January 24, 2006

Five Lisbon highlights; the economic impact of reaching these targets

Reaching Lisbon goals would substantially boost growth

Press release
The economy of the European Union could grow by an additional 12 to 23 percent if the Member States succeed in reaching the Lisbon goals in 2010. The political leaders have agreed upon these goals five years ago in order to foster productivity and competitiveness of the European economy.

George Gelauff and Arjan Lejour from CPB Netherlands Bureau for Economic Policy Analysis draw these conclusions in CPB Document 104, 'Five Lisbon highlights: the economic impact of reaching these targets', which is published today. The research was conducted for the Directorate General Enterprise and Industry of the European Commission. This report is made available today by DG Enterprise and Industry at their website.

The investigated goals
The CPB study investigates the economic impact of reaching goals in five of the most important Lisbon areas. These are:

  • employment growth to 70% of the labour force,
  • increase in human capital from specific education and training measures,
  • rise of Research and Development (R&D) expenditures to three percent of Gross Domestic Product (GDP),
  • lowering the administrative burden by 25 percent,
  • opening up the services markets (services directive).

Impact of higher employment and R&D expenditures
In particular the increase in employment and higher R&D expenditures could have a big impact on GDP. In 2004, 64 percent of the European labour force was employed. This implies that employment has to increase by about ten percent, to meet the target. As a result, the European economy could grow by an additional 6 to 9 percent. This increase is lower than the employment increase, because the productivity of the additional workers is below average. At the moment, R&D expenditures are just below two percent of GDP. The target of three percent requires a substantial increase of these expenditures. Because the return on R&D expenditures is high, the European economy could grow by an additional 4 to 12 percent in about two decades. The wide range in outcomes reflects the uncertainty with respect to the return on R&D expenditures.

Effects of other goals
An increase in human capital has only a substantial impact in the long run. This policy improves in particular the skills of new entrants at the labour market and it takes decades before the new entrants form a major part of the labour force. The effects on GDP of the services directive and the reduction of administrative barriers are also positive, but less substantial.

Assessing the economic potential of the Lisbon goals
The focal points in CPB's analysis are the size of the economic effects per member state and the consequences on international trade if the goals are achieved. To present an overview for the EU as a whole, the effects per member state are aggregated. The feasibility of the Lisbon goals is not examined. The researchers do also not give a complete overview of the policy costs, necessary to meet the goals. Moreover, the effects of the Lisbon goals on leisure and income distribution are not included. In spite of these limitations the study gives a good picture of the economic potential of the Lisbon targets.


George Gelauff
Dick Morks

Read also the accompanying press release.

If Europe would really reach the goals they set, Europe's Gross Domestic Product could increase by 12 to 23% and employment by about 11%. This paper draws this conclusion after having analysed five of the most important Lisbon goals: the internal market for services, the reduction of administrative burdens, goals on improving human capital, the 3% target on research and development expenditures, and the 70% target on the employment rate. Using CPB's general equilibrium model for the world economy we have simulated the consequences for Europe of reaching the Lisbon targets in these fields.


George Gelauff