Technology analyst, Armand van Dormael, asks: what happened to the EU Lisbon Strategy, drawn up in 2000, intending to make the European Union “the most competitive and dynamic knowledge-based economy in the world, capable of sustained economic growth with more and better jobs and greater social cohesion” within ten years?

Introduction

On 23-24 March 2000, at the Lisbon Summit, the EU heads of states and governments drew up a blueprint intended to make the European Union within ten years “the most competitive and dynamic knowledge-based economy in the world, capable of sustained economic growth with more and better jobs and greater social cohesion.” António Guterres, Prime Minister of Portugal, proclaimed that “the European Union faces a true revolution in the way it works; this new attitude represents the triumph of prioritising the socialpolitical over the economic-financial.”

Nicole Fontaine, President of the European Parliament, delivered the opening speech: “The European Community began as an economic one…Europeans are now looking to this European Council meeting to give shape to a social Europe… They are scandalised by untrammelled capitalism whose relocations, social dumping, ruthless exploitation of the disparities between the social and fiscal legislation of the Member States and remorseless pursuit of profit at the expense of working men and women have a direct and traumatic impact on their lives, both as communities and as individuals. For these reasons their expectations of this Council meeting are extremely high. You must not let them down.”

Was it the oozing charm of Lisbon? Or the vapours of the Douro wine? The EU leaders were in a euphoric and combative mood. This Summit was to be Europe’s great leap forward. They foreshadowed the dawn of a golden age for the European economy. The man in charge of orhestrating the implementation of the Lisbon Strategy was Günter Verheugen. He studied history, sociology and politics. After a stint as journalist, he was an SPD member of the Bundestag until 1999, when he became Vice-President of the European Commission.

Philippe Busquin, commissioner for science and research, was responsible for the administration, planning, budgeting and day-to-day operations. He had studied physics, but opted for a policical career. Member of the socialist party, he filled a number of posts in successive Belgian governments. In September 2004, he resigned to give Louis Michel an opportunity to serve on the Commission. Louis Michel started out as a school teacher. Elected to the Belgian Parliament, he occupied several ministerial posts. The current commissioner is Janez Potočnik. As Minister of European Affairs, he headed the negotiating team for accession of Slovenia to the EU.

These are the policymakers in charge of turning the European Union into “the most competitive and dynamic knowledge-based economy in the world.” The political poker game and the struggle for power tends to put run-of-the-mill people into positions of responsibility for which they are not qualified. A commissioner responsible for science, research and development who doles out astronomical amounts of taxpayers’ money should at least have some understanding of the technicalities and be able to assess which avenues of research are relevant and promise economic payoffs.

It is obvious that none of these officials has any notion of how technological innovation comes about. The mental model that supports the Commission’s research and development programme is based on popular, simplistic, counter-productive and misconceived ideas: the idea that basic science is the primary source of innovation and of economic development; the idea that the state must intervene as a provider of funds when industry is unable to compete on its own; the idea that invention, rather than industrial innovation and management, is the major source of technological progress. In fact, creative imitation and the exploitation of the existing stock of knowledge accounts for most innovative economic development. The Lisbon Strategy is a telling symptom of the ineptness and selfdeception that pervades the Commission’s approach to technological and economic problems. If the Lisbon Strategy really was the miracle-working recipe its spin doctors make it out to be, one would expect to see some evidence. The results are depressing.

The Lisbon Legacy

Billed as a historic watershed, the Lisbon Strategy has become the basic tenet upon which the European Union intends to build its economic and industrial future. In political circles, research and development became the catchword. In Brussels, at the annual spring meetings of the European Council, ministers make an all-encompassing review of the state of the European Union. These Councils are mandated to follow up the implementation of the Strategy and to assess how much has been achieved. The President of the European Parliament presents an exposé which is discussed by the ministers.

The Council Presidency then writes up a Communication. Year after year, these Communications are larded with the same truisms about the importance of productivity and growth, the challenge and opportunities of globalisation, the importance of external competition, of long-term sustainbility, and so on. They sound weighty, but are empty of substance and too good to be true.

Following the European Council of 8-9 March 2007, the Presidency concluded: Europe is currently enjoying an economic upswing and reforms are starting to translate into growth and jobs. The renewed Lisbon Strategy for Growth and Jobs is beginning to deliver results. It is contributing to the favourable overall economic upturn, as exemplified by the present economic forecasts: an expected growth rate of 2,7 per cent in 2007 and expected positive developments on the labour markets with seven million new jobs created during the 2007/2008 period…The European Council reiterates the importance of spending 3 per cent of GDP on research and development by 2010.

At the 2008 spring European Council, the Commission announced that “we are on the right track: in recent years we have created 6.5 million new jobs, the unemployment rate has fallen to less than 7 per cent and the foundations of the European economy are sound.” No mention was made of the jobs that had been destroyed. Despite the creation of new jobs, unemployment is on the rise and the wealth-creating sector keeps shrinking. Industrial production in the euro area is down 1.7 per cent against last year. In Switzerland it is up 6.1 per cent; in Norway 2.4 per cent.

The Lisbon Strategy is at the centre of European economic policy. It is a telling symptom of groupthink and collective incompetence. Its major attribute is the extent of self-deception. The oracular predictions that come out of these Councils are out of touch with reality. Words have no precise meaning. Despite the lack of results to achieve its goals, its proponents reaffirm them time and again, hiding their failure behind a façade of misinformation. The EU establishment takes comfort in the fact that the “silent majority” has no way to make its voice heard. Any democratic government that manifestly fails to carry out its proclaimed mandate would be voted out of ofice. The European institutions – legislative, executive and judicial – constitute an unelected and unaccountable super-government immune from the pressures of public opinion. A self-centred, selfserving and self-perpetuating political class commutes between national politics and European institutions, and vice versa.

It is commonplace for governments to hold forth clear views on what is economically best for the country. When they do not succeed, they are generally unable or unwilling to readjust their strategy and reflexively redouble their unsuccessful approach. Authoritarian regimes do not have to justify their legitimacy by proving their competence.

The European Union functions in a virtual world of makebelieve. The introduction of new and massive spending, taxation, regulation and redistribution schemes, on top of national legislation, imposes a heavy burden on the productive sector. The pursuit of political-ideological goals, such as equalisation and the distribution of wealth, turns a blind eye to the difference between what is socially desirable and economically feasible. The expectations prognosticated in Lisbon cannot materialise. After decades of working less and less for more and more, the European industry has priced itself out of the market, currently leaving 19 million people unemployed, unable – or unwilling – to take a job. In the euro area, according to the latest official figures, the unemployment rate is 7.2 per cent. In Switzerland it is 2.6 per cent and in Norway 2.4 per cent.

The Problem with European R&D

At the heart of the Lisbon Strategy is the belief that scientific research is the major source of technological and economic progress. Financing research and development is one of the most important and least understood items of the Commission’s budget. The approach is based on false premises and a misunderstanding of how R&D works. Common wisdom holds that the more money is put into the research pipeline, the more products will come out at the other end. The relationship between research and innovation is far more complex. No one can foresee what will result from a scientific discovery. Technological creativity is a key ingredient on the way to economic growth. Once a new invention rolls off the production line, management and some luck become the decisive factors of success.

Academic research at the cutting edge of knowledge seldom has an immediate applicability. The transfer of knowledge requires capabilities, infrastructures and relationships that extend beyond the traditional academic domains of research, scholarship, learning and teaching. We should not expect much cutting-edge scientific discoveries to emanate from Europe’s ivory towers. New knowledge is mostly produced in industrial research laboratories where scientists are confronted with specific problems and research is results-oriented.

Research conducted at the technological frontier is global, expensive and risky. To be of any value, it must have world class. The backwardness of European universities in the hard sciences leads most capable and ambitious students to complete their education in an American university. Very few come back. In a knowledge-based economy, losing the best and the brightest is proof of failure.

The culture of corporate America is integrated into its educational culture. Research is concentrated in a limited number of institutions with ample resources to invest in the best teachers and the most advanced facilities. The Commission scatters enormous amounts of public resources over a broad field of mediocre institutions and private projects. Programmes are evaluated in terms of expenditures rather than in terms of results.

Random financing thousands of projects and SME’s when only a few can be expected to be profitable, is a pure waste of taxpayers’ money. The potential benefits are overwhelmingly outweighed by the huge expense of it all. Science Magazine recently published an article stating that a lot of research is being conducted in the EU for which there is no demand. The Seventh Framework Programme runs from 2007 to 2013 and has a budget of €54 billion. Thousands of researchers keep lining up to get their part of the manna. One should not expect any epoch-making invention to come out of it.

Hyperion’s Sean McCarthy advertises on the web threeday courses which he teaches all over Europe. He lectures researchers about how to write a proposal, how to negotiate, manage, administer and audit a contract, how to identify the best research topics, how to select the most receptive evaluator, the best partners, the best instrument, and much more. The cost per participant is €475. His advice: never go to Brussels asking for money. Instead, present them with the probable solution to a problem. The trick is to fill out a grant application that interests the evaluators. Thus astronomical amounts ultimately evaporate into the pockets of smart researchers.

Private money goes where it is sensible to spend it. The Commission distributes research funds on the basis of the most cursory vetting. To qualify, there must be at least three participants from three countries. The Commission’s bureaucrats have no way to evaluate the potential of the research applications they approve. The duration of an integrated project runs between 3 and 5 years. The problems of communication and coordination involved in multinational and joint research are obvious. Issues about the ownership of patents relating to jointly generated knowledge and the transfer of such knowledge for industrial or commercial applications require endless negotiations. The main result is a mountain of unread paperwork: 38 per cent of world scientific publications originate in the EU, 31 per cent in the US and 9 per cent in Japan.

Entrepreneurs unwelcome

Setting up a business in Europe requires stamina, patience and a savings account. Entrepreneurs who have a dream and a project face countless obstacles. They must devote precious time to comply with the paperwork imposed by their government and by EU legislation. Wages and social charges are the highest in the world. The balance between risk and reward is skewed toward risk. Profits are blunted by punitive taxes.

This is not a recipe for a growing economy. An entrepreneurial society and an innovative culture require a competitive industrial infrastructure and a competitive workforce; tax policies that allow saving and investment; a favourable business climate and an educational system that incubates enterprising individuals and welfare arrangements that provide a safety net but do not stifle initiative and personal responsibility. The European Union scores badly on all these fundamentals.

The EU makes it hard to be an entrepreneur. Economic growth is related to freedom from the constraint of bureaucracy. This postulate is not understood by European policymakers. Slow growth rates are linked to command and control bureaucracies, especially those that seek to impose social goals. The EU experience provides a chilling reflection: bureaucracy, when it takes command, defaults to interests and goals that are not congenial to productivity or to the operation of efficient firms in a global capitalist system.

Much of the European economy has gradually come apart at its industrial seams, largely because of the Commission’s mistaken policies. The Commission-knows-best approach ignores the process of, and the benefits from, creating longterm wealth through competition. The entrepreneur is the prime mover of economic growth that delivers the social goals. Case studies prove that economic vitality results mainly from the creative, disruptive and unpredictable action of entrepreneurs who bring new products and business methods to market. Entrepreneurial capitalism is competitive, dynamic and ruthless.

The governments of the “Asian Tigers” had enough commonsense to limit their role to the creation of industrial and educational infrastructures and to let the business community take care of employment, growth and development. Asian countries increasingly set the technological and industrial pace, because they have acquired the most advanced technologies and work harder for less. Decades of socialist rule inflicted untold misery upon the Russian and Chinese population. The changeover to unbridled capitalism produced a tectonic shift in global economic power while lifting millions of people out of abject poverty.

Globalisation augurs a new age in which emerging market companies are increasingly out-competing European competitors. Work flows to places where it is done most advantageously. Obviously, Europe isn’t working as it should. Its social model is in serious trouble. The failure lies in the attempt to merge two competing and incompatible moralpolitical creeds: the liberal belief that the market economy is the most efficient to produce prosperity for all and the socialist doctrine that the state is responsible for the wellbeing of its citizens and for the protection of the working class against exploiting capitalists.

Two centuries ago, the Industrial Revolution put Europe at the centre of the global economy. The mechanisation of production did not require any scientific research. Entrepreneurs were free to build and use their machinery and workforce so as to provide maximum profit. In a knowledgedriven economy, knowledge is the asset that makes the difference between success and failure. The IT Revolution has relegated the European Union to the fringes of cuttingedge knowledge. The accelerated development of technology and the shorter life-cycle of products require novel knowledge-management tools. We stand at a moment in history when new learning and dramatic change are needed to rise to the next performance level. Miss the moment and decline is inevitable.

Armand Van Dormael, The European Journal, December 2008