Opinion of the Economic and Social Committee on the '1997 Annual Economic Report Growth, employment and convergence on the road to EMU` (97/C 206/18)

On 22 April 1997 the Commission decided to consult the Economic and Social Committee on the '1997 Annual Economic Report - Growth, employment and convergence on the road to EMU`.

The Section for Economic, Financial and Monetary Questions, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 8 April 1997. The rapporteur was Mr Harry Byrne.

At its 345th plenary session (meeting of 24 April 1997) the Economic and Social Committee adopted the following opinion unanimously.

Introduction

1. The present opinion gives the Economic and Social Committee a welcome opportunity to contribute to preparation of the 'broad guidelines of the economic policies of the Member States and of the Community` which are specified in Treaty Article 103(2). The Member States have in fact made substantial progress, which should be consolidated, towards stability and 'nominal` convergence (the Maastricht criteria). The Committee points out that convergence in real terms of the economies - jobs, per capita growth and interregional cohesion - is still inadequate. The Committee also believes that the economic outlook for 1997 must be looked at with realism and caution.

1.1. The Committee endorses the Commission analysis of the reasons for the inadequate growth rates and deterioration on the employment front which was recorded in the first half of the 1990s: inadequate increase in productive capacity, fiscal looseness in some Member States with regard to public expenditure and wage policy - contrary to the stability objectives -, turbulence on the currency markets and devaluation of various currencies. Due to the rebalancing of the macroeconomic policy-mix there seems to have been a turnaround in 1996.

Towards Economic and Monetary Union

2. The Committee welcomes the fact that the Maastricht convergence criteria which were established to prepare the Member States for participation in EMU - particularly phase three (introduction of the Euro) - have triggered a remarkable convergence of Member State economies. The extent of coordination differs from country to country, with some respecting the formal criteria more than others, but all Member States without exception have made substantial progress towards convergence.

2.1. The Community has thus achieved unprecedented monetary stability, with inflation around 2 %, extremely stable exchange rates - confirmed by the return of Italy to the EMS and the entry of Finland - and the downward movement of short- and long-term interest rates.

2.2. Substantial progress has also been made in budgetary policy - debt and annual deficit - but the Member States still have some ground to cover in this area. Moreover, improved fiscal coordination - not to say consolidation - is required, not just to enable as many countries as possible to fulfil the Maastricht criteria, but also to maintain and improve cohesion between the different regions of the Community.

Jobs: the black spot

3. The Economic and Social Committee is greatly concerned by the fact that the creation of the single market and the policies designed to pave the way for the single currency have not led to an upturn in growth and the jobs market. Employment continues to be top priority in the minds of Europeans.

4. The EC Treaty makes ample reference to the objective of employment. Article 2 makes it very clear that 'a high level of employment and of social protection` is a Community objective. Article 102a, introducing economic and monetary policy, states: 'Member States shall conduct their economic policies with a view to contributing to the achievement of the objectives of the Community, as defined in Article 2, and in the context of the broad guidelines referred to in Article 103(2)`. The ESCB, whose primary objective is to maintain price stability in the Community, is to contribute to the objectives laid down in Article 2, which mentions a high level of employment (Article 105). The Committee strongly believes that the present IGC should see that the EC Treaty includes a special chapter on employment laying down a policy based on precise objectives and equipped with adequate instruments.

5. The Committee endorsed the measures proposed by the EC Commission initially in the White Paper on growth, competitiveness and employment, and more recently Commission President Santer's call for all the parties involved to engage in wide-ranging cooperation under a Confidence Pact for employment. What is needed now, however, is for the Member States and the European Union to implement the measures so as to achieve concrete results and actually to create more jobs. Despite the successes recorded by some Member States, the level of unemployment in the Community as a whole is still excessively high and socially and economically insupportable.

Economic outlook

6. However, the Committee agrees with the statement in the Commission annual report that the supply-side fundamentals in the Community are sound (price stability, interest rates, exchange rates, international context, etc.) and should enable the economy to pick up momentum progressively.

7. Only the Netherlands and Ireland seem to have managed to combine fulfilment of the convergence criteria and job creation successfully, together with Luxembourg which has long been exempt from the problem. After Luxembourg, Austria has by far the lowest unemployment rate in the European union and is currently implementing consensus-based budget consolidation measures. The Netherlands deserve particular praise for achieving a combination of wage moderation, consolidation of public spending, lower taxes and a more flexible jobs market, thus allowing an encouraging improvement in the employment situation, which was described as desperate by some observers just a few years ago. Moreover, they have managed to maintain and build on the essential features of their social model. All these countries show how effective consensus policies involving the economic and social partners can be. The Committee stresses also the very good performance of the Danish economy, in particular the significant reduction in unemployment.

8. While the success of Ireland is attributable to a consensus approach which led to broad agreement between the government and the social partners on rigorous fiscal policy measures, it is also based on optimum use of the development instruments provided by the Community under the Cohesion Fund and the Structural Funds. This shows that the Community can play a very positive role in the economic development of the regions and Member States, and that Ireland's efforts in this area are worth emulating. Italy could reap greater benefit from Community funding if it enhanced its capacity in using the already reserved resources for co-financing ().

8.1. It has to be recognized that in many of the Member States pursuit of the convergence criteria entails tight fiscal policies which narrow the scope for government action to stimulate the economy and may thus have deflationary elements. It is therefore essential to adopt a policy-mix which can combine monetary stability, growth, job creation and fiscal consolidation.

8.2. The Committee hopes the Member States will continue the momentum of the economic-policy coordination and achieve the Maastricht criteria, and that the third phase of EMU will be able to start on 1 January 1999, with a maximum number of participants.

Weakness - demand - solutions?

9. 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. In addition, companies are experiencing an encouraging period of profitability that is only jeopardised by poor prospects for growth in demand for their products and services. In this connection the Committee stresses the need for future Commission annual economic reports to identify the level of real interest rates, which are more significant for the propensity to invest.

10. Continued application of the policy based on moderate wage agreements - a sine qua non for stability in the final run-up to Economic and Monetary Union - 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. As soon as the budget perspective permits it, the Member States could stimulate economic activity, and hence promote employment, by taking fiscal measures in selected areas. These could include sectoral measures, such as a reduction in taxes on housebuilding and renovation.

11. The Committee welcomes the fact that the 1997 Annual Economic Report includes a special chapter dedicated to globalization, and would draw attention to its opinion on employment, competitiveness and economic globalization (). The Committee would emphasize that the Community economy must not be afraid of the globalization of economic activity (production of goods and services), but rather look on it as a challenge and a power-house of progress.

12. In any event, globalization should not lead the Community to abandon its 'social model` (), but rather to make any changes needed to improve its efficiency. In addition to the opinion on globalization, the Committee took a stand a few months ago on the impact of the introduction of new technologies on employment (). The figures show that over the last fifteen years productivity has advanced just as fast in the European Union as in the United States or Japan. The Committee therefore considers that globalization and new technologies constitute for economic operators both challenges and opportunities to ensure the long-term economic growth of the European Union.

12.1. Furthermore, the EU must take all possible steps to prevent 'social and environmental dumping` originating in areas outside its territory and thereby promote fair trade on a world-wide level; such measures could be taken, for example, through the WTO or the ILO.

Rigidities

13. However, the causes of unemployment continue to be heavily structural. Macroeconomic monetary and financial measures are not sufficient. Among the structural problems most commonly mentioned, are job-market rigidities despite the real progress made in several Member States towards positive flexibility with consensus.

13.1. The Committee feels that job creation can be enhanced by demand and investment led growth, flexible and negotiated labour market conditions and by reducing the current tendency for Europe to substitute capital for labour at a greater rate than the USA. A reduction in compulsory levies, with the consequent reduction in wage costs, should, moreover, promote employment, although it could require an alternate tax source in order to finance social expenditure.

13.2. The example of the US economy, albeit not wholly applicable to the European socio-economic model, particularly at this juncture when EU Member States are committed to restrictive policies in pursuit of convergence, demonstrates that it is possible to reap significant results in terms of job creation when operating in a large single market with a strong single currency.

13.3. The Committee envisages issuing an opinion shortly on the relationship between productivity and job creation.

13.4. In addition, the Committee urges continued action against the red tape that hampers job creation. Many intolerable situations (proliferation of over-complicated administrative procedures, too much time taken in issuing permits, etc.) can still be combated with a view to improving the business environment and making it more propitious to job creation.

Structural measures

14. As regards the specific structural measures to be taken, the Committee is thinking initially of various part-time schemes, the reorganization and reduction of working time (), job experience schemes, vocational training, and using experienced workers to provide vocational training, so that the know-how built up in certain areas does not die out.

14.1. The Committee points out that financial constraints have prevented a start being made on the major infrastructure projects, that is to say the European networks. The Committee stresses the importance of national, regional and local public works schemes requiring a relatively large workforce. The Committee also feels environment policy is an important area for new jobs.

Small and medium-sized firms

15. Importance should continue to be attached to the development of micro, small and medium-sized firms. The Committee stresses the need for greater flexibility with respect to such matters as barriers to entry, access to venture capital, obtaining credit from the banks and in particular it should be made easier for firms to build up their own capital. A reduced rate of corporation tax on profits up to a specified threshold, provided that they are retained in the business for investment purposes, would assist the establishment and development of new enterprises. In addition, it is essential to improve the environment in which the self-employed and small businessmen operate by reducing red tape; the aim here should include making it easier to pass on firms from one generation to the next and to improve pension and social security schemes for the self-employed and small businessmen. Furthermore, it should be made easier for employees to become self-employed, and vice versa.

Young people

16. The Committee endorses more aggressive schemes to provide on the job training schemes and jobs for young people. However, it does not believe that there should be a reduction in the minimum wage or the general wage level for young people. The European social model involves a high wage level matched by high productivity. A number of Member States have already launched successful measures which are worth discussing and sharing with all other Member States (bench marking).

The political climate: Economic and monetary union

17. The Economic and Social Committee believes that the introduction of the Euro in 1999 provides a unique opportunity for the Member States to explain the notion of European integration to their citizens and get it accepted. Replacing the national currency with the Euro affects every citizen directly and individually. For what they are worth, recent polls suggest that only a minority of the population supports a single currency and EMU. The Member States have a major responsibility to inform the public.

17.1. In particular, governments must explain to their citizens that the efforts made to achieve the convergence criteria laid down for creating the single currency have not been in vain. The contraction in demand caused through a cut in public spending should be followed by an upturn that investors and consumers could interpret as a new and encouraging signal of a return of confidence and thus of a more stable economy. The Committee hopes that this trend can come about, if possible as quickly as the Commission forecasts (second half of 1997).

Conclusion

18. The governments and economic and social representatives have a key role to play in boosting the economy and thus creating more jobs. They must continue to apply the policy mix that will eventually, through stability, lead to easier job creation. The Community must tackle unemployment with the same determination with which it is pursuing monetary convergence. Consequently, the broad guidelines of the economic policies of the Member States and of the Community will assume greater importance. Indeed one needs a comprehensive economic policy at EU level in order to pursue the employment objective without damaging the substance of the European model and to create in the meantime fair competition conditions. Business and labour must develop a firm political will to create through consensus mechanisms the jobs asked for by the European citizens.

Brussels, 24 April 1997.

The President of the Economic and Social Committee

Tom JENKINS

>TABLE>

>TABLE>

>TABLE>

>TABLE>

>TABLE>

>TABLE>

>TABLE>

>TABLE>

() See the Ecofin Section Report on the economic and social situation in Italy, CES 775/96 fin of October 1996, rapporteur Mr Dantin.

() Own-initiative opinion adopted on 19 March 1997, rapporteur Mrs Konitzer (OJ No C 158, 26. 5. 1997).

() The social model differs from country to country but everywhere it includes collective bargaining, consensus and a high level of social protection.

() OJ No C 66, 3. 3. 1997.

() OJ No C 18, 22. 1. 1996.