These include, inter alia, the unlocking of business potential by creating an entrepreneurial-friendly economic environment, measures to support innovation through higher investment in research and development (R&D) and policies aimed at improving human capital. First of all, Europe needs more new and thriving firms willing to reap the benefits of opening markets and to embark on creative or innovative ventures for commercial exploitation on a larger scale. It is increasingly new and smaller firms, rather than large ones, that are the major providers of new jobs. An entrepreneurial-friendly economic environment would imply less red tape for small and medium-sized enterprises to help them develop at home and across borders, as well as positive action to ease access to the finance they need. Europe is significantly lagging behind in this field. For instance, venture capital financing in Europe remains only a fraction of what it is in the United States relative to the size of each economy. Second, promoting R&D investment is also a major issue. While many Member States expect to increase their R&D spending, Europe will fall short of the 2010 overall EU target of achieving 3% of GDP. In 2005, R&D investment relative to GDP was 1.9% in the euro area compared to 2.7% in the US. The efforts of European countries to increase R&D investment are still insufficient. 16 Finally, to make these measures most effective, they need to be accompanied by efforts to improve the labour force’s level of education and expertise.
The figures I have just mentioned suggest that, overall, structural reforms in the labour market still need to be high on the agenda. This appears even more urgent if we consider that in the past Europe’s growth performance has been, and will be in the future (all else equal), increasingly constrained by its low population growth rate and population ageing. Indeed, since the mid 1990’s, population in the euro area has been growing at a yearly rate of just 0.4% compared to 1.1% in the US. However, what is worrisome is that at the same time, the gap in population growth has been even larger with regard to growth in the working age population. The working age population grew on average by 0.3% per year in the euro area over the period 1995-2007 compared to 1.2% in the US (1.1% in Spain). Finally, turning to labour productivity, while during the 1980s and the first half of the 1990s, hourly labour productivity in the euro area grew on average by 2.3%, it slowed down to 1.3% between 1995 and 2007. Similarly, over the same period hourly labour productivity growth in Spain decelerated very significantly from 2.5% to 0.5%. By contrast, US hourly labour productivity growth rose from 1.4% to 1.8%. The positive labour supply shock, reflected by the increase of employment particularly in the unskilled segment of the labour market experienced in the euro area as well as in Spain has,  2  Average to 2007Q3. 3  Source Eurostat.