Opinion of the Economic and Social Committee on the "1999 Annual Economic Report: The EU economy at the arrival of the euro: promoting growth, employment and stability"

(1999/C 209/13)

On 22 January 1999 the European Commission decided to consult the Economic and Social Committee, under Article 198 of the Treaty establishing the European Community, on the "1999 Annual Economic Report: The EU economy at the arrival of the euro: promoting growth, employment and stability".

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 5 May 1999. The rapporteur was Mr Vasco Cal.

At its 364th plenary session of 26 and 27 May 1999 (meeting of 27 May) the Economic and Social Committee adopted the following opinion by 86 votes in favour with six abstentions.

1. Introduction

1.1. First and foremost, the Economic and Social Committee stresses the importance of the Annual Economic Report under consideration: it is the first one to set out the "broad guidelines of the economic policies of the Member States and of the Community" (provided for under Article 103 of the EC Treaty) in the third stage of economic and monetary union. The Committee is pleased that a large number of countries have qualified for monetary union, and hopes that Greece, and the countries which preferred to remain for the moment outside that union, will be able to join it soon.

1.2. The 11 countries' transition to a single currency - decided formally in early May 1998 - took place smoothly on 1 January 1999 and marks the opening of a period of stability in the euro zone and beyond. The enthusiasm with which the financial markets reacted initially to the birth of the euro is very significant.(1)

1.3. Between the publication of the Annual Economic Report and the completion of the Committee's work, important changes in trends have emerged with regard to the economic forecasts for 1999 and 2000, the Commission has presented its recommendation on the Broad guidelines of the economic policies, on 8 April 1999 the European Central Bank took an important monetary policy decision, and the German presidency has tabled a proposal on the European employment pact. All these factors have been taken into account in drawing up this opinion.

2. Economic situation and prospects

2.1. The 1999 Annual Economic Report

2.1.1. The Commission points out that at the end of 1998 the countries of the European Union, including those which have not (yet) joined the economic and monetary union, had achieved a very high degree of convergence:

- inflation is at its lowest for 30 years;

- the budget deficit has fallen below 3 % of GDP (it has fallen from 6,1 % in 1993 to less than 2 % in 1998);

- on the whole, the public debt is falling significantly, particularly in the countries where it is highest, such as Belgium and Italy;

- exchange rate turbulence - at least between the countries participating in EMU - is a thing of the past thanks to the creation of the single currency;

- long-term interest rates are converging towards a level around 4 %; the real interest rate - around 2 % - is the lowest for twenty years;

- in macroeconomic terms, company profitability has exceeded the levels of the period of full employment of the 1960s.

2.1.2. Although 1.7 million new jobs were created in 1998, the reduction in unemployment remains clearly insufficient(2) in the European Union.

2.1.3. Taken together, these are the fundamentals which - the international environment, economic policies and consumer confidence permitting - should make it possible to work towards a situation of stability and growth conducive to reducing unemployment substantially in ten years or so.

2.1.4. That said, the Asian crisis, which has extended to the countries of eastern Europe and is affecting Latin America, involves risks for the European Union. According to the 1999 Economic Report, this international situation compromises the European Union's growth prospects. This is accompanied by an increasing sense of insecurity on the part of consumers and economic operators.

2.1.5. In 1998 higher than expected growth of domestic demand more than compensated for the effects of the Asian crisis and the EU finished the year with growth of about 3 %. In 1999, however, the Commission forecasts that the slowdown in exports will also affect stockbuilding and investment by companies, with a significant impact on growth prospects. Whilst it is true that the policy mix has been relaxed in reaction to slowing demand, it remains too passive vis-à-vis external shocks.

2.1.6. In principle, again according to the Commission, the EU must react to any threats by applying an appropriate policy mix, and particularly by macroeconomic measures. Efforts must be continued with regard to the labour market and structural policies, in the goods and services markets but also in the field of innovation at enterprise level.

2.2. The spring 1999 forecasts for 1999-2000(3)

2.2.1. The table reproduced below clearly shows the deterioration in economic prospects since the autumn 1998 forecasts, although this deterioration is in the final analysis very limited and largely anticipated.

2.2.2. After the growth forecast for 1999 was reduced from 2,7 % to 2,4 % in the autumn 1998 forecasts (included in the 1999 Economic Report), the spring 1999 forecasts lower this forecast further to 2,1 %. However, the most recent forecasts for 2000 still predict 2,7 % growth.

Main features of spring 1999 forecasts - EU-15

>TABLE>

2.2.3. The Commission is a little less pessimistic about the international situation than in the past: the Brazilian financial crisis does not seem to be spreading through the region, the south-east Asian countries are beginning to see the end of their economic nightmare and some of their national currencies are recovering, a recovery seems likely in Japan from the second half of this year onwards, and above all growth in the United States has not yet begun its soft landing and continues to rise (see point 3.4 below).

2.3. The Commission recommendation of 30 March 1999 on the 'Broad Guidelines of the Economic Policies'(4)

2.3.1. The Commission - basing itself on the 1999 Annual Economic Report and the Spring 1999 economic forecasts, whose trends had been largely expected for some months - calls upon:

- the Member States to pursue a policy of fiscal consolidation in accordance with the stability and growth pact;

- the social partners to negotiate wage increases which are not so high as to threaten price stability or the profitability of firms, but which are sufficiently high to raise real wages enough to boost consumer demand, within the context of increasing productivity;

so as to enable the European Central Bank to contribute under Article 105 of the EC Treaty to growth and job creation without threatening price stability.

2.3.2. The Commission therefore calls on all the players, including the social partners, to engage in a wide-ranging dialogue at all levels, so as to do everything possible to create jobs and reduce unemployment.

2.3.3. The coordination of macroeconomic policies must go hand in hand with structural measures in the markets for goods and services, capital and labour, in accordance with the European employment pact launched in Vienna.

2.3.4. The Commission calls for an increase in investment, including investment at Community level (trans-European networks), and through partnerships between governments and private enterprise, as advocated by the Economic and Social Committee.

2.3.5. For the first time the Commission makes special recommendations to all the Member States. Those belonging to the euro zone are called upon to continue their consolidation efforts in the spirit of the stability and growth pact and the others are called upon to persevere with convergence with a view to early membership of the economic and monetary union. Depending on their starting point, all must continue to implement measures to restructure their economies in the direction called for by the Luxembourg and Cardiff processes.

2.4. ECB action of 8 April 1999

2.4.1. On 8 April the European Central Bank lowered its interest base rate by half a percentage point, from 3 to 2,5 %. The Economic and Social Committee had been sending signals for such a change for several months, and is pleased with the ECB decision. The ECB has given no monetary policy reason, but has determinedly shouldered its responsibility under Article 105 of the EC Treaty, referring to the current prospects for growth and job creation in the Community. It is entirely clear that the ECB took its decision quite independently.

3. The Economic and Social Committee's comments

3.1. Unemployment, which still affects almost 10 % of the active population and remains higher in the case of certain categories such as women and young people and certain regions such as those undergoing agricultural or industrial restructuring, remains at an unacceptable level(5), despite declarations of principle on the priority to be accorded to jobs.

3.2. The Committee broadly shares the Commission's views on responsibility for the conduct of economic policy in the European Union. The ESC takes the view that the main players in the fiscal, wage and monetary policy areas must make a combined effort to put into practice a dynamic strategy to achieve growth and job creation:

- fiscal policy, pursued by the Member States and monitored through the procedures laid down in Article 104a, b and c, has not yet, despite considerable progress on consolidation, achieved the stable state called for by the stability and growth pact. As a result, the governments can allow the automatic stabilisers to come into play in those countries which have achieved (or almost achieved) balanced budgets, but in the others (the three largest countries) they have more limited scope for manoeuvre;

- wage policy, essentially a matter for management and labour (although the Member States remain important players, first as employers and then as joint managers of the labour market), has made a major constructive contribution to the policy mix, and thus assisted the ECB in its efforts to ensure monetary stability and the Member States in fiscal consolidation. It has made it possible to boost companies' profitability to a higher level than that experienced in the period 1961-1973, although differences between regions and between sectors are considerable. Insofar as the rise in productivity allows, wage trends should continue to contribute to supporting private-sector consumption and boosting consumer confidence;

- the monetary policy followed by the European Central Bank (ECB) aims first and foremost at price stability. Insofar as it is possible without endangering price stability, the ECB can however make a continuing, simultaneous, contribution to growth and job creation, in accordance with Article 105 which refers back to Article 2 of the Treaty.

3.3. Among the three main players in Community macroeconomic policy - the ECB for monetary policy, the Member States for fiscal policy and the social partners for wage policy - only the ECB can react quickly to an external threat. Its decision to lower the interest rate (by 0,5 % on 8 April) has an immediate effect on the cost of money but will not have its full impact on growth (0.2 to 0,3 %) until the end of the year. Even though disturbances in the international environment were absorbed with relative ease in 1998, their impact on growth and employment is being felt in 1999, and new threats cannot be excluded since the Commission could not take the effects of the Kosovo war into account in the economic forecasts published on 30 March.

3.3.1. The Economic and Social Committee appreciates the Commission's efforts to define a policy mix appropriate to the current situation, but regrets that the Commission does not develop in greater detail the risks which may arise and ways of dealing with them.

3.4. The fact that economic forecasts have often been adjusted downwards in recent months makes the situation all the more serious. The Committee feels that the pessimism of certain research institutes, which has been widely reported and commented on in the media, is not likely to spur business leaders and consumers to invest and consume more. Moreover, the analysis of threats to growth prospects and job creation in the EU set out in the Commission's 1999 annual economic report is too strongly influenced by the Commission's concerns about the international environment. The Commission recommendation of 30 March 1999 is more subtly phrased, since - while admitting that the problems in Russia and Latin America have not been solved - it recognises signs of recovery in Japan and South-east Asia and the continuing growth in the United States which remains the most important export market for the European Union. Not only has the USA resisted international economic turbulence, thanks to dynamic internal demand; it is also now calling for a European contribution to stimulate the international economy.

3.4.1. In fact, trade with non-Community countries accounts for less than 10 % of EU GDP. As in 1998 the EU more than compensated for the problems resulting from its relations with the Asian countries, for example by boosting domestic demand, everything possible should be done to stimulate internal demand and investment this year too(6). The birth of the euro and the establishment of a growth and employment strategy oblige the EU to take all the measures which, without endangering stability, would ensure the efficient operation of capital markets, so that capital inflows are translated into productive investment.

3.4.2. The flight of capital from non-Community countries in difficulty is matched by capital inflows into the United States and the European Union in search of greater security; this is likely to stimulate investment. Europe's economic weight, reinforced by the advent of the euro, makes it impossible to go on using external excuses to justify poor internal performance. As an economic entity, Europe has great growth potential, and the Broad Economic Policy Guidelines should propose the measures necessary to realise this potential.

3.5. The Committee realises that in fiscal policy terms the reduction of the Member States' structural deficits does not yet entirely fulfil the requirements of the stability and growth pact, which reduces fiscal policy scope. Moreover, public expenditure should be redirected more towards investment, including investment in human capital to develop the "learning society", in order to improve conditions for growth and job creation. At Community level, an acceleration of the funding of trans-European network programmes could greatly aid this process.

3.5.1. This responsible fiscal policy, in conjunction with appropriate wage trends as described in point 3.2 above, creates the conditions to ensure that the ECB's monetary policy can make use of all the scope at its disposal - in the absence of inflationary pressures - to support growth and employment, as required by Articles 2 and 105 of the Treaty. By its decision of 8 April to lower its interest rates, the ECB has taken a step in the right direction, but it should perhaps do more to anticipate economic trends in order to send markets the right signals to boost confidence.

3.5.2. In 1998 industrial producer prices fell by 2,2 % in the EU as a whole. In some countries the trend in consumer prices raises fears of deflationary tendencies. There are therefore calls in those countries for a less rigid policy to stimulate demand and avert a recession.

3.5.3. In other countries where inflationary trends are gathering strength, stricter policies are being demanded. It goes without saying that the ECB must follow a monetary policy which takes the interests of all the EMU member states into account.

3.6. The Committee calls upon the Commission to present in its annual report medium-term scenarios designed to assist the macroeconomic decision-making process.

3.7. The Committee feels that the European Union must have a medium-term growth objective of at least 3,5 % in order to create enough jobs to reduce, in about 10 years, the current level of unemployment to 3 or 4 % and to raise the employment level to approaching 70 %, as proposed by the Commission in the autumn of 1997 in its first draft employment policy guidelines.

3.7.1. This growth rate must be supported by a sustained increase in investment (by about 7 % per annum to move from the current 19 % to 22-23 % of GDP) in order to generate the jobs needed and to prevent the emergence of inflationary pressures as a result of lack of productive capacity. Long-term interest rates and the profitability of enterprises are currently favourable conditions. Still to be developed is a macroeconomic policy which would allow sustainable growth and appropriate development of demand. This policy must be supported by economic reforms in accordance with the process initiated by the Cardiff Summit - reforms which seek to improve the competitiveness and operation of the markets in goods, services and capital.

3.7.2. In a number of Member States, public investment has suffered as a result of those countries' efforts to meet the convergence criteria for entry into the third stage of EMU. The Committee therefore urges that fiscal policy should provide more incentive for investment. In particular, governments should encourage a partnership between public and private sectors as regards investment.

3.7.3. The Committee feels that everything possible should be done to support internal demand. Bearing in mind fiscal constraints and the redistributive role of the budget, a reduction of the tax burden on companies and also households could stimulate investment and boost the confidence of entrepreneurs and consumers. The Committee has for several years been calling for the authorisation, under certain conditions, in the Member States which so wish, of a reduction in VAT rates on products and services with a high labour content. The Committee is pleased that the Commission has presented a draft directive to this end, on which the Committee has issued a largely favourable opinion.(7)

3.7.3.1. The Committee hopes that, after the rise in tax pressure (taxes and social security contributions as a percentage of GDP(8)) in the 1970s (about 36 % to 46 % of the GDP, mainly due to the fall in the number of contributors to the social security system and the rise in social expenditure), and after the stagnation in the tax pressure up to the middle of the 1990s, the opposite trend now prevails. According to the Commission's forecasts, the tax pressure for the whole EU, which was 46,7 % in 1996, and 46,3 % in 1998, would be 45,7 % of the GDP in 2000, although the tax pressure in some Member States has not yet started to fall. The Committee hopes that the fall in revenue will not result in a reduction in social security payments, which are an essential part of the European social model.(9)

3.8. The Economic and Social Committee still believes that economic growth is essential for job creation, but also takes the view that structural and labour market measures are important and necessary if there is to be a significant improvement in the employment situation. There must therefore be an integrated approach to implementation of the Broad Economic Policy Guidelines and the Guidelines for employment policies(10). The Committee is glad that structural policies, which have hitherto been the exclusive preserve of the Member States, are now increasingly becoming a common concern, requiring coordination.

3.8.1. The Committee takes the view that national action plans on employment should be based on the process begun in Luxembourg in 1997, involving: improvement of the capacity for vocational integration (through training etc.), development of the spirit of enterprise, and strengthening equal opportunity policies; the Vienna meeting in December 1998 supplemented this with: re-examining systems of tax and allowance advantages in order to encourage non-active people to take a job and employers to create jobs, encouraging older workers to take more part in the world of work, and encouraging social integration and equality of opportunity for disadvantaged groups.

3.8.2. Moreover, structural policy must ensure that growth also respects ecological imperatives.

3.8.3. In some circumstances greater flexibility in working conditions can make it easier to employ people. The Committee feels that greater differentiation of wage costs could increase the employment-generating impact of growth. To avoid cutting the lowest wages even further and to counter the phenomenon of "working poor", but also to stimulate demand and thus growth, the Committee supports the use of a measure, already advocated in Mr Delors' White Paper, to reduce non-wage labour costs at the lower end of the wage scale to encourage firms to take on young and low-skilled workers. The Committee notes that the Commission returns to this question in its recommendation of 30 March 1999 on the Broad guidelines of the economic policies.

3.8.4. However, education, vocational training and lifelong training are vital weapons in the struggle against unemployment. Bearing in mind that 20 % of unemployment is essentially cyclical, half of the remaining 80 % could be eliminated given a workforce willing and (with the benefit of some short-term training) able to take up jobs. For the other half, the long-term unemployed, training is very important. This does not alter the fact however that, in order to deal with the non-cyclical component of unemployment for which a short-term and medium-term solution can be found, jobs have to be created, and for this more growth is needed.(11)

3.9. The Commission rightly stresses the danger arising for newly industrialised countries from excessively rapid liberalisation of their financial markets (absence of appropriate prudential safeguards). Indeed, banking and exchange control infrastructure is often inadequate to support export and import of capital in the extremely globalised world of finance. Without wishing to challenge what has been achieved with regard to the deregulation of capital movements, the Committee thinks that the Commission should examine the extent to which some of the inadequacies noted in third countries might also exist in the European Union. Finally, consideration should also be given to the question of international arrangements and the coordination of financial institutions.

3.9.1. The recent report drawn up at the request of the G7 finance ministers and central bank governors(12) proposes the creation of a Forum for financial stability at G7 level and a number of international institutions. The Committee hopes that the European Union and the EMU will play an active role in this context.

3.10. The Commission reports on economic and structural reforms ("Cardiff I" and "Cardiff II")(13), on which the Committee has also given its views(14), analyse progress in achieving the internal market and the effect of the euro's introduction. They stress the importance of a fiscal reform which would seek to alleviate labour costs while taking account of the need to continue with fiscal consolidation.

4. Conclusions

4.1. The Committee thinks that the Broad economic policy guidelines(15) should be used as an instrument for the implementation of the employment pact. The Committee is pleased that the Commission, in its recommendation on the Broad guidelines, shares this view. The employment pact, which was designed as a process of cooperation between the various economic and social players, should be based on the coordination of economic policies both at macroeconomic and at structural level. The labour market policy measures advocated in Luxembourg, as supplemented by the structural programme launched in Cardiff, should accompany the appropriate macroeconomic policy mix, embracing fiscal, monetary and wages policy, in order to create a climate of confidence to stimulate consumption and investment and thus to boost employment in a durable way.

4.2. Like the Commission in its recommendation, the Committee hopes that all the players involved in macroeconomic policy - governments, the ECB and the social partners - will be able to work together for a dynamic employment pact which is sustainable in the medium term. The Committee broadly shares the concerns expressed by the Commission in this recommendation, but would point out that the practical success of economic policy coordination and the European employment pact will depend above all on the aforementioned players.

4.2.1. The recommendations by country on fiscal policy largely reflect the approach of the stability and convergence programmes, which do not take into account the deterioration in the economic situation or the war in the Balkans. The role which fiscal policy can play through public investment does not appear in the recommendations by country.

4.2.2. For the markets in products and capital, the Commission reiterates the conclusions of the Cardiff II Report and the examination of the situation in each country, and its recommendations therefore do not take account of the flanking measures needed to ensure that the single market contributes to greater social cohesion and job creation in all regions.

4.2.3. For the labour market, the recommendations addressed to certain countries concern delicate questions such as the consolidation of social security and the flexibility of the labour market. In all Member States, these questions depend on the autonomy of the social partners and/or the dialogue between them and the government, and they are currently the subject of collective bargaining, or legal provisions in most of the Member States.

4.3. The downward adjustment of growth forecasts because of the international situation may have too negative an effect on the climate of business confidence. It must however be remembered that foreign trade accounts for only a small share (10 %) of the European Union's GDP. The Committee draws the conclusion that, once again this year, everything possible must be done to stimulate internal demand and investment.

4.4. The Committee takes the view that in this period of financial turbulence the Commission should do everything possible to enable Community and EMU bodies to play a part in the international fora which already exist or are to be set up.

4.5. The Economic and Social Committee is pleased that the ECB decided on 8 April to reduce interest rates. After the progress made by governments in reducing and controlling budget deficits on the one hand, and the wage trend decided upon by the social partners on the other, the European Central Bank is thus making an active contribution to the quest for sustainable growth aimed at price stability and job creation. Indeed, the substantial reduction made by the ECB will facilitate investment and encourage private demand.

4.6. A macroeconomic dialogue to improve coordination between wage trends, fiscal policy and monetary policy, in order to encourage growth and job creation, calls for new institutional arrangements. This macroeconomic dialogue should involve meetings at least twice a year between the Council, the Commission, the European Central Bank and the social partners, at both technical and political levels.

Brussels, 27 May 1999.

The President

of the Economic and Social Committee

Beatrice RANGONI MACHIAVELLI

(1) The Committee is currently preparing an own-initiative opinion on the single European currency's first months of existence.

(2) Although this varies considerably from one country to another and from one region to another.

(3) The European Economy - Supplement A - Economic trends - No. 4 - April 1999.

(4) COM(1999) 143 final.

(5) The Committee is currently preparing an own-initiative opinion on the single European currency's first months of existence.

(6) See Opinion of the Economic and Social Committee of 2.7.1998 entitled "Europe as an economic entity - a political challenge", OJ C 284, 14.9.1998.

(7) Opinion of 26 May 1999 on the Proposal for a Council Directive amending Directive 77/388/EEC as regards the possibility of applying on an experimental basis a reduced VAT rate on labour-intensive services.

(8) See Appendix I.

(9) The Committee will return to the taxation question in a separate opinion.

(10) At the same session the Committee issued an Opinion on implementation of the 1999 employment guidelines.

(11) Of the 11 % unemployment level, it is estimated that 4,5 % has structural causes and calls for vocational training measures etc. The other unemployed people would be in a position to accept a job if one were created, some of them (2 %) immediately, and the others after a short period of training.

(12) "International cooperation and coordination in the area of financial market supervision and surveillance", report by Hans Tietmeyer, president of the Deutsche Bundesbank.

(13) Economic Reform: Report on the functioning of Community product and capital markets (COM(1999) 10 final, 20.1.1999) and Economic and Structural Reform in the EU (COM(1999) 61 final, 17.2.1999).

(14) Opinion of 26 May 1999.

(15) It should be noted that a resolution adopted by the EP on 11 February 1999 takes up the idea - suggested in earlier ESC opinions - that the Commission should make proposals for the Broad Guidelines, to be adopted by the Council by qualified majority after the EP's approval and an ESC opinion.

APPENDIX

to the opinion of the Economic and Social Committee

Macro-structural features: similarity and diversity

>TABLE>