Europe is falling behind. In his state of the Union address US President George Bush pledged to devote more attention to research and development. While Bush’s cure (doubling federal spending on research to $50 billion) is wrong, his assessment of the problem is correct. Investing and research should be made more attractive if we are to secure progress and growth in the future, and in Europe we are desperately falling behind.

A recently released UNESCO Science Report indicates that Asia, and especially China, spends vast sums on Research and Development. In fact Asia accounts for almost one-third of global spending on R&D. Again China’s cure is wrong, but the assessment of the problem is correct. Meanwhile in Europe we are desperately falling behind.

Last month the Copenhagen Institute published Vera and Benefica, a booklet written by the Danish Prime Minister Anders Fogh Rasmussen. The manuscript was written in 1996 before he took office. The book is short and clearly inspired by the French economist Frederic Bastiat and the American economist Henry Hazlitt. It is a dialogue between two ladies Vera (truth) and Benefica (well-meaning).

In Vera and Benefica, Mr Rasmussen eloquently describes how governments cannot create jobs – only reallocate them or, even worse, destroy them!

The US and Asia spend lots of money on R&D, but they only move money around in the economy, without creating jobs. Their focus on increased savings and the need to invest, however, is right on.

And this is where the EU is falling behind. The latest figures show that in the EU the top 500 private R&D spenders actually reduced their R&D investment by around 2%. Outside the EU the top 500 spent 3.9% more.

The problem is that people in the EU are tied down and restricted by tons of rules and regulations that make it difficult to get a proper return on investment.

If the EU is genuinely committed to growth and to the goals of the Lisbon Agenda to become the most competitive and knowledge-driven economy by 2010, then something must be done.

While Europe is ahead in some hi-tech sectors it has still seen a shortfall. Most European companies are small and medium sized enterprises (SMEs) – which do not have large R&D budgets or even large assets so they have to rely on their intellectual property rights if they are to attract investors.

In Europe, however, there is no coherent intellectual property regime. The current system is fragmented within various legal systems, there is a high administrative burden and prohibitively high costs. All these combine to discourage the filing of patents to protect inventions.

It has been argued that patents harm SMEs. The opposite however is true. For innovation focused SMEs, patents are vital to protect inventions and investment in R&D from being stolen by multinational companies. It becomes simply impossible to produce and deliver the product if SMEs have to compete with the productive capacity of multinational companies.

The lesson from Anders Fogh Rasmussen’s book is that government should de-regulate and step back. It should focus on securing property rights, free markets and the rule of law – not meddle in the economy.