Opinion of the European Economic and Social Committee on ‘Recommendation for a Council Recommendation on the economic policy of the euro area’

(COM(2018) 759 final)

(2019/C 159/07)

Rapporteur: Javier DOZ ORRIT

Referral European Commission, 24.1.2019 Legal basis Article 304 of the Treaty on the Functioning of the European Union Section responsible Economic and Monetary Union and Economic and Social Cohesion Adopted in section 20.12.2018 Adopted at plenary 24.1.2019 Plenary session No 540 Outcome of vote (for/against/abstentions) 162/2/2

1. Conclusions and recommendations

1.1. The EESC is of the opinion that building economic resilience, an objective that underlies the recommendations of the European Commission on the economic policy of the euro area, is of the utmost importance for the euro area economies, given the prominent downside risks to economic growth, which could well evolve into a new crisis in the not too distant future. However, the Committee would like to stress that the pursuit of economic resilience should go hand in hand with increased labour market resilience, that is, the capacity of labour markets to weather shocks with limited social costs ( 1 )

1.2. The Committee appreciates the European Commission’s recommendation for differentiated fiscal policy stances across the Member States but warns that in several Member States with high public debt and negative or zero output gaps, the building of fiscal buffers at this point may be counterproductive for inclusive and sustainable growth and debt sustainability.

1.3. Euro area economic policy 2018 The Committee reaffirms the position it took in its opinion on ( 2 ) on the crucial importance of overcoming the public and private investment deficit suffered by the EU. For these reasons, it asks the EU institutions to adopt the guidelines and measures necessary to encourage public investment and facilitate private investment.

1.4. The EESC welcomes the proposals to shift taxes away from labour and strengthen education systems and investment in skills, as well as the effectiveness of active labour market policies that support transitions to high quality jobs. Labour market segmentation should also be addressed. Member States must ensure sufficient financing for social investment and social protection systems.

1.5. Moreover, the EESC fully shares the European Commission’s concern regarding the need to act against tax fraud, evasion and avoidance with measures against aggressive tax planning in order to make tax systems more efficient and fairer and in the context of improving the quality of public finances.

1.6. The EESC reiterates the importance of implementing the European Pillar of Social Rights as a means of increasing resilience, promoting upward convergence and ultimately protecting the European integration project from centrifugal trends.

1.7. The EESC welcomes the European Commission’s recommendation for a symmetric rebalancing of current account imbalances in the euro area and in particular the call for higher wage growth in Member States with surpluses. The EESC thinks that in the medium term national real wage growth should be commensurate with national productivity growth and not lagging behind it.

1.8. Improving the business environment and promoting the completion of the single market, without undermining social and labour rights, are, in the EESC’s view, important ways of strengthening economic resilience in the euro area. The Committee is in full agreement with the European Commission that the establishment of the common consolidated corporate tax base is a step in that direction and should be pursued.

1.9. Facilitating the financing of businesses should be another of the priorities of economic policy. The EESC reiterates that the Capital Markets Union is very important when it comes to financing economic activity and expresses its concern about the delays and obstacles that the development of the Banking Union is encountering, including the volume of bad debts in some Member States.

1.10. The EESC urges the Member States to demonstrate political leadership and the necessary commitment in order to overcome disagreements on the way forward to deepening the EMU, most notably completing the Banking Union, increasing own resources and establishing, within the EU budget, a function for macroeconomic stabilisation which would allow an increase of the economic resilience of the euro area.

2. Background

2.1. Although output growth in the euro area has entered its sixth year, it is now expected to slow down while downside risks are visibly increasing and the scars of the Great Recession, from lower potential growth to disparities among Member States and high unemployment rates in certain areas, remain. Convergence towards more resilient economic structures is thus a major objective, as is advancing the deepening of the EMU. Against this background, the main recommendations of the European Commission for economic policies in the euro area in 2019 are the following:

2.2. Deepen the Single Market, improve the business environment, and pursue resilience-enhancing product and service market reforms. Reduce external debt and pursue reforms to boost productivity in euro area Member States with current account deficits, and strengthen the conditions that support wage growth respecting the role of the social partners and implement measures that foster investment in euro area Member States with large current account surpluses.

2.3. Rebuild fiscal buffers in euro area countries with high levels of public debt, support public and private investment and improve the quality and composition of public finances in all countries. Unlike previous years, the European Commission has not issued a recommendation for a specific fiscal policy stance in the euro area for 2019.

2.4. Shift taxes away from labour and strengthen education systems and investment in skills, as well as the effectiveness of active labour market policies that support transitions. Address labour market segmentation and ensure adequate social protection systems across the euro area.

2.5. Make the backstop for the Single Resolution Fund operational, set up a European Deposit Insurance Scheme and strengthen the European regulatory and supervisory framework. Promote orderly deleveraging of large stocks of private debt. Swiftly reduce the level of non-performing loans in the euro area and prevent their build up, including by removing debt bias in taxation.

2.6. Make swift progress on completing the Economic and Monetary Union, also with the perspective to strengthen the international role of the euro, taking into account the Commission proposals, including those concerning the financial sector as well as the Reform Support Programme and the European Investment Stabilisation Function under the proposal for the 2021-2027 Multiannual Financial Framework.

3. General comments

3.1. The EESC is concerned that the downside risks to the economic outlook for the euro area could well evolve into another socioeconomic crisis in the not too distant future, which would pose major challenges for adjustment.

3.1.1. Current output growth has already peaked after having reached only 1,7 % in 2017. Potential output growth is still below its rate in 2008 while public investment is very far from recovering from its large drop (by more than a quarter of its peak level) since the beginning of the crisis.

3.1.2. Disparities among Member States persist, especially in terms of unemployment. Despite improvements in headline indicators, the total number of hours worked and the volume of employment remain below their 2008 level, while real wage growth has been modest and continues to fall behind productivity growth, suggesting the gains even from modest growth remain unequally distributed.

3.1.3. The euro area still registers a sizeable current account surplus, mostly driven by current account surpluses in particular Member States; this indicates relatively low domestic demand, and is one of the causes of international tensions feeding into trade protectionism.

3.1.4. Despite recent downward adjustments to growth predictions, the European Central Bank decided to end its quantitative easing programme, thus removing an important pillar of policy support to the euro area’s growth.

3.1.5. While vulnerabilities from the crisis, such as high public and private debt levels and non-performing loans weighing on banks’ balance sheets persist, there is still insufficient progress in strengthening the EMU institutional architecture in a way that would increase the resilience of the euro economy without bearing too heavily on public finances, labour markets and social policies for adjustment in the event of shocks.

3.1.6. There are important global downside risks, from increasing trade protectionism to volatility in financial markets.

3.2. Given the consequences of the previous crisis, the scars of which, especially in labour market and social domains are still visible in several Member States, the EESC thinks that strengthening the economic resilience of the euro area by advancing decisively and promptly to completing and deepening the EMU and the single market, along the lines proposed by the European Commission, is essential for preventing another economic crisis turning into labour market and social crises.

3.3. In addition to these risks, technological advances present opportunities but also threats. On the one hand, and provided that sufficient investment in them takes place, they can help increase the chronically weak productivity growth in the euro area. On the other hand, they are likely to favour some societal groups, notably those with higher and better skills, more than others.

3.4. Although the average output gap ( 3 ) in the euro area is projected to turn modestly positive in 2018 (0,3 % of potential GDP), there are significant differences between Member States, suggesting that the cyclical upturn is not the same everywhere. The size of a country’s positive output gap is an indication of how far its fiscal policy stance could tighten without fiscal policy being procyclical. Several Member States (and most notably a couple of large ones with a considerable bearing on the overall euro area performance) with high public debt/GDP ratios have negligible or negative output gaps. While Member States should do their utmost to ensure the high quality of their public finances, urging them to build fiscal buffers by means of contractionary fiscal stances is likely to perpetuate low growth in them, without helping reduce their public debt as a share of GDP.

3.5. Moreover, a well-documented deficiency of the EU economic governance and one of the motivations behind reforms such as the establishment of the European Fiscal Board has been the sole focus on the compliance of national fiscal policies with the EU’s fiscal rules while the aggregate fiscal stance in the euro area has been neglected. The absence of a recommendation for the aggregate area stance this year is therefore unfortunate and misses an opportunity to combine with more specific recommendations for differentiation between Member States.

3.6. In line with previous EESC opinions, the Committee is urging the Member States and the European Commission to strengthen public investment as a means of promoting long-term growth but also of reducing current uncertainties and of promoting smooth transitions to a more sustainable and equitable growth model.

3.7. alone The Committee questions whether in countries with high public debt/GDP ratios more efficient and effective public procurement ( 4 ) can provide enough space for increasing public spending on investment – including in education, skills and enabling active labour market policies – to the appropriate levels for enhancing long-term inclusive growth and meeting the targets of the Paris Agreement on cutting carbon emissions and whether such changes can be sufficiently timely given the urgent need for public investment.

3.8. Euro area economic policy 2018 The EESC opinion on ( 5 ) underlined the great contradiction posed by the situation of countries that maintained excessive surpluses of their current account balance and fiscal surpluses with negative net rates of public capital formation. The Committee expresses its concern that, despite the repeated recommendations of the Commission and the Council, the Autumn Forecast foresees that these countries will continue with very high current account surpluses until 2020 ( 6 )

3.9. The Committee welcomes the emphasis on strengthening education systems and investment in skills and reducing labour market segmentation and reiterates its call for structural reforms that promote higher aggregate productivity growth, while creating high quality jobs and ensuring the fair distribution of productivity gains.

3.10. The Committee agrees with the call for higher wage growth in Member States with surpluses. It notes, however, that productivity growth alone will not necessarily help increase real wages in Member States with negative net international investment positions as in many countries there has been a decoupling between productivity and real compensation growth. Measures supporting more equal distribution of productivity gains should also be taken. The primary tool for this is collective bargaining based on the autonomy of the social partners, which should take account of rises in the cost of living and in real productivity when setting wages, as well as addressing other aspects that improve the quality of employment.

4. Specific comments

4.1. ‘Addressing tax fraud, evasion and aggressive tax planning (ATP) [is] essential to make tax systems more efficient and fairer. [Such measures] are essential to secure government revenues, impede distortions of competition between firms, preserve social cohesion and fight increasing inequalities’. The EESC fully agrees with this statement in the working document accompanying the proposed recommendation ( 7 ) . It therefore calls for the rules adopted to combat these crimes and these malpractices at European level to be applied without delay, and to evaluate the possibility of establishing other more effective measures that also include instruments to end the illicit activities of tax havens.

4.2. The Committee thinks that more decisive steps should be taken to facilitate public spending on investment, for example, by exempting spending on public investment from the calculation of deficits in the application of the EU’s fiscal rules (the so-called Golden Rule), taking due account of the sustainability of existing debt levels.

Brussels, 24 January 2019. The President of the European Economic and Social Committee Luca JAHIER

(1) This definition of labour market resilience is taken from the OECD’s 2012 report on What makes labour markets resilient during recessions?, in the OECD Employment Outlook, OECD Publishing, Paris.

(2) OJ C 62, 15.2.2019, p. 312.

(3) That is the difference between actual and potential GDP as a share of potential GDP.

(4) See European Commission (2018), Analysis of the Euro Area economy, SWD(2018) 467 final, p. 8.

(5) OJ C 62, 15.2.2019, p. 312.

(6) Statistical Annex, European Economic Forecast – Autumn 2018, Table 50, p. 196.

(7) See European Commission (2018), Analysis of the Euro Area economy, SWD(2018) 467 final.