EN Official Journal of the European Union C 255/10

Opinion of the European Economic and Social Committee on ‘The financial crisis and its impact on the real economy’

(own-initiative opinion)

(2010/C 255/02)

Rapporteur: Mr CEDRONE

On 26 February 2009, the European Economic and Social Committee decided, under Rule 29(2) of its Rules of Procedure, to draw up an own-initiative opinion on

The financial crisis and its impact on the real economy.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 13 November 2009. The rapporteur was Mr Cedrone.

At its 458th plenary session, held on 16 and 17 December 2009 (meeting of 16 December), the European Economic and Social Committee adopted the following opinion by 122 votes to 75 with 33 abstentions.

1. Conclusions and recommendations

1.1 The EESC considers that, faced with a crisis like the current one, a significant willingness to coordinate action is needed, through common efforts that are appropriate to the seriousness of the situation, in order to identify the measures and proposals for the short and long term that will stimulate recovery and avoid a repetition of the events that caused the current difficulties.

1.2 International finance : on the basis of the ideas that the EESC has already published, it is worth restating that there is still a need to adopt, in short order, a system of rules that, whilst allowing the free movement of capital, also introduces a system of supervision and penalties to prevent any recurrence of the negative impact of an uncontrolled system. Rules are needed to restore a more honest, transparent market. Eliminating tax havens, banking secrecy and some of the perverse mechanisms of the past connected with speculative instruments would help achieve this. We need to return to a distinction between retail banks and investment banks.

1.3 European finance : a single European market for finance needs to be created, so as to ensure not only greater transparency, facilitation of transactions and adequate information for all operators, but also a supervisory system overseen by the ECB and the European system of central banks (ESCB-ECB) for tasks of guidance and international coordination of supervisory activities. Meanwhile, the day-to-day management, supervision and monitoring of individual countries’ financial markets can be left to national supervisory authorities (1).

1.4 Monetary system : The EESC considers that an in-depth look at the issue of the international monetary system would be helpful to stabilise exchange markets and avoid unfair competition within the WTO in international trade.

1.5 Supporting the real economy and businesses : economic governance:

— a second, more ambitious European support plan is needed as regards the resources for and implementation of the measures that are required in various economic sectors in different countries, including structural reforms, or, failing that, a well-coordinated plan to give a positive signal to European businesses and citizens on the added value and quality of European integration;

— radically reform the various policies for which the EU is responsible (Structural Funds, cohesion, CAP, environment, training, research, the Lisbon Strategy, etc.), starting with the simplification of procedures and regulations;

— finance a system of European networks (energy, transport, communication) by launching a Community loan and by supporting the development of Public-Private Partnerships PPPs;

— agree a common approach to intervention for European banks to stimulate them to restore lines of credit to businesses, with special conditions for SMEs, for example by deferring debt, establishing a guarantee fund, or direct funding from the state and the EIB;

— where this does not happen, enable employees of SMEs to access ‘social shock absorbers’, i.e. employment support measures;

— agree fiscal policy measures to stimulate demand, recovery and employment, in conjunction with macroeconomic and monetary measures;

— make the labour market, which is currently too fragmented, ‘more European’, i.e. more integrated with communicating vessels, removing obstacles both within and between countries; we need an inclusive labour market, i.e. one that can take on not only the short or long-term unemployed, but also people who have never had a job (around 100 million Europeans). Obviously, this must be done in a way that complies with the social and economic standards enjoyed by workers in the destination country;

— take steps to attract investment in industry, including inward investment, by ensuring that Europe offers comparative advantages versus other regions in respect of competition law, the rules and agreements aimed at promoting employment, labour productivity and tax regimes. The scale of unemployment is a measure of the extent to which EU human capacity is ignored by entrepreneurs and international business.

1.6 Helping the European public : Social cohesion and governance:

— bring about an agreement amongst all the interested parties: a European pact for growth, competitiveness and employment. The pact should aim to put people, cohesion and solidarity at the centre of the economic system and alleviate the impact of the crisis for citizens and workers;

— provide for means of worker participation in the life of businesses to create and/or extend ‘economic democracy’; social dialogue should also be improved and expanded;

— promote a change in consumer policy, from private to public consumption, e.g. big networks, through investments to improve the quality and availability of services;

— increase the globalisation fund; implement a programme for young people (with universities), and for workers who have lost their jobs, who want to set up their own businesses, including through social economy enterprises as an alternative;

— agree measures to reduce taxation on work;

— extend the Erasmus programme, progressively expanding it to all those university students who want to take part in it;

— SIMPLIFY all Community procedures as far as possible;

— extend the pact to domestic and international business and to entrepreneurs, so that they locate investment in Member States rather than elsewhere, and so begin to create jobs for the surplus human resources of the EU.

Building a political Europe from the bottom up : political governance (in the future)

1.7.1 It is important to ensure, in the future, that the public does not continue to pay the price of non-Europe, which the limited Community measures in response to the crisis are amply demonstrating. These limits are not the result of too much Europe, but too little. The Lisbon Treaty is a significant step forward in this direction. The EESC will take part in the new institutional arrangements and give its opinion to the new Commission and the new Parliament in respect of the new competencies conferred by the Treaty.

1.7.2 The EU needs to put the democratic deficit and democracy of its institutions at the heart of the debate, including through new forms of direct participation by the public and civil society, which cannot watch passively as new injustices and new powers emerge.

1.7.3 All this makes it necessary that the EU be effectively represented externally; a ‘European political area’ should be created, with the means to act as a counterweight to the new economic and political balances that are emerging internationally as a direct result of the crisis, as these risk weakening citizens’ rights as well as making them poorer. As already stated, the EESC will support the work of the new EU High Representative for Foreign Affairs and Security Policy and continue to give its opinion regarding civil society in the international arena.

2. Introduction

2.1 The EESC felt it would be useful to draw up this own-initiative opinion in order to provide an overview of the financial crisis and put proposals to the Commission and the Council, in its capacity as a body representing the real economy and organised civil society, in particular as regards restoring financial flows to businesses, growth and employment.

2.2 For years we have been facing the consequences of widespread euphoria (Samuelson) brought about by vague information emphasising the voice of ‘experts’ who guaranteed the ‘validity’ of what was happening, and the superiority of the ‘current’ model, claiming that the market would sooner or later eliminate ‘excesses’.

2.3 The EESC is nevertheless convinced that the commitment of businesses and workers, mindful of their economic and social responsibility, will give a positive turn to the crisis, if they receive the proper support from national governments and the European Union.

3. Our current situation: the international financial crisis

Origins : The origins of the crisis are so well documented by now that there is no need to revisit them. The EESC nevertheless considers it useful to highlight at least two factors that created the conditions for the crisis, namely the direction taken by international finance, supported by an ultra-liberal economic culture, which ended up feeding itself more than the real economy, thus producing a huge financial bubble. This was largely unregulated, and such rules as existed were inadequate and widely flouted, which was the second cause of the crisis. The rules that existed did not work or were not applied by supervisory bodies and ratings agencies, whose behaviour made markets less transparent (2).

3.1.1 It is now apparent that within the bubble, bankers were wittingly or unwittingly engaged in high-risk activities for which the provisions and precautions were wholly inadequate. In retail banking, in the pursuit of volume, imprudent loans were made via mortgages and credit cards. In investment banking, these loans and others such as LBO financing were packaged and repackaged into complex derivatives and traded without due diligence or adequate reserves. It is clear that inappropriate incentives were in place for those executives and staff whose activities affected the risk profile of the bank and that, as a result of these incentives, personal rewards took precedence over the interests of most of the stakeholders in the banking system and the ordinary people who, knowing no better, had purchased these securities. However, this does not justify the improper practices and unscrupulous abuses that we have witnessed. This behaviour damaged the entire financial system and put it in a bad light.

3.2 Causes : the crash was possible because no policy existed, because of errors and omissions on the part of governments and others, not just with regard to finance, but also in terms of macroeconomic and monetary policies. At global level, for example, there was the USA’s extremely loose budget policy. The EU lacked adequate instruments with which to take action, and saw its socio-economic model assailed from several sides as the cause of all the problems. International bodies were too weak to intervene. The situation has lasted too long. Political forces have often used globalisation as an excuse, blaming it for everything and thus bearing substantial responsibility for the causes of the crisis (1).

Consequences : the effects have been disastrous, but we must not succumb to pessimism. Sadly, part of the financial system was ruled by euphoria, greed, speculation and widespread irresponsibility. The high concentration in the banking sector (to the point of being convinced that the banks were ‘too big’ to be allowed to fail) and the failure of risk management inevitably helped to provoke the current consequences by setting off an unobstructed domino effect. The financial crisis, which was the root cause, thus turned into a macroeconomic crisis and infected the real economy. This means that we now face a financial crisis which has spilled over into production sectors, thus causing an economic, monetary, trade and social crisis that has turned into a crisis of confidence.

3.3.1 It should nonetheless be acknowledged that the last thirty years have made possible unprecedented worldwide development and economic growth, particularly in developing countries. This growth was made possible not least by the development of financial markets. Many benefited from these but deluded themselves that this process could go on for ever without any problems.

3.3.2 The situation will certainly have an impact on power shifts at global and national level, as the Pittsburgh G20 has already demonstrated. There will be a new economic and political ‘geography’ once the crisis has ended. The financial crisis, which was the root cause, thus turned into a macroeconomic crisis and infected the real economy, with lower GDP and sharply higher unemployment. In this context, the EESC wonders about the position of the EU and the role it should play in the future.

4. What can be done? Means of combating the crisis

4.1 Restructuring the financial system

The EESC welcomes the outcome of the G20 meeting in London and the G8 meeting in L’Aquila, which defied pessimistic expectations to demonstrate that the global economy and financial system must be governed jointly or not at all. Participants approved the principle of ‘global governance’, which gives a proper role back to policy-making. It is to be hoped that European governments also draw the necessary conclusions (see point 4.4). However, the outcome of these meetings must be translated into concrete and effective action, beyond the changes brought in by Basel II, by means of a Basel III, restructuring and reforming international organisations.

4.1.1.1 Of course, it would have been desirable if the good intentions expressed at the subsequent G20 meeting in Pittsburgh had been followed up by deeds. What actually happened was that people avoided addressing the real problems on the table: the rules governing the financial system and reform thereof (1); the trade imbalance between the USA and China, the structure of public limited companies, rising unemployment, etc. This means that the risk remains, if nothing is done, that ‘some financial stakeholders [will] pretend that the crisis was only a minor setback, and that they can return to business as usual’. (3)

4.1.2 The EESC believes that the role of supervisory bodies should be strengthened (4), but above all designed to make them effective; they should also be independent of political authorities and have the power to impose penalties for non-compliance. Tax havens should be abolished and/or their activities made transparent so that they do not become means of laundering dirty money and of tax evasion. Indeed, it is the lack of transparency that is the main problem. Everyone needs to know the real nature of banks’ loans, assets, reserves and risk profiles.

4.1.3 The EESC hopes that the guidelines adopted and the (few!) decisions taken in London, L’Aquila and Pittsburgh signal a change of direction and will, within a credible timescale, usher in a new economic and market culture which is less ideological and more transparent. We should be wary of talking about morals and ethical conduct in the financial market as some would like to, since those who are suffering so much as a result of the crisis might feel this to be provocative. It is much better to talk of rights or penalties, and of rules and instruments for implementing them.

4.1.4 This is the most convincing and effective way of regaining consumers’ trust and so reactivating demand. A new economic discourse is needed, one that refers to the real economy, investment, work, risks, rights, duties and safeguarding competition.

4.1.5 The EESC believes that stakeholders in the real economy, businesses and workers must express their opinions and arguments with greater force. They must reclaim their role, which is vital in promoting economic and social development, competitiveness, innovation, growth and employment. And policy-makers should do the same.

The international monetary system should also be overhauled. During the G20 meeting in London, the G8 meeting in L’Aquila and the G20 in Pittsburgh, the issue of how the international monetary system operates and might be reformed did not, aside from the allocation of IMF quotas, emerge as one of the priorities for putting the global economy back on a path of sustainable growth. Some of the commitments made by the G20 and the G8, if they were implemented, might nevertheless have a substantial impact on foreign exchange markets and thus on the way the system functions.

4.1.6.1 The decision taken to provide aid to developing countries and to Africa in particular, to triple IMF funding (to 750 billion dollars) and to allocate a further 250 billion dollars worth of Special Drawing Rights (SDRs), in order to provide financial support to the economies most adversely affected by the crisis, should give pause for thought about the huge mass of dollars that is to be put into circulation in order to support countries with high current-account deficits.

4.1.6.2 The increase in US public borrowing envisaged (which will bring total debt to around 100 % of GDP over the next three years), underpinned by President Obama’s new policy of deficit spending to get the country out of recession, will further encourage the issuing of massive amounts of dollars, which will have a substantial impact on the international economic system. The same situation arose in the second half of the 1960s, culminating in the devaluation of the dollar and the collapse in 1971 of the Bretton Woods system of fixed exchange rates.

4.1.6.3 Those most concerned about this situation are the Chinese, whose foreign exchange reserves have increased by 5 000 billion dollars over the past 10 years and are likely to continue increasing over the coming years, albeit at a slower rate. China fears that the weakening of the dollar will undermine the value of its huge foreign currency reserves.

4.1.6.4 The euro, which in the space of a few years has become the second international reserve currency, is not a valid alternative to the dollar, as convenient and desirable as this may be, nor is it possible to imagine a ‘supranational reserve currency’, favoured by the Chinese monetary authorities, in the form of SDRs used not just as now between individual governments and international institutions but as a payment instrument for international financial and commercial transactions. Issuing new SDRs is certainly a useful way of creating additional reserves for economies with current account deficits, but it cannot provide a long-term solution to the crisis.

4.1.6.5 It is very likely, and also to be welcomed, that the euro will increasingly take on the characteristics of an international reserve currency and a reference for setting the prices of goods on world markets. But the EESC would also like the Chinese authorities to stop protecting their currency, which represents an economy that is becoming ever more crucial in the global economy. For ten years, the renminbi has been strictly pegged to the dollar, and only since 2005 has it been tied to a basket containing other currencies. The renminbi must be made freely convertible on international markets.

4.1.6.6 The EESC believes that more efforts are needed at international level; China cannot continue relying on a sustained increase in exports, building up current account surpluses and expecting others to deal with the problems of managing exchange rates at international level, problems which it also helps to create through monetary and fiscal policies that encourage the accumulation of savings and restrain domestic spending.

4.1.6.7 The global monetary system, based on floating exchange rates, is characterised by constant and drastic currency fluctuations, driven by speculation. This situation is extremely damaging to the world economy but could be corrected by means of an agreement on policy between the central banks of the main industrialised countries. Under this agreement, the banks would agree to take joint action should one currency be forced too far up or down in order to keep exchange rate volatility within reasonable limits.

4.1.7 Setting European rules on finance – creating a single European market for finance (5). Despite the rules in force at European level and despite the euro, we are still a long way from this goal, even in the euro area. The crisis has demonstrated the need to move in this direction without delay, going well beyond what has already been done, through appropriate reforms, as called for by the Larosière report and the Commission's proposals. This would also enable the ECB to act more quickly and more flexibly. It must not be forgotten that the main purpose of finance is to support businesses and stimulate entrepreneurship, growth and employment: a task that could be made easier by a reformed, more competitive, more transparent financial market whose various aspects were better integrated.

4.2 Supporting the real economy

4.2.1 In its Communication for the 2009 spring European Council, ambitiously entitled Driving European recovery (6), the European Commission gives top priority to restoring the confidence of the public and of economic operators as a means of overcoming the current crisis, increasing demand and creating new jobs. The proposed measures must produce tangible results and not simply remain announcements of good intentions.

4.2.2 In particular, the EESC considers that the key problem to be tackled is that of employment and the lack of liquidity for businesses (7). Recent ILO estimates indicate that around 40 million jobs have been lost since the beginning of the crisis in December 2007 (7 million of which in the OECD alone), and the forecasts for the future are rather pessimistic. This social disaster can only be overcome when trust is restored in the functioning of the markets and through public measures to promote growth, competitiveness, innovation and employment. Europe needs an economic policy and a programme that will attract businesses, help them to grow, and create jobs.

4.2.3 The EESC fully endorses the Commission's objective. The approaches set out in the Communication should be supported because they concern urgent measures to be taken in the banking and finance sectors, to support the real economy and to promote Europe's internal market. However, they demonstrate a traditional and by no means innovative course of action that focuses on better application of sectoral economic policies directly managed and/or coordinated by the Commission.

4.2.4 Restoring confidence among Europe's citizens and businesses in the capacity of the European institutions and national authorities to weather the crisis must mean recognising that the crisis was not due solely to cyclical phenomena, albeit dramatic ones, or to market imperfections or failures.

4.2.5 The particular nature of the crisis affecting the global (and European) economy has deeper and more systemic roots relating to ethical and moral values (accountability, legality, social justice), which are the basis of modern-day society and prompt its actions in all areas of economic, social and civic life. Restoring confidence in the functioning of economic and financial systems cannot be achieved by acting solely on market ‘mechanisms’ that have worked badly, but through European macroeconomic and microeconomic policies.

4.2.6 While agreeing with this general approach to the current problems, the solutions proposed in the Commission's communication seem to the Committee to be weak or at least not very effective with respect to the changes that need to be brought about in the various national production systems, and at the level of European and international policy, in order to support growth of the Member States’ economies. And this in the context of a crisis that is having a bigger impact in Europe (GDP down) than in the USA, whereas that country has responded with a strong unified programme and with bigger and more effective public measures. The EU should promote the implementation of measures that have been harmonised among the Member States. The EU should therefore produce a second action plan, more effective and coherent than the first.

4.2.7 Looking only at steps to be taken in the short to medium term for the recovery of Europe's economy, the EESC believes that the attention and financial resources of the EU and the Member States should focus on a limited number of measures, but ones that will have a substantial impact on the various markets and on economic operators in general. These measures should aim to: restore confidence in the functioning of the financial system; fine-tune the Union's main public intervention policies; and support the Member States worst hit by the crisis, starting with the countries of eastern Europe.

Restoring confidence in the functioning of the financial system. It is possible for Europe's economy to recover by restoring stability and operational viability to the financial markets, with compliance for new rules and new systems of macro and micro supervision guaranteeing that they work properly and responsibly at international level. Finance must resume its traditional, unique role in promoting economic growth: financing the concrete activities of economic operators (companies, households, networks and services, infrastructure, the environment and energy).

4.2.8.1 The issue of the significant – and sadly inevitable – state intervention to support the banking system remains unresolved. The EESC considers that this situation cannot continue into the long term and that an ‘exit strategy’ from such interventions needs to be drawn up, with conditions being systematically placed on the banking system such as internal restructuring, whilst improving the quantity and quality of reserves recorded on the balance sheet. This strategy should give new impetus to an international credit and finance market that is independent and transparent, and should avoid a repeat of recent events.

4.2.8.2 As regards the increased supervision and transparency of financial operations advocated by the Commission and emphasised by the G20 in London, the G8 in Aquila and the G20 in Pittsburgh, and also with reference to the proposal for reforming the European financial system announced by the Commission and the Council, the EESC will assess that proposal. It certainly considers that if financial supervision is to be entrusted to a new, independent European body, that body must have real power to act (8).

4.2.8.3 This could be expected to assist the process of harmonising Member States’ existing legislation on the financial supervision sector and its capacity to impose penalties.

4.2.9 Improvements to the European Economic Recovery Plan

4.2.9.1 In a previous opinion (9), the EESC suggested a thorough review of the Recovery Plan proposed by the Commission, not only and not so much in terms of financial resources, which it considered inadequate given the seriousness of the crisis, as in terms of the coordination of and approach to the measures to be taken in each Member State to promote the recovery.

4.2.9.2 The conditions of access to such measures, notwithstanding the sectors currently considered as priorities in terms of financial needs (car industry, construction, SMEs, etc.), must ensure that the measures are coherent and implemented uniformly, and comply with the rules of the single European market.

4.2.9.3 It is not desirable that individual initiatives financed under the European plan from the Community budget or from Member States’ funds for emergency help to businesses, sectors or countries in crisis should in any way bring back situations where certain businesses are favoured or protected to the detriment of others.

4.2.9.4 The single market is one of the key drivers of the European economy. Strengthening and developing it is the best way of ensuring the growth of productive initiatives and new jobs. Coordinating and monitoring measures proposed under the Plan at European and national level must demonstrate to the European public that the Community is able to manage financial aid in a way that is compatible with Community legislation and in the interests of the territories and people who are most vulnerable to the effects of the crisis.

4.2.9.5 The EESC considers that, in the context of these support measures for the productive economy, particular attention should be paid to SMEs (through a specific soft loan scheme with simplified procedures; see, for example, the Small Business Act). The types of measures that it is planned to introduce in order to boost the recovery of small and medium-sized enterprises are not sufficiently explained in the European Plan. Concerning smaller businesses, whose overall contribution to EU employment is very significant, the EESC takes the view that the initiatives must be designed within a macroeconomic frame of reference that takes account of national and local circumstances, the various levels of sectoral specialisation, and the different needs in terms of new skills, innovative technologies and business service infrastructure.

4.2.9.6 Without an appropriate European and national frame of reference on the prospects for future SME growth, the risk, as has happened in the past, is that measures will be fragmented and piecemeal, with the result that aid will be provided to everyone without actually helping anyone to grow in size or improve the quality of the products and services they provide.

4.2.9.7 The EESC also considers that social dialogue and negotiations, i.e. greater involvement of businesses, trade unions and social economy organisations, could be helpful in overcoming the crisis.

4.2.10 Changes to be made to the EU's key policies

4.2.10.1 The EESC considers that, to restore confidence among European businesses, there also needs to be a fundamental change in the way the Commission manages common policies in important economic and social fields, in particular cohesion policy. The EESC has already issued an opinion (10) on that policy in which it proposed a number of changes.

4.2.10.2 The serious economic crisis that is currently affecting every country in Europe, and which may continue into 2010, calls for a radical reform of the management of the Structural Funds (ERDF and ESF) and a review of the measures planned for the programming period 2007-2013. The Commission is drawing up some proposed changes to simplify procedures, speed up payments and redefine the areas for action under certain sectoral policies. However, these measures are not sufficient. Such measures are needed to safeguard the cohesion of the EU, which is currently under threat from the crisis.

4.2.10.3 The effort that the EESC is asking the Commission to make to adapt the proposed measures to the new circumstances that are arising from the international crisis needs to be greater. It requires a root and branch rethink of these policies. Apart from anything else, the conflict that is becoming apparent between central and regional governments concerning the management of Structural Funds resources to address the crisis is something to consider when rethinking aid for the most disadvantaged territories of the Union.

4.2.10.4 In the case of cohesion policies, too, the EESC believes that, for every country in receipt of those resources, specific sectoral and local priorities should be drawn up with the aim of focusing Community and national resources on programmes and projects that are thought to have the greatest economic and social impact. Those reviewing the guidelines for cohesion policy should be guided by the following principles: coherence in the choice of measures, coordination at European and national level of policies on aid to businesses, common programmes for specialised training and the development of new skills.

4.2.10.5 In short, the crisis should be an opportunity for the EU not only to make better use of the policies at its disposal, but to put new ones in place: improving infrastructure and launching, for example, a plan for the environment, for the creation of new European networks for energy and communication (e.g. broadband) via European public financing (eurobonds?); this would give an extraordinary boost to economic recovery.

4.2.10.6 The EESC believes that this is an extraordinary opportunity for an in-depth debate on the Community budget as it is currently configured, both in qualitative and quantitative terms, and to put on the table, perhaps through a group of experts, the issue of fiscal policy, one that is key to growth and development and can no longer be avoided or used as a means of economic and social dumping at European level.

4.2.11 Support for Member States worst affected by the crisis, starting with the eastern countries of the EU

4.2.11.1 The EESC considers that the Commission should establish, if not an ad hoc fund for the countries worst affected by the crisis (a proposal rejected by the most influential countries of the EU), at least a package of financial measures, including through the EBRD, targeted at initiatives to stabilise the weakest economies in the EU, as is starting to happen. In this context, particular attention needs to be given to countries in the east. Specific funds should therefore be set aside for that purpose. There are several reasons behind the request for specific funding for these countries. Otherwise, there is a risk of enlargement, the second pillar of integration (the single market being the other one), collapsing.

4.2.11.2 In the coming months (and years), the EU will have to face situations that will be very difficult to resolve: a crisis in the economy and in employment, social conflicts, institutional reforms, the differences between Member States, and all of the above in a context of growing euroscepticism in political parties, national governments of many EU states, and public opinion, which is unhappy with decisions taken at European level.

4.2.11.3 Trust in the European economic and social model and in its ability to provide appropriate solutions that are in the interests of all the Member States will be restored if the EU addresses the problems of the weakest countries, helping them to overcome the difficulties they face.

4.2.11.4 The crisis that many countries in the east are experiencing, in the credit, financial services and manufacturing sectors, is not so great as to pose an insurmountable challenge for the EU. Many of these activities started with help and direct investment from the EU15, and it is hard to imagine, following the process of harmonisation they had to undergo in order to become full members, that the ‘case by case’ policy will lead to minimal and insignificant economic measures. This would be a strategic error that would be irreparable in the short to medium term, and a serious case of political short-sightedness that could jeopardise the future of European integration.

4.3 Helping the European public

4.3.1 After the crisis, ‘a new equilibrium will be reached, but not at earlier levels: we need to be prepared to accept a lower standard of living’. If this prediction (11) comes true, the only thing that is clear is the certainty of who will have to accept an even ‘lower’ standard of living – only, it is hoped, for a short period.

4.3.2 The risk we must avoid is that businesses and workers will continue to pay the cost of saving the market, whilst capital will continue to be able to move to safer markets, continuing to hide from tax authorities. Otherwise, we may see a further erosion of wages that will cause the market economy to lose its social legitimacy. If this is to be avoided, the European model of the social market economy needs to be strengthened and extended, putting people back at the heart of the economic system.

4.3.3 For these reasons, the EESC considers that fiscal policy, too, should receive more attention from governments and from the EU with a view to coordination so as to avoid disparities that are incompatible with the single market. In addition, priority should be given to those reforms that broaden the tax base rather than increasing tax rates, taking more account of wealth rather than business activities and labour.

4.3.4 It is also important to avoid a situation where the consequences of the financial crisis have a dramatic impact on Member States’ pension systems, as has happened in the United States, where some pension funds have made significant losses as a result of the crisis in hedge funds. This has led to the workers who subscribed to those funds seeing the value of their savings halved. The EESC takes the view that work should be done towards establishing a regulatory framework and pensions model to protect the interests of Europe' citizens and workers.

4.3.5 The increase in injustice and inequalities has reduced, and risks reducing further, the areas of freedom; it may jeopardise democracy in European countries and the EU in particular, which still has a very significant ‘democratic deficit’ to overcome; at the very least, it will undermine the consensus among the new poor about the policies that need to be implemented to overcome the crisis and foster sustainable development.

4.3.6 The EESC considers that this is a key moment for the EU to demonstrate its relevance with practical, tangible initiatives to help the people, businesses and workers who have been most heavily affected by the crisis.

This should be done with provisions to protect rights: the EU should therefore be able to intervene in social policy with its own initiatives. The social question should be a fully-fledged part of the strategic agreement mentioned in point 4.4.3. Measures must also be taken in the area of economic policy (including special funding for the Lisbon Strategy) and support for the most vulnerable businesses that the EU and its Member States should provide (see point 4.2).

4.3.7.1 Structural measures are needed to make the labour market more penetrable and inclusive, with rules agreed at European level using the ESF, simplifying procedures and bringing forward payments.

4.3.7.2 Steps should be taken to assist businesses that commit to implement and comply with the principle of social responsibility in Europe and the principle of the social clause outside Europe.

4.3.8 The EESC calls on the Commission, not least through economic incentives, e.g. the Structural Funds, to do everything it can, in cooperation with the European social partners, to promote agreements and/or find solutions that reduce the impact of the crisis on businesses and workers, inter alia by sharing the good practices that are emerging in some countries.

4.3.9 The EESC calls on the Council to put in place the necessary provisions, a European code, to establish rules of engagement, to reduce income disparities and to foster a new kind of distributive justice - not just in the financial sector. Income disparities grew out of all proportion without any justification. It would be helpful to proceed by means of a European agreement involving all the parties.

4.4 Towards a political EU: from the grass-roots up

4.4.1 The EESC considers that the EU, if it is to address and overcome the crisis, needs decision-making instruments that it does not currently have. This is the main cause of its lack of action, which risks marginalising it vis-à-vis the major powers of China and the USA. For this reason, the EESC considers that the EU should give itself the means to act, even if this means using temporary instruments, so that the work done and commitments made in this period of fundamental change are not in vain.

Political governance : The EESC believes that one of the main causes of the current crisis lies in divisions and in errors by politicians; with no united vision, politicians were unable to act and ended up abdicating their leadership role at both global and European level. The results are now clear for all to see.

4.4.2.1 International governance : The EU does not yet have a common foreign policy, nor any powers of its own to manage the crisis, but what is needed is a single voice, at least for the euro area, in international forums and, in particular, in organisations that we are preparing to reform, to counterbalance the decision-making power of other economic and political blocs. The EU is the world’s largest market in goods and services, and the biggest contributor of publicly-funded development aid to the poorest countries. Its currency, the euro, is the second international reserve currency. It is thus, in many respects, an economic giant, but, if we look at its decision-making capacity at international level, the EU is a political dwarf. This is a paradox that the European public really cannot understand. What needs to happen instead is for global politics to be more heavily influenced by European proposals and values.

4.4.2.2 The heads of state and government must therefore have the courage to recognise this shortcoming and seek to address it; they are currently behaving like a team without a captain; a state of affairs that has significant economic and political costs. There is no need to draw in historians and/or founding fathers to be convinced of this (‘If Europe were once united, there would be no limit to the happiness, to the prosperity and the glory which its 400 million people would enjoy’ – Winston Churchill, 1946). Early action should be taken to draw up a binding agreement for managing crises, which can then be transformed into the Community method, and not the opposite, which is what is currently happening.

4.4.3 Economic governance : the main aim must be to equip the EU with the tools to establish and develop common macroeconomic and sectoral policy guidelines (at least in the euro area, which would have a positive impact on all 27 countries); in other words, complement the common European monetary policy, starting with the euro area, with a common economic policy, which cannot remain limited to the mere desire for coordination, and which provides for measures in strategic areas of European interest (the environment, energy, innovation, immigration, employment, cohesion, etc.). A new European pact for growth, sustainable development, competitiveness and employment should be drawn up; this pact should place special emphasis on the social and environmental market economy and should aim to complete the single market, as called for in the Lisbon Strategy.

4.4.4 Social governance : the European pact must have social and cohesion policy among its key objectives. The EU should have more scope to act in the area of social policy (12) to define a ‘minimum threshold’ or minimum standard for fundamental social rights. All of these reasons call for a Europe that is more able to act. It should start doing so by recalling that the EU started as an economic project (ECSC, EEC and the euro) with political ends.

4.4.5 The EESC therefore considers it necessary, at this time, to increase public involvement, especially of young people, in the process of European integration, by trying out new kinds of grass-roots participation. This is an issue that must not be left to chance. For example, it would have a major impact on public opinion if the EU were to launch an effective proposal with sustained impact that would put people first, with new ways of getting the public involved in important European policy decisions. This would be an excellent way of bringing the European public together with its institutions and would help to reduce the EU's democratic deficit. This is a vital question for the future of the Union. It cannot continue to be postponed, even if a small step forward is being taken with the Lisbon Treaty.

4.4.6 A significant contribution towards this could come from European civil society, which deserves more than a passing mention, and must not remain a separate sphere or be used simply as a fig-leaf. This is a challenge for the EESC and its Programme for Europe.

Brussels, 16 December 2009. The President of the European Economic and Social Committee Mario SEPI

(1) See EESC opinion on the Report of the de Larosière Group, OJ C 318, 23.12.2009, p. 57.

(2) See EESC opinion on the Report of the de Larosière Group, OJ C 318, 23.12.2009, p. 57 and the EESC opinion on A European Economic Recovery Plan, OJ C 182, 4.8.2009, p. 71.

(3) Situation of the financial and banking system – Joint article by Christine Lagarde, Minister for the Economy, Industry and Employment, Anders Borg, Swedish Minister of Finance, Wouter Bos, Dutch Minister of Finance, Jean-Claude Juncker, Luxembourg Minister of Finance, Elena Salgado Mendez, Spanish Minister of Finance, Peer Steinbrück, German Minister of Finance, and Giulio Tremonti, Italian Minister of Finance, published in various European newspapers on 4 September 2009.

(4) Regulation of the European Parliament and of the Council on Community macro prudential oversight of the financial system and establishing a European Systemic Risk Board, COM (2009) 499 final, 23.9.2009; Regulation of the European Parliament and of the Council establishing a European Banking Authority, COM (2009) 501 final, 23.9.2009; Regulation of the European Parliament and of the Council establishing a European Insurance and Occupational Pensions Authority, COM (2009) 502 final, 23.9.2009; Regulation of the European Parliament and of the Council establishing a European Securities and Markets Authority, COM (2009) 503 final, 23.9.2009.

(5) See note 3.

(6) COM(2009) 114 final, Driving European recovery, 4.3.2009.

(7) See EESC opinion on the Results of the Employment Summit, OJ C 306, 16.12.2009, p. 70.

(8) See EESC opinion on the Report of the de Larosière Group, OJ C 318, 23.12.2009, p. 57. During his speech at the EESC Plenary Session on 30 September 2009 Mr Barroso also expressed a point of view along these lines.

(9) See EESC opinion on A European Economic Recovery Plan, OJ C 182, 4.8.2009, p. 71.

(10) See EESC opinion on the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on the results of the negotiations concerning cohesion policy strategies and programmes for the programming period 2007-2013, OJ C 228, 22.9.2009, p. 141.

(11) John Nash, winner of the Nobel Prize for Economics, October 2008.

(12) During his speech at the EESC Plenary Session on 30 September 2009 Mr Barroso also expressed a point of view along these lines.