Hamish McRae: The gap between the US and Europe may have widened, but it's not all bad news

The Lisbon Agenda is doomed, so says Hans Eichel, the German finance minister. So what should the EU finance ministers do about it when they meet to discuss progress this weekend in The Hague?

The Lisbon Agenda is doomed, so says Hans Eichel, the German finance minister. So what should the EU finance ministers do about it when they meet to discuss progress this weekend in The Hague?

To recap: the Lisbon Agenda was set out at the 2000 Lisbon summit. It was designed to make the EU "the most dynamic and competitive knowledge-based economy in the world" by 2010. It set out a number of targets for research, education, jobs and so on, plus labour and pension reforms. The aim was to close the gap between Europe and the US.

Now, four years in, it is clear that the gap has not narrowed but actually widened. Not only has Europe grown more slowly than the US, it has also fallen behind on the targets it set itself. All this has been evident for some time. The new fact is that an EU finance minister is prepared to admit it, for Mr Eichel's comments were the first time any minister has gone on record on this matter.

Acknowledging there is a problem is the first step towards solving it, so it is a bit of relief that the problem is out in the open. What next?

Well the first thing is to ask whether the target was ever realistic and the answer surely is no. Or rather at a producer level the answer is no; at a consumer level there is a lot of evidence that the gap has more or less disappeared.

The charts here illustrate this. Take the simple measure of internet access, the extraordinary feature is the convergence between the different nations. In 2003 the US had a significantly higher penetration than Europe. By next year that gap will have closed, with the UK quite possibly having higher penetration than the US. Take broadband access (second graph). Again the US seems to be losing its lead. The projections are just that, but if they are right the UK could again have more broadband subscribers relative to population than the US by next year. The broadband surge here seems to be coming at just the right time for demand. One measure of the British willingness to embrace the new technologies: a higher proportion of flights are booked online in the UK than in the US.

Of course the UK is more advanced than most of continental Europe (though behind Scandinavia) but the gaps are not huge and they are tending to narrow.

Even in e-business, Europe does not seem to be losing much ground. The third graph shows that last year the US was way ahead of Europe and Japan. But by 2006 the gap is projected to be a lot narrower if you allow for the different size of the economies.

On the other hand at a business-to-business level there probably is still a gap and is it hard to know whether that is narrowing or not. European business does not seem to have achieved the same advances in productivity as the US. That would suggest, on the face of it, that it is less adept at using the new technologies. But it is much harder to increase productivity if demand is stagnant, which in continental Europe it has been, than it is if demand is booming. In specific areas such as online procurement there probably is still a gap too.

There are huge gaps in performance across Europe, with the UK apparently catching up with the US in the application of technology, Scandinavia level or ahead and much of the eurozone lagging. So at a consumer and a commercial level there is not a general and complete failure to achieve the goals of the Lisbon Agenda: more like very uneven progress.

More worrying has been the lack of progress in the knowledge industries and, in particular, the universities. As the latest rankings of world universities by Shanghai Jiao Tong University show, there is no continental European university in the world's top 20. Cambridge is at three, Oxford at eight and Tokyo at 14. Imperial and UCL are at 23 and 25 and the Swiss Federal Institute is at 27. Otherwise, all the top universities are American.

From a UK perspective this is mildly encouraging, particularly as foreign access to US universities is curtailed by visa restrictions. But from a continental European point of view it is a catastrophe. You cannot realistically hope to be a world-class knowledge-based economy if you don't have world-class universities. It is not just that you don't generate the knowledge; you don't retain the brightest graduates, who will choose to do their post-grad work in the US or UK. Consider also the relative success of sectors such as biotech in the US and UK as a result.

There is a plan to try to standardise European degree courses on a four-year first degree plus one year masters, or a three-year first degree plus two-year masters. But this would not tackle the quality issue and might even undermine the UK's three plus one-year system. The idea of a European employer not accepting a one-year masters from one of the top universities in the UK while accepting a degree from a European university that does not even make the top 500 is a bit absurd but strange things happen.

At any rate the key is improving the quality of European universities as a necessary but insufficient condition for improving European competitiveness in general. But it will take time. It will take time to improve continental universities and then it will take time for the graduates to move through the job market. So 2010 was always unrealistic, with 2020 or 2025 a more reasonable timescale. But it will be expensive and it will require radical changes to the way continental universities are organised. Given the slow progress towards the supply-side reforms set out in the original Lisbon plan, it is hard to be optimistic.

Still, while there are no quick fixes, there are some things that are worth talking about this weekend in The Hague. One is to look at why Europe has lost the lead it had established in mobile telephony thanks to the early adoption of GSM. There are some regulatory blockages that could be cleared that would help Europe improve its position. Another is to look at why young, well-qualified Europeans leave to come and work in the UK and US. What, for example, would be the labour market or tax reforms that would entice them to stay? (France is currently considering its 35-hour week: has that been a relevant factor in youth migration?)

Enterprise finance is another issue. There is some evidence that the weakness of continental private equity (the new fancy word for venture capital) is damaging the ability of new businesses to get off the ground. The French government is concerned about this and is trying to force financial institutions to funnel more money that way. I'm not too sure that is the right way to go about fixing the problem but it is a start to recognise the problem exists.

But ultimately no top-down solution will change things if there is a general lack of consumer demand and consequent slow growth. People in slow-growing economies are disinclined to take risks because if things go wrong they cannot earn their way out of trouble. So the finance ministers in The Hague need to think about the macro-problem of slow growth as well as the micro-problems of rigid labour and capital markets and weak universities. Meanwhile, a cheer for Mr Eichel for his candour in admitting failure.