Is This Upbeat Feeling in Brussels Warranted?

After five weeks away from the office, spring is definitely in the air on my return to the EU capital.

Unemployment is down to a 15-year low of 7.1% and growth, which hit a six-year peak of 2.7% in the eurozone last year, is set to hit 2.5% this year and next, with inflation at around 2% for the foreseeable future.

So, has eurosclerosis finally been overcome? Is the Lisbon strategy of promoting sustainable growth and jobs in the new knowledge-based economy paying off? Is continental Europe entering the ten-year Goldilocks phase nurtured by Gordon Brown in the UK?

Craig Mundie, the chief research and strategy officer at Microsoft, is far from convinced. Talking to him earlier this week he repeatedly stressed to me that Europe is not only failing to catch up to the US in terms of innovation and productivity, but risks being overtaken by China and India.

"They have a stronger output of engineers and a host of meritocratic universities, a huge influx of foreign direct investment and venture capital, and are building innovation clusters," he says, virtually dismissing the notion that Europe can create its own Silicon Valley - ever.

A key issue he cites is the dearth of venture capital. Microsoft-sponsored research by Library House, commissioned for its own SME conference here, shows that this market is still five times smaller than in the US despite being worth €6.4bn in 2006, with more than a third of this going to start-ups in the IT sector. But China, whose market is growing at 55% a year, is set to catch up in two or three years and India, enjoying 90% annual growth, within four to five years.

Another failing is the lack of world-class technology-based universities (apart from a few elite ones) and the particularly strong impact in Europe of the global shortage of high skills talent. On top of this, Europe is also hit by an ageing population, falling birth rates and resistance to migration. The European Commission estimates that, while 5.5m new jobs will be created this year and next, 3m jobs are already unfilled. Germany, whose engineering companies have restored the country to its position as the world's leading exporter, is suffering from an acute shortage of engineers and is considering opening up its labour market to selected migrants.

Can the new Galileo be saved?

Nothing illustrates better the futility of Europe's pretentions to outdo the US in technological innovation and leadership than the project to set up a satellite radio navigation system with greater pinpoint accuracy and civilian independence than the Pentagon-funded - and Pentagon-founded - GPS. Galileo is four years behind schedule and the eight European hi-tech companies, including EADS and Britain's Inmarsat, meant to bring it into service by 2012 have fallen out over funding and work-share.

This grandiose scheme, using 30 satellites circulating the globe at 24,000km, could create 140,000 jobs in a market worth more than €300bn by 2025. But the collapse of the public private partnership, still the UK's favoured solution, means that Jacques Barrot, the EU transport commissioner, has suggested that the EU taxpayer foot the €2.4bn bill outstanding.

In a desperate, transparently fixed lightning poll, carried out by Eurobarometer, Mr Barrot claims to have found 63% support for public funding of the project, and 80% backing for the scheme itself - even though 60% have never heard of it.

But the EU's 27 governments have - several - different ideas about funding it - provided it means no extra expense for them. They could raid other current research funds or, horror of horrors, re-open the 2007-2013 "financial perspective" agreed only after acrimonious debate (over the UK rebate).

The Americans are quietly laughing, with Boeing, Lockheed Martin et al bidding to launch GPS3, an equally accurate - and free - service for users in 2013. Perhaps the EU should turn to the Chinese and Indians and ask them to stump up the money - and take most of the touted jobs with them.

Is Charlie racing ahead on his own?

Charlie McCreevy, the amiable EU internal market commissioner who skips meetings of the 27-strong "college" to attend Cheltenham each year, is the only player in Europe who doesn't believe that private equity and hedge funds should not be subject to tougher transparency rules, according to Poul Rasmussen, president of the European Socialist Party (PSE) and ex-Danish premier.

Launching a 250-page study of the funds by socialist MEPs, Mr Rasmussen said Mr McCreevy, the neo-liberal former Irish finance minister who has hailed the funds as the saviours of clapped-out firms and praised their "constructive destruction," tried to call him - and the $1.7trillion industry - to heel. If the ECB, OECD and others were worried about the systemic risks presented by the funds, he added, so should Charlie. (He favours at most a self-regulated code of conduct).

The PSE report, part of a series about reforming the European social market economy to make it fit for globalisation, calculates that a quarter of the 6900 hedge funds are based in Europe and private equity invested €160bn in leveraged buy-outs last year. Their investments account for 70% of the total under management - compared with just 5% for long-term venture capital. Pension funds, it says, account for a third of private equity funds raised - and a half of hedge fund investment.

The group, calling for greater transparency and disclosure, especially in the interests of pension funds, insists that the funds' short-termist views and overwhelmingly debt-financed activities are damaging to the long-term economic prospects of Europe - and their 4 million employees' jobs, rights and conditions. "Capital markets should respond to the needs of the real economy," Mr Rasmussen said.

The socialist MEPs want the funds to be regulated at national and EU level, dismissing suggestions that this will force them overseas or offshore, with, inter alia, a common minimum investment threshold and aggregate deposits for all HFs made known to bank supervisors (but not the public). This would help control those systemic risks, they say, but the evidence is that Charlie isn't listening.

Or is he being reined in?

Late last year Mr McCreevy launched a plan to open up the EU's €88bn postal industry to full competition by 2009, with Royal Mail, Deutsche Post and some other operators in accord.

Unions have taken to the streets in protest, worried that the universal service obligation (guaranteeing daily delivery for the same price anywhere) is unfunded under his plans, which would allow private operators to cherry-pick profitable urban centres and slash jobs. And, now, there's talk among even agreeable governments about delaying the scheme until the end of 2010 or allowing recalcitrants such as Belgium and France to do so. Germany, which chairs the EU until the end of the month, is thinking of scrapping its own plans to end the DP's monopoly.