Is Europe Reforming? Evidence from Cross-Country Structural Indicators

With the adoption of the Lisbon Agenda in 2000, the European Union established for itself the ambitious goal of becoming the most dynamic and competitive economy in the world by 2010. Despite initial optimism, the first half of the decade has been dispiriting and targets established under the Lisbon strategy will be difficult to achieve. Many observers have concluded that governments have failed to implement the policies required to achieve these targets and that, without radical changes, the strategy will fail to deliver its promises. Without disagreeing with these conclusions, the present paper argues that they portray the situation excessively negatively. Using cross-country structural indicators compiled by the OECD, it shows that changes have occurred during the first half of the Lisbon programme, although not everywhere. The first part of the paper reviews recent developments in indicators of labour market policies and labour market performance. It shows that structural policies have moved in the right direction in several countries, notably tax wedges on labour income for low-wage earners and the implicit tax on continued work. This has been associated with a somewhat better labour market performance, notably higher employment rates. As well, the easing of product market regulation, which is deemed to increase the competitive pressure felt by firms and incite them to invest and innovate, has been associated with faster productivity growth in some countries and some industries. Nevertheless, the heterogeneity of performance across countries suggests that there is still a large room for countries where reforms are less advanced to adopt good practices. In these countries, more comprehensive implementation of labour market and product market reforms is needed to mobilise unused labour resources, put productivity growth on a faster trend and accelerate the growth of GDP per capita. Based on this overview, the paper raises some political economy issues related the method of coordination adopted by the Lisbon agenda.