EPE – European CPO-Summit, 10.-11.5.2006

Wim Kok,
Former Prime Minister and Minister of General Affairs of the Netherlands, Amsterdam (NL)
10.5.2006, 9:45-10.45 Uhr

“Challenges for the European Industry in the Global Economy”

Distinguished ladies and gentlemen,

first of all, I would like to thank you for having invited me to Frankfurt and to speak to you about challenges and opportunities for Europe and for the European industry in the global economy.

As you certainly have noticed I have no executive business experience myself, having been a trade unionist until the mid 80s and a member of parliament and minister after that, until I finished my second four year term as prime minister of the Netherlands in 2002.

Upon my withdrawal from active national and European politics I decided to accept invitations to join the boards – as non-executive director- of a number of international companies (Royal Dutch Shell, ING, TNT and KLM) – and that is quite an experience, I must say.

Amongst my activities on top of that I was invited by the European Commission and the European Council to head groups of independent high level experts in advising on EU enlargement by ten new member states, on European labour market and social reform and more recently (in 2004) on revitalising the so called Lisbon Strategy. And that Strategy was all about business competitiveness, as you know, in conjuncture with major global and European trends that affect each of our economies and societies and each of our companies as well.

To be honest with you, I am afraid that the impact of dramatic changes, that already are taking place today and will undoubtedly continue to occur, both in terms of global competition and demographically, is still heavily underestimated by too many Europeans, not only by ordinary citizens but also by our policy makers.

Sometimes because people do not like changes, at least changes that affect their personal lives. Sometimes because politicians do not want to run the risk of getting unpopular by presenting painful reforms to people and to parliaments. But partially also because there is still a lack of real insight and information about the magnitude of challenges Europe is already and will be facing in the near future.

That is why also business leaders, including people like yourselves, have a role to play – a role that is often underestimated in my view.

It is not only the role of political and social leaders to inform, educate and convince people and to communicate with people.

It is much better for the process of managing change in society if also business leaders take their responsibility. Because in the end it will also prove to be in their interest to have a well informed, motivated workforce and staff.

The so called Lisbon agenda was launched by European leaders, including myself, in the spring of 2000, when the economy was booming and when the sky seemed to be the limit.

Where are we now, six years later? And what was the Lisbon Strategy exactly about?

The Lisbon Strategy is well known for the three pillars on which it is based; economic growth, social cohesion and environmental sustainability. Indeed, most Europeans prefer to live and work in societies combining a strong economic performance and economic progress with both social inclusion and environmental sustainability.

There is nothing wrong with that ambition; the Scandinavian countries for example give the evidence to the rest of Europe that this marriage between economic strength and a decent level of social protection is not just theory (because social security is not only a cost factor, but also an economic asset). But what about the medium-term and longer-term affordability of all this in a radically changing global context?

That was exactly the question that dominated most of our discussions in the high level group when we were preparing our report on the revitalisations of the Lisbon Strategy, one and a half year ago, namely:
what is  needed for EU-member states in the years and decades to come to sustain their model of social inclusion – in whatever form – in a much more competitive global environment and with a rapidly ageing population?

Our advise to the European Union and its member states was to set clear priorities. Europe can simply not afford any further delay in revitalising its strategy for growth and employment, in reforming its economy and making it crystal clear who is responsible for what in Europe. That is what I call the “ownership issue”; for too long national governments have wrongly been blaming “Brussels” for their own imperfections and/or lack of political courage.

To that end, a strong political will and determination are needed, both at European and national level. Frankly speaking, no longer with the unrealistic ambition of becoming the world’s number one economy by 2010. Because that will prove to be an illusion. But in order to remain a strong global player.

Please do not misunderstand me: since the set-up of the Lisbon process in 2000 definitely a good number of positive results has been realised, for example in countries like Finland, Denmark, Sweden, Ireland and the UK. But overall, the structural outlook for our economies is still modest, in spite of the cyclical upturn we are witnessing nowadays in most EU member states.

Let us look squarely at how things stand. Over the last decades, Europe has by far not succeeded in closing the economic gap with the US – a gap which, since the 1970s, has remained at about 30% of GDP per capita.
And since the mid-1990s annual labour productivity growth in the US has outstripped that of the European Union.

That does not imply, by the way, that European countries should try to copy the American economic and social model. We Europeans have different values and traditions. But we can not close our eyes for facts and realities!

One of these facts in that international competition is rapidly intensifying and this is not going to end soon: Europe is facing a twin challenge from the US and Asia.

Of course: the rapid growth of economies like China and India will create not only new competitors to Europe, but also vast and growing markets.
But in order to take full advantage of that opportunity, Europe needs to strengthen its economic and industrial base, recognising that over the decades ahead competition in manufacturing goods at home and abroad, especially those with a high wage content and stable technologies, is going to be formidable.

Indeed China, industrialising with a large and growing stock of foreign direct investment together with its own scientific base, has begun to compete not only in low, but also in high value-added goods. And although Chinese wages are a fraction of those in Europe, it is clear that the difference in quality of a growing number of products and goods produced in China or the EU is already small or non-existent.

India’s challenge is no less real notably in the service sector where it is the single biggest beneficiary of the “off shoring” or “outsourcing” of service sector functions with an enormous and rapidly growing pool of educated, cheap, English-speaking workers.

Of course both China and India will be facing - sooner or later - external or internal frictions affecting their economic growth rates (environmental problems, social disputes, unemployment, regional disparities, resistance against too much flexibility - in India -, risk of discontinuity because of complex “balancing act” in China between political control and economic freedom), but it would be wrong to use this as an argument to deny their strong and rapidly growing role in the world economy.

In a global economy Europe has no option but to radically improve its innovative capacity and its knowledge economy in its widest sense and to develop its own area of specialisms, excellence and comparative advantage, supported by structural social and economic reforms.

But Europe must also face a second challenge, an internal challenge – the problems arising from its ageing population. Two forces – declining birth rates and rising life expectancies – are interacting to produce a dramatic change in the size and age structure of Europe’s population. These are two separate but interconnected problems.

The total population size in the European Union is projected to fall already by around 2020. The average ration of persons in retirement compared with those of the present working age in Europe will double from 24% today via 30% in 2015 to almost 50% in 2050.

All this will have serious repercussions for public finances, healthcare and pensions, but also for the labour market and our economic growth potential in coming years.

In case the present use of the European labour potential would remain unchanged, European Commission projections estimate that the pure impact of ageing populations will be to reduce the potential annual EU growth rate from 2.0 to 2,25% now the around 1.5% from 2015.

As a consequence, a better utilization of labour is desperately needed, both by increasing employment (e.g. by making a much better use of Europe’s potential workforce) and by working more hours on a life-time basis.

People will inevitably have to work longer before they retire, preferably on a flexible, tailor made basis, taking their individual capabilities and preferences into account.

And they must be enabled to do so; they will have to be provided with up-to-dated skills which are in demand. Modern, properly functioning educational systems, including life long learning, must ensure that this is possible. Education, training, work experience are key prerequisites for Europe’s future; for economic but also for social reasons.

Europe must focus on these two challenges – all the more so because it has seen its biggest enlargement since the creation of the European Community now two years ago. It is clear that in a way this has not made reaching the Lisbon targets any easier.

The positive aspect of enlargement however is that it offers the prospect of new member states achieving rapid rates of growth in GDP and productivity, so creating an area of economic dynamism in Central and Eastern Europe.

And there is already evidence that this is happening. Output and productivity growth in most new member states have already been above that of the US over the last five years. As they replace redundant ageing technology with state-of-the-art processes they will jump a generation in terms of their technological capacity.

Nonetheless, I would not be surprised if their relatively low tax and wage rates, attracting not only foreign investment, but also inward investment from the rest of the EU, would prove to be a source of continuing friction. The current restrictions within parts of the EU on free labour movement from new member states as well as the tone of the debate in large parts of “old Europe” on the services directive only illustrate this.

Unless there is a clear prospect of greater convergence by meeting the Lisbon goals on growth and employments in all parts of the European Union these tensions will probably not disappear.

Ladies and gentlemen,

in view of these challenges - global competition, an ageing society and internal cohesion- Europe needs to accelerate employment and productivity growth via a wide range of reform policies and via a set of interconnected initiatives and structural changes releasing its potential.

This demands priority action across five policy areas (not one by one, but simultaneously):

1. The knowledge economy:
Making Europe much more attractive to researchers and scientists by creating optimal conditions to compete for the best brains in the world:
At the same time, making R&D and innovation top priorities:
Strengthening Europe’s industrial basis, promoting the use of information and communication technologies (ICT) and adopting a Community patent at short notice.
I already mentioned the vital importance of education and training for competitive European knowledge economy.

And I would like to add here the strong and urgent need for  a concentrated effort, both nationally and Europe-wise, to analyse strengths and weaknesses (in a global context) of Europe’s key industries, because creating the
conditions for a healthy future for our industrial base is of vital importance to all of us. Also task for European-industry itself. Wrong to assume that industry has no future. Just look at export numbers (impressive – Germany). But what is needed to improve competitiveness)

2. The internal market:
Completing the internal market for the free movement of goods, capital and also labour and urgent action to create a single market in services, including financial services.
The EU member state can simply not afford the luxury not to make the best possible use of the benefits of the single market for services, eventually with some exemptions and/or transitional periods (70% of the European jobs are service related).

The recent vote by the European Parliament in favour of an amended services directive, now accepted by the European council too, is a considerable step forward. Of course: all these amendments have watered down the original draft directive significantly, but the good news now is that there is broad  social and political support for opening up the internal market for services.

And finally; in order to reap the full benefits of a single market an appropriate and timely implementation of agreed EU-legislation by member states is absolutely essential.

3. The business climate:
Enacting measures to reduce the administrative and regulatory burden;
Improving the availability of and access to risk capital;
Facilitating the rapid start-up of new enterprises;
Creating an environment which is more business-friendly and finally less and better regulation at all levels.

4. The labour market:
Increasing the adaptability of workers and enterprises:
Creating an inclusive labour market by striking the right balance between flexibility and security and by moving away from job-security to employment-security;
Developing strategies for life-long learning and active ageing through more effective investment in human capital in order to increase the participation rate of female and older workers. Empowerment and employability of workers; very important, but also a responsibility for companies to make a contribution to that.

5. Environmental sustainability:
Spreading eco-innovations and building leadership in eco-industry;
Pursuing policies which lead to long-term, sustained improvements in productivity through eco-efficiency;
Developing synergies between a strong economic performance and environmental sustainability (climate change; high energy prices).
Meeting the challenge to turn the tough European environmental regulation and standards into a global comparative advantage for our European industries.

These are 5 main areas where concentrated action is needed.

More could be said of course: about tax levels for example (but national sovereignty) and about the vital role of a macro-economic policy framework in support of growth, demand and employment, respecting the Stability and Growth Pact.

The high level group proposed in its report on the Lisbon Strategy not only to focus on growth and employment, but also to make the role and responsibility of national governments more visible. Therefore we proposed to
introduce national action plans for growth, jobs and competitiveness, in line with the EU Broad Economic Policy Guidelines – a proposal that was accepted by the European Council.

Of course national governments and other actors bear the main responsibility for creating the right conditions for sustainable growth and employment in their respective countries and they will be more successful if they pursue the right reforms and involve national parliaments, social partners, other stakeholders and citizens in the process.

But on top of that joint European policies really make a difference.

If Europe wants to improve its competitiveness it must make a much better use of its single market for example, not only for goods and products but also for services, including financial services. As Europe has to agree finally about a Community patent.

And as it has to stimulate and support by all possible means a strong improvement of its R&D and innovation profile in order to strengthen the European knowledge economy.
A real boost to the knowledge economy strongly needs in European dimension.
And also as industrial policy needs for various reasons a strong European dimension, also to avoid protectionist tendencies.

And finally the European budget must much better reflect growth and employment priorities. Today, the European Union is spending far too much of its budget for agricultural subsidies. Instead, Europe must focus on the future.

Ladies and gentlemen,

as I said earlier: the challenges facing Europe, including the need for structural reforms, must be explained much better to the European citizens. This requires vigorous debate, dialogue and communication.
Citizens are not always sufficiently aware of the urgency and scale of the challenges we are facing and of the high price they or their children will have to pay if we fail to give the right and timely answers.

I have experienced myself, both as a trade union leader and as a political leader and prime minister in the Netherlands, how difficult it is to communicate all this and to convince people that economic and social reforms are necessary, simply because the status quo is not an option.

Miracle solutions or blueprints are not available; every success creates at a certain moment in time its own problems and complexities. This is certainly also true for the Netherlands.

Confidence is the key word in my view. How to increase people’s confidence in the future?

During my active life in politics and in the labour movement I have learned how important it is to build confidence and mutual trust between interest groups within societies and between countries. And that is perhaps what we miss most currently, also at the European level. There is a strong need for – what I call – new leadership and moral authority in Europe in order to put new life in that process.

Almost one year ago a majority of the French and the Dutch electorate has rejected the European constitutional treaty; a serious setback for the integration process.

Shortly after that European leaders decided to have a period of internal reflection now before deciding how to proceed further. In terms of damage control this was probably unavoidable, the best possible decision to find a
way out for the moment, but that decision also contains a certain risk. The risk namely that this ‘period for reflection’ is mainly used for not thinking at all about our common future and that Europe now enters into a period of political stagnation and growing confusion.

This should not take us too long. Everyone and especially our political leaders should be aware that for social and economic reasons Europe can simply not afford to be a mainly passive, inward looking and meditating continent. The world is not going to wait for us.

So, whatever the final results of the reflection and the internal debate on the constitutional treaty will be, if we want to raise current employment and income levels and if we want to sustain our social model in whatever form, considerable improvement of Europe’s competitiveness is a bare necessity.

There are definitely some signs of hope:

• The Barroso Commission shows the strong will to focus on growth and jobs
• Positive signs in Germany after the September elections, but still considerable amount of uncertainty in France and Italy
• Cyclical upturn in most member states in 2006-2007.

But European unemployment continues to be at an unacceptably high level, whilst the structural economic outlook remains worrisome. I still have the impression that there is not enough sense of urgency in Europe. Too many defensive or even protectionist positions are taken. Europe is too much dominated and influenced by fear and uncertainty.

Instead, people should understand that the longer they wait before adapting to new realities, the more painful the consequences will be, both economically and socially.
Therefore we have to act and must act now; we have no more time to lose.

I thank you for your kind attention, ladies and gentlemen, and I would be most happy to take some of your questions.