Opinion of the Economic and Social Committee on 'Employment policy and the role of socio-economic organizations in the third phase of economic and monetary union` (1999/C 40/12)

On 29 January 1998 the Economic and Social Committee decided, under Rule 23(3) of its Rules of Procedure, to draw up an opinion on 'Employment policy and the role of socio-economic organizations in the third phase of economic and monetary union`.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 20 October 1998. The rapporteur was Mr Thierry Dock.

At its 359th plenary session on 2 and 3 December 1998 (meeting of 2 December), the Economic and Social Committee adopted the following opinion by 94 votes to three, with two abstentions.

1. The new conditions established by monetary union

1.1. The advent of the single currency marks a vital step forward for the European venture. It establishes new conditions that are likely to alter the behaviour of various players including the socio-economic organizations. This behavioural change is in many respects essential, as the success of European monetary union will depend on it.

1.2. One of the major changes brought about by the abolition of national currencies is the Member States' loss of the exchange rate tool.

1.3. The third stage in economic and monetary union will also signal the birth and coming of age of new players.

1.3.1. The European Central Bank

1.3.1.1. The objectives of the European system of central banks are set out under Article 105 of the Treaty establishing the European Community:

'The primary objective of the ESCB shall be to maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies of the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2.`

1.3.1.2. Among the objectives set out in Article 2, the Union is instructed 'to promote economic and social progress and a high level of employment and to achieve balanced and sustainable development, in particular through the creation of an area without internal frontiers, through the strengthening of economic and social cohesion and through the establishment of economic and monetary union, ultimately including a single currency in accordance with the provisions of this treaty`.

1.3.2. The coordination of economic policy through the Council

1.3.2.1. While determining the architecture and legal foundations for the single currency, the European Treaty also provides for a number of measures in respect of the economic integration of the Member States.

1.3.2.2. Article 99 (ex Article 103) states explicitly that 'Member States shall regard their economic policies as a matter of common concern and shall coordinate them within the Council`.

This involves in particular:

- setting broad guidelines for the economic policies of the Member States and the Community,

- monitoring economic developments in each of the Member States and in the Community,

- making recommendations to Member States that do not conform to those broad guidelines.

1.3.2.3. The coordination of economic policies is a vital cog in the machinery that will enable monetary union to fulfil its objectives. If Member States fail to coordinate economic policies adequately, the single currency may well turn out to be an enormous disappointment. The procedures for coordinating economic policies were clarified at the Luxembourg European Council meeting in December 1997.

1.3.2.4. The European Council's resolution on the coordination of economic policy during the third stage of EMU states that economic policy and wage determination will remain national responsibility. Meanwhile, it observes that a higher degree of coordination and monitoring are essential since economic developments at national level will have more far-reaching repercussions.

1.3.3. The key role of the socio-economic organizations in the area of wages

1.3.3.1. In the third stage of EMU, there will be a greater need to steer monetary policy and economic policy from the European level. The success of monetary union will also depend on appropriate use of a third tool: employment and labour market policies, including wages policy.

1.3.3.2. Socio-economic organizations, and in particular the social partners, traditionally play a critical role in these areas. Their responsibility could be even greater within monetary union.

1.4. The central banks, the Council and the socio-economic organizations will form the cornerstones of EMU. Each will carry specific responsibilities, managing monetary policy, economic policy and employment policy respectively.

1.4.1. If EMU is to achieve its set objectives, it will not be possible for these players to work haphazardly. Adequate coordination will be required, involving in particular the efficient circulation of information.

2. The European Central Bank in the third stage of monetary union

2.1. The Treaty of Maastricht is extremely clear regarding the independence of the ECB in carrying out its brief.

2.2. The Committee does not question that independence but it is keen to establish the best way of making the dialogue between the European Central Bank and the socio-economic world as effective and democratic as possible. Not only will the European Central Bank have to build up and consolidate its reputation to ward off an inflationary drift, but, first and foremost, it will have to convince European public opinion of its policies. It is that quality of dialogue and transparency that has in the past enabled several national central banks to establish that their objectives are not only legitimate but also economically effective in the medium and long term.

2.2.1. With high unemployment in various Member States coupled with a certain public scepticism vis-à-vis European integration, that task will not be easy.

2.3. It should also be stressed that monetary union will be launched before genuine economic or political union has been achieved and that the ECB will be particularly open to criticism. This is a unique situation and the consequences must not be underestimated. Dialogue with the Council and the European Parliament are also essential elements.

2.3.1. For that reason, we fully endorse the establishment of the Euro 11, which will pave the way for positive dialogue between the ECB and the political authorities.

2.3.2. The Treaty also provides for regular hearings in the European Parliament. Article 113 [ex 109 b)] states that, besides presenting its annual report to the Council and the Parliament, 'The President of the ECB and the other members of the Executive Board may, at the request of the European Parliament or on their own initiative, be heard by the competent committees of the European Parliament.`

2.3.2.1. Given the democratic nature of the European Parliament, we can only hope that this article will be implemented in full.

2.4. As representatives of socio-economic interests, we believe that it is essential that the principal policy strategies of the ECB should be submitted to the Economic and Social Committee.

2.4.1. The Committee is the prime institution bringing together the various economic and social interest groups. That makes regular exchanges of information between the ECB and the organizations represented in the ESC indispensable.

2.4.1.1. A preliminary meeting between the European Monetary Institute and the Section for Economic, Monetary and Financial Questions was held in Frankfurt in November 1997. This exercise was a useful one and is worth repeating in the future.

2.4.2. Contact with the Economic and Social Committee would provide the European Central Bank with a dedicated channel for discussing and listening to the concerns of the socio-economic organizations.

2.4.3. Such contact already exists in various forms in some Member States. The establishment of genuine monetary union is the ideal opportunity to translate the idea to European level.

2.4.4. Once EMU has been established, it would be useful for the Economic and Social Committee to draft an opinion every year focusing on the monetary and exchange rate policies being implemented in the EMU countries. The purpose of such an exercise would be twofold. As well as briefing the different European institutions on the ESC's assessment of the monetary and exchange rate policies being implemented, it would also provide a golden opportunity to contribute to and stimulate discussion within the various organizations represented in the Committee.

2.5. In addition to contacts with the ESC, meetings between the ECB and the representatives of the social partners would also seem appropriate.

2.5.1. Traditionally, the social partners have played a key role in wage negotiations. Without in any way calling into question the independence of the European Central Bank, regular meetings with the ECB would guarantee sufficient coordination between monetary policy and the wage rises negotiated by the social partners.

2.5.2. Care should be taken to ensure that the dialogue between the ECB and the social partners is on a par with that existing at national level in several Member States. Otherwise, there will be a serious risk of misunderstandings that could be detrimental to decision-making. This would be reflected in unemployment and slower growth.

2.5.3. That dialogue will not be easy to set up, particularly since negotiating mechanisms differ from one Member State to the next. An imaginative way will have to be found to ensure the relations between the European Central Bank and the social partners are as fruitful as possible, taking national diversity into consideration.

2.6. In conclusion, the European Central Bank will be required to carry out an extremely delicate task in the third phase of EMU. To do so, it enjoys full independence guaranteed by the Maastricht Treaty.

2.6.1. The Committee considers that the ECB will accomplish this task all the more effectively if it is able to establish fruitful dialogue not just with the political authorities, but also with the representatives of those involved at grassroots.

3. Wage negotiations in EMU

3.1. On the employment market, working conditions are as a rule negotiated collectively. That bargaining may occur at several levels: national, sectoral, or company. Often, various levels of negotiation coexist.

3.2. The links between the various forms of collective bargaining and economic performance have been examined in a wide range of specialist literature ().

3.2.1. The conclusions of those studies have not been unanimous, but two types of conclusion stand out.

3.2.1.1. Some research highlights the fact that the best employment results are obtained in systems where bargaining is either highly centralized, or highly decentralized.

- In the decentralized model (where the centre of gravity for bargaining is at company level), competition between the players can be expressed forcefully. The market has free rein and ensures that employment and wage levels are determined on a competitive basis.

- In the centralized model, socio-economic organizations are more aware of the potential macroeconomic fall-out from their respective demands. The players bargain by considering the consequences of the decisions taken and making a trade-off between salaries, employment levels and competitiveness.

3.2.1.2. The second theory highlights not so much the degree of centralization in bargaining but rather the level of coordination existing between the various bargaining levels. Like the centralized system, a high degree of coordination enables the socio-economic organizations to take account of the macroeconomic consequences of the decisions they are involved in. The bargaining partners are more likely to consider the need to avoid spiralling costs and inflation.

3.2.1.2.1. Inflationary pressures may thrive on wage increases which are not warranted in terms of productivity gains. This triggers an increase in production costs which may in turn drive prices up. This then stimulates demand for further wage increases with the risk of creating an inflationary spiral. If such inflationary pressures are to be prevented it is important that collective bargaining takes into account the need to keep real wage rises in line with productivity trends.

3.2.1.2.2. A system with adequate coordination between the various levels at which collective bargaining takes place is particularly attractive when the economy is thriving. It is easier to control inflationary pressures.

3.2.1.2.3. The social partners have much more difficulty in contributing to that end under arrangements which are poorly coordinated. Wage claims are made in a more disparate fashion and do not take account of the macroeconomic repercussions of the decisions taken at micro level.

3.2.1.2.4. The danger is, therefore, that the socio-economic organizations will be unable to prevent inflationary pressures, particularly in the event of an economic upturn. Monetary authorities could then be forced to step in, in particular by raising interest rates. Such a combination of factors is hazardous, insofar as it could damage the overall economic situation, yielding poorer results in terms of growth and job-creation.

3.3. Wage costs are certainly not the only factor shaping employment patterns. There are other equally crucial parameters such as training of the workforce, innovation processes, the thrust of demand for goods and services, etc. It is nonetheless true that divergent trends in costs, and in wages in particular, can land a country in difficulties with competitiveness and the risk of job losses. The single currency will make it impossible for a participating Member State to devalue in order to correct a disadvantage in terms of competitiveness.

3.3.1. Wage cost control therefore has an added dimension in EMU.

3.3.2. There are various avenues open to the socio-economic organizations, who are in the front line of wage negotiations. Countries may opt for greater centralization or, conversely, greater decentralization in collective bargaining. Each model has its pros and cons.

3.3.2.1. The essential aspect for EMU is that, irrespective of the system adopted, there is adequate coordination between the various levels and fora where collective bargaining is taking place, particularly in relation to wages. It is a question of ensuring that haphazard negotiations do not help fuel inflationary pressures. This risk is particularly acute during economic upturns.

3.3.2.2. Whilst the socio-economic organizations should be taking care to consolidate the coordination of collective bargaining, an additional dimension should be gradually introduced. Wage changes in neighbouring countries, particularly if they belong to the EMU, are increasingly important. Good coordination between the various bargaining levels within the national context is not good enough. The European dimension must be taken into account.

3.3.3. Collective bargaining patterns are developing differently across the EU. Studies show that some Member States are decentralizing whilst others are attempting to boost the level of coordination in collective bargaining relations.

3.3.4. In the latter instance, the method is tripartite agreements or social pacts (Portugal, Italy, Ireland, Spain). The European or transnational dimension is sometimes catered for explicitly (Belgium).

3.3.4.1. The processes underway are complex in nature. Some countries manage, without any underlying conflict, to combine intensified dialogue at intersectoral level with, for some issues, increased empowerment for economic and social partners at company level.

3.3.4.2. In some cases, the involvement of civic representatives in tripartite dialogue along with socio-economic organizations can facilitate consensus-building.

3.3.4.3. Recent tripartite agreements have enabled several Member States to boost policies conducive to employment and growth. Such agreements are crucial insofar as they help to capitalize on the consequences of the economic situation while consolidating it at the same time.

4. Precautions to be taken against asymmetric shocks

4.1. The abolition of national currencies could create new difficulties for Member States in the event of an asymmetric shock within the monetary union.

4.1.1. An asymmetric shock means an unexpected event with a direct or indirect impact on socio-economic parameters: employment, production, inflation.

4.1.2. By contrast to a symmetric shock, affecting all the Member States' economies in a similar way, an asymmetric shock would affect one country or group of countries only.

4.1.3. An asymmetric shock may result from a natural phenomenon (earthquake, etc.) or an economic situation, putting a country out of synch with the economic cycle in the other Member States. It may also be triggered by factors both outside and inside the country, or by an inappropriate decision.

4.2. In the past, devaluation was one of the tools available to deal with asymmetric shocks. Obviously, this avenue will no longer be open for countries belonging to the monetary union.

4.2.1. The ECB meanwhile, will not be able to take account of the quirks of the economic cycles of each participating country. Alternatives to devaluation will have to be applied. Some of them will be largely the responsibility of the social partners.

4.3. Other options place governments in the front line.

4.3.1. The most dangerous option would be one compelling Member States, in the event of an asymmetric shock, to indulge in all-out competition at the expense of neighbouring countries. The battleground could be in the area of taxation, environment or working conditions, with a distinct possibility of an escalation. Harmonization, especially of draft legislation in the field of corporation taxes or taxes on savings, is all the more necessary in the context of monetary union.

4.3.2. The 'pact for stability and growth` defined the principles that should guide Member States in the area of budget policy. In the event of an asymmetric shock, a state could always use available budget margins, within the limits of the 3 % deficit ceiling. Social spending and public budgets in the wider sense are the main instruments which Member States may deploy in the event of a shock. It is therefore crucial to have sound public finances. It should be noted that few Member States currently have genuine budget margins.

4.3.3. The limited scale of the European budget vis-à-vis the gross domestic product of the Union, will leave little room for automatic stabilizers. This constitutes a major difference between the European Union and the United States of America. The Treaty nevertheless enables the Council to take specific measures to benefit a single state.

4.3.3.1. Article 100(2) of the Amsterdam Treaty states that 'Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by exceptional occurrences beyond its control, the Council may, acting unanimously on a proposal from the Commission, grant, under certain conditions, Community financial assistance to the Member State concerned.`

4.3.4. One aspect of monetary union that is all too often ignored is mobility. Various studies on the United States have shown that it is largely geographical mobility that enables the country to adjust following an asymmetric shock in a region. In Europe, there is far less mobility. However, the latest Commission report on employment showed that mobility in Europe is not so weak after all. But there are major obstacles to the mobility of non-Community migrants, people who are dependent on social security benefits and, to a lesser extent, unemployed people.

4.3.5. In the past in Europe there was massive worker migration to areas which had invited workers from elsewhere. In the current climate of high unemployment, there is a risk that mobility will foster racism.

4.3.6. Such a risk must not be ignored, but should not cause the issue to be wound up without due consideration. The mobility issue must, in the Committee's view, be placed on the Community agenda. European integration cannot be allowed to develop into a political union where only poor people or foreigners are unable to circulate freely.

4.4. Governments are the first concerned by the implementation of the tools mentioned above. Other avenues that may be explored in the event of an asymmetric shock would put the socio-economic organizations in the front line.

4.4.1. Wage flexibility is often quoted as a necessity in monetary union. It could fill the gap left by exchange rate fluctuation, particularly in the event of an asymmetric shock.

4.4.1.1. Differences in the levels of taxation and similar charges create a considerable discrepancy in European Union countries between the cost of labour and the nominal wages received by workers.

4.4.1.2. Wage flexibility does not necessarily mean undermining the purchasing power of the workforce. If need be, wage deductions for collective and social security benefits could be modified to provide a temporary buffer. Such a policy would enable a country hit by an asymmetric shock to benefit from a quasi-devaluation.

4.4.1.3. This could of course undermine the financing of social security and collective benefits.

4.4.2. The socio-economic organizations, with support from governments, in accordance with national circumstances, must play an anticipatory role. The principle would be to build up reserves when the economy was thriving. Those funds would be used in the event of a crisis to cushion the shortfall in revenue. That approach would achieve a triple objective:

- engendering sufficient wage cost flexibility to cope with an asymmetric shock,

- underpinning the purchasing power of the labour force,

- guaranteeing stability for the funding of social benefits.

4.4.3. Certain Member States are already implementing this type of scheme.

4.5. Be that as it may, it is clear that not only the socio-economic organizations are equipped to help a Member State deal with an asymmetric shock. Other tools, such as budgetary or fiscal policy, need to be made available.

5. Conclusions

5.1. In many respects, the introduction of European monetary union is likely to alter the behaviour of many of those involved, including the socio-economic organizations.

5.2. Without genuine economic and political union, the task facing the European Central Bank will not be easy. To carry out its brief, the ECB has been given full independence. The Committee is convinced that the ECB would be well advised to launch exploratory dialogue with both the political authorities (Council, European Parliament) and the representatives of those involved at grassroots level, particularly the Economic and Social Committee.

5.3. The socio-economic organizations will hold important responsibilities under monetary union. They will be directly involved in wage negotiations. In order to avoid fuelling inflationary pressures, the economic and social partners should seek to enhance coordination between the different levels and fora conducting wage negotiations. With monetary union, it will no longer be possible for participating Member States to devalue in order to correct a competitive disadvantage.

5.4. Lastly, the socio-economic organizations could usefully consider mechanisms for cushioning asymmetric shocks. While the economic and social partners have some tools at their disposal, important responsibilities also rest with government authorities in the Member States, which should, if necessary, be able to activate stabilizers, using budgetary or fiscal policy in particular.

Brussels, 2 December 1998.

The President of the Economic and Social Committee

Beatrice RANGONI MACHIAVELLI

() See in particular OECD, Négotiation collective et performance économique in 'Perspectives de l'emploi`, July 1997, Paris.