# IMMC.EESC-2017-05444-AC.ENG.xhtml.EESC-2017-05444-00-01-AC-TRA-EN.docx

EN

European Economic and Social Committee

European Economic and Social Committee

ECO/444

ECO/444

Euro area economic policy 2018

Euro area economic policy 2018

OPINION


  European Economic and Social Committee


  Recommendation for a Council Recommendation on the economic policy of the euro area

  [COM(2017) 770 final]

OPINION

European Economic and Social Committee

Recommendation for a Council Recommendation on the economic policy of the euro area

[COM(2017) 770 final]

Rapporteur: Javier DOZ ORRIT

Rapporteur: Javier DOZ ORRIT

Consultation

| Consultation | European Commission, 18/01/2018 |
| --- | --- |
| Legal basis | Article 304 of the Treaty on the Functioning of the European Union |
| | |
| Section responsible | Economic and Monetary Union and Economic and Social Cohesion |
| Adopted in section | 20/12/2017 |
| Adopted at plenary | 18/01/2018 |
| Plenary session No | 531 |
| Outcome of vote

  (for/against/abstentions) | 182/2/5 |

Consultation

European Commission, 18/01/2018

European Commission, 18/01/2018

Legal basis

Legal basis

Article 304 of the Treaty on the Functioning of the European Union

Article 304 of the Treaty on the Functioning of the European Union

Section responsible

Section responsible

Economic and Monetary Union and Economic and Social Cohesion

Economic and Monetary Union and Economic and Social Cohesion

Adopted in section

Adopted in section

20/12/2017

20/12/2017

Adopted at plenary

Adopted at plenary

18/01/2018

18/01/2018

Plenary session No

Plenary session No

531

531

Outcome of vote

  (for/against/abstentions)

Outcome of vote

(for/against/abstentions)

182/2/5

182/2/5

1.Conclusions and recommendations

1.

Conclusions and recommendations

1.1The EESC welcomes the emphasis on sustainable and inclusive growth, resilience and convergence as policy objectives in the European Commission's recommendation for the euro area policies
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1.1

The EESC welcomes the emphasis on sustainable and inclusive growth, resilience and convergence as policy objectives in the European Commission's recommendation for the euro area policies

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1.2The EESC notes that although economic recovery in the euro area has gathered pace since last year, it remains "fragile", "incomplete" and "atypical", as mentioned in the European Commission's Autumn Forecast
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1.3Despite increases in the number of jobs created, there is ample evidence both from the European Commission and the European Central Bank that the 'labour market slack' remains significant, a factor that has been underlying relatively weak wage growth compared to the strength of economic recovery. The persistence of unemployment and underemployment in the euro area implies losses of skills and productive capacity for these Member States and constitutes a major threat to social inclusion, well-being and equality.

1.4Moreover, investment in the area remains below 2008 levels, also contributing to significant losses in production potential in many euro area Member States. The persistent current account surplus of the euro area with the rest of the world further suggests that domestic demand in the area remains low.

1.5The EESC acknowledges that high public and private debt levels in the euro area make its economy vulnerable and accepts the need to reduce them.

1.6After carefully weighing up the relative opportunities and risks arising from the above factors, the EESC disagrees with the European Commission's proposal for an overall broadly neutral fiscal stance and instead proposes a positive fiscal stance of around 0.5% of GDP. The likelihood of a slowdown in growth between 2017 and 2019, which the Commission forecasts, the change announced in the ECB's monetary policy, the persistence of a clear investment deficit and world trade and geopolitical risks would also require that the baton be passed from monetary policy to fiscal policy.

1.7A fiscal stimulus focusing on public investment would deliver stronger demand in the short-term but also expand growth potential in the long-term, thus addressing the question of public debt sustainability. Such public investment should focus not just in infrastructure but also in education and skills policies ("social investment"), thus helping to implement some of the principles of the recently proclaimed European Pillar of Social Rights.

1.8The EESC recommends that in applying the fiscal rules, the European Commission should exclude public expenditure on investment from the scope of application of the Stability and Growth Pact.

1.9The EESC welcomes the explicit mention in the recommendation by the European Commission to prioritise structural reforms that will not only increase productivity and growth potential, improve the business environment and support investment, but also support the creation of quality jobs and reduce inequality, in line with calls made in previous EESC opinions
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  . It reiterates that if vital support of citizens for the reconstruction of the euro area and the achievement of structural reforms in this regard is to be secured, the social dimension of these reforms needs to be strengthened, and democratic, transparent forms of euro area governance, aimed at ensuring economic prosperity and a high standard of living, must be deployed.

1.10The EESC commends the European Commission for calling on Member States to combat tax avoidance, among other things by continuing to work towards the establishment of a Common Consolidated Corporate Tax Base (CCCTB). It also considers it a priority that, for economic, political and ethical reasons, the European institutions and the Member States implement effective measures – those already agreed upon and new ones – against tax fraud, money laundering and the illicit activities of tax havens.

1.11The EESC supports the necessary steps for deepening the EMU,  including full and speedy completion of both the Banking Union – European Deposit Insurance Scheme, common backstop for the Single Resolution Fund and the strengthening of the European supervisory framework for avoiding the accumulation of risks – and the Capital Markets Union. Both should not only contribute to better and more diversified financing of the economy, but at the same time should make the financial and economic system safer, more stable and more resilient to shocks through more cross-border private risk-sharing and financial integration.

1.12In line with its previous opinion ECO/435, the EESC reiterates its view that the euro is the currency of the whole of the EU and emphasises the need to:

-create a fiscal union;

-strengthen Member States' responsibility for and ownership of obligations vis-à-vis the EMU;

-introduce structural reforms within the European Semester platform;

-further strengthen economic coordination and governance, and create a European Monetary Fund;

-improve the system of financial intermediation, leading to the reinforcement of real long-term investment by optimising the role of the EIB, EIF and EFSI 2.0;

-make the EMU more resilient so that it can exert greater influence in the world.

2.Background

2.1Following the launch of the debate on the future of Europe and the accompanying reflection papers, most notably on the deepening of the EMU and the future of the EU's social dimension, and the proclamation of the European Pillar of Social Rights by the Social Summit of Gothenburg, the European Commission published its Annual Growth Survey, accompanied by a recommendation for euro area policies for 2018. The main recommendations of the European Commission are set out the following points.

2.2Pursue policies that support sustainable and inclusive growth and improve resilience, rebalancing and convergence. Member States with current account deficits or high external debt should additionally aim at containing growth in unit labour costs. Member States with current account surpluses should additionally promote wage growth and implement as a priority measures that foster investment, support domestic demand and facilitate rebalancing in the euro area.

2.3Aim at a broadly neutral fiscal stance at the aggregate level for the euro area and a balanced policy mix.

2.4Implement reforms that promote quality job creation, equal opportunities and access to the labour market, fair working conditions, and support social protection and inclusion.

2.5Continue work to complete the Banking Union with regard to risk reduction and risk sharing, including the creation of a European Deposit Insurance Scheme, making the common backstop for the Single Resolution Fund operational and strengthening the European supervisory framework to prevent the accumulation of risks.

2.6Take measures to tangibly accelerate reduction of the levels of non-performing loans on the basis of the agreed Council (ECOFIN) Action Plan and promote orderly deleveraging in Member States with large stocks of private debt. Enhance the integration and development of EU capital markets to support growth in the real economy while safeguarding financial market stability.

2.7Make swift progress on completing the EMU.

3.General and specific observations

3.1Output growth has gathered pace compared to previous European Commission forecasts and extended to more Member States in the euro area compared to last year. On the other hand, the following three issues should be noted.

3.2First, that this acceleration in recovery is taking place after a relatively long period of stagnation in the euro area as a whole, in comparison to economies such as that of the US. This stagnation and the failure of economic policies in the Eurozone to mitigate it has left serious economic and social scars in many parts of the area and has undermined the trust of citizens in the EU's capacity to deliver prosperity.

3.3Secondly, in its Autumn forecasts the European Commission forecast that the output growth rate for 2017 – 2.2% – is likely to represent a peak compared to 2018 and 2019, when growth is expected to fall slightly – by 2.1% and 1.9% respectively. Domestic demand in the euro area, as evidenced by the remarkably high current account surplus with the rest of the world, has remained subdued: private consumption, although growing, is expected to slow down, while the investment gap persists.

3.4Thirdly, the recovery has depended on the support of expansive and unconventional monetary policies which have so far been actively delivered by the ECB, with fiscal policy unduly constrained. The ECB has recently announced the gradual phasing out of its unconventional policies. While this will not necessarily mean that monetary policy support will be rolled back, the need for fiscal policies to be more supportive of the recovery has not diminished.

3.5In addition to the changes in monetary policy and the projected slowdown in growth after 2018, there are other reasons for proposing a moderately positive fiscal stance in the euro area, which the EESC would set at 0.5% of GDP: its persistent investment deficit, which does not occur in other economic regions of the world; a rate of unemployment that is too high – 9.1% in 2017; and the persistence of geopolitical risks and risks in world trade due to the emergence of protectionist policies, particularly on the part of the US. It is therefore necessary for the policy mix to use all the instruments that favour sustainable growth.

3.6The EESC thinks that a somewhat more expansionary fiscal stance for the euro area as a whole than that currently proposed by the European Commission would be beneficial for recovery and compatible in the longer term with public debt sustainability. Applying the Golden Rule for Investment (including social investment) in implementing the fiscal rules would help in this respect and create a favourable context for more inclusive growth and upwards convergence. It would be equally helpful to boost socially responsible investment and investment geared to attaining the UN's SDGs.

3.7The EESC expresses its total agreement with the Commission's criterion of the need for countries with fiscal space and balance of payments surpluses to increase their public investment rates on the grounds that this "[...] would generate significant positive spillovers to the rest of the euro area. Long-term GDP effects would exceed the short-term impact as public investment would raise the productivity of private capital and labour over a sustained period of time"
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3.8The EESC welcomes the European Commission's call for Member States with current account deficits and high external debt to focus not just on improving their productivity growth, but also on improving the business environment. In this context, it notes that fair redistribution of income and wealth deriving from productivity gains should increase equality and have a positive impact on domestic and aggregate demand in the euro area. It is important to stimulate domestic demand as a necessary condition for supporting growth and overcoming the crisis. Increasing wages, especially the lowest, is today one of the main tools for achieving these objectives in the European economy and society.

3.9The coordination of fiscal policies should be complemented by progress towards tax harmonisation, one of the main objectives being to end tax avoidance in the EU. The EESC supports the urgent adoption of the CCCTB Directive. It is a necessary instrument for the implementation of the measures that put an end to the scandalous tax evasion carried out by various multinational companies and that deprive public budgets of between EUR 40 and 60 billion
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  , while exercising unfair competition vis-à-vis companies that comply with their tax obligations.

3.10Tax fraud, money laundering or the sum of illicit activities developed in tax havens move sums much higher than those of the previous paragraph that detract from public finances at a time when they are especially necessary. In the opinion of the EESC, it should be a priority for the EU institutions and their Member States to lead the global fight against these crimes and urgently implement the legal instruments already approved to confront them and take whatever measures are necessary to significantly reduce them.

3.11The EESC believes that priority in structural reforms should go to those reforms that enhance productivity growth but also strengthen job security and the social protection system within the framework of appropriate business conditions. No euro area country can compete in the modern world on the basis of low wages and casual employment. The emphasis should be on reforms that combine negotiated flexibility with security so as to enhance, and create incentives for enhancing, skills and innovation. Labour market reforms should promote greater stability in employment, which will help improve both the supply and the demand side of the euro area economy, even in the short term. They should also help to boost collective bargaining, based on the independence of the social partners, and social dialogue.

3.12The EESC thinks that the proposed steps towards completing the Banking Union are essential in order to relieve the burden on national government budgets, alongside ensuring the public benefit of banking system stability.

3.13Efforts should also be made to establish the Capital Markets Union. Together with the Banking Union, this should expand and diversify sources of financing for the economy. More cross-border private risk-sharing and financial integration should make the financial and economic system safer, more stable and more resilient to shocks. Where appropriate, they can also help to absorb asymmetric effects of economic shocks more effectively, which will benefit all Member States.

3.14In line with the above, the EESC stresses once more that tackling the issue of non-performing bank loans is of paramount importance for complementing policies that aim to relaunch growth. Steps should be taken promptly to address the problem, while at the same time taking into account consumer protection considerations.

Brussels, 18 January 2018

Georges DASSIS

The president of the European Economic and Social Committee

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