US embassy cable - 05VIENNA3025

UNCLAS SECTION 01 OF 02 VIENNA 003025 
 
SIPDIS 
 
E.O. 12958: N/A 
 
TAGS: PREL, ECON, EFIN, ECIN, ELAB, AU, EUN 
SUBJECT: ALPBACH ECONOMIC FORUM - EUROPE NEEDS MORE 
 
REFORMS, LESS ENLARGEMENT, AND A REVITALIZED GERMAN 
 
ECONOMY 
 
Summary 
 
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1.  The August 18-September 3 European Forum Alpbach's 
 
Reform Symposium focused on the flagging Lisbon Agenda, 
 
moribund EU growth rates, labor market inflexibility, and 
 
Germany's bleak economic outlook.  Politicians, 
 
academics, and subject experts called for more democracy 
 
and closer political and economic policy coordination 
 
within the EU.  Many speakers cited the Lisbon Agenda's 
 
failure as an example of the EU's political weakness. ha 
 
There was a strong consensus that, without higher growth 
 
rates and continued structural reforms, the EU would not 
 
be able to maintain its generous social welfare system. 
 
On enlargement, most argued that enlargement beyond 
 
Romania and Bulgaria was not an option.  Many 
 
participants touted the "Scandinavian model" as the best 
 
blueprint for enhanced labor market and social reforms 
 
throughout the EU.  Germany's economic problems are 
 
likely to continue for several more years, with its 
 
anemic growth prospects affecting the entire Euro area. 
 
There was near-unanimous criticism of the European 
 
Central Bank's tight monetary policy.  End Summary. 
 
The EU - Call for Reform, Democracy and Common Policies 
 
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2.  A common message was that the EU needs more 
 
democracy, closer political coordination, common fiscal 
 
and economic policies, and renewed "bonding" with its 
 
citizens after the constitution ratification debacle. 
 
Anna Diamantopoulou, Greek MP and former EU Commissioner, 
 
stated that the EU would only have a future if it has a 
 
political future.  According to former EU Commissioner 
 
Mario Monti, the EU is severely handicapped, especially 
 
vis--vis the U.S., because it speaks and acts "as one" 
 
only with regard to trade, competition and monetary 
 
policies.  Fritz Verzetnitsch, President of the Austrian 
 
Trade Union Federation, supported Monti's view that the 
 
EU should forge a more united position towards the 
 
outside world. 
 
The Lisbon Agenda - Pessimistic Outlook 
 
--------------------------------------- 
 
3.  The overwhelming majority of speakers maintained that 
 
the Lisbon Agenda had failed because of the EU's 
 
political impotence.  Most pointed to the October 2005 
 
Lisbon revision and the Austrian Presidency as the last 
 
chances to salvage anything from the process.  The Lisbon 
 
Agenda, while elaborating perfectly laudable economic 
 
targets, lacked implementation strategies and interim 
 
goals, but most of all, political commitment.  There was 
 
consensus that such ambitious projects need closer 
 
central coordination and would be difficult to carry 
 
through without a political union. 
 
Low Growth Threatens EU Social System 
 
------------------------------------- 
 
4.  Daniel Thorniley, Senior Vice President of the 
 
Economist Group, presented a gloomy medium-term economic 
 
outlook for the EU-15, with projected average growth of 
 
only 1.5-1.8% over the next five or more years.  Without 
 
higher growth rates, there was general agreement that the 
 
EU could not maintain its high environmental and social 
 
standards, nor provide much-needed investment in 
 
education, research, infrastructure, administrative 
 
reform and innovation.  Several economists criticized the 
 
lack of EU-wide, growth-oriented economic policies, as 
 
well as inflexible fiscal policies, which in most Member 
 
States just focused on deficit reduction.  There was 
 
concern about the EU's lagging productivity growth and 
 
the widening gap compared to the U.S.  Noting that 
 
services represent 70% of the EU's total output, Monti 
 
underlined the necessity of establishing a single market 
 
for services.  There was near-unanimous criticism of the 
 
European Central Bank's (ECB) tight monetary policy, with 
 
many asserting the ECB missed opportunities to spur 
 
growth in 2001-2004 by not lowering interest rates. 
 
EU Enlargement - Unlimited Enlargement is No Option 
 
--------------------------------------------- ------ 
 
5.  There was general agreement that the May 2004 EU 
 
enlargement had been positive and that without it, the EU 
 
would be facing additional economic challenges. 
 
Nevertheless, most analysts cautioned that the EU needed 
 
sufficient time to deal with this enlargement, 
 
economically and politically, before launching a new 
 
enlargement round.  The Dutch and French referenda on the 
 
constitution highlighted that Member States must address 
 
enlargement within a domestic policy context.  Ewald 
 
Nowotny, economist and Vice-Rector of the University of 
 
Vienna, opined that the EU would have to define its 
 
borders clearly, as unlimited enlargement is not an 
 
option.  With the accession of Romania and Bulgaria, the 
 
EU will reach its provisional limit.  Nowotny argued that 
 
Croatia and other Balkan states are potential candidates, 
 
but requisite political conditions in the region are 
 
lacking.  Nowotny added that the EU should offer "large 
 
and economically underdeveloped countries," such as 
 
Ukraine, Belarus and Turkey, a privileged partnership. 
 
However, Nowotny warned that full membership for these 
 
countries in the near-term would weaken the EU and 
 
ultimately "destroy" it. 
 
EU Labor Market Issues - More Flexibility Needed 
 
--------------------------------------------- --- 
 
6.  Several economists praised the "Scandinavian Model" 
 
as the best approach for Member States to achieve higher 
 
growth rates, budgetary responsibility, more R&D 
 
spending, while maintaining the welfare state.  Many 
 
highlighted successful reforms of the labor markets in 
 
Scandinavia, which promoted "flexicurity" (flexibility 
 
for firms, security for employees).  However, several 
 
labor representatives criticized "flexicurity" as one of 
 
many subtle methods to restrict labor rights and 
 
benefits.  Christoph Leitl, President of the Austrian 
 
Chamber of Commerce called for more development of an EU 
 
social model, which would spur economic growth and fight 
 
unemployment.  Globalization, according to Leitl, 
 
required global institutions and social partnerships to 
 
ensure minimum labor standards. 
 
Germany's Economic Situation - Bleak Outlook 
 
-------------------------------------------- 
 
7.  There was much discussion and reflection about 
 
Germany's current economic malaise.  Most agreed that the 
 
cost of German reunification had severely hampered 
 
growth.  Several economists criticized the German 
 
Government for not having raised taxes to finance 
 
reunification, but most agreed the decision had been 
 
political.  There was agreement that other factors, e.g., 
 
unbridled growth in social spending, had aggravated 
 
Germany's current economic problems. Michael Huether, 
 
Director of the German Economic Institute, cautioned that 
 
reforms will be difficult, because Germany is not a true 
 
market economy, rather a social state model.  Restoring 
 
confidence and optimism would be key for Germany's 
 
recovery, since recent policies have destroyed trust in 
 
the government's economic policies and institutions. 
 
8.  Several speakers warned that eastern Germany could 
 
develop into a "Mezzogiorno" of the north, with per 
 
capita GDP in western Germany roughly equivalent to GDP 
 
in the U.K., Belgium or Austria.  However per capita GDP 
 
in eastern Germany lagged behind that of Portugal and 
 
Malta.  Most speakers warned that Germany's anemic growth 
 
would continue to hold back growth throughout the EU, 
 
perhaps even pushing many countries into recession. 
 
There was consensus that Germany will remain a special 
 
case for some years - reunification costs and the 
 
structural budget deficit will not fade away any time 
 
soon. 
 
BROWN