliverability" on Lisbon reforms could lead to a 
"credibility gap". 
 
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Commission report reveals that EU is falling behind 
--------------------------------------------- ------ 
 
4. (SBU) In its progress report to the Spring Council, the 
Commission found that the EU "is still far from achieving 
the objectives set at the 2000 Lisbon European Council. 
Employment and productivity do not make a sufficient 
contribution to European growth."  The main reasons for 
this, according to the Commission are the low employment 
rate of workers aged between 55 and 64, the inadequate take- 
up and use of information and communication technologies and 
the lack of investment in knowledge sectors (research 
innovation, education, training).  Moreover, the internal 
market is still too fragmented in terms of both services and 
intra-EU trade. 
 
5. (SBU) The structural indicators compiled by the 
Commission show that the EU has not managed to catch up with 
the U.S.  In 2003, GDP per capita was 39% higher in the U.S. 
than in the EU.  While the difference has been reduced by 
three percentage points, the EU is still lagging far behind 
the U.S.  The EU has also fallen back with regard to labor 
productivity growth, with an annual average of 1.8% in the 
U.S. between 1999 and 2003 and only 0.7% in the EU.  The gap 
in labor productivity with the US has thus widened and 
accounts for 40% of the difference in GDP per capita.  In 
2002, the participation rate in the EU was 64.3%, clearly 
below the 67% target for 2005 and 70% in 2010 - and even 
further below the U.S. employment rate of 71.9%. 
 
6. (SBU) In its progress report, the Commission identified 
three priorities for 2004:  more investment in networks and 
knowledge, the reinforcement of industrial competitiveness 
and more measures to increase labor market participation, in 
particular of older workers. 
 
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Whose fault? 
------------ 
 
7. (SBU) The lion's share of the problem lies at the member 
state level.  According to the Commission's progress report, 
"the performance of the member States in transposing the 
directives related to the Lisbon strategy area is . 
mediocre."  Currently the share of transposed directives 
amounts to "an average of 58% across the Union". 
 
8. (SBU) Moreover, there are many areas in which 
responsibility for reforms lies exclusively with the member 
states, such as labor market, pension or tax reform. 
According to competition Commissioner Mario Monti, the 
achievement of the Lisbon target "largely depends on factors 
which are outside the Community control," i.e. at the member 
state level.  Clearly, member states' efforts have not been 
sufficient:  The Commission finds that labor market reforms 
have been stepped up but appear insufficient to reach the 
employment targets.  Similarly, despite significant progress 
in pension reforms, long-term sustainability of public 
finances is not yet secure in about half of the member 
states. 
 
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Outlook 
------- 
 
9. (SBU) After the Spring summit, Council President Bertie 
Ahern stated that "the climate for delivering the Lisbon 
Agenda is better than at any time in the past four years". 
Ahead of the Lisbon mid-term review in spring 2005, the 
Council invited the Commission to establish a high-level 
group headed by Wim Kok, the former Dutch Prime Minister, to 
carry out an independent review (USEU septel).  The group 
should prepare a report identifying measures which together 
form a consistent strategy to achieve the Lisbon objectives. 
 
10. (SBU) Comment:  It is unlikely that another report will 
produce much value added.  Everybody knows very well what 
needs to be done, now it is high time to walk the talk. End 
comment. 
 
11. (U) This cable has been coordinated with USEU. 
 
12. (U) POC: C. Ohly, Economic Specialist, e-mail 
ohlyc@state.gov; tel. 49-(69)-7535-2367, fax 49-(69)-7535- 
2238. 
 
BODDE