There will have to be a sea-change in the attitudes of government, workers and businesses in Europe if the Continent is to make up the ground that it is losing to its competitors in the global economy, according to Edmund Phelps, winner of the 2006 Nobel Prize in Economics.

In a sobering keynote speech at The Future of Europe Summit in Andorra on Thursday, Phelps listed a variety of factors – from the macro-economic to the attitudinal and societal – that must change if Europe is to lift its productivity rates and compete successfully in increasingly competitive markets.

“If Europe is to become an economy of leadership, of innovation and dynamism, a lot of things have to change -- a lot of things have been holding Europe back,” said Phelps, who is McVickar Professor of Political Economy, Columbia University, New York.

Many of the problems run deep. He noted that the tradition of “solidarism,” which has its roots in ancient Rome and inspired the growth of unions, hampers entrepreneurship. Likewise, employer confederations “work against outsiders” and “instill uncertainty,” bringing “a desire for order and consensus that leans to requiring virtual unanimity among stakeholders for change.”

This tradition has meant that “Europeans have viewed speculation as worthless and viewed rational economic policy as a coordinating role with state – companies as an arm of the state is inimical to dynamism.”

He added: “The power of labour thanks to myriad labour laws is such as to potentially cause lots of difficulties to companies, particularly fragile young companies; there is too much job protection.” Another area of particular concern, Phelps said, is the financial sector, which still “doesn’t do a good job of assisting and mentoring the start-up entrepreneur.” There are not enough “angel investors,” or active venture capital firms, while banking is based on relationships and is “inhospitable” to outsiders.

On the micro level, Phelps cited as an example, the need for a start-up enterprise to attain 21 licenses to set up in Italy. Meanwhile, management in Europe is “not up to snuff by world standards.”

“There seems to be a habit in Europe to give the managers an easy ride, they’re not challenged by the boards of directors, companies are very clubby formed by connections, so there’s not a hard-nosed spirit of dynamism at the company level, working in the interest of the shareholders.”

There are also macro factors that will drag on Europe’s attempts to pull itself up. Demographic trends mean that by the 2020s and 2030s higher taxes will be needed to cover the costs, which will have a negative impact on profits and investment. The global environment might also work against Europe as interest rates rise and credit markets re-price risk based on the current financial crisis.

To be sure, many European countries have embarked upon a range of reforms, and they are trying to ease the burden on companies. But that alone, Phelps warned, will not be enough to propel the economies.

“It’s not that simple,” he warned. “There’s no ´magic bullet´ to raise dynamism, even if you had a sweeping change of the entire institutional structure.”

“I don’t think reducing welfare entitlements will generate a rebirth of economic dynamism for spontaneous innovation. It’s a huge leap from one to the other, there’s a whole panoply of changes that need to occur before the Continental economies acquire a high level of dynamism.”

Are there any reasons for optimism? Phelps noted that the European corporate sector is trying to lead the way by reforming itself, without necessarily having the support of the government. Increased foreign share ownership has helped this.

Europe also has a chance to benefit from the recent productivity gains in the U.S. Canada, Ireland, South Korea and elsewhere in the past dozen years -- much as Europe did in the 1950s.

“There’s a tremendous opportunity for Europe to snatch the technology that’s out there. But it is naive to think this by itself will bring back dynamism.