1. Modelling the Lisbon Strategy: Analysing Structural Reforms in the EU using QUEST III Werner Röger, Jan in ‘t Veld, Janos Varga European Commission DG ECFIN June 2008

2. Europe’s productivity performance

3. The EU’s Innovation Gap:

4. Possible explanations 1.Product market competition 2.Skill composition of the labour force 3.Financial market imperfections 4.R&D subsidies Methodology: Semi endogenous growth model (Jones) calibrated for the EU (27) and the US

5. 1.Model Main characteristics: Three sectors: final goods, intermediates, research Monopolistically competitive final and intermediate goods sector Three types of labour (low, medium and high skilled) Only high skilled workers can move between production and R&D Technical progress is modelled as increasing variety of intermediates

6. Sources of market failure: Monopoly pricing in the final goods sector. Monopoly pricing in the intermediate goods sector (but free entry). Administrative entry costs. Limited access to loans. Intertemporal knowledge spillovers. International knowledge spillover. (Imperfect competition in the labour market).

7. Households:

16. Summary: Could these reforms close the productivity gap with the US? By how much? How long would it take? % Increase of GDP after 10 Years100 Years R&D tax credits0.0%0.3% Service Competition1.5-2%3-4% Venture capital0.0%1.5% Admin Burden0.0%1.0% High skilled share1.0%1.5% _____________________________________________ Sum2.5-3%7.3-8.3%