EU's economic liberalization drive risks stagnation

By Shada Islam and Daniela Schroeder Mar 24, 2007, 15:31 GMT

Brussels - Former European Commission president Jacques Delors' 1992 drive to create a single European market where goods, services and people could move freely across national borders thrust the European Union onto the global stage, waking up US and Asian policymakers to the emerging economic might of once-sleepy Europe.

A decade later, the 2002 introduction of the euro, the common European currency currently shared by 13 EU states, once again put the spotlight on an upbeat Europe, determined to tear down national barriers, even in the sensitive monetary sector.

Zoom forward to 2007, however, and Europe's economic landscape is looking more sombre.

Governments are lagging behind in keeping their promises to dismantle inefficient cartels, liberalize their economies and cut red tape as the EU's so-called 'Lisbon Agenda' - adopted in 2000 to transform Europe into the world's most dynamic economy by 2010 - runs out of steam.

Most crucially, although EU economies appear to be picking up pace after years of slow growth and quasi-stagnation, Europe's overall economic performance remains lacklustre, with the US and Japan still ahead in terms of growth and job creation.

In addition, the now-27 nation bloc is grappling with the impact of globalization. Labour unions complain about job losses as industries move to cheaper locations in search of low-cost labour.

Across Europe, politicians and business leaders are wringing their hands over the emerging might of China and India as global economic powerhouses.

Recent studies confirm that Europeans are right to be worried. The EU's economic development is only now reaching the level achieved by the US more than two decades ago, according to a report by Eurochambres, the pan-European business lobby.

An in-house study by the European Commission also recently issued a grim warning on the challenges facing Europe, including continuing high rates of unemployment and failure to keep up with a rapidly- changing 'knowledge economy.'

Striving to revive Europe's flagging fortunes, the commission recently called for a renewed commitment to reform and modernization, saying governments should use the current economic 'good times' to consolidate finances.

'What we are attempting is the whole-scale modernisation of our continent. A root-and-branch reform at all levels of governance and in all policy areas,' European Commission President Jose Manuel Barroso said recently.

The commission's focus now is less on removing barriers to cross-border trade and more on ensuring that markets function better.

But the task is proving more difficult than anticipated, with major barriers still existing in sectors such as services, energy, the free movement of workers and intellectual property protection.

A key problem is that while the commission sets targets for building an integrated single market, implementation of the rules are the responsibility of national authorities.

In energy and telecoms services for instance, national regulators have widely different powers and degrees of independence from governments.

With energy security concerns high on the EU agenda, the commission's current priority is to push for further energy-sector liberalization.

Barroso is calling for 'full ownership unbundling' under which energy monopolies would have to sell off their transport and distribution networks to independent operators. The EU executive says this is essential to encourage competition and ensure lower energy prices for consumers.

However, several governments oppose such a separation of energy production and transport activities, fearing it will slash the clout of their domestic energy giants and reduce national energy security.

Breaking up inefficient energy cartels is another priority, with Brussels recently challenging Poland, Italy and Spain over their handling of foreign takeover bids for local companies.

In the telecommunications sector, Germany is facing EU charges over a new law allowing Deutsche Telekom, the German phone giant, to keep rivals temporarily off its high-speed internet network which the company plans to build in the country's main cities.

The telecoms industry also opposes a bill aimed at forcing mobile phone operators to slash the cost of making calls abroad, insisting that self-regulation would be more effective in driving down prices for consumers.

Finally, efforts to allow the free movement of service providers such as hairdressers, construction workers and consultants have had to be watered down to meet fears in the EU's old member states that the bill would lead to an influx of low-cost workers from the bloc's eastern European newcomers.

EU officials insist that despite resistance, EU governments are slowly but surely liberalizing their economies to keep up with a changing world.

As one official in Brussels put it, 'the EU single market is a work in progress. And will stay so for a long time.'