Education is key to meeting many of the goals that EU countries have set themselves. It influences both the growth and social dimensions of the Lisbon agenda. Highly educated populations tend to be more innovative - which has positive consequences for an economy's productivity. Education is equally important for social outcomes: income inequalities across Europe are more highly correlated to variations in national educational performances than to any other indicator.

Skill levels across the EU are improving, but the overall picture is mixed, with huge variations between the best and worst-performing countries. Secondary education in the Nordic countries is outstanding. But across much of southern Europe it is poor: too many youngsters fare poorly on literacy and numeracy tests and leave school too early. Almost 30 per cent of young Europeans in their twenties now have a university degree, a share that is three times higher than among those over 60. However, universities in much of the EU are mediocre. Many suffer from overloaded curricula, demotivated professors, and high student drop out rates.

The EU itself has few competences in education - policy continues to be made at national level. This is good because improvement requires more local autonomy, not centralisation. However, the EU can help to cajole countries to move in the right direction by benchmarking their performances and encouraging them to learn from each other.

Knowledge – its creation and diffusion – are key to a country’s competitiveness. To benefit in the long-term from the new division of labour created by globalisation, EU countries need to develop stronger comparative advantages in innovative goods and services. Creating and implementing innovation requires above all a highly trained workforce, with skills in science and technology. The ability to adapt to new technology requires well functioning secondary schools that are strong in maths and science tuition and a tertiary education system that facilitates the adoption and diffusion of innovation. A dearth of researchers is one of principal obstacles to higher R&D investment in the EU.

There are a number of steps that the EU should take to facilitate innovation. Regulatory barriers need to be dismantled and approval procedures speeded-up. This will foster the innovation of new products and services by providing companies with greater economies of scale and by reducing the cost of regulatory compliance. The share of the EU budget devoted to R&D needs to rise. Less money should be spent on supporting agriculture and more on improving the environment for innovation. The EU needs to reach agreement on an EU-wide patent on order to reduce the cost of filing EU-wide patents. Member-states must also be permitted to make more use of public procurement to foster the adoption and diffusion of innovative technologies. Finally, the EU needs to encourage the integration of service sectors across the EU. At present, service sectors are fragmented, with the result that there is often insufficient scale to make innovation worthwhile.