JOINT COMMITTEE ON EUROPEAN AFFAIRS debate -
Wednesday, 11 Feb 2004

Lisbon Agenda - Module 1: Competitiveness.

Chairman

We will take each of the speakers in turn and then have questions. Is that agreed? Agreed. Members have the speaking notes in any event.

This is the first in a series of meetings planned on the Lisbon strategy. In today's meeting we will focus on fostering competitiveness as the key to generating and maintaining growth and employment.

Perhaps we could concentrate on that issue because we will discuss other aspects of the Lisbon agenda over the next few meetings. The remaining three modules, which we will consider in the coming weeks, will deal with promoting growth oriented economic policies, delivering more and better employment and ensuring sustainable growth.

We are grateful today to the participants who have agreed to come at short notice due to the fact this is the first meeting in this series and we could not proceed as we had expected. I welcome Mr. Gerard de Graaf, head of the unit on internal marketing, DG, in the European Commission, Mr. Andrew McDowell from the National Competitiveness Council, Mr. Declan Hughes, manager of science and technology policy in Forfás, and Dr. John Fingleton from the Competition Authority. I propose to ask Mr. de Graaf, Mr. McDowell and Dr. Fingleton to make some opening remarks. If Mr. Hughes wants to say something after Mr. McDowell speaks, he will be welcome to do so. We will then take questions from members.

This is an important part of European policy. Reading some of the background notes, it is alarming to see the ground we must still make up following the completion of the Single Market and the fact that some of the momentum has been lost. This is an important issue and one on which I am sure the committee will wish to report to both Houses of the Oireachtas. I ask Mr. de Graaf to give a brief presentation. We will then hear the other speakers before opening the discussion up to members.

Mr. Gerard de Graaf

I thank you, Chairman. I am pleased and honoured to be here. The Commission welcomes the interest of this committee in competitiveness, particularly in the Internal Market.

Competitiveness is generally defined as the ability of countries to raise their standards of living. They do so by becoming more productive. There is usually a mix of factors which impact on competitiveness and it is a complicated process. One of the factors is an Internal Market. There are other factors which the committee may discuss today or on another occasion, such as the labour market, incentives for enterpreneurship, research and development, education, macro-economic policy and exchange rates. It is a dynamic process. As Ireland is probably finding out to some extent now, a country can be competitive one day, but it can lose some of its competitive edge the next day. It is a process which constantly keeps a country on its feet.

What is the Internal Market's contribution to competitiveness? It is simple. The Internal Market is about competition and exposing industries and companies to more competition. As we all know, if companies are exposed to competition, they will try to become more effective because if they do not, they will lose market share or disappear altogether. Companies which are shielded from competition tend to become lazy and to sell products which are sub-standard at too high prices to consumers. The Internal Market's contribution is to open up industries and companies to the forces of competition.

One thing we must avoid in Europe is a black and white judgment on Europe's competitiveness. We often hear that Europe is not competitive, but some member states are highly competitive. Finland is the most competitive country in the world. It is number one in the competitiveness rankings. Denmark, Sweden and Luxembourg are highly competitive. Some industries or companies in Europe are highly competitive and some of them are the best in the world. We should not talk ourselves down.

It is difficult to deny that Europe overall has weaknesses, which it must tackle. We have had some anaemic growth over the past couple of years and low productivity increases. It is, therefore, difficult to maintain our standing in the world. It is perhaps useful to remember why competitiveness is important. As I said, it is about our standard of living, maintaining our quality of life and being able to pay for pensions and health care and education costs. It is absolutely vital that Europe maintains and increases its level of competitiveness.

The Internal Market has been in existence for ten years. How has it contributed to competitiveness? We have done some internal analysis and the conclusion is that the Internal Market has created more than 2.5 million jobs, €900 billion in extra prosperity, which is almost €6,000 per family, and it has added 1.8% to our GDP. That is a record which should not be sniffed at. However, there is a persistent myth that the Internal Market is completed, that most of the work has been done and, therefore, it is only a matter of maintaining it. That is wrong because there is a lot of work still to be done. As Commissioner Bolkestein regularly says, it is like driving a Ferrari in second gear. Why would we want to do that?

The Internal Market is about competition. However, a number of alarm lights have started to flash red. If we look at a number of the indicators of the strength of the Internal Market, they are starting to point in the wrong direction. Intra-EU trade in manufacturing goods has stalled and was lower in 2003 than in 2002. That is not a good indication. Foreign direct investment is down dramatically in the European Union. Price convergence has stalled since 1998, despite the introduction of the euro. These are all signs that the Internal Market is not bringing about the level and intensity of competition we know it is capable of and, therefore, it is hindering our competitiveness.

What should we do and what needs to be done to get trade and investment going again and to get the Internal Market to make the contribution to competitiveness of which we know it is capable? The first thing is action, not words. In Europe we talk a good game about competitiveness. However, when it comes to showing a track record, there is not much there. It is poetry without the motion.

There is a long list of measures on the desks of the Council and the European Parliament to remove obstacles to the Internal Market, such as Community patent, enforcement of intellectual property rights, professional qualifications, public procurement, which has just been adopted, and a services directive, which we have just made. The list is long. At decisive moments the political will was not there to take the difficult decisions which needed to be taken. We have done all the easy things in the Internal Market. However, we must do the difficult things. It was often the case that when one lobby said something, it was enough for Ministers to cave in. The Competitiveness Council, in particular, has not met expectations. The first thing is action, not words of which we have had enough.

The second thing is that the member states must take the necessary measures. The Lisbon process cannot be achieved at European level alone. If the German, French, Italian and Irish Governments do not take the necessary measures, we will not achieve the Lisbon objective. We must also ensure that what we do at Community and national level is fully in sync and mutually supportive. Often the impression we have at the Commission is that what is being discussed and negotiated at European level is considered a distraction in many capitals.

The third thing which must be done is that we must focus more on implementation. It takes a long time for rules to be adopted in the European Union. More than five or six years is the average, while it is seven years in financial services. It takes a long time for measures to be adopted. Then they must be implemented, which adds more time to it. However, that is not enough. Measures must be applied on a daily basis, particularly in the context of the expansion of the European Union to 25 member states. We must ensure the rules are complied with and that we do not end up with a situation where breaches of law take place without any consequences and where the confidence of players in the market sags and the Internal Market fragments as a result.

Chairman

Thank you very much, Mr. de Graaf.

Dr. John Fingleton

Competition and competition policy is one of the areas where Europe has contributed a huge amount that is visible and positive to the Irish economy. Our own Competition Act is very much based on the Treaty of Rome. Indeed, before it was enacted, many cases were taken under that treaty regarding abuses of dominant positions in the Irish market. Some of the famous cases before the Europe Court of Justice, such as Magill, have a resonance here. Competition lawyers all over the world talk about the Magill case for very different reasons than people do here.

I want to address two issues: first, to put in context the relationship between competition policy and competitiveness; and, second, to identify some issues, all of which have to do with the allocation of responsibility between national and EU levels. Our view of the relationship between competition and competitiveness - which has been developed in a number of documents and most recently in our submission to the enterprise strategy group - is that the relationship works through productivity. Competition is not just about bringing down prices or transferring money from producers to consumers. It is really about encouraging producers to find ways of bringing their costs down.

The fact that Aer Lingus cut its costs by 30% in the last two years is a good example of the type of incentive effects that competition in the market gives companies to bring down costs. Lower costs mean higher productivity per worker and hence competitiveness for the economy as a whole. We see this where companies that are exporting or that are locating here have lower costs. Even if the services or products they are buying are not traded, their prices in the Irish market do affect our terms of trade. More subtly, perhaps, we see that sophisticated domestic markets also have a positive effect on competitiveness. This is particularly important in areas such as health care, education and information technology where Ireland is trying to encourage foreign direct investment. The ability of companies in that field to sell into a sophisticated local market is also an important aspect of their attraction for locating here. For too long we have ignored the importance of domestic consumer markets for competitiveness. The Competition Authority has been trying to get that message across.

It is important that we tackle both public and private restrictions on competition. By private restrictions, I mean abuse of dominance, cartels and other anti-competitive agreements. Public restrictions are regulations that restrict entry or competition, preventing pricing or advertising in a free way by firms. Sometimes those are justified but in all too many cases we see, they are disproportionate. The objective they seek to achieve bears no relationship to the size of the restriction.

Turning to policy issues, I have identified three such issues that arise and all of them relate to the allocation of responsibility between the core and periphery, or the question of subsidiarity. I should preface this point by saying that, as economies grow and become richer, there will be an increased role for domestic competition policy, for an economic reason, quite apart from any political imperative: increasingly, services that are important for consumers are domestically or locally produced. One thinks of everything from childminding to restaurants in this regard. It is not much use to us, however, if refuse collection is done well in the Netherlands, which it is, when one is living in Tipperary. As many of these services are locally produced, even though we live in a globalised society, it is really important that competition operates at local level. Domestic policy will be important for that reason.

The legal reason why domestic policy is going to be more important - and this is the first of the issues relating to subsidiarity - is the decentralisation of the enforcement of Articles 81 and 83 of the treaty. This was regulation 1 of 2003 that was agreed about 18 months ago and which gives the member states' competition authorities joint competence with the European Commission's competition director to enforce Articles 81 and 82 in national law. We do not yet know how this will be implemented in Ireland. We may be unique in that regard, which is not a pleasant distinction to have. The Department of Enterprise, Trade and Employment is currently seeking advice from the Office of the Attorney General on the details of that, but the deadline is 1 May 2004. There is a high probability that primary legislation, or at least secondary legislation, may be required to give effect to that regulation and we have an obligation to implement it by 1 May. That will be one to watch. I mentioned it at my last appearance before the committee, around the time it was enacted. It will place a much greater emphasis on the role of domestic competition authorities in enforcing European competition rules. It is a brave new world for European competition law enforcement.

The second issue relates to public restrictions on competition. Article 86 of the treaty has been used by the Commission to push through important liberalisation in sectors like telecoms and energy. I would argue, however, that Article 86 has been seriously under-enforced at European level. EU states have restricted competition in many ways the Commission has not sought to tackle, for two reasons. One concerns resources and the Commission's directorate general for competition has limited resources. The other is the question of subsidiary because the Commission really does not want to be seen to interfere in domestic markets.

Taking the example of taxi markets, restrictions operate in many European countries. There is a restriction on who can operate taxi services at Brussels's Zaventem Airport. People here may have queued there for a taxi, as I have done. Such restrictions clearly have an effect on trade but the Commission has never sought to intervene at that local level. We rely on domestic policy to deal with many such issues.

One of the ideas I have been promoting is the question of whether we should decentralise some of the Commission's role to national competition authorities. In that way, national competition authorities could make national governments more accountable for laws and regulations that are contrary to EU law. At the moment, the Commission is the only entity that can enforce that regulation.

The final issue I wish to raise concerns the nexus of policies in complementary areas. By complementary areas I mean consumer policy, single market policy and State aid policy. In some cases, including State aid policy, single market policy, and the Article 86 policy I have just mentioned, the Commission has to take the lead, in effect. Therefore, it is a question of making sure the Commission is working closely with member states on those issues, and with the directorate general for competition. I am not convinced, either at European or national level, that the synergies between competition and consumer policies are fully exploited. That is another day's work but at European level an interesting development has occurred with regard to the professions. The directorate general for competition, along with the directorate general for the internal market, and supported by the consumer directorate general, is taking seriously the question of competition in the professions. That parallels our own work on that matter, which will be coming out in May this year. We welcome that type of co-ordinated approach. Trying to find more ways of ensuring that these policies are consistent and synergistic is important in a decentralised and larger Europe.

Chairman

Thank you, Dr. Fingleton. Our next contributor is Mr. Andrew McDowell from the National Competitiveness Council, Forfás.

Mr. Andrew McDowell

If I may, Chairman, I would like to introduce the chief executive of Forfás, Mr. Martin Cronin, and Ms Helena Acheson, who is manager of our competitiveness and innovation division.

Chairman

You are very welcome.

Mr. McDowell

It has been well stated that the key determinant or measure of competitiveness, both at national level and in the European context, is the concept of productivity, which is income or output per head, as broadly measured. I will focus my remarks on how the Lisbon agenda is trying to improve productivity within Europe. Obviously, it is trying to do all sorts of other things, such as environmental sustainability, social cohesion and enlargement, but there is a particular agenda that focuses on improving productivity. The reason for that agenda is that Europe is not as productive as other parts of the world. Productivity, output per capita or income per capita - however one wants to measure it - in Europe is about 70% of that in the United States. The reason is that we do not work as many hours, which is a valid choice made by Europeans. Also, when we work, we are not as productive in the hours we work as people in the United States.

The industries in which that is most apparent - where the productivity gap between Europe and the United States is largest - are mainly in the services sectors, including retail trade, wholesale, distribution, financial services, road freight and so on. Europe is very productive in manufacturing and in public services where we are at least as productive, if not more, than the United States, but the gap in those big services areas, services which people consume every day, means that overall we are less productive and less rich than the United States.

What is interesting about the services areas in which we are less productive is that they are all very intensive users of information and communications technologies. The Americans have managed to exploit the opportunities available from ICTs to improve productivity in those sectors to a degree that has not been apparent in Europe. There are several reasons for this and this is apparent from much documentation that is available from the European Commission and other commentators. One reason is a lack of competition across Europe. More competition means there is more of an incentive for companies to invest in these technologies and to improve their competitiveness. That has been well covered already.

The second reason is over-regulation. There are regulations that impede the development of the Single Market, thereby removing the incentive for some companies to generate the economies of scale needed to justify the investments in ICT. There are also regulations that simply place a cost burden on industry which reduces productivity and competitiveness. A recent OECD-IMF study estimated that better regulation by Europe could add approximately 3% to productivity growth and 4% to total employment in the long term.

The final reason Europe is less competitive or productive than the United States is insufficient investment in knowledge and innovation. The gap in overall research and development expenditure between Europe and the United States increased dramatically over the 1990s. Investment in research and development in the EU stagnated at approximately 1.9% of GDP while it grew to 2.7% of GDP in the United States. The difference is mainly in the private arena. US companies privately spend much more on research than European companies. Similarly, Europe invests much less in higher education in our universities. Again, the gap is mainly in the private arena. There is more private money going into higher education in the United States than in Europe.

What can Europe do about this? It can increase competition and create a more effective and cohesive Single Market. Again, that has been well covered. It can improve the quality of regulation. In fact, our Presidency together with the Netherlands, Luxembourg and Britain have launched an initiative on how to improve the quality of regulation from Europe. Those three countries hold the next three Presidencies. Much work is being done on how to improve engagement with stakeholders and on how to achieve valid environmental and social goals, while at the same time minimising the cost of reaching those goals on industry and, ultimately, on the consumers.

We can increase investment on research and innovation and my colleague, Declan Hughes, will say a word on that in a moment. We can deliver some institutional reform within Europe, making us better able to effectively put in place policies that support competitiveness. We have created an EU Competitiveness Council which has brought together Internal Market competition and industry into a more cohesive and coherent unit. The same needs to happen within the European Commission itself. There is a number of directorates working in different areas which really need to be brought into one overarching economic reform or competitiveness unit within the European Commission.

What do all these policies being put in place mean for Ireland? More competition in services is clearly good for us as it reduces services prices for consumers, reduces input costs for companies and, ultimately, could increase employment in Ireland in internationally traded services industries. If we have a single European market in services, as we do in manufacturing, we might get the same levels of investment in internationally traded services industries which we have achieved in manufacturing. Better EU regulation will deliver more consultation with Irish stakeholders, simpler transposition of directives for Government and the achievement of valid environmental, social and economic goals with lower compliance costs. I will pass over to my colleague, Declan Hughes, who will talk about the research agenda.

Mr. Declan Hughes

It is important to recognise that Ireland has benefited greatly over the past 20 years or more from investment in research and development from the European Union. The priority accorded to investment in research has always been part of the European project. In the 1980s and even in the early 1990s, when there was little national investment, Ireland benefited greatly through the Structural Funds and the framework programmes. They are still a significant contributor of funding for researchers both in industry and in academia in Ireland. Results from the sixth framework programme which was launched last year are quite encouraging. Irish researchers have managed to achieve a draw down of approximately €50 million so far from the sixth framework programme, which is the equivalent of approximately 1.4% of the total available funding.

The issue of Europe's competitiveness and competitiveness relative to the US, particularly in the area of research and development, is a key concern for Ireland. Looking at the differences, as Andrew McDowell mentioned, investment in research and development in the EU is approximately 1.9% of GDP. It has been at that level for approximately the past decade while it has been increasing in our major competing regions. It is about 2.7% or 2.8% in the US and it is 3% in Japan. That is due to a number of factors, including lower business expenditure on research and development. The growth rates in investment are also significantly lower in the EU compared to the US. We are not even catching up relative to where the US is.

On the public investment side, annual investment from the public sector in the US is growing at approximately 9% per annum, while in the EU it is approximately 1.4%. Ireland has made great strides over the past number of years in increasing investment in research through Science Foundation Ireland, which will administer funds of approximately €120 million this year. Similarly, Enterprise Ireland will administer €80 million for applied research.

As regards Europe's attractiveness for graduates and leading researchers, there are currently about 400,000 EU-born graduates in the science and engineering fields working in the US. Europe has set itself a target of reaching 3% of GDP by 2010. Reaching that level will require an additional 700,000 researchers within the EU. Part of that deficit could be met by bringing back researchers from the US. Creating an attractive environment for researchers has obviously got to be a key priority.

The priority accorded to research and development under the Lisbon agenda is very much welcomed by Ireland. It is strategically in line with the issues we are addressing at national level. It is important to note that the establishment of a European research area was a key priority of the Lisbon agenda in terms of reducing duplication between the national research systems and increasing co-ordination of effort among member states. However, in 2002, when the heads of state again reviewed progress on the creation of a European research area, they were disappointed with the progress achieved and they set the specific target at Barcelona for Europe to reach 3% of GDP in terms of gross expenditure on research and development by 2010. Two years on, initial indications as to progress are not encouraging. Europe is unlikely to reach the 3% target by 2010. Two thirds of that increased investment had to come from the business sector, so the major challenge for Europe will be to increase and drive investment in research and development within the business sector.

From Ireland's point of view, the European research area provides quite a good agenda. The key issue now is to get delivery of the key elements of that. We would see significant potential for the priority areas to contribute to improving Europe's overall competitiveness. During the Irish Presidency, a number of these will be progressed in terms of improving our competitiveness relative to the US and in terms of our overall attractiveness and in areas such as intellectual property protection, in particular, the implementation of the Community patent and increasing investment in basic research at European level to improve the attraction for researchers who want to locate to Europe. They are a key magnet for the attraction of industrial and enterprise research and development activities.

Science Foundation Ireland was established in 2000 specifically to increase investment in basic research and create centres of excellence to act as targets for leading companies. It has invested €65 million thus far in centres for joint industry-academic collaborative research. We expect those to be a success.

European investment in research has been critically important to Ireland over the past 20 years and our progress under the sixth framework programme is also encouraging. The key priority will be to determine the priorities at European level for the seventh framework programme. One of the key areas for consideration will be investment in basic research. Europe will invest €17.5 billion in research up to 2006 and the financial prospectus published by the European Commission yesterday indicates a significant increase in investment in research and development up to 2010. That must be discussed by the European Parliament but the initial indications of the Commission's commitment to research and development are positive.

Overall, they are strategically in line with domestic policy priorities in terms of moving our industrial base up the value chain and increasing the research intensity of multinational and indigenous firms. Under the 3% action plan agreed in Barcelona, member states were asked to develop their own action plans to respond and make a contribution to increasing the overall business investment in research and development within the Community. Ireland, currently at 1.4% in GNP terms, is below the EU average but has made significant progress over the past decade with growth rates in business and public expenditure in research and development among the highest in the OECD.

Last year, the Tánaiste and Minister for Enterprise, Trade and Employment established an Irish high level 3% action plan group. It is chaired by her Department and comprises representatives of all Departments, research agencies and the private sector. The group has spent the past six or nine months working through the issues relating to intellectual property, human resources and public funding for research. Its report is expected shortly.

Chairman

Public procurement contracts were not mentioned. This is a major competitiveness issue in the UK, according to the Financial Times earlier this week. Structures have been put in place there to address the issue so that large and small companies are aware of the procurement needs of the public service and have an opportunity to tender for that work. I suspect there is not a similar competitive approach throughout the rest of the EU. Is that issue under consideration? What are the concerns of Forfás in this regard?

The European Council in Lisbon made a decision in this area in 2000. The increase in productivity per worker between 1996 and 2000 was 2.4% in the US while it was 1.23% in the EU, but following the Lisbon Council, when this great decision was taken, the increase in productivity per worker in the US was 1.58% in 2001-02 while it reduced to 0.4% in the EU. There may well have been a period during which the decision fed through but productivity per worker reduced, particularly in comparison to the US.

It is always a good idea to put major issues before European Councils attended by Heads of State and Government because they can take policy decisions and move agendas along. The problem is that an issue such as the Iraq war can arise. The European Council can only deal with so many issues at one sitting and other issues get on to the agenda. Is the Council the vehicle best suited to advancing this agenda? If not, what is?

I refer to one other issue, to which I do not want a reply until the end of the meeting. The committee currently holds the presidency of COSAC because Ireland holds the EU Presidency. It is also in the troika for COSAC, which comprises the European affairs committees of all member and accession states. When COSAC meets in Ireland in May, it will be the first time 25 member states will be represented. The chairmen and vice-chairmen of all those committees will meet in Dublin next week to prepare the COSAC agenda. Usually three vice-presidents of the European Union also attend COSAC.

Under the Amsterdam treaty, COSAC has the power to make recommendations for the consideration of the institutions of the Union and, for the first time, hopefully, it will address this issue. There will be a few meetings but if, at the end of the process, this committee wishes to raise this issue or circulate its report at COSAC, it has the ability to put it on the agenda of 25 member states and the European Parliament to generate a concerted effort at national Parliament level in tandem with the European Parliament. At the end of the meeting, will each member of the delegation outline one or two significant recommendations that the committee should make in its report?

Deputy Quinn

I thank the representatives for their contributions. The Labour Party supports the broad thrust of the Lisbon process. It was largely designed by Antonio Gutierrez and others and it goes much further than the competition issue. However, I fully respect that Forfás is addressing one aspect of a much wider process. My questions will go to the heart of Mr. McDowell's contribution regarding what happens when one must necessarily compare like with unlike, such as the productivity of European and US workers. US workers have the lousiest holidays in the world. No worker in Europe would trade US holidays for European holidays and, if the Lisbon process is to improve everybody's quality of life overall while allowing for great disparities in wealth and opportunity, none of us would suggest that between Christmas day and New Year's day, people should work for two days.

Is Forfás now known as the National Competitiveness Council?

Chairman

No, Forfás works with the National Competitiveness Council.

Mr. McDowell

Forfás acts as the support and research body to the NCC.

Deputy Quinn

I believe in competition in a raft of areas but I am an idolater of the god of competition. If competition were to be introduced to reduce anti-competitive practices, which impose a high cost on our society, I would prefer if the gods of the Law Library were taken on rather than clapped out taxi drivers. They are bigger fish and impose much heavier costs on the economy than taxi drivers. The transformation of the Law Society and the Law Library would dramatically reduce massive costs on our society.

I will give one example but the ideological prejudice which applies to this question also applies to other areas, so members can extrapolate to other sectors, including my own area of architecture. Why is the Attorney General's office the only area of public procurement in the State which does not introduce competition in fees among those lawyers who serve on various tribunals and who are ripping off Irish society?

My second question is to Mr. McDowell. I find it hard to reconcile what he was saying, though maybe I misunderstood his analysis. He spoke about the delivery of everyday local services in Europe being less competitive and more expensive than their counterparts in America, if I understood him. It could be a mistake on my part. What real effective competitive market is there for the delivery of domestic services between Alaska and Texas, in comparison with Finland and Greece? Can you really compare like with like when you talk about the delivery of a hamburger in Alaska and Finland, on one hand, and in Greece or Texas on the other? At what point do arithmetical averages become nonsensical or, more importantly, misleading?

If we introduce competition through the Lisbon process to make us more productive and to reduce costs can we start with the fat cats, not the easy targets? Second, to what extent do average figures distort climatic and geographical advantages which cannot be changed by the gods of competition?

Chairman

Colleagues, we are talking about the EU and the US so we should keep the discussion on that basis.

Deputy J. O’Keeffe

I commend the presentations, which made a dry and arid subject very lively. We have been given a wake-up call. I am impressed by the outcome of the internal market and the 2.5 million jobs which resulted from it. I have an interest in that I was involved in negotiating the Single European Act when in Government. I am glad it worked but now there is a bigger hill to climb.

The case made is compelling. We in Ireland must focus on the domestic situation. I agree with Deputy Quinn on the rip-offs and I favour tendering for tribunals. As a lawyer I want to see competition at every level. It is not a matter for our European colleagues, but do difficult political decisions need to be taken? For example, should the groceries order be confronted at the political level, like below-cost selling? Are those part of this package? The restriction on retail size is another issue in that area. Decisions must be made in these areas and advice should be taken from independent experts by politicians grasping those nettles.

Another issue is the reference to the need for more investment in higher education. The British Prime Minister was nearly toppled recently on a higher education issue which presumably grew out of the need for more funding. That means more taxes to pay more funding, parents, as I know to my cost, paying more, or private sector involvement, which has been very successful in the US.

In macroeconomic terms it is easy to accept the advice on extra funding for research and so forth but on coalface issues it may be more difficult for us as politicians to grasp the nettles being dangled in front of us.

Senator Ormonde

I welcome the delegation. We have spoken of the internal market and the domestic market, the allocation of responsibility and how best to improve quality of life for EU citizens. The gap between the EU and the US is wider now and we spoke of how we must close that gap, but we should also consider whether we want to be more like the US. I do not want that. I think differently from Americans, whose concepts and way of life are different from ours in Europe. We must strive for ourselves, but not to become like them - I am concerned we would use them as our model. We should aspire but retain our own identity and quality of life. We should increase our competitiveness and I hope the report takes this into consideration.

Does the public understand how important this competitiveness and increased investment in education and research are? Does the public know what is required of them and of us in terms of subsidiarity? That is my big worry. We say things beautifully in here but do we reach beyond ourselves? We take our responsibilities seriously in Ireland but are other countries the same? We must consider how to improve our productivity, how to increase investment in education and how to upskill our workers. I feel fine talking here about these matters but it is different outside these chambers. What are the views of the delegation?

Mr. de Graaf

These are very sharp, interesting questions. One is whether we want to be like the Americans, with some speakers saying our people may not want to. The answer is "No". I started by saying the most competitive countries in the world are Finland, Denmark and Sweden, so we do not need to be like America to be among the most competitive economies in the world. The point is what one does with that wealth if we become more productive - is it to be distributed to the benefit of everyone or is it to be limited to a privileged group? Those are societal choices and I am convinced those choices in Europe will not change.

Deputy Quinn mentioned vacations. I was in the US until 2001 and was offered jobs with ten days of holidays per year. I said no thanks because I wanted to come back to Europe. We do not want that model and we are not aiming for it but we want to increase our productivity to invest in health care and education and to pay for pensions.

Public procurement was mentioned and it is 16% of our GDP, a huge amount of money, €1,300 billion, spent by our governments every year. Is it spent wisely? No. If we operated like our governments we would soon be bust. We have directives in place but compliance with those directives among member states is not 100%. We did recent research which was widely published in the press. If governments at all levels, national and local government, would apply competitive procurement procedures, they could save 30% on expenditure. That is a lot of money taken in aggregate. If member states saved just 10% on their procurement expenditure, no single member state would have a problem with the Maastricht criteria or the Stability and Growth Pact. No member state would exceed the 3% limit. Public procurement is a crucial area. We all know that if one has a local company, or one is a local politician, the idea that jobs will leave the area and someone else will provide a service is difficult to accept. For a company in one's own city to grow and sell to other cities and countries is a concept that is rather difficult for some politicians to accept. The benefits exist and this is demonstrated.

Dr. Fingleton

I concur on the public procurement point. In addition, the buyer power of the Government in many markets countervails market power by suppliers and it can have a knock-on effect on the private sector. This issue comes up not just in the areas mentioned but, for example, in the insurance market, where the liability insurance market, local authorities and central Government are big buyers of insurance. One of the interesting questions is what have they done to optimise their insurance contracts. In the area of pharmacy, it is not clear that the Government has put out to tender GMS contracts and so on in other areas of the professions, not just lawyers. It runs across the whole board. On the other hand, the OPW has done pioneering work in terms of contracting. There is a diverse range of examples when we look across markets.

On the question of whether we want to be like America, I know from having lived there that America is very different. Some areas of America are very pleasant to live in while other areas are less pleasant, just as Europe is very different. I do not think this is the issue. We did not deregulate the taxi market to be like America. We did it so that people would not take out their cars when drunk and get home safely. We did it so that people could do business in the city. Deregulation of the taxi market has had a hugely positive effect on the city. It has been tough on taxi drivers. I have been involved in trying to ameliorate the difficulties in the interest of getting reform through.

It is not a question of either taxi drivers or lawyers. We must tackle all of them. One of the big problems for the Competition Authority is that it operates in a target-rich environment. It is currently taking on banks, insurance companies, lawyers, newspapers and petrol stations. I could supply a list of sectors of the economy at which it is looking. In a number of areas, including transport, publicans, pharmacies and so on, outstanding recommendations of the authority are not being implemented.

This leads me to the groceries order. Experience in this House suggests I will never agree with everyone on the issue. Our view is that the competition law is an adequate protection of below cost selling. If a supermarket sells a basket of goods below cost it would come under competition law. I would point out that shopping centres supply car parking services free as a way of getting people to go to shopping centres. If one wants to be literal about the issue and make everyone charge the cost of what are called gateway products designed to get people in and drive competition in the market, we would have a very regulated society. In retailing and distribution in the United States, when they had the boom we had in the late 1990s, their costs of distributing and retailing food fell and their prices fell while ours rose. That had to do with the point made by Andrew on the adoption of information technology. They adopted it because it was a highly competitive market, and we did not.

There are very high hidden costs of not having competition in the retail market. Upstream, it means that when our manufacturers go abroad, if they are not selling into a sophisticated competitive local market, it will be very difficult for them to succeed in the more difficult international markets. In other words, if one cannot get Tesco to put one's products on Irish shelves, how can one get it to put one's products on German shelves? There is a transition question on how to manage change. There is no doubt in my mind that this is where one must be at the end of the day. Too often, the difficulty of transition means we do not look at where we want to be. On the groceries order, this is one of the many issues which comes up in regard to transport and so on. Everyone agrees that we need better functioning markets. It is a question of how to get from here to there, without paying an arm and a leg for it. We paid an arm and a leg for Telecom and we cannot afford to do that in every single market where we deregulate.

Chairman

I ask Mr. McDowell to hold his questions for a moment because I understand Mr. de Graaf has a plane to catch. I want to let other Deputies in and I will then come back to Mr. McDowell.

Deputy Harkin

I, too, welcome the delegation. While I will not pretend for a moment that I understand everything that was said, somehow I think I am getting to grips with part of it.

When defining competitiveness, reference was made to the fact that it was designed to deliver a better standard of living for all of us, but this means for everyone. In the context of balanced regional development - I am speaking specifically within Ireland - if one looks, for example, at GDP per capita in the regions, it is obvious that there is quite a divergence. I specifically want to look at one issue, namely, State aid policy. If one looks at the provision of natural gas in the west of Ireland, as things currently stand, it will not be worthwhile for Bord Gais or some other company to provide that service. We need to look at something like PSO. What are the rules governing that kind of State aid to ensure that we have the services people need that allow companies, etc., to become competitive, which is what it is about, while at the same time being allowed by the EU? If one does not have some kind of intervention, there will be market failure. No matter how much we talk about competitiveness or about companies driving down their costs because they have access to something like natural gas, if there is not some mechanism whereby it can happen, it will not happen in the sense of balance between the regions.

Staying with that topic, reference was made to how important and crucial it is to invest in new technologies, including investment in research and innovation. If one draws a line from Dublin to Galway, it would be safe to say that 75% of research and development - it might be much higher - occurs south of that line, while north of it very little is happening. How important is this in the context of overall competitiveness in Ireland?

The difference between over-regulation and better regulation was referred to, which I found very interesting. One often hears local cheesemakers, for example, complaining about the regulations with which they must comply. While I know we need basic regulations for hygiene, etc., how can we balance the local needs with overall EU legislation? Is there a mechanism whereby we can ensure we get value for money from public-private partnerships? We talk about difficult political decisions. In many ways, investing in public-private partnership is an easy political decision because it ensures that we get the infrastructure, schools or whatever we are looking for now and we pay for it over the next 20 years. It is borrowing by another name as far as I am concerned. Is there any mechanism whereby we can ensure we get good value for money in this regard?

On public procurement, I was shocked to hear the statement that if we operated like our governments we would go bust. It is not working. Is there a role for the Comptroller and Auditor General, for example, to ensure that public procurement delivers what it should?

Deputy Haughey

I thank the speakers for their presentation leading to this interesting debate. On the right-left political spectrum, is this right-wing politics? I accept that the European Council in 2000 in Lisbon agreed to go down this road but I am uneasy about some of the remarks the delegates have made about what is needed. I would welcome their views on that. Are right-of-centre governments enthusiastically embracing this agenda and are governments which are left-of-centre lethargic in implementing it?

Is the EU, in its totality, embracing this agenda? For example, are the Commissioners in charge of the environment, workers' rights and regional development supportive of it? Is this just one aspect of the EU or is the entire Union behind this policy?

In Ireland we believe social partnership has brought about economic recovery and the Celtic tiger. Is the concept of social partnership - where government, employers, trade unions and farmers come together to set wages and deal with other aspects of society and the economy - a good thing and is it well developed at EU level?

Deputy Andrews

Would the delegation accept that the internal market, the Lisbon agenda and the euro have coincided with Europe's time of weakest growth? The Chairman referred to this question earlier and it strikes me that this is the case.

What is the definition of competitiveness? Mr. de Graaf suggests it is the capacity countries have to increase living standards, while Mr. McDowell suggested it is productivity, unit costs and that kind of thing. The core of the question of whether or not we want to be like America is our definition of competitiveness. The European model of competitiveness is Mr. de Graaf's definition. The other definition is a black and white calculation based on statistics.

I take issue with Deputy Quinn when he restricts to the Law Library his criticism of barriers to competition, which is fashionable these days but does not bear analysis. I thank Dr. Fingleton for referring to the myriad other types of industry which suffer from that problem. I declare a vested interest in this matter.

Chairman

I ask the delegates, in their reply, to suggest some major recommendations which the committee would make.

Dr. Fingleton

I will take in reverse order the questions I feel I have a competence to answer. Social partnership is not necessarily good or bad for the competition agenda. For example, many of the market reform issues, such as transport and energy, might have been advanced better if some of the difficult compensation issues which have held up those processes had been dealt with as part of the overall framework. They have been on the outside looking in rather than on the inside being supported by social partnerships. That might be something to look at in helping social partnership.

I have no comments on state aid or PPPs and the question as to whether or not there is under-enforcement of Article 86. A related question was raised about public procurement, as to which national bodies might take on the co-responsibility with the Commission of enforcing public procurement law within member states. In many of the countries that will join the European Union on 1 May, the domestic competition authority takes responsibility for state aid, public procurement and other things because the Commission was not available to them until now. This is an existing model and we could learn from something they have done well. Very often, having a domestic agency that can ask the Government to account for itself is an important thing. As Europe goes forward, having some of these decisions taken at a local level would improve enforcement.

Mr. de Graaf

I am sorry to go because the discussion is becoming very interesting. I will start with the last questions. Are we talking about productivity or living standards? I like to talk about living standards because, ultimately, we want to ensure that our citizens have a good quality of life and that our environment is clean. A member asked who is driving the Lisbon agenda and why citizens do not talk more about competitiveness. Competitiveness is a very abstract notion, and even a threatening notion, to citizens. It probably means working harder and fewer holidays. If presented in that way, the Lisbon agenda does not attract support from citizens. Do they want to become the most competitive in the world because they want to be No. 1 and not No. 2 and because they want to work harder? That would not get much support from citizens. We must talk about standard of living and quality of life. People in Germany are finding out the hard way what it means not to be competitive. They have seen cuts in their social welfare systems and in many places that affect their social model.

The Lisbon process is not driven by a right-wing agenda. It is a very social agenda. What do we do with the extra wealth that is generated? That is the question politicians must answer.

Are the Commissioners for the environment, workers' rights and regional development fully behind it? They are, because Lisbon is a very big tent. It is not just about becoming the most competitive economy in the world. It is also about sustainable development and becoming a knowledge based economy. There is a broad base of support for it and we like to think these things are not mutually exclusive. If we become more competitive we will probably have industries that are less polluting and will be able to afford social security systems. These policies need to be looked at in their coherence and integration and not separately.

The Lisbon process is about many things but it is not about wage negotiations between the social partners. That is something the Lisbon process should not get involved in.

A question was asked about public procurement and public private partnerships. The answer is competition. If you have a particular need you do not ask only one person to fulfil that need. There must be a process by which people feel they must give the best value for money. That is the same for public private partnerships. If someone can build a light rail system to Dublin Airport, it would be wise to check if someone else can do it better and at a lower cost. The whole thing boils down to choice and competition in the marketplace.

A comment was made about over-regulation and the link between regulation at EU and national level. I tend to become rather defensive when I talk about this. I cannot leave the committee with the impression that good regulation comes from the capitals and bad regulation comes from Brussels. That is not true. We examined this issue. Some 92% of rules and regulations with which Swedish citizens and businesses deal are drawn up in Stockholm or by local government with only 8% coming from the EU. In the UK, the position is 60:40. We need to talk about better regulation but it is not good enough to consider it only in terms of the EU because we then close our eyes to a major part of the problem.

When asked, companies will say their biggest headaches are taxation, social security and product requirement, things in which the EU does not get involved. Such issues are national and there is a big job to be done at that level. There is also a big job to be done at EU level but we are in this together. It is easy to point at the EU and say it should do it.

As to what should be your recommendations, one such recommendation should deal with delivery. We, in Europe, talk an excellent game in this regard. The European Council conclusions were spot on. The European Council is not a decision-making body. It is a guidance body which will suggest to the competitiveness council or to ECOFIN what they should do. The competitiveness council makes its own decisions. The European Council does not decide anything; it gives guidance. The key word is "delivery". There are enough analyses, conclusions, papers and conferences. What is needed most is decisions.

My second message is that competitiveness begins at home. Only the Irish Government can help Ireland's competitiveness. The EU can provide assistance and can bring about the framework conditions within which the Irish community can flourish but we cannot increase competitiveness. That is something which many member states still do not understand. That has to change.

Chairman

I understand Mr. de Graaf may be under pressure of time and may need to leave soon.

Mr. McDowell

On whether the Spring European Council is the right institutional mechanism to bring forth the Lisbon agenda, this once off intensive focus may not serve that purpose. A great deal of work has been done to make the competitiveness council a much stronger body for advancing, together with ECOFIN, the Lisbon agenda. Reform within the European Commission to integrate many of the responsible directors into a coherent entity would help to keep focus on this issue.

Productivity is economic speak for living standards. There should not be a view that productivity is about a US view of competitiveness and living standards.

Deputy Andrews

The difficulty is that the public understands it in that framework.

Mr. McDowell

I accept that. We must, when drafting documents, use language which does not deliver the wrong message. Increasing our incomes by taking an extra week from our holidays is not productivity growth; it is work intensification. Productivity growth is increasing our incomes by being smarter at work and using more technology.

Deputy Quinn

If one takes output per hour and the calendar year and divides that by the number of working days, one will get a different result in productivity as measured by output per hour than one will get if one uses the value product of what is sold. This is where the statistics, depending on the unit of measurement used, can lead down the road to which Deputy Andrews referred.

Mr. McDowell

Statisticians in the OECD do output per hour calculations. Unfortunately, Europe still comes out weaker than the United States. We work fewer hours and those hours are less productive in the main because of a lack of application of technology. That is something which the Lisbon agenda will address.

On the recommendations the COSAC committee might bring forward, the most important thing, as my colleague said, is to come up with an output as quickly as possible. There must be a quick win to reinforce confidence in the process. There has been little in that regard in the past couple of years. The issue of Community patent has been argued about for more than 20 years. It is bogged down in technical detail within the competitiveness council. Ireland should, during its Presidency of the EU, adopt a single European Community patent which makes it easier for companies to register patents for new technologies. If we could do that, it would reinforce confidence that Europe is capable of delivering economic reform. I recommend we do so.

Chairman

What is the role of Forfás on the competitiveness issue?

Mr. McDowell

We advise the Minister and Department of Enterprise, Trade and Employment on matters relating to enterprise, trade, science, technology and innovation. Historically, we have dealt with national issues but we now find policy advice in those areas is increasingly influenced by what is happening in Europe. During the Presidency, we are working closely with our parent department on issues such as European competitiveness council and the Lisbon agenda.

Mr. Hughes

I will deal with the public procurement and regional innovations issues raised by Deputy Harkin. Public procurement is fundamentally about reducing barriers to entry to markets and improving access to information and opportunities. At the outset, we should recognise the contribution made by the EU public procurement directives in opening up markets in Ireland. A new directive to be introduced shortly will further streamline and harmonise public procurement practices throughout Europe.

Ireland has a good record in terms of the green book which sets out the procurement guidelines for State agencies and Government Departments. Total public procurement is approximately €15 billion. That covers a wide range of areas in which we see potential for further innovation and research on how public procurement could be an objective driven instrument of policy. The Chairman referred to the debate currently taking place in the UK on how it can further stimulate competitiveness in various markets there. We recently completed a similar review in Ireland. There appear to be greater opportunities for the use of public procurement in terms of buildings, materials, information technology and telecommunications. This would increase overall value for money and could be used as a driver for innovation and research within markets where we are not just seeking off-the-shelf solutions but are also thinking a little further in terms of economic benefit. Many issues remain to be addressed.

This issue is also being considered as part of the European research area objectives in terms of increasing the level of innovation within the public procurement market. This will help in terms of raising awareness in the public sector as regards its technology, intelligence and assessment capabilities. Similarly, it will help in terms of how we specify tenders within the public sector and in getting that balance between the short-term value for money and long to medium-term economic returns.

I do not have the figures on regional innovation. I will send them on to the committee. Distribution, in terms of performance and research and development is a function of the industrial base and research capacities within the regions.

The importance of the education sector in building innovation capacity within the regions is critical to that and this was recognised in the national spatial strategy. We should not be too despondent either. The performance of NUI Galway in the Science Foundation Ireland calls for tenders has been very encouraging. It has got about 25% of the total and is up there with the best - with UCC and Trinity.

Current innovation performance is a reflection of the industrial base. A process of industrial restructuring is going on, particularly in the BMW region, in terms of trying to attract higher technology types of activity in IT, pharmaceuticals and the international services areas. This is an ongoing process and is linked to building up the capacities of a number of areas such as the growth centres in the regions. It is also linked to building up the capacities in the institutes of technology in terms of incubation space, research facilities within those areas and networking.

The European research area offers the opportunity for greater linking and networking and the opportunity to learn from other regions within the EU. One of the five key priorities of the financial perspectives published yesterday by the Commission is the networking and co-ordination of both national and regional policies. This is an area where there is potential, within the broad Lisbon process, for linking and collaboration between regions at different stages of development.

I come back finally to the COSAC committee, which was mentioned by the Chairman. The key issue for us in the research area is the eventual acquisition of greater co-ordination of research policies across the EU. At the moment we have 15 different research systems, and will soon have 25 - all at different stages of development in terms of policies. Vast differences exist across the Union on simple matters such as human resources, recognition of researchers and their qualifications and areas such as intellectual property law and how it is treated.

It is important to have greater co-ordination of policies between member states in order to improve Europe's overall competitiveness. An existing process is the OMC, open method of co-ordination. It started up this year in the research area and Ireland is a key participant. It seems to have worked quite well in the labour market area. We see this as an area which needs a significant push at European level.

Chairman

Thank you.

Deputy Harkin

The issue of State aid policy was not really addressed. We know that in some cases - competitiveness and a good standard of living for everybody - the market will simply not deliver. This can happen in peripheral or rural areas throughout Europe. What is the balance between the market and State aid? How important is this to a region?

Mr. Hughes

In the industrial development area the State aid issue is clear and quite well developed. Where there were market failures in the BMW region, for example, a certain amount of State aid is allowable, particularly in the horizontal areas of research and training. There, essentially, the public returns are greater than those which accrue to the firms.

It is more difficult in the areas such as infrastructure investment. However, we still have an opportunity and potential for public investment where we deem the market to be failing. In the area of telecommunications, in particular, significant investment has taken place, particularly in the BMW region and with inter-urban connections. At a meeting earlier this week the European Commission stated it was anxious to increase the provision of structural funding for networks, whether wireless or optical fibre, in less developed regions.

Deputy Quinn

Will Forfás, or whoever wishes, respond to a question which follows on that of Deputy Harkin? In the area for which the State has direct control, specifically the National Roads Authority or some of the more recent interventions in broadband, my distinct impression - correct me if I am wrong - is that the NRA prioritisation of the roads programme is market, demand or volume driven, whereas the needs of a place like Sligo are capacity supply. This means we will not get industry into the Sligo city area unless communications are improved in advance of the location of competitive private companies, coming with IDA or other assistance. We could talk about this all night but I assume Forfás knows more about these issues than I do.

The topic is complicated but I am taking the shorthand version. For example, in so far as Forfás has a role, can it influence the decision making of the NRA to change its priority of road development programmes so that the N4 developments will start from Sligo rather than from Mullingar? The problem is not getting from Dublin to Sligo but from Sligo to Dublin. Therefore, where the road improvement occurs is critical. This is just one example but the principle is capable of extrapolation elsewhere. This example is in an area where the State is the only provider of the service in question, the roads. In the area of broadband, for example, the issue is a bit more blurred. I just use the issue of the roads as an example.

Mr. Martin Cronin

Both the IDA and Forfás would have made an input to the roads authority as part of the mid-term review of the national development plan. What has come from that review is a mix of demand driven and developmental development. I am not quite sure whether the mix is right. That is a complex question. The mix is probably as good as we will get for the amount of money we are spending. The debate should really be on whether we need to spend more money to build infrastructure ahead of demand in order to promote an even spread of development.

Chairman

Thank you, Mr Cronin. I also thank Mr. McDowell and Mr. Hughes and Dr. Fingleton and Mr. de Graaf who have already left.

Today's module dealt specifically with competitiveness. The next three modules will deal with promoting growth oriented economic policies, delivering more and better government, and ensuring sustainable growth. Anybody who has heard today's discuss will agree the area is interesting and requires the attention of national legislators and governments throughout the Union. I thank all of you for what has been a very interesting presentation. Ms Catherine Meenan, policy adviser to the committee, has been making notes and we will report on the issue in due course.

We have a few matters to discuss under any other business. The minutes of 4 February have been circulated. Are they agreed? Agreed. On correspondence, we had a letter from Mr. Paul Mark, secretary general of the parliamentary association for Euro-Arab co-operation and parliamentary dialogue. This is an invitation to attend a conference in Tunisia on 27 and 28 April. This was referred to us by the Ceann Comhairle. It is proposed to send two Members. Is that agreed? Agreed. We had correspondence from Mr. Matthias Wissman regarding the Berlin conference for European cultural policy. This conference will take place from 26 to 28 November 2004 and it is proposed to send two Members. Is that agreed? Agreed.

The date of our next meeting is scheduled for next Wednesday morning, 18 February, at 11 a.m. The Minister of State at the Department of Foreign Affairs, with special responsibility for European Affairs, Deputy Roche, will be here to discuss the forthcoming GAERC meeting.

The joint committee adjourned at 15.40 p.m. until 11 a.m. on Wednesday, 18 February 2004.