But a revived Germany would certainly have a better chance of driving innovation in Europe.

“At the moment the mood is optimistic,” says Gerhart Maier, managing director of Invest in Germany. “Immediately after the coalition treaty everybody was hesitating, but it seems the economy is now finding new courage.”

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Germany, he says, “is playing a very active role in the EU, particularly in the R&D field”. He points out that promoting technology and research was a core element of the coalition treaty that created the Merkel government.

A minister for innovation and research has been appointed and a technology advisers group convened to advise the chancellor directly.

On two measures, patents and productivity, the German example might be instructive for some of its fellow EU members. The European patent office is headquartered in Germany, and Germany registers more patents than the UK and France combined.

Improvements in productivity are closely tied to R&D, Mr Maier says, and have a helpful knock-on effect on Germany’s historically and comparatively high labour costs: “The productivity rate is increasing sharply in Germany – it is probably the best in Europe – and that means a lot of R&D applied; otherwise you would not be able to decrease the labour unit costs. Germany is the only European country that is decreasing labour unit costs, and we are already down to the level of Italy.”

It is difficult to tell at this early stage in the Merkel chancellorship, however, exactly what innovation-boosting reforms and initiatives will be pursued.

Meanwhile, in France, a string of new measures have been introduced. “For the past three years the French government has put the question of attractiveness [for investment] at the centre of its economic policy,” says Clara Gaymard, president of the Invest in France Agency.

Much of the recent reform drive has focused on R&D and innovation. Ms Gaymard sums up France’s new strategy as “to be more market-driven, to finance the project and not the structure, and to put more money on the table”.

The French are aware they need to increase international visibility of their areas of excellence, create better public research teams and lower taxes on R&D activities.

Specific measures aimed at boosting innovation include:

  • simplification of the co-operation process between private-sector companies and public-sector research institutions;
  • grants to lure back expatriate French scientists;
  • re-organisation of the national system of R&D support;
  • identification of the most competitive clusters and reinforcement of them;
  • ambitious reform of the research tax credit in 2004, which was further widened in 2005. The public R&D budget will get a €1bn-a-year boost over the course of the next five years.

The government is right to pursue tax system reforms (albeit small and narrowly targeted reforms) as heavy and complicated taxes stifle innovation and enterprise. Business taxes for R&D activities were cut in 2003, and the following year further improvements were made to the research tax credit system. New laws were introduced in 2004 that reduced tax and social securities contributions for ‘young, innovative’ companies and encouraged the activities of business angels.

Another law, currently in the parliament, is intended to bring about a more market-driven approach to the way public R&D money is spent.

An Agency for Industrial Innovation (AII) was set up in August 2005 aimed at helping to bring innovative technologies and products to market. Programmes will be co-funded by AII and its industrial partners. Another new agency, called Oseo, is dedicated to supporting small and medium-sized companies carrying out R&D through co-financing and financial guarantees.

“These past three years we’ve really done all the reforms necessary to reach the international standard and be like Finland, the US or Japan and reach 3% of GDP in R&D,” Ms Gaymard says. At the EU level, though, it is safe to say that many more reforms are necessary.