Opinion of the Economic and Social Committee on the 'Communication from the Commission entitled "Growth and Employment in the stability-oriented framework of EMU - Economic policy reflections in view of the forthcoming 1998 Broad Guidelines"` (98/C 214/27)

On 2 March 1998 the European Commission, acting in accordance with Article 198 of the EC Treaty, decided to ask the Economic and Social Committee for an opinion on the above-mentioned communication.

The Section for Economic, Financial and Monetary Questions, which was instructed to prepare the Committee's work on this matter, adopted its opinion on 3 April 1998 (rapporteur: Mr de Bigault du Granrut).

The Committee adopted the opinion set out below at its 354th plenary session held on 29 and 30 April 1998 (meeting of 29 April). The opinion was adopted by 70 votes to 36, with 19 abstentions.

1. Introduction

1.1. The Commission has submitted its 1998 annual economic report. This report:

- has been issued in a new form: it summarizes the major challenges confronting the EU, namely growth and employment;

- comes at a historic moment in time, namely in the run-up to the decisions on the third stage of economic and monetary union (participating states, rates of exchange); and

- coincides with a period of exceptional stability, in view of the degree of convergence achieved by the Member States as they move towards EMU.

1.2. The Committee welcomes this opportunity to give its views on the Commission report, despite the short deadline for the preparation of its opinion. The report will provide the basis for formulation by the Council, in June, of the 'Broad guidelines of the economic policies of the Member States and of the Community` (Article 103 of the EC Treaty). These 'broad guidelines` will increasingly function as the benchmark for the economic policies of the EU and its Member States and also for the policies which fall within the remit of the EU social partners and socio-economic associations.

1.3. The Committee notes that the Commission's economic forecasts are based on estimates made in autumn 1997 and in essentials confirmed by the March 1998 estimates. The forecasts fundamentally point to maintenance of stability and growth and, consequently, of employment. The report is clearly optimistic, but it does also demonstrate how essential it is to persist with the convergence and stability policy - shortly to be bolstered by the institutional framework for EMU - if the EU is finally to make progress as regards employment. It is against this background that the Committee has considered the Commission's report.

2. Contents of the report

2.1. The 'Autumn economic forecasts`, published by the Commission in October 1997, stated that the annual growth rate would turn out to be 2,6 % in 1997 and would gradually increase to 3 % in 1998 and 1999. This rate of growth signifies a net increase in jobs of 0,5 % in 1997, 0,8 % in 1998 and 1,3 % in 1999. Bearing in mind the increase in the workforce (particularly women workers), the unemployment rate in the EU is expected to fall from 10,7 % in 1997 to 10,3 % in 1998 and 9,8 % in 1999.

2.1.1. The 'Spring 1998 Economic Forecasts` refer to the events which have taken place in Asia and alter only very slightly the figures set out in the Autumn 1997 Economic Forecasts: growth is expected to rise from 2,8 % in 1998 to 3 % in 1999. The rate of unemployment is expected to fall from 10,7 % in 1997 to 10,2 % in 1998 and 9,8 % in 1999.

2.2. These same forecasts clearly indicate that in the course of the period under-review (1997-1999), investment and personal consumption will progressively take over from exports as the driver of growth.

2.3. The EU's poor record as regards growth (1,6 % per year in the period 1991 to 1996) and employment (- 0,4 %) can mainly be put down to an ill-judged economic policy mix which failed to prevent considerable tensions and monetary upheavals. In general terms, the following obstacles may be identified:

- stability conflict of fiscal policy, wage policy and monetary policy;

- the increase in long-term interest rates and the 1995 monetary crisis;

- the fall in investment rates in the climate of instability which has prevailed since the first oil crisis.

2.4. It is imperative to avoid these obstacles in future. There is a good chance that this can be done. The EMU will bring stability to the EU; against this background Member States will pursue stringent economic policies, facilitated by price stability, wage moderation, low long-term interest rates and the absence of perturbations in the exchange rates of EMU states against each other. The EU should continue rigorously to enforce the economic strategy of 'the broad economic policy guidelines`.

2.5. The factors conducive to growth are, in particular, supply-side factors:

- inflation is under control;

- investments are achieving an increasingly high level of return of investment;

- slack in the economy.

2.6. Monetary conditions, including long-term interest rates and exchange rates are favourable to an internally-generated increase in demand. This is important since demand must not be stimulated by excessive wage increases or expansionary fiscal spending. In the years ahead, growth is expected to stem increasingly from domestic demand, in response to favourable monetary conditions, especially contracting risk premiums of long-term interest rates, the strength of the dollar against European currencies, and improved confidence of business and consumers. These favourable monetary conditions were brought about by the remarkable progress made by the vast majority of Member States towards convergence of inflation rates and the correction of excessive fiscal imbalances (second paragraph of point 1.1 of the Commission's communication).

2.7. The Commission takes the view that, whilst it brings risks, growth in the EU will only be marginally affected by the crisis that is having such a devastating effect on Asia. The negative effects on trade could be offset by a further easing on the monetary front and the dynamics of domestic demand.

2.8. With a view to maintaining monetary stability and market confidence (in the short-term) and transforming the economic upturn into strong sustainable growth (in the medium-term), there is a need to ensure a harmonious transition to EMU and steadily resolve the unemployment problem. The fundamental prerequisites are in place. What is needed is a willingness to implement both macro-economic and structural policies which match up to the task.

3. The unemployment challenge: the Commission's view

3.1. Within the space of some three pages the Commission gives an excellent survey of the unemployment challenge facing the EU. The Commission draws attention first of all to Article 2 of the EC Treaty (subsequently amended by the Treaty of Amsterdam) which stipulates, inter alia, the need to achieve 'a high level of employment`.

3.2. It can be argued that a competitive economy has three characteristics: (1) productivity gains not less than those of a state's principal trading partners, (2) an external trade equilibrium based on an open market economy and (3) a high level of employment. The EU may be regarded as 'competitive` only in terms of conditions (1) and (2). The employment performance of the EU economy is mediocre.

3.3. In 1997 the EU unemployment rate was 10,7 % of the labour force, i.e. 18 million people had no jobs. The level of employment (number of persons in employment divided by the number of persons of working age) has fallen from 67 % in 1961 to 60 %; the current figure for the US and Japan is 74 %. If the employment rate in the EU is to be increased to 67 % or 72 % the EU economy will have to create a total of 22 million jobs or 34 millions jobs respectively.

3.4. The Commission points out that whilst unemployment constitutes a weakness, it does however provide the EU with a potential for growth - over and above productivity gains - which is not available to the US and Japan. This potential is all the greater in that, if we take account of the various part-time working arrangements, the level of employment in the EU is 55 %. Exploitation of this potential would make it possible to promote the European social model and switch to 'greener` production methods.

3.5. This employment potential should be exploited by enhancing the 'employability` of workers, on the one hand, and job creation by the economy, on the other hand. The provision of upskilling training for all workers (both employed and unemployed) is important but the overriding factor for persons who are unemployed is that jobs should be available. It is not vocational training which constitutes the bottleneck on the EU labour market. The Commission has shown that of the 10,7 % of the labour force which is currently unemployed 6 percentage points could re-enter the job market if jobs were offered to them.

3.6. Over the last 20 years, the annual productivity gain has held steady at 2 %. Growth increase will have to be significantly higher than 2 % if the requisite number of jobs are to be generated. Agreement on moderate wage increases could, however, slow down the substitution of capital for labour (this factor is responsible for approximately half productivity gains). The Commission also points out that 'by incorporating new technologies, the new investment [backed up by wage moderation, which increases the profitability prospects] will contribute to sustaining total factor productivity growth and, to the extent it is capacity widening, slow down the substitution process` (substitution of capital for labour) (see page 8 of the Commission's Communication).

3.7. The Commission highlights the success of the common, consensus-based macroeconomic strategy pursued by the EU, within the framework of the 'broad economic policy guidelines`. This common macro-economic strategy comprises:

- a stability-oriented monetary policy;

- progress towards sounder public finances (in accordance with Article 104 of the EC Treaty and the Stability and Growth Pact);

- wage trends consistent with the price stability objective and the need to increase the return on investment and the purchasing power of workers.

3.8. Once again the Commission underlines the fact that 'the more the stability task of monetary policy is facilitated by appropriate budgetary measures and wage development, the more monetary conditions, including exchange rates and long-term interest rates, will be favourable to growth and employment` (page 9). The realization of EMU will consequently rule out exchange-rate turbulence, avoid stability conflicts between monetary policy, on the one hand, and fiscal and wage trends, on the other hand, improve investment prospects, strengthen production capacity and, consequently, generate more jobs.

3.9. In a subsection entitled 'monetary policy` the Commission points out that the primary monetary objective will be to maintain price stability in the euro land; the ECB and the ESCB will also have to play their part in achieving the economic objectives of the EU set out in Article 2 of the EC Treaty, including sustained, non-inflationary growth and a high level of employment. The credibility of the ECB as guardian of price stability will promote low long-term interest rates and appropriate wage trends.

3.10. On the basis of the Stability and Growth Pact, fiscal policy will increasingly:

- promote private-sector investment, given that long-term interest rates will drop as the state syphons off a lower percentage of savings;

- more headroom for fiscal policy once fiscal equilibrium is restored;

- reduce debt-servicing and therefore make it possible to redirect social and quasi-fiscal expenditure.

3.11. The Commission points out that, overall, the reduction in fiscal deficits in the EU over the last few years has been brought about as a result of a reduction in the percentage of GDP accounted for by public expenditure; the Commission does, however, recognize that the Member States should do more to reduce taxation, in particular taxes on wages, the real rate of which has gone up from 35 % in 1980 to 42 %.

3.12. Wage movements are the province of management and labour but governments also have a role to play as large employers. Whilst paying due regard to the subsidiarity principle, stakeholders in the economy cannot disregard what is going on in the EU as a whole, where responsibility for monetary stability falls within the remit of the Community authorities. Increases in nominal wages have to be compatible with price-stability. Real wage increases linked to productivity should help to increase returns on investment, whilst at the same time maintaining purchasing power of wages.

3.13. If productivity conditions differ, it will be both possible and necessary for wage increases to differ according to regions and skills. If wage trends fail to reflect productivity patterns, they may destroy jobs. Any asymmetric shocks which may occur should be dealt with by means of increased market flexibility.

3.14. The Commission draws attention to the importance of structural policies which promote growth and employment. The Community framework for such policies is not well defined; these policies are also subject to the principle of subsidiarity. There are however a number of provisions which provide the basis for a more consensus-driven approach in this field, namely: the programmes for completing the single market; the broad economic policy guidelines; and the employment chapter agreed upon at Amsterdam. It has not, however, yet been possible to reach the same level of consensus in this field as that achieved on macroeconomics. The fundamental economic role played by structural policies is to: a) shield the process of macro-economic growth from upheavals; (b) make the EU more competitive (and thereby enhance its productivity potential); and (c) ensure that growth leads to the creation of more jobs and is more environmental-friendly. If they are to be really effective, however, structural policies must not run counter to the pursuit of sound macro-economic policies. EMU will, moreover, make it necessary to pay more attention to structural adjustments. The Commission draws attention to the earlier commitments in respect of TENs and the promotion of SMEs but does not provide any further details with regard to the action taken in respect of these commitments.

3.15. The Commission calls for improvements to be made in the operation of the markets in goods and services so as to give free rein to competition and to enable market-driven sectoral adjustments to take place against a background of growth. There are still too many unnecessary rules and regulations which are damaging to employment. We therefore need to speed up the implementation of the Commission's action plan for the internal market. The most significant barriers are to be found in the fields of public procurement and the construction industry. There are also major barriers affecting services to business and consumers. The Commission is endeavouring to simplify the business environment through its SLIM BEST programmes.

3.16. Turning to labour-market measures, attention is drawn to the 'Employment Guidelines`, which seek to:

- improve the 'employability` of manpower;

- promote entrepreneurship;

- encourage the adaptability of firms and workers;

- strengthen equal-opportunity policies. (See point 4.5 of the Commission's communication.)

3.17. Finally, the Commission examines a number of areas in which the labour-intensity of growth could be increased through structural measures. These areas are as follows:

- a slow down in the process of substituting capital for labour, to be achieved by broadening the spread of wage costs; the Commission puts forward two options: downward widening of wage-(income) distribution - a development regarded as unattainable by the Commission - and/or reducing non-wage labour costs;

- a reduction in working hours, subject to a number of conditions.

4. Observations

4.1. The Economic and Social Committee congratulates the Commission on the conceptual quality of the 1998 economic report, which clearly pinpoints the economic priorities of the Commission - and thus of the European Union - namely growth and employment.

4.2. With a view to achieving these objectives, the Committee shares the Commission's view as to the importance of further convergence and monetary stability. The Committee welcomes the fact that a decision will very soon be taken as to which Member States - and the Committee hopes that it will be a large number - will be in the first wave to adopt the single currency. The euro-area is set to be an area of stability which will promote investment and therefore encourage growth and employment.

4.3. The Committee is pleased to note that it is clear from the forecasts that the export-led economic upturn brought about in 1996 is now developing into growth led by investment and personal consumption. The Committee would however point out that the figures for 1998 and, more especially those for 1999 are only forecasts and there is at present no guarantee that demand will continue to expand. Whilst the growth forecasts for 1998 may be regarded as reliable, uncertainties remain as regards 1999.

4.4. In particular, the crisis affecting Asian states and the impact of this crisis on the Japanese and US economies could have a very much worse effect on the EU than suggested by the low proportion of overall EU trade which is with the south-east Asian states concerned (). Given this possibility, the EU must be in a position to react swiftly by introducing a series of appropriate macro-economic measures. Such measures are that much more likely to be successful if the underlying economic and monetary situation in the EU is sound and if fiscal deficits are brought down or even, if possible, eliminated.

4.5. The forecasts for the EU are mean figures which frequently mask considerable differences as between Member States; this applies particularly in the case of the forecasts with regard to the corporate sector (investments).

4.6. The Committee takes the view that the situation and prospects described in the Commission's report are based on an optimistic diagnosis. The Committee would like to share this optimism but notes that unemployment remains at a high level and current expectations are that the increase in the number of jobs will not be adequate.

4.6.1. The figures set out in point 3.3 underline the extent of the challenge facing the EU if it wishes to achieve an employment rate comparable to that of the USA and Japan. Over a period of ten years the employment rate would need to increase by between 20 % and 25 %.

4.7. The Committee thus totally endorses the statement by the Commission, in its proposal for guidelines for Member States' employment policies in 1998 (), that if there is to be real progress at EU level, member governments will have to put forward detailed action plans which not only reflect the situation applying in their own countries but are also formulated and implemented within a joint European framework of objectives and guidelines.

4.8. The Committee shares the Commission's view that the EU, its Member States and the social partners should continue to pursue the macro-economic approaches advocated in the broad economic policy guidelines so as to pursue the drive for stability and growth in order to generate the jobs which the Community needs. The policy pursued to this end in a number of Member States is already bearing fruit.

4.9. Economic and monetary union should certainly provide favourable conditions for revival of investment and consequently of growth. Lasting, dynamic growth is the sine qua non for the creation of jobs. Appropriate economic and structural policies also have a vital role to play.

4.9.1. The minimal inflation and low interest rates (for short- and long-term loans) resulting from monetary stability will be a key factor in boosting investment and creating sufficient production capacity for a non-inflationary increase in demand.

4.9.2. This prospect must be backed up by a wage policy which takes account of the need for wage increases not to outstrip productivity, whilst at the same time providing for real annual wage increases which are adequate to stimulate demand.

4.10. If the Member States are to be in a position to reflate the economy when and where necessary, they must continue to pursue the convergence policy which was launched at Maastricht and has subsequently been backed up by the Stability and Growth Pact; there must, however, be no increase in the overall tax-burden. By controlling public-sector deficits, Member States will provide themselves with new scope for action in the event of a subsequent recession.

4.11. There can be no changes in exchange rates within euro land, and thus there can be no devaluations to offset wage-driven erosion of competitiveness. This will be conducive to the establishment of appropriate wage trends, i.e. wage increases linked to increased productivity and geared towards monetary stability and economic growth.

4.12. The Committee believes that it is in the interests of the EU as a whole that Member States which do not join EMU from the outset should nonetheless apply the broad economic guidelines and adhere to the stability and growth pact, in order to ensure continuation of economic convergence between all Member States. If those Member States (temporarily) remaining outside the euro land joined the EMS this would remove one of the final obstacles to their participation in EMU. The Committee welcomes the fact that Greece has recently joined the ERM and the measures taken by this country to enable it to participate in EMU without delay.

4.13. The Committee agrees that every effort should be made to avoid bottlenecks on the labour market, in order to achieve an optimum balance between supply and demand. Vocational training must match future jobs.

4.13.1. The Committee attaches crucial importance to the measures set out in the Employment Guidelines for improving the labour-market situation (see point 3.6 above).

4.13.2. The Committee urges that the ratio of unemployment benefit to wages be set at a level which takes account of the need to (a) ensure an appropriate net income, (b) encourage people to look for and take jobs and (c) encourage people to be ready, in some cases, to accept a place on a vocational training scheme.

4.14. The EU should invest in manpower. People must be ready to change jobs several times during their working careers and therefore need access to on-going training. The broadest possible basic education is a fundamental prerequisite for this training. Special attention should be paid to the training requirements of women rejoining the labour market.

4.15. The Committee draws attention to point 3.11 above; it shares the Commission's view that the Member States should endeavour to reduce the tax burden on wages.

4.16. Selective - and fiscally neutral - action in respect of non-wage costs (at the lower end of the wage scale) could in a number of cases make growth more employment-intensive. Recent surveys have shown that service industries, such as hotels and restaurants, are an important source of jobs, even though they may not always be full-time jobs. As tourism is becoming ever more important because people have more free time, the prospects in this sector are favourable and they deserve to be encouraged. Social services and the health sector are also major sources of job.

4.17. Negotiated reorganization and reduction of working time, as outlined by the Committee in one of its earlier opinions () may make a significant contribution to the improvement of the employment situation, and therefore to social progress and well-being, in the European Union.

4.18. Financial market trends need to be carefully monitored. These markets are increasingly globalized; portfolio managers therefore constantly seek to improve returns to their investors; often to the detriment of labour - and hence employment.

4.19. Improving the way in which the markets in goods and services operate must remain an ongoing priority in the context of the completion of the single market. The single market is still burdened with too much unnecessary red tape. The Committee is addressing this issue in greater detail in its work on the Single Market Observatory. In this opinion it would draw attention to the need to combat - possibly working together with the WTO - the restrictions hampering EU exports of goods and services, particularly exports involving intellectual property.

5. Comparability of employment statistics

5.1. The Committee () wishes to highlight the lack of comparability between national unemployment statistics. The figures used in all international analyses should be the harmonized figures published by the Statistical Office of the European Communities. The statistics forwarded by the Member States should also be comparable, i.e. compiled by harmonized methods.

5.1.1. If a full and accurate assessment is to be made of the problem of employment, the following conditions need to be met:

a) A precise picture needs to be available with regard to employment levels in the various EU Member States; this picture should be based on statistics, compiled using the same method throughout the EU, which make it possible to compare the following factors:

- the conditions for including persons on the lists of job-seekers. This data should indicate, inter alia, the way in which each Member State applies international standards, such as those in respect of the minimum number of hours which have to be worked a week before persons are excluded from the list of job-seekers and the conditions in respect of the exclusion of persons receiving invalidity pensions from the list of job-seekers;

- the quantitative distinction between full-time and part-time working and the calculations used to determine equivalent full-time jobs;

- the quantitative distinction between permanent full/part-time and fixed term contract working;

- the distinction between persons choosing to work under a fixed term contract and those who do so while seeking permanent full or part-time employment ().

b) The potential of the sectors which offer promising prospects for employment, such as services during periods of growth, as opposed to the sectors currently shedding labour (industrial sector) needs to be explored more effectively;

c) Job-creation broken down by size of enterprise needs more careful study.

5.1.2. The abovementioned statistics will make it possible to:

- identify measures which have proved successful in Member States with the best record in combating unemployment;

- identify, in a pragmatic way, those sectors in which it will be possible to create long-term jobs.

6. Conclusions

6.1. Employment remains the major challenge facing not only the Member States and the EU, but also the socio-economic organizations. The goal should be sustained strong growth in order to generate a sufficient number of jobs to offset productivity gains and the number of new arrivals on the labour market and thereby bring down the level of unemployment, as soon as possible, to levels which can be supported by society. Unemployment continues to have serious consequences in terms of individual suffering and hardship; it is therefore unworthy of a highly-developed industrial society. Unemployment brings about the destruction of human resources, thereby giving rise to enormous costs. Unemployment jeopardizes the credibility of politics in the eyes of the public, whereas we should endeavour to increase this credibility and acceptability with a view to future projects, such as the single currency and EU enlargement.

6.2. The driving forces of growth should shift more quickly towards increased investment and private consumption. Vocational training and other structural measures to facilitate the achievement of a better balance between supply and demand on the labour market remain necessary.

6.3. The broad economic policy guidelines are a very important tool for coordinating the economic policies of the Member States. These guidelines should continue to target growth and job-creation, whilst being backed up by: EMU, the Stability and Growth Pact, the social dialogue, the macroeconomic strategy geared to growth and employment and appropriate structural measures.

6.4. Finally, the Committee calls upon the EU, the Member States and the social partners to reach the consensus in respect of structural policy that they have already achieved for macro-economic policy, so as to enable the latter policy to fulfil all its job-creating potential.

Brussels, 29 April 1998.

The President of the Economic and Social Committee

Tom JENKINS

() It is always possible that this crisis will have medium-term effects, because of its impact on investment flows.

() OJ C 95, 30.3.1998.

() OJ C 18, 22.1.1996.

() OJ C 19, 21.1.1998.

() OJ C 129, 27.4.1998.

APPENDIX to the opinion of the Economic and Social Committee

The following amendment, supported by at least a quarter of the votes cast, was rejected in the course of the debate:

Point 4.15

Amend the final part of the sentence to read as follows:

'... should endeavour to reduce taxation which is placing an excessive burden on labour.`

Reasons

One of the key conclusions of the Ruding Report on taxation dealt with fiscal competition between the Member States. Such competition leads to a redistribution of the burden of taxation between the different production factors. A higher level of taxation has been applied to factors which are more immovable, such as labour, whilst the reverse has been the case with regard to moveable factors, such as capital (tax on savings and profits).

In its document the Commission does, however, once again call for a reduction in the taxation on labour with a view to reversing the trend which has been in evidence for about ten years.

In its opinion the Committee, too, should highlight this priority which is based on phenomena which have been duly recorded and fully studied in surveys carried out at both national and EU level.

Result of the vote

For: 33, against: 53, abstentions: 4.

The following passages contained in the section opinion were amended in the course of the debate but their retention was supported by at least a quarter of the votes cast:

Point 4.17

'The realignment of working hours - and hence the reshaping of the living conditions of the persons concerned - together with the acceptance of greater flexibility in the field of employment regulations continue to be key objectives with a view to creating jobs across the economy. This is a task for management, labour and other socio-economic organizations at EU level.`

Voting on the deletion of this point

For: 77, against: 31, abstentions: 9.

Point 4.18

The EU has to reduce payroll taxes, rather than increase them, in order to boost the economic performance and international competitiveness of its enterprises, to prevent relocations and ensure that an adequate level of investment, in real terms, is maintained within the EU.

Voting on the deletion of this point

For: 57, against: 53, abstentions: 14.