Portoroz (Slovenia), 24 November 2004

Dear participants of this year¡¯s Portoroz Business Conference,

Dear colleagues,

Ladies and Gentlemen,

I would first like to thank you for the opportunity to take part in this debate on competitiveness and economic growth at what is a critical moment for the Lisbon process. In the run up to the Lisbon Mid-Term Review by the European Council next March 2005 we have a real opportunity to breathe new life into our reform agenda, and it is one which we cannot afford to miss.

Knowledge for growth

The recent Kok report is a useful input at this initial stage of the Mid-term Review, with its diagnosis of the current delivery gap, its several recommendations, and notably its reaffirmation of the validity and ambition of the Lisbon strategy.

In calling for urgent action to realise the knowledge society as a top priority, it rightly underlines knowledge as one of the keys to securing EU competitiveness and sustainable economic growth. Indeed, the generation of new knowledge through research and intangible investment, its exploitation through technology and innovation, and its dissemination via education, training, human capital flows, technology transfer and ICTs, make it the lifeblood of the economy and society.

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Kok, moreover, highlights the need to raise private and public R&D spending as ¡°the centrepiece of a concerted effort to increase the creation and diffusion of scientific, technological and intellectual capital¡±, while lamenting the fact that ¡°the importance of R&D remains so little understood and that so little progress has been made¡±.

Yet, the evidence of the positive impact of R&D on economic growth in the economic literature is overwhelming. Studies demonstrate that up to 40 % of labour productivity growth is generated by R&D spending and that there are powerful economic spillover effects between firms, sectors and countries. (For example, the normal range of economy-wide rates of return to R&D investment found in econometric studies is from 50 ¨C 100 %.)

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So clearly, a renewed and enhanced commitment to research, innovation and education is required in order to reinforce the knowledge-based growth policy agenda at the heart of Lisbon.

In this respect I believe we need to reflect on a specific ¡°Knowledge for Growth Pact¡± along the example and as a complementary mechanism to the ¡°Growth and Stabiltiy Pact¡±. If the aim of the latter is to ensure economic stability and fiscal discipline, the former should ensure relevant conditions and incentives for sufficient level of funding for the R&D investment and thereby revived economic growth. Pact would be organised around a limited number of quantitative objectives that the EU and the Member States would commit themselves to achieve over a specific period of time. The actions undertaken would cut across all the policy areas concerned, i.e. not only research but also education, industrial policy, internal market, justice and home affairs etc. They would be implemented through the EU legislation (e.g. on the mobility of research workers), a revamped Open Method of Co-ordination and would be financed from the new 7th Framework programme for research and the new Framework Programme for Innovation.

I am sure there will be additional discussion on the pact in the coming days and weeks. This is why I would like to concentrate now on some other, more economic aspects of our discussion today.

The Barcelona goal ¨C the 3% Action Plan

The 2002 European Council in Barcelona recognised the importance of R&D when it set the goal of raising Europe¡¯s overall level of research investment from its current level of 1.95% of GDP to 3% by 2010, of which two-thirds should be from private sources.

In order to progress towards this goal, the Commission and Member States have been implementing an ¡°Investing in Research¡± Action Plan, adopted by the Commission in April 2003.

The plan takes a systemic approach by addressing all factors affecting directly and indirectly the performance of research and innovation systems ¨Cfinancing mechanisms, IPR issues, competition and state-aid rules, product market regulation and standards issues, researcher careers and mobility, private¨Cpublic research relations, etc. It reflects the fact that the 3% challenge is not only a matter of quantity - the quality of the knowledge produced and the capacity to diffuse and absorb it is equally important.

Such a broad, but coherent set of actions as the Plan contains, requires a concerted policy-mix, mobilising policies and instruments in the area of research and innovation, as well as in several other policy domains, and at both EU and national levels.

Clearly most of the research investment increase implied by Barcelona has to come from industry - private investment in R&D will have to double to reach the necessary level of 2% of GDP. But industry will only invest more in R&D in Europe if it can expect reasonable returns on investment. This is why much of the Action Plan concerns itself with making the overarching business framework conditions more attractive and conducive to increasing private investment.

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However, we should not underestimate the vital role of increased public R&D investment. Countries with high levels of public investment in R&D tend to have high levels of private investment. Studies also show that direct public funding of research and fiscal incentives for R&D have a leverage effect on business R&D investment.

This can come about in two ways:

• Firstly, different forms of direct support have a stimulative effect on the level of industrial investment;
• Secondly, increased public funding can raise the quality and excellence of the science base, creating poles of excellence and a critical mass of knowledge and competence which provide an attractive investment environment for R&D intensive businesses.

At EU level, the focus of expenditure of other policies and instruments, where appropriate, can also be increasingly directed to more knowledge investment objectives. Examples include cohesion policy - the structural funds, and competition policy - the framework for R&D state aid.

At national level, public procurement is also a potentially important means to foster R&D and innovation in areas where the public sector can act as a launching customer for new research intensive products and services, in areas such as health, transportation and e-government.

Progress to date

Progress towards the Barcelona goals depends mainly on what Member States do, given that responsibility for most actions lies mainly in their hands.

For those actions which lie primarily within Member State competence, the so-called ¡°open method of co-ordination¡± process has been launched by Member States with the support of the Commission. This aims to foster exchange of good practice, mutual learning and the co-ordination of actions and policies between Member States and / or with EU level. The experience over the first year has been promising but there is a need and the potential in Member States to strengthen and make it more effective.

Nearly all Member States have set individual quantitative targets and are putting in place policies to enhance research efforts and the performance of their research and innovation systems. The targets vary significantly from country to country, reflecting differing starting points as well as differences in industrial structure. Finland, for example, has just set itself a new research investment objective of 4% GDP as part of its new globalisation strategy.

However, the Member State targets are often not acted upon, policy measures are incremental, are not implemented as planned, and the overall effort and ambition are incommensurate with the Barcelona 3 % goal. Even if we assume that all national objectives are achieved, the level of research investment in the EU will still only reach about 2.5% of GDP in 2010.

This failure to progress decisively is due to several factors:

Relatively low priority given to research as an instrument of economic growth policy, in terms of allocating budgetary resources particularly in countries in a tight budgetary situation;

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Unfavourable conditions for private investment in research due to the economic downturn during the 2000-2003 period;

Difficulty to develop and implement appropriate policy mixes requiring co-operation and mobilisation of joint action between several Ministries.

Aside from supporting OMC, the Commission also has an important role in the implementation of the Action Plan involving legislative proposals, regulations and stimulating actions by Member States by establishing strategic orientations on specific issues to be implemented on a voluntary basis (action plans, guidelines, etc.).

To give some examples:

Revision earlier this year of two block exemption regulations relating to SME state aid and technology transfer, and work begun to prepare the revision of the Community Framework for State Aid for R&D.

Strengthening the EU¡¯s financial instruments, in particular through the EIB¡¯s Innovation 2010 Initiative which aims to invest an additional € 40 billion in research and innovation up to 2010.

Adoption this year of proposals for directive and two recommendations to facilitate the entry and stay of non-European researchers.

Reform of cohesion policy placing specific emphasis on competitiveness, focusing on research and innovation.

The take-off of European Technology Platforms as a boost to critical mass RTD in areas of strategic importance for the EU.

Despite such advances, insufficient overall progress means that a substantial delivery gap has opened up. Action must be taken immediately if we are to make up for lost time. The Commission¡¯s proposal to double the budget for the next research Framework Programme sends a strong signal to Member States about the size of the step-change that is now necessary.

Dynamising the process with a number of key high-impact initiatives

It is clear that supplementary effort must be made if we are to make decisive progress towards the Barcelona and Lisbon goals. The Commission and Member States must work together closely in this regard, and take full advantage of the Lisbon Mid-Term Review and the ecomomic up-turn. Attitudes of trust and mutual support will need to be fostered in order to ensure effective implementation of the difficult reforms and policy action programmes embarked upon.

In its proposals for the next phase of the Lisbon Strategy, the Commission will come forward with a number of key initiatives to mobilise public and private research investment. These initiatives will make optimal use of the Commission¡¯s own instruments while fostering and supporting action taken in the Member States, dynamising their commitment, and raising their ambition to a level which is commensurate with the Barcelona goals.

This support can take the form of ¡®policy guidelines¡¯ to be implemented on a voluntary basis in areas where there is mutual interest for concerted action between Member States, or where increased effectiveness can stem from complementaty action at EU and national levels.

Specific areas under consideration include: fiscal incentives for research; a guarantee scheme under FP7 to facilitate access to EIB financing of large European RTD projects; developing the role of ¡®foundations¡¯ and similar bodies in the EU for R&D funding; exploiting the potential of public procurement by raising the R&D and innovation intensity of procured goods and services; developing a systematic anticipative approach to identify and rectify regulatory and standards gaps or impediments to the development and deployment of new technologies.

Maximising the Commission¡¯s support role to Member States will help increase ownership and engagement at national level, and in particular, will strengthen the role of the OMC as a driver of effective national policies and actions.

Conclusion

The message of Kok report is clear and simple. The Union is not succeeding in achieving the results leading towards the fulfilment of the objectives. Therefore both changes and a different approach are necessary.

The current delivery gap with the Lisbon Strategy demands that we take new, decisive action if we are to get back on track. The decisions related to the structure of the Union budget in the next Financial Perspective, will be a clear signal if we are aware of the seriousness of the situation. If high-impact initiatives can be initiated rapidly, they could play a significant role in advancing towards the Barcelona and Lisbon goals.

But such strong and decisive actions as are needed, require the political will and commitment of Member States, and in some areas depends very much on our capacity to act jointly rather than in isolation.

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Ultimately, by acting together we can better ensure that the knowledge economy & society will fully develop in Europe and play its rightful role in securing competitiveness, sustainable economic growth and quality of life of all European citizens.

Thank you for your attention.

Item source: Date: 24/11/2004