1. From the internal to the external dimensions of European integration Luc Soete UNU-MERIT, University of Maastricht The Netherlands Centre dAnalyse Strategique, Europe in the Global Economy Conference, Paris, 22-23 November 2007, Paris.

2. Three reflections The internal integration process of the EU has also led to a significant policy diversion in the direction of internal market dimension The external dimensions of the EU as follow-up of the internal dimensions The knowledge dimension and Lisbon as the last major attempt at internal economic transformation. Quid about the external dimensions of Lisbon?

3. 1. European integration A history of success and failure of industrial policy with as central driver: the pursuit for scale economies Central European problem one of scale (M. Abramowitz in the 50s) From the origin of the European Community for Steel and Coal to sun- rise industries microelectronics From the Single Market to Lisbon with research: ERA, ERC, ETP,… EIT Only two areas of formal European supremacy over member states: Competition policy as countervailing power to industrial integration Monetary union as countervailing power to fiscal independence Lisbon as an attempt to correct some of those institutional biases: Employment policies given the wide diversity in unemployment, employment participation, training Research, innovation, education left out of original integration process

4. External dimensions ignored, seen today as result of internal progress Trade diversion not just one effect of economic integration: there are also other diversion effects… Missed external opportunities particularly in new areas not part of initial integration agenda Network services, unused European heterogeneity Research, education, innovation Globalisation as part of the EU internal narrative Defines ultimately the EU negatively The EU appears not as a player in this game Choice made at 50th EU anniversary to start acting as a global player so as to be able to influence (Jacques Barrot): Environment setting of norms and standards Migration (neighbourhood policies) Peace

5. Different external agendas Global agenda (developing countries: emerging and less emerging economies) Scale? Return to normalcy in terms of power (G-8 meetings who invite a Chinese and Indian representative) Solve the problem in the IMF of representation Address the African situation Interaction between the global and internal agenda Different location of countries (Portugal, Ireland, Bulgaria, Estonia or Slovakia) Different cultures in EU more or less strongly internationally integrated: Enlargement has added global bits and pieces of interest to the EU In new world, Lisbon agenda has today by definition internal/external implications

6. Emerging economies Major impact on world trade. Richard Freeman compared the entry of BRIC in WTO as a doubling of the world labour force Thirty years of adjustment probably required, global reorganisation of trade flows Affects all countries: EU, US but also other developing countries Implications for global demand of price inelastic goods: energy, raw materials, agriculture. Reversal of immiserizing growth concerns BRIC as a set of very different countries in terms of: Industrial structure Human resources and research capability

8. Researchers per 10,000 persons employed

9. Science and technology indicators BrazilRussiaIndiaChina R&D expenditure as % GDP, most recent number available between 1996 and 2004 0.981.280.851.31 Researchers in R&D (per million people), most recent number available between 1996 and 2004 3443319119663 Information & communications technology expenditure, 2004, % of GDP 6.33.33.84.4 Personal computers, 2004 (per 1,000) 1051321241 Internet users, 2004 (per 1,000) 1201113273

10. Transatlantic agenda 80% of regulation that plays a role on global markets is either US or European inspired Both EU and US are the world regulators/standard setting agencies. When they disagree little progress is made (e.g. sustainability) Being challenged? Regulatory cooperation or competition (having advantages of diversity of regulation) How do we relate to the rest of the world (should EU/US form a front? We are under treat. We have at our disposal the means to keep the old order) Real assets of Free Trade agreements is the regulatory framework

11. Regional global agenda Neighbourhood agenda Strange dilemma: highly volatile region around us but the EU is clearly the central power in that region. EU engagement is a rather erratic one: achievements not very great): misconceived policy? Some of those countries can become members: anti-chamber for membership, some others not. This is a recipe for disaster. Need to rethink it Two main engagements: migration and energy Much richer and different demography than our neighbours with no EU migration policy 70 to 80% of world energy reserves are in our neighbourhood with no common EU policy (energy produced by state owned firms) Oil has always had a strong foreign policy dimension in other countries; not in Europe. Problem of not having a European state.

12. 2. Global Knowledge challenge Research (global in some fields, see ERC move and individualisation of search for research talent) Education very differentiated in terms of bilateral international relations (Bologna agreement spread to 36 countries) Technology/innovation (local competitiveness: Lisbon logic: strong internal focus employment, increased tradability of technology output (licences, firms driven, etc.) Different public-private involvement with on the public side a national tax payer obsessions (geographically bounded) Rapidly growing different costs factors: researchers costs in China (10 to 20% of US/Europe) as opposed to manufacturing (30%) Different mobility factors: researchers/highly skilled much more mobile. Issue of common attractiveness… EU blue card, mobility need for totally different instrument

13. EU firms becoming global: how the external dimensions overtake Division of labour inside companies? Global production value chains CEO of large companies are saying they are global companies. Those companies are benefiting from globalisation thanks to technology. How to insure that Europe remains a place that is attractive to some parts of the chain. They will keep in Europe whatever is reflected in locational advantages Many countries adopting a strategy to speed up the transition to a knowledge economy. Open knowledge areas. Case of China, close to ours. China wants to raise its standards, need massive knowledge transfers from Europe to China. Double edge, improving crucial expertise… but will then be in competition with Europe What are conditions for us to transfer knowledge that will be a win win situation for us.

14. Mutual globalization and localization of knowledge Globalization of S&T: importance of international access; of exchange of codified knowledge, global scientific communities, where knowledge is shared. But at the same time strong localization of knowledge: knowledge appears a joint production factor (codified and tacit knowledge) subject to different local increasing returns and global access features As a result dramatic increase in knowledge hotspots also within EU: Agglomeration effects in knowledge increasingly at level of tacit knowledge accumulation, hence crucial importance of universities Up to now US and to a lesser extent other Anglo-Saxon universities (Canada, Australia, UK) have acted as global attractor poles for international scientists and engineers (see rankings)

15. Open research, open innovation… open Europe? Knowledge as an essential input as problem solving tool for EU/global problems ranging from agriculture, health, to energy saving, climate change to migration In many of those areas global research and global implementation is essential for EU citizens Puts a direct challenge to closed nature of Lisbon/Barcelona targets (1% public funds and 2% private funds), building on internal reform agenda? Is also part of a broader shift in the recognition of the importance of individual research talent as opposed to institutional research support Move towards grant portability both ERC and national research councils with ERC likely to be superior to national research councils because of scale advantages. Need for a Common Research Policy as mirror picture of CAP

16. EUs failures and the Doha Round Failure In the absence of the service directive, international access to service markets was an essential request of EUs major high-tech service incumbents (finance, insurance, telecoms, logistics, business services, etc.). The so-called Singapore Issues (government procurement, investment, competition and trade facilitation) represented a crucial addition to the multilateral trade negotiations. The omission though in 2004 of those, for the EU most commercially relevant Singapore Issues (the 2004 July Package), left Europe's offensive interests with little reason to organize politically in favour of an agreement. The July Package rearranged the balance of political economy forces within the European Union against a new WTO agreement. A new round of optimism…

17. Conclusions: strategic cooperation Multilateral or bilateral? Arena to be emphasized Lisbon is about European competitiveness Attractiveness is a central issue in there To support companies to go global, problem of access to global markets Use free trade agreements to open new markets: allows Europe to exploit its standards as global standards, bilateral agreements Go farther in this strategic dialogue, influence internal Chinese implementation of Lisbon agenda. Subtle way of soft power… Comprehensive strategic partnership Multilateralism: Doha round and EU responsibilities, financial disturbances, reform Breton Woods Sustainability issues (Bali conference) Development: insights in multilateral framework is also very weak