Supply-Side Policy Coordination in the European Union

Europe’s overall economic performance has been depressing for more than a decade. The reasons are well known, as are the solutions. The problem lies squarely with the supply side. While some countries have been able to undertake the necessary reforms, others have not. Can the solution come from outside, through more centralization, formal or informal, at the EU level of government? Our answer is negative. Centralization works by exploiting externalities and increasing returns, but it cannot substitute for domestic policy failures. With few exceptions, chiefly research and higher education, the supply side displays no significant externalities and no increasing returns. Is the Open Method of Coordination, which lies at the heart of the Lisbon strategy, an alternative to centralization? Here again, our answer is negative. We view the strategy as misguided in its ambitions, muddled in its endless list of priorities, undercut by the illusory precision of its quantitative targets, and flawed in its reliance on improbable peer pressure. We make three main proposals. First, in order to complete the single market, held up by powerful interest groups, we suggest increasing the powers of the Commission or, preferably setting up independent agencies. Second, in those countries where the labor markets need politically difficult reforms, we recommend that national parliaments be required to debate the conclusions of European Council meetings. Third, to overcome Europe’s scientific innovation failures, we propose that the EU’s research budget be primarily used to provide matching grants for setting up new universities and research centers.