Opinion on the Annual Economic Report for 1994 (94/C 195/17)

On 6 April 1994 the Commission decided to consult the Economic and Social Committee on the Annual Economic Report for 1994.

The Section for Economic, Financial and Monetary Questions, which was responsible for preparing the Committee's work on the subject, adopted its Opinion on 12 April 1994. The Rapporteur was Mr Giacomelli.

At its 315th Plenary Session (meeting of 27 April 1994) the Economic and Social Committee adopted the following Opinion by a very large majority, with 16 abstentions.

1. The Commission's 1994 annual economic report - forecasts and recommendations

1.1. In the view of the Commission expressed in the 1994 annual economic report, the economic recession of the last few years is the most serious that Europe has experienced for 50 years. If account is taken of the new German Länder, three million jobs have been lost. However, the trough seems to have been reached and, barring policy mistakes (interest rates, budget deficits, wage trends, inflation), there is hope of a recovery. The White Paper on Growth, Competitiveness and Employment and the Council Recommendation of 23 December 1993 on broad economic policy guidelines for the Member States and the Community (1) (a document referred to in many places of the Commission's economic report) indicate a series of actions necessary to make the Community economy more competitive and dynamic and help halt and eventually bring down unemployment.

1.1.1. According to the Commission's economic report, 'a substantial reduction in unemployment requires that growth remains both strong and employment-creating for many years. This calls for determined structural adjustment efforts and careful macro-economic management. Structural adjustment needs to aim at making the labour market more effective and at modifying various aspects of the 'employment system' so as to make growth more employment-creating'. The White Paper holds out prospects of improvements in this respect. It considers for example that active labour market policies are necessary to prevent current cyclical unemployment from consolidating into structural unemployment, which is much more difficult to combat. Emphasis is accordingly placed on improving training in order to preserve and possibly improve the skills of those who have lost, are in the process of losing, or run the risk of losing their jobs.

1.2. Recovery should be underpinned by the restoration of confidence, which in turn will boost consumer demand and bring an upturn in investment. Investment should be boosted by the results of the Uruguay Round: although the effects will not be felt immediately, they can still play a part, whilst the renewed growth in the United States and Canada should also provide a stimulus. Further interest-rate cuts would also support the recovery.

1.3. However, other factors suggest that caution is needed, i.e. there is no guarantee that interest rates will continue to fall and the high level of unemployment is not set to tail off before 1996 at the earliest. There is also diffidence among the Member States who wish to participate in the final stage of EMU as they are afraid that they will not be able to meet the necessary criteria (budget deficit, inflation, public debt). According to the Commission's 1994 annual economic report, confirmation of the first signs of recovery is conditional in some countries on quelling inflation, and in all Member States on moderate wage settlements and on control and reduction of budget deficits.

1.4. The figures used in the Commission report are basically those issued in November 1993, although a slight upward adjustment has had to be made, notably in the case of unemployment. They also confirm that the modest growth envisaged will not bring down unemployment. At best, the deterioration may be stemmed in 1996.

Key indicators199319941995

GDP P 0.3+ 1.3+ 2.1Private consumption P 0.1+ 0.3+ 1.3Unemployment

(% economically active population)10.611.211.3(December 1993, 10.9)

1.5. As regards monetary policy, the Commission invites the central banks to promote a drop in short-term interest rates. It is vital that further progress be made towards eliminating the conflict between the objective of stability and wage and national budgetary behaviour. If necessary, short-term rates could fall even further than anticipated.

1.6. This is all the more important as monetary policy in the Community has not yet been eased sufficiently to be compatible with a strong boost to growth, particularly if account is taken of the likelihood of a restrictive budgetary policy in several Member States in 1994 and after.

1.7. The Commission also notes that the significant drop in interest rates in Europe at the end of 1993 was due not only to falling inflation but also to the favourable prospects for medium-term budgetary consolidation.

1.8. The Commission notes that there is an interaction between interest-rate levels, budget deficits and growth prospects. A continued downward trend in interest rates and the improved growth possibilities which this would bring with it will help to reduce budget deficits in line with the broad economic policy guidelines and the convergence criteria.

2. The situation

2.1. Certain indicators of confidence published in mid-February show, by reference to a base of 100 in 1985, a rise between October and December 1993 from P23 to P19 for industrial output, from P44 to P38 for building and construction, and from 96.8 to 97.5 for the general economic climate. Consumption, however, has stagnated after a rise of two points in September.

2.2. The Commission often stresses the need to restore the confidence of economic operators so as to increase demand and bring about investment-led growth. Confidence however depends first and foremost on employment prospects. People who are afraid of losing their jobs will act with the utmost caution. In other words, everyone will tend to cut back expenditure on consumption and postpone investment. Businessmen will also react in the same way if they feel that sales prospects are unlikely to improve sufficiently to justify capital expenditure.

2.3. The ordinary citizen then takes refuge in saving as a hedge against a rainy day. This sector is dominated by public borrowing. To meet its funding requirements, the State in fact increases taxation and borrows from savings, whilst generally giving priority for political reasons to consumer expenditure rather than to stepping up investment. In all Member States, however, infrastructure requirements remain considerable.

2.4. As far as short-term economic trends are concerned, the figures currently available suggest a 1 % to 1.25 % growth rate in 1994 and a 2 % growth rate in 1995. As regards the economic policy followed to date by the Member States, current trends will have to be compared with the recommendations in the 'broad guidelines'. Although there are fears about inflation, current trends are rather favourable according to the Commission, which expects 2 %-3 % inflation for 1996, whilst wage growth has slowed since November 1993. However, the weakness in the economy has obviously had an effect on national budgets, with expenditure rising and no improvement in sight.

2.5. It is doubtless true that the incipient economic recovery will remain too weak to reduce unemployment. While the indicators suggest that the bottom of the trough was reached at the end of 1993, the heralded recovery will not generate growth rapidly enough to create jobs. According to some sources, unemployment, which was 10.9 % in January, may reach 12 % this year (the Commission's November 1993 forecasts indicate 11.5 % for mid-1995).

2.6. The White Paper suggests that the resumption of growth should enable at least the majority of Member States to cut their PSBR in 1996/1997 to the level foreseen by Maastricht.

2.7. If the expected recovery is the early confirmation of a sustained improvement, it should be used to consolidate the budget situation by bringing the PSBR down to 3 % as quickly as the economic situation permits. The Member States where the national debt is excessive should go further than this, and speed up their progress towards the target of a debt/GDP ratio of no more than 60 %.

2.7.1. Nevertheless it remains the case that, as a result of the deep recession in Europe, the 3 % budget deficit/GDP ratio has been exceeded in a number of Member States. The Commission report on convergence estimates the impact of the 1990-93 recession on budget deficits at 2.2 % of GDP. The Committee concludes from this that an economic policy aimed at making good lost growth and production might over, say, the next four years reduce European budget deficits by approximately the same percentage, i.e. from 6.4 % to 4-4.5 % of GDP. A growth policy of this kind might also make a major contribution to reversing the unemployment trend.

2.7.2. The Member States must also pay attention to the structural elements of the budget deficits. The benefits of efforts to trim in certain areas should be weighed up against the danger that attempting to bring down the deficit too fast might in the short term result in an uncertain or even faltering recovery.

2.8. The trade deficit of the European Union is shrinking. This can be attributed primarily to the reduction of imports because of the recession, but also to a certain improvement in European competitiveness as a result of the appreciation of the dollar and yen, as well as economic recovery in a number of third countries.

2.9. The Community's growth potential is too weak since it is based on an investment rate of 19 % of GDP, which can only lead to a 2 % growth rate; this is insufficient to significantly reduce or even mop up unemployment in the medium term. The White Paper states that the investment rate would have to be stepped up to 23-24 % of GDP by the year 2000 to produce a level of growth capable of bringing down unemployment. In the meantime it must be remembered that wage rises and the level of self-financing of investments depend on productivity gains. New investments must clearly be used for creating jobs, but they must also be expected to go into increasing the use of new technology so as to permit restructuring and rationalisation and hence competitiveness. With this in mind, an improvement in the jobs situation would be based on intensifying efforts in the fields of vocational and continuous training.

2.10. The Member States should generate sufficient savings to cover their investment requirements. The constant level of private savings should prompt the Member States (a) to reduce current public spending in favour of productive investment, (b) to contribute to the building-up of national savings and (c) to avoid recourse to foreign capital. Some cut in the proportion of GDP absorbed by public spending, which at around 50 % of GDP on average far exceeds the levels reached in the USA and Japan, would no doubt stimulate the competitiveness of the Community's economies. The privatization of systems of public and social expenditure must not be allowed to undermine the foundations and principles underlying social systems in Europe, although it is necessary to monitor the effectiveness and allocation of such expenditure.

2.11. Similarly, cutting the public sector's role in the European economy - which is due to over-rigid laws - will make businesses more competitive. And if the Recommendation of 22 December 1993 on the 'broad guidelines' is followed, the public sector's greater awareness of current problems will have a beneficial effect by shifting public finances towards promoting public investment.

2.12. The policy advocated by the White Paper is also based on implementation of the 'broad guidelines'. In this context the proposals on the major infrastructure networks are also important nationally, as much in terms of employment as of competitiveness.

2.12.1. It is a cause for regret that neither the Community programmes, nor consequently the national programmes, have as yet been approved, probably because of differences of view about funding in the ECOFIN Council. At a recent informal Council meeting the Ministers of Finance gave their approval to a selection of priority projects but failed to specify how they would be financed. The Committee hopes that the ECOFIN Council will find a practical solution to this financing problem in the short term.

3. The international environment

3.1. The fact that the Uruguay Round has been concluded on schedule is encouraging for the future of international trade. The international economy has therefore narrowly escaped the risk of a new wave of protectionism. Even though we should not expect a growth miracle to ensue following the GATT renegotiations, the dangers of a deterioration in the trade climate and a consequent adverse effect on the economic situation seem to be limited. The agreement remains vague for certain sectors but consolidates and reinforces existing rules. Solutions nevertheless still need to be found to certain contentious issues (United States/European financial services, 'textile' compensatory measures, etc.) as well as in certain excluded areas such as aeronautics and the audiovisual sector. Secretary-General Sutherland has himself recognized that it would have been unrealistic to assume a priori perfect harmony between the parties to the Agreement.

3.1.1. The Committee also urges that the Conventions of the ILO be applied in all relations with non-EU countries and invites those Member States which have not yet ratified the Conventions to do so with due diligence.

3.1.2. In this context - and this is a remark intended in particular for the countries of South-East Asia - the Committee regrets the absence of any social clause in the GATT agreements aimed at preventing unfair competition from countries offering goods produced by children or by workers not covered by proper welfare protection.

3.1.3. This leads the Committee to wonder whether the Community will be able to accept for much longer a situation where GATT provisions, and the rules on free competition underlying GATT, remain applicable to countries which do not respect human rights, which prevent or hamper the entry of goods and services from EU Member States, which do not have social security for workers, which do not apply minimum environmental standards, and where the strong economic growth caused by this behaviour does not lead to a significantly higher standard of living for their peoples.

3.1.4. GATT rules currently inhibit the application of ILO Conventions aimed at preventing unfair competition and are also an obstacle to the proper consideration of environmental and human rights demands. To remedy this, it is necessary to ensure, after the official signing of the Agreement in Marrakesh scheduled for 15 April 1994, that ecological, social and legal concerns are all among the priorities of the new World Trade Organization due to replace GATT from 1 January 1995.

3.2. Many stumbling blocks continue to exist between trading partners, and, even in areas which appear to have been settled, departures from agreements by one or other party may lead to an automatic response in kind by its trading partner. In particular, the recent clashes between the United States and Japan continue to give rise to fears that there may be a return to bilateral relations and a retreat to protectionism in certain fields. The USA is currently threatening to reintroduce 'super article 301' of its trading laws in trade with both Japan and the EU. As far as the European Union is concerned, the most important thing is to remain permanently vigilant to make sure that agreed principles are adhered to in the interests of the open European economy.

3.3. With the exception of the largely encouraging performance of the Czech Republic, Poland, Hungary and Slovenia, the countries of Central and Eastern Europe are having great difficulties in making their transition to market economies. Most of these countries are having to contend with negative growth rates. The Community itself has not been able to develop a strategy which allows it to play a more active role in the development of these countries. Even if one day it succeeds, the positive effects on the Community economy will not be felt immediately. Moreover, faced with the enormous needs and political uncertainties of Russia and the other countries of the former USSR, the Community cannot for the moment really contemplate doing any more than is already provided for under cooperation and association agreements, since it is itself going through a period of sharp recession and having to devote as many resources as possible to its own economic recovery. It is clear that the Community must open its borders to products from these countries, but it should not hesitate to avail itself of the appropriate trade instruments whenever specific Community industries are threatened by unfair competition.

3.4. Recent Community initiatives to finance projects in the countries of Central and Eastern Europe seem to show a willingness to take a step in the right direction. The Committee will return to discuss what appears to be the harbinger of new developments as soon as the early results have become better known.

3.5. The fact remains that financial aid is not the only type of aid to come into the reckoning. These countries also need advice and know-how in all areas (technical, administrative, social, educational, organisational, etc.) if they are to set up the structures necessary to support their transition to market economies. This task will be made easier by the high level of education and training to be found among large segments of the population in these countries.

3.6. Perhaps when the economic crisis has been overcome in Europe, the Community, Member States and private investors will eventually be able to make a more substantial contribution to bolstering the market economies of the countries of Central and Eastern Europe.

3.7. In the meantime we must face up to the fact that popular discontent may well sow the seeds for a return to a centrally controlled economy or even to totalitarianism (whatever its political persuasion).

3.8. While the entry into force on 1 January 1994 of the Agreement on the European Economic Area between EU Member States and EFTA countries (barring Switzerland) reinforces the free trade area which to all intents and purposes already exists between the two sides, it has not as yet produced the dynamic economic growth expected, especially in the light of the accession of some of these countries to the EU. Early signs of a recovery are however on the horizon, notably in Sweden.

3.9. As far as the industrialized countries are concerned, the United States is the only country currently enjoying a higher rate of growth. However, its trade deficit is still widening alarmingly as the economic recovery is sucking in imports, which have become dearer because of the relatively weak dollar.

3.10. The Japanese economy is merely trundling along, despite the many successive recovery programmes decided by the Government. On top of the effects of the appreciation of the yen, Japan is facing the most serious recession since 1975, with very weak growth (2.2 % drop in the annual rate).

3.11. The countries of South East Asia on the other hand are experiencing very strong growth. Even if Europe's declining share of international markets cannot be put down exclusively to competition from these countries, the vigour of their economic development is a reminder to the business community of the European Union that the competitiveness of our economies and companies is a challenge which cannot be ignored.

3.11.1. Without prejudice to its reservations expressed in points 3.1.1, 3.1.2 and 3.1.3, the Committee feels that it is worth giving thought to the fact that these countries of South East Asia have managed to achieve really high growth rates without development aid from the EU or its Member States. Despite many years of EU development aid, the economies of the African countries however have not taken off. Europe's development aid in Africa has therefore failed in its objective of stimulating growth in these countries and eventually creating markets for EU export industries. This is one reason why we should consider ways in which the European presence in Africa could be more effective, including the possibility of rechannelling financial aid into the technical and administrative assistance which these countries require.

4. The effects of Community and national policies

4.1. Initially, what seemed to be well-founded hopes were raised by the completion of the internal market, the initialling of the Maastricht Treaty and the prospect of transition to the second stage of Economic and Monetary Union. It was felt that the internal market's consolidation, in conjunction with solidarity in the new European Union, would strengthen public confidence and persuade people to invest, thus boosting growth rates to the benefit of all. To a large extent, these hopes have been dashed by the difficulties caused by the ratification of the Maastricht Treaty, and the realization that a lot of ground still has to be covered before the Community of Twelve is welded together in a real single market.

4.2. Furthermore, the Community's and Member States' economies and economic performances - far from converging as they are required to - have remained as they were if they have not actually started to move further apart. There is no doubt that the national economic indicators which serve as 'Maastricht criteria' are diverging. Thanks to the depressed state of the economy and low commodity prices (including oil), inflation is moving in the right direction (even though it is still a fairly long way away, on average, from the 2-3 % laid down in December 1993's 'broad guidelines'). However, all Member States' budget deficits have increased, and their growing debts have reduced the room for manoeuvre which macro-economic policymakers need in their pursuit of sustained, non-inflationary growth.

4.2.1. Although the divergences between Member States have not increased, the aims of Maastricht have been left behind by all members of the EU despite the fact that it was considered essential in all cases to meet the criteria set at Maastricht. Member States have performed satisfactorily if not brilliantly on the inflation front.

4.3. It is however conceivable that, within the limits of their room for manoeuvre, the Member States might be able to activate the automatic stabilizers in order to encourage growth and new jobs, although such a policy temporarily makes it more difficult to follow the budget-deficit convergence criterion even if such a criterion has not been cast aside. Very few policies of this kind have been pursued, and the lion's share of Member States' spending has not been channelled into the productive side of the economy.

4.4. In the field of exchange rates, 1993 was marked by upheavals of such intensity that it was necessary to extend the EMS's margin of fluctuation to 2 x 15 %. Afterwards, the exchange markets calmed down. Consequently one may well ask whether prompter action should not have been taken to stifle speculation.

4.5. The Committee thinks that, if it was deemed necessary to act urgently, it would have been better to tackle the deep-seated causes of the monetary disorder instead. The changes made in August 1993 were not solely a response to speculation, but were the result of ill-tuned economic policies. It was these that caused the pressures from which speculators profited. A realignment of certain exchange rates at the right moment, in the light of real economic performances, would undoubtedly have discouraged any large-scale speculation in good time.

4.6. The fact is, however, that no such realignment took place. This, plus the temptation to keep the EMS an area of stability and the fact that in some cases the Member States pursued conflicting objectives (some aiming for stability and others opting for economic recovery), were in all probability the main causes of the period of turbulence which the Community went through last year.

4.7. In this context, the position and policies of the central banks help to create a climate of uncertainty, and raise question marks about the pertinence of certain actions. Clearly, the Committee does not wish to challenge the principle of the independence of the central banks, which are the sole guarantor of monetary stability and an important element in the fight against inflation. The fact remains however that the actions of certain banks are sometimes difficult to understand, given their responsibility for contributing to the smooth development of their national economies.

4.7.1. It goes without saying that the Bundesbank, the bank most frequently cited, has had to handle the monetary aspects of German reunification and its caution is understandable. Nonetheless, the Committee thinks that as real rates remain too high in a period of falling inflation and cyclical depression, the Bundesbank could have acted more decisively in cutting its key rates. This would have helped businesses to finance their working capital and reserves, and would have stimulated investment, growth and employment. The beneficial effect would also have been felt in other Member States, especially those whose central banks have felt obliged to follow the Bundesbank. Apart from political reasons, however, nothing should have stopped other central banks from pursuing monetary policies more favourable to investment and employment.

4.8. It is true that in the meantime, because of the fall in inflation and the bleak outlook for consumption and investment, the Bundesbank has made several, albeit small, reductions in its rates, even though the M3 money supply has risen well beyond the targets set. We must recognize that the discount rate and the Lombard rate have been brought down to 5 % and 6.5 % respectively but, above all, the repurchase rate, the third key rate, but the one covering two thirds of banks' refinancing needs, has been gradually reduced from 5.97 % to 5.7 % quite recently.

4.8.1. These reductions have been anticipated or followed in other Member States.

4.8.2. However, it is necessary to bear in mind that interest rates are only one of the components in the 'growth, competitiveness and employment' triangle.

4.9. Although the reduction in interest rates is currently just what businesses, workers and consumers want, and what the OECD is recommending to those countries which are cautious, it cannot be overlooked that during the first few months of 1994 fears about higher inflation have emerged following the surge in growth (4.5 % in the last quarter of 1993) and the upturn in US interest rates. Any anticipation of the recovery in Europe and the current fall in rates, despite the swelling money supply in Germany, could reverse the trend in European central banks' rates. The recent turbulence caused by a sharp and abnormal rise in the German money supply bears witness to the extreme fragility of the situation. Already, long-term rates have started to move upwards. Neither must one forget that a general economic recovery could trigger off a rise in commodity prices, which are currently very low because of the recession and an under-valued dollar.

4.9.1. There is no doubt that inflation in Europe is being further slowed down by the continuing effects of Europe's longest and deepest recession since the Second World War, i.e. high unemployment and very low levels of capacity utilization. If the recovery is sustained, the existing slack in production capacity will mean that there will initially be no supply bottlenecks in the face of rising demand, and therefore no new surge of inflation.

4.10. It is too early to make an appraisal, in employment terms, of the Commission's 1993 White Paper on growth, competitiveness and employment. However, it is fair to say that the measures agreed in Edinburgh and Copenhagen do not seem to be having their hoped-for effects. There are grounds for wondering whether the concept of Community funding for certain activities (research, education, direct investment in large-scale projects such as cross-border networks) should not be clarified to make things more coherent and more transparent. In this respect, the decisions of the ECOFIN Council in Athens contain specific proposals for the immediate future.

4.11. The Committee deplores the ECOFIN Council's and Member States' delay in implementing the investment programmes of the trans-European networks (transport and energy) as scheduled in the Conclusions of the Presidency of the European Council of 10 and 11 December 1993. This issue has been dealt with in detail in point 2.12.1, with Community and national authorities being urged to shortly begin implementing these programmes for the sake of the jobs they create.

4.12. The Committee would point out that the White Paper and the 'broad guidelines' adopted by the Council in December 1993 are medium and long-term instruments. Their effects will not be felt in the short term. Indeed, the Community as such does not have any short-term economic policy instruments. In the months ahead it is the economic climate worldwide which will decide whether the European Union and the Member States will feel the effects of the hoped-for modest recovery. The European Union and the Member States will have to foster and consolidate this recovery and transform it into sustained growth by applying the White Paper's recommendations jointly and coherently.

5. Medium-term prospects

5.1. The Committee hopes that the Community debate on the White Paper will continue at all Community levels. Eventually the Community economy will no doubt benefit from certain structural measures which are designed to achieve growth, competitiveness and employment side-by-side. One's thoughts turn first of all in this context to seeking more flexible production and labour markets. Recent examples may be seen in the car, metalworking, chemical and public service sectors in Germany where collective bargaining has led to agreements between management and employees which trade off job guarantees against wage moderation and a redistribution of working time. For capital-intensive industries, improved use of production plant over time is an important factor in competitiveness.

5.2. The Committee believes that the Community must continue to fight for sustainable solidarity within the framework of a European social model which is marked by the quest for quality and safety in all areas (safety of products, health and safety at work, social welfare) as well as the encouragement of risk-taking and the entrepreneurial spirit. Enterprises, which create wealth through using labour and capital, and the trade union movement, will be the main pillars that guarantee this European social model.

5.3. Improving the investment climate through the optimal use of fiscal instruments and financial encouragement is still an important area for the Member States because of the principle of subsidiarity. However, the Community must retain a major role as a referee to prevent the Member States giving themselves over to excessive competition which would lead to a loss of tax revenue, which in turn would be detrimental to public investments and the continuity of welfare protection.

6. Institutional considerations

6.1. Earlier Committee Opinions on annual economic reports were drawn up at the request of the Council on the basis of Council Decision 90/141/EEC of 12 March 1990 on the attainment of progressive convergence of economic policies and performance during Stage One of Economic and Monetary Union.

6.2. The present Opinion, however, is being drawn up under a new procedure since the Community moved on to the second stage of EMU on 1 January 1994 and the Treaty on European Union came into force on 1 November 1993. The annual economic report is no longer sent to the Council for approval. But it is published by the Commission and the Council will be able to take note of it and discuss it. The Commission will draw on the Council's discussions when forwarding draft recommendations with a view to formulation of the 'broad economic policy guidelines' provided for under Article 103 of the Treaty on European Union. The function of the annual economic report has thus changed.

6.3. From the second stage of EMU onwards, coordination of the economic policies of the Member States falls within the remit of the Community; the aims themselves are mainly laid down by the Council. The Member States are responsible for implementing the measures needed to ensure the convergence of their economies. This flows not only from the principle of subsidiarity laid down by the EU Treaty but also from the Council recommendations of 22 December 1993 on 'The broad guidelines of the economic policies of the Member States and of the Community (1).

6.4. Article 103 of the Treaty on European Union allows the Council, acting under a proposal from the Commission, to forward confidential and public recommendations to Member States not complying with Community objectives. Article 103(5) states that detailed rules may be laid down for the multilateral surveillance procedure. The Commission as yet does not intend to put forward any proposals on the matter. It will wait until it has first gained experience of applying the new procedure. It should also be noted that, according to Article 103(2), the European Parliament is to be informed by the Council of the 'broad economic policy guidelines'. It is very regrettable however that Article 103 makes no mention of the Economic and Social Committee.

6.5. The new procedure faces the Committee with a legal problem which has fundamental political implications. It can be expressed as follows: if the Committee's Opinion is no longer compulsory, what will be the role of the socio-economic interests represented on the Committee in the formulation of policies which will affect them and which, under the first Council Recommendation of 22 December 1993 on the 'broad economic policy guidelines', call for their solidarity and cooperation, notably in respect of price stability, control of production costs, investment policy and job creation.

6.6. In this context the Committee welcomes the referral by the Commission of the annual economic report even if, as in the past, the deadline for drawing up what is destined to be a detailed Opinion remains extremely tight. The Committee realizes, however, that the most important problem is the limited role now to be played by the Commission in coordinating the economic policies of the Community and the Member States. Under the provisions of Article 103(2) this role is henceforth limited to the formulation of recommendations which the Council can always change, whereas previously the Commission had an exclusive right of initiative and presented proposals, after consulting Parliament and the Economic and Social Committee, which the Council could only amend on a unanimous vote. This new approach may well impair the effectiveness of the decisions taken. It also poses problems of transparency and calls into question the democratic nature of the Community's decision-making process.

7. Conclusions

7.1. Appropriate, concerted macro-economic policies must be drawn up by the Community and national authorities in order to curb unemployment but without abandoning medium and long-term pursuit of economic convergence. This presupposes close cooperation between governments and central banks. The European Monetary Institute could be gradually brought into play as a coordinator in this matter.

7.1.1. The Commission considers that there is a good chance of achieving 3 % growth in 1996, and that unemployment should then start to fall. This presupposes a rise in exports and hence greater competitiveness and an increase in investor and consumer confidence. Wage moderation and State budgetary control are vital here. They must permit a balanced policy-mix, with low interest rates, support for confidence, and encouragement of public saving. All this presupposes continuation of the policy to maintain stability and control inflation.

7.2. The Committee considers that the Member States should make resolute efforts to start bringing their budgets back into balance, in particular by progressively cutting general current expenditure and encouraging productive public investment.

7.3. The Committee cannot however support an overall strategy of cutting real wages (a cause of deflation) and adopting a policy of ill-considered budgetary stringency: in our straitened economic circumstances this might exacerbate the problem of unemployment and put back economic growth. Given the existing record levels of unemployment, the additional unemployment which such an approach would cause is both unthinkable and unacceptable.

7.4. The Committee therefore advocates greater coordination of economic policies, with action to counter the danger in the form of an appropriate European investment initiative and substantial cuts in short-term interest rates, whilst keeping an eye on long-term interest rates which have started to creep up slowly.

7.5. Though recognizing the need for monetary stability, the Committee considers that it is important to avoid the mistakes of the past in view of the very high unemployment and relatively low inflation experienced at present. What is needed instead is an economic policy based on the adjustment of enterprises to new openings, thereby reversing the unemployment trend. The necessary adjunct to this is the achievement of strong, sustainable and non-inflationary growth.

7.6. The Committee would like to make it known that it will reflect in another context on the shape of tomorrow's society, especially as regards involvement in employment, job distribution and social protection.

7.7. In view of the institutional review of the Treaties in 1996 and the wider role which the economic and social interest groups are called upon to play, both in helping to implement the 'broad guidelines' laid down by the Council and their involvement in working out an incomes policy, the Economic and Social Committee urges that consultation of it be made compulsory in connection with the harmonisation of economic policies provided for in Article 103 of the EU Treaty. Furthermore, to make the procedure provided for in this Article more transparent and more democratic, the Commission's right of initiative should be restored and provision made for the involvement of the European Parliament in legislation as well as the consultation of the Committee of the Regions alongside the ESC.

Done at Brussels, 27 April 1994.

The Chairman

of the Economic and Social Committee

Susanne TIEMANN

(1) OJ No L 7, 11. 1. 1994.

(2) OJ No L 7, 11. 1. 1994.