Innovation vs. Austerity: how can Spain enhance its knowledge economy in austere times?

European Commission

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European Commissioner for Research, Innovation and Science

Innovation vs. Austerity: how can Spain enhance its knowledge economy in austere times?

The Economist’s Spain Summit Closing session

Madrid, 3 June 2014

Ladies and gentlemen,

The subject of this Summit, “Accelerating the return to growth”, could not be more relevant for the situation in Europe today.

After a long period of economic downturn, the signs of recovery in Europe are becoming evident. This is true in Spain, where the European Commission’s Spring forecast put growth in 2014 at 1.1 percent, rising to 2.1 percent in 2015.

However, the recovery remains fragile and uneven, and it is now urgent for the European Union to really focus on the measures that can secure growth and jobs.

I am convinced that research and innovation must be at the heart of a lasting recovery, so that Europe takes its place as the knowledge economy.

I’m certainly not alone in that conviction. Last October the EU Heads of State and Government declared clearly that ‘Investment in research and innovation fuels productivity and growth and is key for job creation’.

And the point of consensus following the European elections is that Europe must focus even more on jobs and growth.

Indeed, the evidence shows that the Member States that continued to invest in research and innovation have fared better in the current crisis.

There is also a wide agreement that investing in research and innovation is the entry ticket to the knowledge economy.

So it is worrying to see that many Member States have cut research and innovation spending in the last few years. In Spain, the public budget for research was cut by 25% in real terms between 2008 and 2012. And Spain is by no means the only such Member State.

At first glance, and considering the severe pressures on budgets, such cuts are perhaps understandable. However, public research investment helps create the knowledge base and talent that innovative companies need, and it also leverages business investment in research and innovation, crucial elements in fulfilling the aims of Europe 2020.

The countries that are cutting investments for a prolonged period risk losing the highly skilled talent that is essential to remain competitive and for generating future jobs and growth. It will be very difficult to recover from these lost investments.

So unless we reverse this trend, I am afraid that there will be parts of Europe that, in the long run, will not be able to compete in the knowledge economy. The ‘innovation divide’ risks becoming an entrenched economic divide.

It is against this backdrop that the European Commission is preparing new proposals that focus on research and innovation as the sources of renewed growth.

I will be presenting these with Vice President Olli Rehn next week.

One of the thorniest issues that we will address is how we solve the conundrum of investing more in research and innovation in times of fiscal consolidation, when public budgets are under greatest pressure.

The very clear message from the Commission is to prioritise and to reform.

Some countries have been here before. Finland turned its economy around in the 1990s by focusing on innovation and making the necessary investment, despite huge budget pressures.

At the same time, Finland reformed its research and innovation policies and has been continuously improving them ever since.

And more recently, we are seeing that continuing to invest in the sources of jobs and growth is paying off in several Member States and in the transformation of economies like South Korea and China.

And this is also what the EU did last year when it agreed its new seven-year budget.

While the overall budget envelope was reduced, there is a decisive shift towards research and innovation – with Horizon 2020 seeing a 30% real terms increase in finance. And hand in hand with this increase, Horizon 2020 has been radically reformed to be simpler and achieve greater impact.

Reform will bring in more business investment in innovation. Many businesses look globally when they invest in research and innovation. So Europe and Member States like Spain must be able to put forward an attractive proposition.

The Single Market is, I believe, a huge motivation to invest in Europe. But we need to make sure the Single Market works, especially in high tech areas such as the digital economy and biopharmaceuticals.

Progress at European level, for example on the European patent, remains essential, so we will continue to implement the innovation-friendly measures championed by the Innovation Union initiative.

Alongside these framework conditions, there is the potential for smart investments by the public sector to leverage private investment.

The European Union has just agreed six partnerships with industry worth some 17 billion euro in pharmaceuticals, ICT, transport and the bio economy. More than half of this investment comes from the private sector. This kind of public private partnership can, and should be, supported by individual countries.

Indeed, public and private investments in research and innovation are closely linked.

Improvements in the quality and efficiency of public spending can help create a ‘virtuous circle’, by leveraging higher investment levels from the private sector and generating increasing economic returns.

Our proposals next week will support governments to make the necessary reforms.

No government can fund world class science and innovation in all areas, and so each country must take tough decisions to prioritise their research and innovation budget in the areas where it will produce the greatest impacts.

The aim here must be smart specialisation – playing to a region or Member State’s particular strengths and talents and focusing resources where they have the greatest impact rather than spreading investment too widely and too thinly.

We’re encouraging this approach under the EU’s new Cohesion Policy. From now on, every Member State and region must have a smart specialisation strategy in place as a condition to receiving funding for research and innovation from the European Structural and Investment Funds.

I am also a firm believer that public funding for research and innovation should be allocated on a competitive basis to the best proposals. This objective approach is the foundation of excellent science, but it is not yet common practice in all Member States.

There is also much to be done to improve the performance of universities and public research organisations.

Universities need to be able to enter partnerships with business and other actors.

The performance of universities should be assessed independently. And positions in universities should be advertised openly with recruitment based on merit.

These reforms are all important ways to ensure that public money is being well spent. They will also enable the free movement of researchers and ideas across Europe creating a European Research Area.

We also need to reform how we finance research and innovation. Beyond grant funding, we have seen that many countries are using tax credits and financial instruments to support business research and innovation.

And at European level we have also reformed how we support research and innovation, with the new Horizon 2020 programme which has a budget of nearly 80 billion euro.

The programme aims to get bigger impacts for our investments in scientific excellence, industrial leadership and societal challenges.

Horizon 2020 also represents economic reform, designed to generate growth and jobs. We have a programme that has cut red-tape, where excellence is the benchmark and where we champion both top quality fundamental research, and its application in innovation.

The programme will promote even greater industry involvement, in particular for SMEs and new entrants.

Indeed, while research and innovation for SMEs are promoted across the whole programme, Horizon 2020 also introduces a new instrument designed to meet their specific needs.

There are also new financing options in the form of risk-sharing (through guarantees) or risk finance (through loans and equity) to support innovative companies.

I urge Spanish companies, including SMEs, to seek out the new opportunities provided by Horizon 2020. This is not just about support to finance innovative projects, but also to enable companies to access the best knowledge and expertise from across Europe.

But Horizon 2020 can only complement investment and reform at national level.

Spain is not facing its challenges alone – many Member States share similar problems. I know that Minister de Guindos, who is responsible for research in the Spanish government, is ambitious to reform, and the European Commission is keen to help.

For example, the Commission is financing a Peer Review of Spain’s research and innovation policy by experts from seven other European countries.

The European peer review will provide suggestions to Spain on how to reinforce the contribution of research and innovation to your economy and society.

Minister de Guindos has committed to closely examining the suggestions and take them on board.

Spain’s determination to reform has already resulted in the very welcome National Reform Programme, in particular the newly-adopted Strategy and Implementing Plan for Research and Innovation and the announcement of a National Research Agency.

These are the right steps, but what more could Spain do?

Yesterday, as part of the European Semester process the European Commission presented the results of its assessment for 2014, together with proposals for Country Specific Recommendations to be endorsed by the European Council.

Recommendations are made for each Member State, and the proposed recommendations for Spain include the financing of the new national strategy for science, technology and innovation as well as making operational the new State Research Agency.

This means that when Spain reviews its spending priorities within its fiscal consolidation strategy, it should identify the sources of funding for the new National Strategy and Plan for Science, Technology and Innovation.

The Commission also considers that Spain needs to increase the quality of research outputs. This means that the new State Research Agency should follow best practice in the allocation of funding to universities and other research-performing organisations based on their performance. Greater use should be made of competitive calls for proposals which use international standards of peer review. In the long run such measures will encourage excellence and deliver better value for money.

Finally, the Commission’s assessment is that Spain needs to foster public-private cooperation and facilitate the commercial development of research outputs. So there should be incentives for researchers, universities and public research organisations to cooperate with industry.

Ladies and gentlemen,

If I were to distill what I have been discussing down to one message, it would be this:

Combining investment and reform of research and innovation must be Europe’s roadmap to growth and prosperity.

I don’t underestimate the task. I know from my own experience with Horizon 2020 just how difficult this is, and I know what a big challenge it is for Spain.

This means a relentless focus on jobs and growth. It will mean Europe as a whole will need to shift resources towards research and innovation and other growth-enhancing measures.

This is already happening at the EU level, and the Commission is encouraging Member States to do likewise within their fiscal consolidation strategies.

At the same time we need to reform our research and innovation systems and create the framework conditions that will attract innovators, entrepreneurs and business investments.

It’s a challenge that I know you will meet and it is absolutely essential to do so – so that the economy that will emerge from the crisis will be very different from before.

We are with you every step of the way.

Thank you.

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