Making Lisbon work in Stockholm

Even by the standards of the EU's often optimistic policy aspirations, the decade-long economic reform process initiated at the Lisbon summit last March represents an ambitious programme.

The distinctive feature of the Lisbon conclusions is not the pledge of EU leaders to create "the most competitive and dynamic knowledge based economy in the world by 2010". Rather, it is the decision to embrace a wide-ranging reform package and to employ the full set of European policy mechanisms - from traditional Commission-led legislation to new "soft" measures such as the benchmarking of member-state performance - in an attempt to achieve this headline goal. Within the summit conclusions, it is possible to see a coherent European economic policy emerging, one that seeks to reform labour markets, reduce state aid and heighten competition across the EU.

One year on is far too early to reach any definitive conclusions about the overall success or failure of the Lisbon process. Some progress can clearly be detected in the realm of telecoms reform and the development of an e-europe strategy. Work in other areas, such as transport, postal and energy liberalisation, continues to be held back by political divisions across Europe.

Yet it is imperative that European governments undertake a robust and honest assessment of progress when they meet at the Stockholm summit in late March. One vital feature of the Lisbon agreement is this built-in annual review process, which provides an opportunity not just to isolate policy areas that will need further work but also to maintain the political momentum behind the Lisbon conclusions. A successful Stockholm summit would reaffirm the importance of the Lisbon process and add clarity to policy areas, such as energy liberalisation, which were fudged in the original agreement. The fear is, however, that EU governments may be tempted to use Stockholm either to water down the Lisbon targets or to re-direct the thrust of reform towards their own particular priorities.

Privately, both the leading European business associations and the Commission are expressing concern that the political impetus behind the Lisbon process may already be faltering. There are two substantial grounds for these fears. The first is the rapidly changing global economic outlook. Last year's Lisbon summit took place in the context of a relatively benign economic climate. European growth was on a upwards path, underpinned by the recovery in Asia and the continuing strength of the US economy. While the euro's downward plunge on the currency markets proved a cause of some embarrassment, a steady improvement in the budgetary position of most EU governments ensured greater room for manoeuvre in economic policy.

Now, of course, there is rising concern about the health of the US economy and greater volatility in global stock markets. The Lisbon summit was initially - if somewhat erroneously - dubbed the "dot.com" summit. There is a danger that those EU governments which have never fully embraced a US-style equity culture will use the bursting of the dot.com bubble as evidence of the weakness of this approach.

There is also a good chance that for the first time in a decade, Europe will actually outgrow the US this year. This may encourage EU leaders to become complacent about the need for further economic reform. Yet as Gordon Brown, the British Chancellor, recently pointed out, the slowdown in the US increases the need for Europe to "share the burden" of global economic growth. However, the economic reality is that should the US slowdown begin to bite in Europe, hard-pressed governments may be tempted to turn away from some of the painful reforms implied in the Lisbon agreement. Major liberalisation efforts in labour-intensive sectors such as energy or postal services are likely to result, in the short term at least, in substantial job-cuts and union unrest.The second major worry is whether the EU has the political and institutional will-power to pursue the Lisbon targets effectively. The Lisbon agenda was not a concluding agreement but implies a decade of almost constant reform.

While the EU has shown itself adept at pushing through long-term policy goals in one specific area - the single currency being a case in point - it does not have a good track-record in pursuing a coherent strategy across a broad range of policy areas. EU history is littered with good ideas that have run into concerted opposition from vested interests and then quietly been dropped in favour of some new trend. A fair chunk of the Lisbon agenda, most notably the creation of a European rather than nationally-based financial services market, is left over from the Single Market Programme which was supposed to have been completed in 1992.

Yet there are reasons to remain optimistic about the Lisbon process. The Commission is putting the finishing touches to its own report on the state of play. It feels it has made a reasonable fist of fulfilling its own commitment to provide the necessary legislative foundations. It has also worked hard at supporting the new "soft" mechanisms for pushing forward reform in areas such as social exclusion.

Fortunately, under the EU Presidency calendar, the vital follow-up summit has fallen into the lap of the Swedes, who are broadly committed to the spirit of the Lisbon agenda. Some business leaders are concerned that the Swedish Presidency's priorities could result in environmental issues being added to the Lisbon conclusions - potentially increasing the regulatory burden on industry. However, the Swedish government has so far indicated that its chief ambition for Stockholm is to accelerate the Lisbon process, rather than add new targets to the original agreement.

The British government has also been increasingly active in trying to rally fresh support behind the Lisbon process. In a rare statement of his European strategy, Mr Brown recently insisted that liberalising measures in the energy and financial services sectors must remain a top priority for the EU. The Chancellor suggested setting new, even faster deadlines to open up the European energy market by 2004 and the liberalisation of capital markets by 2003.