Opinion of the Economic and Social Committee on 'Europe as an economic entity - a political challenge` (98/C 284/13)

On 29 January 1998, the Economic and Social Committee, acting under the third paragraph of Rule 23 of its Rules of Procedure, decided to draw up an opinion on 'Europe as an economic entity - a political challenge`.

The Section for Economic, Financial and Monetary Questions, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 9 June 1998. The rapporteur was Mr Nyberg.

At its 356th plenary session (meeting of 2 July 1998) the Economic and Social Committee adopted the following opinion by 87 votes to one, with three abstentions.

1. Background

1.1. The Cannes European Council, meeting in June 1995, decided to order a report on Europe as an economic entity. This resulted in an interim report, followed by a final report which was presented at the European Council meeting in December 1996. A follow-up report was compiled for the December 1997 European Council meeting, when it was decided that such reports should be compiled on a regular basis.

1.2. Underpinning the Cannes decision to order a report was the European Council's view that the European Union as an economic entity offered additional room for manoeuvre and a specific added value conducive to the creation of sustainable employment.

1.3. The Economic and Social Committee is currently drafting an own-initiative opinion partly because of the EU Institutions' failure to date to draw the economic and political conclusions of the facts contained in the reports; and partly because the Amsterdam Treaty's employment chapter and employment policy guidelines have provided a Community instrument for dealing with employment policy, education policy and other structural policies. Whilst this will have a positive effect on employment, it is not enough. An economic policy to increase demand in the European economy as far as possible but without triggering inflation, is also needed. The present opinion does not address the anticipated challenges of the changing global economy, but focuses on the benefits of a coordinated economic policy, and how we can more fully exploit the EU's inherent demand potential.

2. The ESC on a coordinated economic policy

2.1. In its April 1997 Opinion on the Commission's annual economic report, the Committee dealt with the economic links as follows:

'The best way to achieve a renewed economic upturn is increased investment, driven by increased demand. The technical conditions needed to boost investment, viz. low long-term interest rates, are a reality in almost all Member States. (...) Continued application of the policy based on moderate wage agreements (...) should be accompanied forthwith by measures to stimulate demand. Demand must be supported by a wage increase in real terms which does not exceed productivity gains, by measures to stimulate exports and to boost innovative capacity, as well as by an increase in employment. Given the linkage between demand, employment levels and investment trends it is essential to avoid falling into a vicious circle.` ()

2.2. The ESC's two opinions in the run-up to the November 1997 Employment Summit contain ideas which can serve as the starting point for this opinion ().

'In the future context of EMU, an ideal policy mix requires an optimal interplay between the social partners who are responsible for a sound wage-development, the budgetary authorities that committed themselves to the Stability and Growth Pact, and the European Central Bank that will decide about monetary policy. Thus, monetary policy should not only focus on price stability, but also support the general economic objectives of the Community as defined in Article 2, including "sustainable and non-inflationary growth respecting the environment (...) a high level of employment and of social protection". The European Central Bank is to take the revised title of the Growth and Stability Pact seriously, and should adopt an approach to monetary policy that does not exclusively focus on price stability.`

3. EU internal demand = 92 % of GDP

3.1. The Report on Europe as an economic entity, presented to the Dublin Summit, consists of three parts: employment performance in the EU; economic statistics for Europe as a whole, using the same model as that used for individual Member States; and a discussion of the mutually reinforcing effects of coordinating economic and structural policies.

3.2. Employment in Europe

3.2.1. The report deals only with the most significant employment trends. Despite the fact that 8 million jobs have been created in the EU over the past 20 years, unemployment has risen and employment levels have fallen because the working age population has risen by 28 million.

3.2.2. The problem is that not enough new jobs have been created, owing to weak demand for labour. When discussing this, the report blames both structural factors, such as fragmented product and service markets, insufficient competition and high labour costs for certain types of work; and broad economic issues, including a lack of investment, unstable macro-economic policies and exchange-rate instability.

3.2.3. The greatest job losses have occurred in manufacturing industry. Agriculture has been declining slowly. The services sector, however, has seen sustained employment growth even throughout recession periods. This has produced a significant employment shift towards the services sector, whose share of the jobs market has increased from 50 % to 65 % over the last 20 years. At the same time, female employment has risen from 43 % to 50 %. These changes are bound to continue.

3.2.4. The low level of employment in the EU (approx. 60 %) is not wholly negative, in so much as it provides room for growth. In addition to the 18 million unemployed, an estimated 9 million would enter the workforce if jobs were available. Compared to previous years, the next few years will not see any large increase in the working age population. On the other hand, there will be a shift in the age composition, with a decrease in the number of younger workers, who are better equipped to adapt to current labour-market demands. There will be an increase in the older generation, which, although more experienced, will require further training for those who are already part of the workforce. The upshot is that the existing and potential labour force can, with the help of appropriate macro-economic and labour-market policies, provide real potential for substantial economic growth.

3.3. EU GDP

3.3.1. This is the central, innovative section of the report. If we compare, as the report does, the GDP of the various Member States, it emerges that 92 % of the EU's GDP consists of consumption and investment within the EU, while only 8 % comes from demand from third countries. By way of comparison, the foreign trade figures for the USA and Japan are 8,3 % and 8,6 % respectively. This new perspective overturns the existing picture of an individual's country's demand being heavily dependent on exports, including exports to other Member States. Table 1 of the report, which contains the external trade figures for Europe as a whole, and for the 15 Member States, illustrates this difference.

Exports, including exports to other Member States, account for 23 % of GDP. Unfortunately, different calculation methods are used for individual countries and for total exports. The figures for exports as a share of GDP are inflated, as they include the imported element of exports. For example, if goods are exported to another country for processing, and then imported for finishing before being exported definitively, they actually show up twice in the statistics ().

3.3.2. The report states that consumption is the most stable element in relation to growth.

3.3.3. Investment as a share of GDP has fallen from 24 % to 19 % in just over 20 years. Temporary growth can be created through other measures, but sustainable growth can only be achieved if the investment rate also rises. One of the reasons given for the falling investment rate is that profitability has decreased. The report has nothing to say, however, about the more difficult periods of the 1980s and 1990s, when profitability rose again but was not accompanied by any increase in the investment rate.

3.3.4. EU external trade, albeit only 8 % of GDP, has been beneficial to both employment and growth. This is perhaps particularly true of the early 1990s when an increase in exports compensated for a reduction in domestic demand. International competition does, however, require continuous changes in production, if comparative advantages and new technology are to be exploited.

3.4. Competitiveness

3.4.1. In the EU as an economic entity, the key factor is productivity growth, which determines competitiveness and hence better real wages and higher profits. Therefore, a positive view of competitiveness calls for more focus to be put on productivity and investment issues.

3.4.2. Despite this, negative measures are often suggested to counter a drop in national competitiveness - devaluation, lower social standards, tax cuts designed to boost competitiveness or more state subsidies. Whilst these measures can no doubt provide temporary relief, in the long term they may even curb both the pressure for change and investment. According to the report, competitiveness should therefore be a matter for companies rather than countries.

3.4.3. Around half of the average 2 % productivity growth is estimated to have come from technical progress and the rest from substitution of capital for labour. The report gives a few feasible explanations for the decline in productivity growth over the last 20 years. There has been a slow-down in technological innovation, and the market for manufactured goods may have reached saturation point. There could be productivity gains in products such as computers, but these may have been reported incorrectly. Business horizons have been foreshortened, and this has led to lower investment.

3.5. The growth potential of the workforce

3.5.1. In addition to the 18 million unemployed and the 9 million people who would join the workforce if work were available, the workforce could swell further if the number of women in paid employment continues to rise. Even if there was enough work, not everyone would be able to walk straight into a job. The biggest problem is the level of training and expertise needed for today's labour market, in tandem with issues such as child care, transport, etc.

3.5.2. Improvements in the quality of the labour force are seen as the key to sustainable economic growth and higher productivity.

3.6. Economic and political convergence

3.6.1. The economic policies of the Member States have progressively moved closer together. This is mainly due to the single market, which has provided bigger markets, more competition and higher productivity. In addition to the sharp increase in cross-border trade, direct investment has also risen.

3.6.2. The road to EMU has also led to more uniform economic policies, which, according to the report, has produced low rates of inflation, a reduction in the budget deficit, large productivity gains, high levels of profitability, a trade surplus, reasonable wage settlements and a reduced risk of instability and currency turbulence.

3.6.3. The convergence in incomes per head and growth in the cohesion countries mentioned in the report is of less significance.

3.6.4. The deregulation of financial markets worldwide has facilitated capital mobility, and this could lead to a better distribution of resources. However, this imposes stricter discipline on companies and governments.

3.6.5. As the report points out, together these changes have created new macro-economic conditions for the Member States' economic policies.

3.7. The report's conclusions

3.7.1. The report's overall conclusion is that a coordinated, macro-economic and structural approach can boost growth without fuelling inflation.

3.7.2. The report aims to focus on the interplay between macro-economic and structural policies. The former is to provide the general framework for growth, whilst the latter should improve market efficiency, in terms of goods and services, and of the labour market.

3.7.3. The 1997 follow-up to the report states that domestic demand currently seems to be self-sustaining, and hence the levels of growth expected for 1997-1999 will lead to both increased consumption and investment. It says that macro-economic policy must be coordinated if the favourable climate is to be sustained.

3.7.4. The follow-up emphasizes that the exigencies of competitiveness will require investment in human resources and an active labour market policy to be backed up by investment in infrastructure. Public expenditure on labour-market policy is estimated at 1,5 % of GDP, of which less than one third comprises active measures. Public investment as a share of GDP has declined from 4 % to 2,3 % over the last 20 years.

4. The picture of the European economy is incomplete

4.1. 18 million unemployed and 57 million living in poverty

4.1.1. The approximately 18 million unemployed make up over 10 % of the labour force. The debate has focused on the scale of unemployment and the strain it places on public expenditure in particular. However, there is a 'social` cost to pay for every unemployed person. Besides the economic implications for the public purse, the effects of unemployment are unacceptable in the social system we aspire to in Europe.

4.1.2. For the national budget too, the problem grows from merely providing unemployment benefit, to include provision for the families of the unemployed. It is a safe bet that most of the EU's currently estimated 57 million poor people come from families where one or more members are unemployed. Social expenditure in general, lost tax revenue, and also the cost of dealing with crime also weigh on public expenditure, and are directly linked to unemployment.

4.1.3. The figure of 57 million is based on the number of people with less than half of the average national wage. According to this definition, there are poor people everywhere, but poverty levels differ according to national income levels. For each country, the figure depends on how incomes are distributed. Unemployment is the most common cause of poverty. Diagram 2 gives the 1992 calculation of Member State poverty levels ().

4.2. Poverty and demand

4.2.1. Whilst the immediate economic consequences of poverty are considerable, the repercussions in terms of lost demand are perhaps even greater. This self-evident side-effect of poverty is hardly ever addressed. What impact does it have on growth and employment? More than 10 % of the EU's population have a lower level of income than they would if all were in work. In order to assess how much demand is lost because of this, we need to know how much lower their incomes are than they would be if they were in work. By way of example, a jobless poor level of 10 % which is missing out on 20 % of their potential income, knocks 2 % off GDP.

4.2.1.1. According to this calculation, half of a potential increase in demand from the poor would however, end up in the public purse in the form of taxes. This means that at least 1 % of the 3 % budget deficit existing in most countries is a result of this income distribution problem.

4.2.2. The poverty issue gives considerable food for thought. The way countries use their incomes depends on the size of the income. A low income means less saving, greater demand for basic necessities, and heavier dependence on the public sector. This has a knock-on effect on investment, output and the size of the public sector.

4.2.3. These brief comments make a clear case for putting income distribution back on the agenda. EU level discussions have been dominated by the need to get inflation and public finances under control, but the fight against unemployment through pro-active labour market policies and skills development should, increasingly, take priority. If we are to solve the problem in the long-term by boosting demand, then income distribution must also be back on the agenda.

4.3. The urgent need for education and training

4.3.1. The modern labour market needs employees with more training than ever before. The Commission regularly publishes figures according to which 10 % of all technology is replaced by new technology every year, whereas the natural turnover in the workforce is around 2-3 % (newcomers and retirement). The extent to which the figures are realistic or reliable is not the issue, but rather that they highlight a problem on a scale which most definitely warrants political initiatives.

4.3.2. Newcomers must have the training which the labour market requires. Relations must therefore be improved between the education authorities and the labour market. Action must, however, focus on those already in work and on the unemployed.

4.3.3. The current consensus is that labour-market policy must be active, and draw heavily on training measures. This is in the spirit of the guidelines which were framed at the Employment Summit. Clearly, training initiatives must be directed first and foremost at the unemployed.

4.3.4. However, the same need for training holds good for most of the remaining 90 % of the workforce - i.e. those in work. Important skills development initiatives of this kind have been launched under Objective 4 of the Structural Funds. The scope of current action is therefore clearly inadequate, particularly in view of the Commission's requirement assessments. The situation calls for powerful initiatives within the framework of the employment guidelines.

4.4. Investment scope and trends

4.4.1. There has been a clear decline in investment as a share of GDP, from 24 % to 19 %. Private investment has fallen from 20 % to barely 17 %, and public investment from 4 % to barely 2.5 % of GDP. The reduction in private investment has thus had double the impact on GDP growth compared to the reduction in public investment. On the other hand, the latter has fallen by almost 50 %. The reduction in public investment could be due - in part - to privatization.

4.4.2. We need however to know what kind of investment has been reduced, or increased, whether private or public. It is important to know why the changes came about and what impact they had. It is often a good idea to reduce investment in sunset industries, whereas sunrise industries need more. Is this a feature of the current development scenario?

4.4.3. The statistics show that public investment has had to shoulder its share of the spending cuts needed to meet the convergence criteria. This is unfortunate, considering the vital importance of investment for growth and employment. The Committee therefore calls on the Commission to encourage the Member States to look into ways of avoiding this negative impact on investment.

4.4.4. The Member States need to view public investment in the light of its impact on employment and productivity. It is needed to boost general demand: more investment would also increase economic capacity without inflation giving cause for concern.

4.4.5. Although public investment (e.g. in infrastructure) is a key element for competitiveness, it must be accompanied by an increase in private investment if the correct investment/GDP ratio is to be restored.

4.4.6. It is even more difficult to get hold of reliable statistics for investment in education and training, for both the public and corporate sectors. Only trend statistics for this type of investment, and statistics showing the need for investment in various skills, will make it possible to assess what remains to be done.

4.4.7. This would enable us to determine whether the decline in traditional investment should, in fact, give cause for concern. It could be that investment in human resources has taken over from investment in fixed capital. If this is the case, then the decline in fixed capital investment could be acceptable. However, it is too early to draw any conclusions, until reliable statistics and analyses are available.

4.4.8. Another feature is that the growth in services leads to less fixed investment and more intangible investment, which does not show up in the statistics either.

4.4.9. The reason why, in spite of the above considerations, a decline in fixed capital investment is unacceptable, is quite simply that the need for such investment is still evident. One example is trans-European networks. Others include refurbishment of the housing stock, with provision of running water, sewerage pipes, etc., and healthcare for the elderly. Since productivity has increased more quickly than economic growth, it has been difficult to create enough jobs. This is a further argument for more investment.

4.4.10. In conclusion, the Commission should address the urgent need for new investment statistics. Even without them, however, it is clear what direction political initiatives should take. Fixed investment should be increased from the current 19 % of GDP, and an education and training investment campaign should be promoted. Investment is also needed to speed up the innovation-to-market process.

5. The emergence of a more coordinated economic policy

5.1. EMU

5.1.1. The achievements made in the run-up to EMU form the basis for the next stage. Meeting the convergence criteria has involved sacrifices, e.g. in the form of unemployment. The effects were aggravated by policies which were ill-suited to the climate of recession in the early 1990s.

5.1.2. Once convergence is achieved, the situation changes. There will be no new negative side-effects for the EU, whereas the achievements will provide positive spin-offs. These include low interest rates, which means that firms do not need to devote the same effort to planning for exchange rate fluctuations and they can act more effectively whenever more general economic turbulence arises. All these stability-based gains favour growth and employment. Tangible factors thus affect investment decisions more than was the case with high inflation and unstable exchange rates. To some extent, the influence of currency and financial markets over policy has declined.

5.1.3. Several ESC opinions have discussed the different aspects of EMU. Here we only wish to highlight the connection between public investment and budget calculations, and the extended need for further economic cooperation in the wake of EMU.

5.2. More ambitious employment targets

5.2.1. For several years, employment has been at the top of the European Council's agenda. If the ambitious targets are to translate into concrete action, they must influence the general work of the Council of Ministers. A first step was taken in this direction following the Essen European Council, with the multi-point programme which was set out for the Member States. The decisive steps were, however, only taken with the new draft Treaty in Amsterdam, and the subsequent special Employment Summit.

5.2.2. The most important feature of the new provisions of the Amsterdam Treaty, currently being applied, is that, whilst the Member States continue to be responsible for implementing measures to combat unemployment, it is the Council of Ministers which frames the guidelines for the measures. Furthermore, the Council has to check on what the Member States are doing, and recommend appropriate action wherever there is room for improvement. The EU has therefore acquired a new role in framing and policing employment policy.

5.2.3. For many years EU policy has also been geared towards employment, via the Structural Funds. Money is channelled through the various Objectives to enable Member States to improve the employment climate. The impact on job creation has been less effective than planned. Accordingly, it has been decided to make job-creation a priority. The Structural Funds differ essentially from the employment chapter of the Amsterdam Treaty in that they allocate money directly to national employment measures. This direct influence over job-creation measures constitutes a more ambitious policy for the EU.

5.2.4. The next section reflects on whether, and in what way, better coordinated economic policies could provide for more ambitious employment targets. We believe that the bulk of the practical arrangements for increased coordination should be carried out by the Member States. However, the EU institutions can usefully harness the Structural Funds to channel EU funding through to the Member States, and the EIB and the EIF should step up funding for national projects. But to involve the EU further in the practical implementation arrangements is hardly the best way forward. We believe that the method provided for in the Amsterdam Treaty's employment chapter - discussion of policy direction and monitoring of policy as implemented in the Member States - provides the most feasible way. However, we do not believe that the Amsterdam Treaty provides for optimum exploitation of this method.

6. Opportunities for increased output and employment in Europe

6.1. Can output and employment be increased in Europe? What can be done with regard to current industrial capacity? What can be done to boost it? We will focus on the way the labour market is organized and how capacity is utilized.

6.2. Utilization of capacity

6.2.1. Diagram 3 shows the post-1970 industrial capacity trend in (West) Germany, which averaged 84 %. It is now 87 %, which is where it was in the 1960s. That decade was characterized by full employment and relatively high demand and output, whereas (West) Germany today has high unemployment and relatively low demand and output.

6.2.2. The 1990s employment situation in Germany and Europe is thus not a result of under-utilization of capacity, but rather of low demand. European output and employment cannot, then, be boosted merely by improving utilization of capacity. This does not mean that it is impossible to boost output by improving capacity take-up.

6.2.3. We can also speak of utilization of capacity with reference to the national economy, if we take into account the savings surplus in the private sector and unemployment. There is a large savings surplus in the EU. It is put at 5 % of EU GDP, which is equal to approx. ECU 350 billion (16 % of Germany's GDP). Besides the uncertainty about the future which is behind the wish to save, large public budget deficits have made a high degree of private saving necessary.

6.2.4. When the deficit is cut, it becomes necessary to 'activate` the savings surplus in order to boost output and employment in Europe. If one succeeds in increasing investment it has a positive impact on output capacity and, consequently, potential growth. However, certain conditions must be observed. The most important is price stability. This puts the spotlight on the workings of the labour market and hence labour-market policies.

6.3. The European labour market

6.3.1. The main aim of monetary policy is to achieve price stability. Rising employment in Europe puts pressure on wage settlements and inflation; a tighter monetary policy is then introduced to offset this, thus undermining any gains in employment. European labour-market practice is thus decisive in ensuring that employment gains do not trigger such a policy.

6.3.2. There are large discrepancies in the proportion of long-term jobless in total unemployment figures. Youth unemployment also stands out. In some countries there are large differences between various sections of the labour market. These discrepancies show that what is the best employment policy for one country is not necessarily the best for another though, generally speaking, education and training initiatives are vital in all European countries. Their impact is both short- and long-term.

6.3.3. In the first place, the needs of industry can be better catered for through education and training, thus avoiding bottlenecks and the attendant pressure on wages and inflation. Since unemployment is not equally distributed across the labour market, a lack of certain categories of manpower could block job-creation initiatives. At the same time, there can be high unemployment amongst uneducated groups.

6.3.4. Secondly, an educated worker is more prepared to try new kinds of work. This is important for the European labour market. Just as with an efficient social system which combines adequate security with an incentive to work, better education can encourage voluntary mobility in the workplace.

6.3.5. Thirdly, growth prospects are improved. Higher education and training levels lead to increased productivity. Education standards are a decisive factor in the long-term prosperity of a nation. The boost in productivity provided by education and training measures also make higher wage rises possible.

6.3.6. An important factor, when discussing structural unemployment, is the speed and distribution of job-creation. 'Natural` unemployment (NAIRU - non-accelerating inflation rate of unemployment) is not constant. If unemployment falls sharply, bottlenecks could lead to inflationary pressure even with relatively high levels of unemployment. The same happens when jobs are created only in certain sectors and unemployment remains high. If, however, employment gains are evenly distributed, the labour market and education and training policies can respond, and satisfy industrial demand for new manpower. Bottlenecks are thus avoided in a situation of high unemployment. There can also be a positive impact on NAIRU if it is adapted to the type of changes occurring in the labour market.

6.3.7. In order to impact positively on NAIRU, economic policy must be combined with structural policy measures. Labour market structural policy is most effective in times of increased employment. It does not, in itself, create jobs, but does help protect them. If labour-market flexibility can be enhanced through structural policy initiatives, then it must also be possible to avoid an economic upturn being ruined by bottlenecks.

6.3.8. These are topical considerations, since more and more European countries are beginning to experience falling unemployment. This can be seen in Diagram 4, showing OECD unemployment figures for 1994-1998.

6.3.9. As mentioned earlier, there are discrepancies in Member State labour markets. However, there are also important similarities, e.g. inter-country wage pressure. In 1977, the Danish Arbejderbevegelsens Erhvervsråd attempted to calculate international wage pressure, and concluded that wage increases in trading partner countries have a considerable influence on wage settlements. This means that, besides the direct impact of trade within the EU, economic and political measures in one country can impact on the wage structure of the others. A successful anti-bottleneck policy therefore affects not just wage trends in the particular country, but also those of EU countries in general. This further reduces the need to adopt a compensatory monetary policy.

6.4. The link between growth and inflation

6.4.1. The Arbejderbevegelsens Erhvervsråd has calculated an international economic model which effectively illustrates the effects of increased demand on employment. The main question is what impact does labour market reaction have on employment and growth ().

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6.4.2. The table shows that a considerable number of jobs is at stake - almost 2 million, depending on labour-market reaction. A strategy which combines financial policy initiatives with structural policy measures to improve impact on the labour market will boost employment. This will be particularly effective in times of rising employment.

6.4.3. The connection does not just apply to coordinated financial policy and structural policy. The impact on growth and employment of an increase in general demand in the private sector is likewise dependent on labour-market reaction. This is shown in Table 2, where the initial measure is a reduction in private sector savings surplus. The impact of this increase in demand thus depends on whether the labour market can keep pace with the changes.

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6.4.4. The labour-market situation is of central importance to the budget balance. The public budget variations in Table 2 reflect the impact of both employment and interest-rate levels. The greater the impact on employment, the more is saved on transfer payments, and the more tax revenue increases. The lower the impact on inflation, as a result of wage settlements, the weaker the impact on interest rates, which also reduces the public debt servicing requirement. In times of increasing growth and employment, structural policy can also impact positively on the budget.

6.4.5. In practice, structural policy and cyclical policy are mutually dependent. An economic upturn will only be sustainable if it is backed up by structural policy. Similarly, there must also be an upturn in production and employment, if structural policy is to have a noticeably positive effect.

7. Political options

7.1. At the Employment Summit, the Heads of State and Government declared that employment policy must be built on three pillars: mobilization of all Community policy areas, coordination of Member State employment policy, and coordination of macro-economic policy ().

7.2. As an example of the political debate, we will summarize some comments made by Franco Modigliani, Nobel prize winner for Economics, and by the Italian politician, Giorgio La Malfa:

- The EU must make a speedy assault on unemployment by means of massive investment. The future of EMU depends on this.

- Labour market inflexibility is one reason for the problem, but not the sole reason, and probably not the main one either. Countries which have the lowest unemployment figures often have lower than average inflation.

- The EU must set an employment objective which can be achieved through a gradual but comprehensive increase in investment. This can be funded, in the long-term, from savings on unemployment benefits.

- Agreements must be concluded between employers, the workforce and government to avoid any impact on inflation when employment rises.

- The Member States must implement this policy together, since increased investment in one country has a considerable impact on the others.

7.3. All for one and one for all

7.3.1. The following econometric calculations show the difference between a go-it-alone expansionist policy and a common expansionist policy. In 1981, France embarked on a job-creation policy by encouraging private consumption and both public and private investment. The key instruments were an increase in the minimum wage and social transfers. The tax regime was changed to encourage investment. The aim was to reduce unemployment in the wake of the second oil crisis. Owing to the exchange rate policy, the Franc plummeted.

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7.3.2. EU growth for the same period was 0,2 %, 0,8 % and 1,6 %. Despite a year-on-year increase in employment in the French public sector, private sector employment decreased, so the overall result was negative. Unemployment climbed even higher because the labour supply increased.

7.3.3. The new French policy had no equivalent in the other Member States, and led to a deterioration in the balance of payments. Upbeat consumer confidence was vital to the development of the economy.

7.3.4. In order to demonstrate the different scenarios resulting from a unilateral policy change and an EU-level policy change (9 countries in this particular case), the Danish Arbedjerrörelsens Erhvervsråd's economic model provides a simulation in which the policy change is an across-the-board increase in investment equal to 0,5 % of GDP. The French policy change involves certain other factors.

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7.3.5. With a common expansionist policy, growth increases and the balance of payments and budget balance deteriorate less. An expansionist financial policy is effective mainly because an increase in demand leads to an increase in output, and, consequently, to rising incomes. If consumer confidence is also affected, the impact is even greater. This is what happened in France in 1982. The example shows that in the case of unilateral French expansion, increased consumer confidence raised GDP by a further 0,7 %, aggravated the balance of payments deficit by a further 0,2 %, and improved the budget balance by 0,4 %. In reality, these gains were offset by an increase in transfers, as a consequence of rising unemployment and high interest rates.

7.3.6. The example also shows the impact the accompanying devaluation of the Franc had on employment in the other countries. In France, the weaker franc created 82 000 jobs in the short term, according to this calculation. In Germany, there were 34 000 job losses, 18 000 in Italy, 12 000 in Great Britain and 12 000 in other EU countries. This means that almost all the gains made in France were offset by losses in other EU countries, and that these were unfairly distributed, as they followed trade patterns.

7.3.7. In short, when a nation boosts its economy single-handedly, it is the balance of payments which suffers most. If there is a common expansionist policy, the economy is boosted, and this largely compensates for the impact on the balance of payments. The French example also shows how an expansionist financial policy can put a stop to a downward spiral: by increasing consumer confidence. It also shows how what might be seen as a rash policy for a single country, can be effective if implemented in common.

7.3.8. The effects produced by exchange rate fluctuation will not be an issue when EMU takes off. What remains is the effect in terms of an increase in output in an individual country as a result of expansion abroad. We have therefore carried out further research, based on the current economic situation and current EU membership. The figures are based on the assumption that there will be expansion equal to 1 % of GDP. The table below shows clearly that cooperation is worthwhile. The more countries take part in expansion, the greater the beneficial impact on GDP and employment, and the negative impact on the national budget and the balance of payments is contained somewhat. The best employment results will be achieved by stimulating the EU's considerable demand capacity.

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7.4. Economic policy has been underpinned by the fact that individual countries compete with each other. Growth must thus be export-led, i.e. from demand from other countries. They have acted like private companies. This situation has partly changed with the single market and EMU. But there is still often a defensive approach to competitiveness, in the shape of measures directed at neighbouring countries.

7.4.1. It is hoped the corporate environment will be characterized by the fullest and fairest competition possible, but it often attempts to avoid competition by means of cartels, for example. It is hoped the Member States will embrace cooperation, as opposed to competing in trying to take production and employment from each other. EU competition law is extremely important, but there should be a more level playing field between countries to make fair competition between companies possible.

8. Economic convergence - not just monetary?

8.1. We have seen how wage agreements in one country impact on other countries. That this is not merely theoretical can be seen in Diagram 5. Wage settlement discrepancies have gradually diminished for the countries covered in the diagram - mainly EU countries - until very small variations remain in the 1990s. This change has taken place without any formal, trans-national agreements, but the alternative to wage rises in line with neighbouring countries is unemployment.

8.2. It is not just the differences between countries which have changed dramatically, but also the level of wage increases. Time after time, wage rises have been smaller. This means that, besides convergence on inflation, we can also say that wage settlements have converged. Inflation and nominal wage increases have both fallen steadily. The extent to which lower pay settlements have brought down inflation, or low inflation has led to lower pay settlements, is for others to determine. What is important is to note that both inflation and pay settlements seem to have stabilized at a low level.

8.3. This is positive for goods- and labour-market stability. But even here, certain relationships between different economic factors must be maintained if the economies are to function satisfactorily and unemployment is to fall. The relationship between inflation and pay settlements is vital to demand and employment trends (consumption accounts for 60 % of GDP). Growth economies must have real pay rises if growth is to be sustained. Moreover, in order to encourage more investment, the existence of consumer demand must be accompanied by the knowledge that investment is profitable. This means that productivity, both in the current economic climate and over a longer period, must rise faster than real wages.

8.4. Despite the convergence on wage increases, there are large differences in the way they are negotiated. In recent years there has been a link between positive employment trends and nationwide tripartite or other agreements on wages, etc. Examples include Ireland, the Netherlands, Denmark, Austria, Norway and Finland, although the type and scope of the agreements differ.

8.5. We would point out that there is convergence in labour law, environmental and tax policy, in the form of minimum levels.

8.6. When the minimum rules method is used, these are decided at EU level. However, the minimum rules rarely establish the level which will be applied in the various countries, as a higher level is permitted. The EU decides which direction the regulations shall take, but not how far they must go.

8.7. As regards the run-up to EMU and employment guidelines, the EU establishes the guidelines but not the measures to be implemented. The EMU convergence criteria set targets, but do not say how these should be reached. The employment guidelines establish the direction 'structural` measures should take in 19 points. The Member States choose the type of measure, and only when it is considered at EU level that the measures have not gone far enough can the choice of measure be criticized.

8.8. The convergence which has been achieved with the help of the convergence criteria will now be followed by greater convergence in those areas - viz. labour-market policy and education and training - which are covered by the employment guidelines. But even in the future, Member States will continue to differ greatly in terms of economic development, economic structure and social regulations; their position in the economic cycle can also vary. Important political decisions will thus continue to be taken at Member State level. Decisions concerning public income/expenditure measures, targeted or general measures, or whether it is preferable to implement initiatives in the public sector or encourage private sector activity, will all still be taken at Member State level, even in a future, more coordinated economy.

9. Conclusions

9.1. If unemployment is to be cut significantly, then the economy must grow. This growth must be sustainable from environmental and other standpoints. Increased growth goes hand in hand with lower unemployment. But how can this be achieved? The political debate has played increased demand off against labour market flexibility. Instead what is needed is interaction between increased demand and structural changes in the form of an active labour-market policy and education and training initiatives. Policy must not be used to reduce the economic pressure which causes structural changes in the economy. What is needed is cost pressure so as to switch production from non-profitable industry; and profitability, so that industry will be attracted to sunrise sectors.

9.2. Labour-market policy, and education and training initiatives put the individual in a stronger labour-market position. However, growth which is not demand-led does not create new jobs. The opposite is more likely, as a more efficient workforce meets existing demand with fewer workers. The pitfalls in pursuing demand-led growth policy at national level are obvious. However, it is possible to pursue such a policy at EU level, thanks to economic integration. Problems of balance which occur when a country - e.g. France in 1982 - pursues an expansionist economic policy, level out the more countries follow suit. If all countries follow suit, there is maximum gain and minimum inconvenience.

9.3. According to some estimates, massive coordinated public investment throughout the EU15 could create some 5 million jobs. Thus the problems which individual countries which pursue a demand-led expansionist economic policy have to deal with in terms of budget balance, the balance of trade, and capital outflows can be solved by coordinating policy at EU level. One problem remains, however: inflation.

9.4. Inflation and budget balance assessments are carried out first of all by the central banks, which have independent status. The global financial market strengthens this policy. In the short-term, besides bringing about considerably lower pay settlements and keeping inflation down, the policy of austerity has, in practice, generally resulted in even more unemployment. By the same token, a more expansive economic policy reduces unemployment, but there is a risk that it will push up inflation again unless accompanied by other action.

9.5. Seen in this light, it is not possible to combat unemployment unless inflation is tackled simultaneously. Therefore, a demand-led sustainable growth policy must be combined with anti-inflation measures. No realistic, reliable analysis can escape this. Politicians must put forward an alternative which makes it possible to combine demand-led growth with anti-inflation measures.

9.5.1. It is sometimes pointed out that inflation no longer poses any real problem. But the important thing is how inflation has been brought under control, i.e. via a policy of low demand, with high unemployment as a side-effect. This is why, given basically the same economic climate, the central banks will not allow inflation and the accompanying rapid rise in employment. Similarly, a side-effect of a policy reversal to halve unemployment would be high inflation.

9.5.2. It is thus necessary to find other ways of keeping down inflation. The only alternative which would not inflict unacceptable human and social damage on the European social model is to change wage bargaining and settlement arrangements, so that current pay increase rates could be maintained even if unemployment were cut by half.

9.5.2.1. The social partners thus have a key role to play in the fight against inflation. Labour costs account for the lion's share of production costs, if earlier stages of the production chain are taken into account. This is why wage increases which outstrip productivity gains over a long period of time always lead to higher prices.

9.5.2.2. This is why the Member States should report consistently - not just in the 'Broad Economic Guidelines`, but also in the annual employment plans - on what government, the social partners and industry are doing to keep down inflation.

9.5.2.3. It is, first and foremost, up to the social partners to share responsibility for keeping pay settlements, in the long-term, within the framework provided by low inflation, productivity increases and sufficient demand. The method consists in keeping real wage increases down to low nominal levels in order to increase purchasing power whilst keeping down inflation.

9.5.2.4. Legislation is needed both to enable the social partners to carry out their wage bargaining responsibilities, and to ensure that wage bargaining can be conducted in the public interest ().

9.5.2.5. The convergence criteria have already led to a high degree of Member State harmonization on wage settlements, inflation and budget deficits. The social partners are thus obliged to step up exchanges of information prior to the negotiations. The ESC therefore calls on them to look into the possibility of setting up, within the framework of the social dialogue and in addition to existing committees on economics, the labour market, and education and training, a joint committee to discuss wage structures. This should, of course, be done without direct encroachment on negotiations at national level.

9.5.3. Countries which do not manage to achieve stable wage settlements will have to cope with dwindling job security, shrinking unemployment benefits, failure to cut unemployment and, eventually, lower real wages. Reduced competitiveness inevitably impacts on the employment conditions available to the workforce. When devaluation is not an option, governments are forced to concentrate on the real circumstances.

9.6. This, however, is not enough. The structural problems inherent in the labour market must also be addressed. The EU labour market is out of synch, as the demand for specialist knowledge and skills is not met by the education system. This is the biggest obstacle to greater labour market flexibility.

9.6.1. When there is an upturn in investment and economic activity, the skilled workforce supply/demand disparity not only hinders growth; it also leads to higher inflation and bottlenecks.

9.6.2. The individual's stronger position vis-à-vis the labour market, thanks to better skills and qualifications, means he/she is ready to risk trying new jobs. Public investment in education has probably decreased during the convergence process, so it is important to start by restoring it to previous levels. It should be increased in the long-term.

9.7. The new Treaty provides greater scope for common action in the fight against unemployment. But it is not enough to fight on one front only, viz. via a structural policy with low nominal wage settlements and low inflation. A demand-led, expansionist economic policy is also required. The two approaches can provide an excellent combination. To paraphrase the economists, we could say that a policy of this kind would cut NAIRU, thus enabling the central banks to allow demand to increase without slamming on the brakes. This is providing we can stop regarding the foreign trade total - i.e. 23 % - as a policy constraint, and base our actions on the considerably lower limit of 8 %.

9.8. Everyone has an important part to play here: the social partners and other interest groups, industry, governments and the EU institutions. In this context, tripartite cooperation within the framework of the social dialogue should be extended into a partnership for jobs in which employees, employers and industry face up to their responsibilities, and governments and the EU commit themselves to seizing the opportunity to pursue a more expansive economic policy with a view to boosting employment.

Brussels, 2 July 1998.

The President of the Economic and Social Committee

Tom JENKINS

() OJ C 206, 7.7.1997.

() ESC opinion of 1.10.1997 on the European Council on Employment; OJ C 355, 21.11.1997 and ESC opinion of 30 October 1997 on the Communication from the Commission on the Proposal for guidelines for Member States, employment policies 1998, OJ C 19, 21.1.1998.

() The figures in the report on Europe as an economic entity refer exclusively to trade in goods. Calculations for the next version indicate that exports to third countries are closer to 9 %. Moreover, the inclusion of trade in services takes the total third country share to approx. 11 %. Since these figures do not significantly alter our analysis, we have based the report on published figures.

() For a detailed account of poverty calculation methods, see the ESC's Opinion of 1 July 1998 on the Costs of poverty and social exclusion in Europe, rapporteur: Mr Burnel.

() The normal scenario assumes that wage rises will be just as high as they have been historically. The 'flexibility scenario` is characterized by a more flexible labour market, e.g. as a result of active labour-market policies and skills-development initiatives, for example. This leads to lower wage increases than in other situations, when unemployment falls. There is less need for a compensatory monetary policy response, and less damage is done to European competitiveness. Accordingly, the impact on growth and employment is enhanced. In the 'bottleneck scenario`, the labour market is unable to react in time, thus producing bottlenecks, and compensatory monetary policy initiatives as a consequence of impaired competitiveness. It has been calculated that this scenario would produce wage increases of a quarter of one per cent per annum.

() 'Continuation and development of a coordinated macro-economic policy, underpinned by an efficient internal market, which will lay the foundations for sustainable growth, new dynamism and a climate of confidence conducive to boosting employment ... With regard to the macro-economic context, it is essential for the Union to pursue a policy of growth geared to stability, sound public finances, pay restraint and structural reform.`

() Cf. ESC opinions on Employment policy and the role of socio-professional organizations in the third phase of economic and monetary union (rapporteur: Mr Dock) (currently being drafted) and on Employment and the euro (rapporteur: Mr Geuenich) (currently being drafted).

STATISTICAL APPENDIX to the opinion of the Economic and Social Committee

1. European trade - Exports of goods at current prices - Foreign Trade Statistics

Member States

Trade with other Member States and outside the EU % of GDP

Europe as an Economic Entity

Trade outside the EU

Export market 8 % of GDP

Single market 92 % of GDP

Source: Commission services. No year is given for the figures.

2. Poverty rates as a proportion of the national or union average disposable income, 1992

(There are no figures for Austria).

Source: ECHP 1994 and Nordic SLCs.

3. Utilization of capacity - German industry (in %), 1960-1997

Source: EcoWin.

4. Development of unemployment (in %), 1994-1998

Source: OECD's Economic Outlook, No 62.

5. Hourly wage in manufacturing industry

Average 1976-1980

Average 1981-1985

Average 1986-1990

Average 1991-1995

Source: OECD's Economic Outlook, No 62.