Opinion on the 1995 Annual Economic Report

(95/C 133/11)

On 21 December 1994 the Commission decided to consult the Economic and Social Committee on the 1995 Annual Economic Report.

The Section for Economic, Financial and Monetary Questions, which was responsible for preparing the Committee's work on the subject, adopted its Opinion on 7 March 1995. The Rapporteur was Mr Ramaekers.

At its 324th Plenary Session (meeting of 30 March 1995) the Economic and Social Committee adopted the following Opinion by a large majority with 5 votes against and 4 abstentions.

1. Introduction

1.1. The Economic and Social Committee welcomes the fact that the Commission has requested its Opinion on the 1995 Annual Economic Report. In thus consulting the Committee, the Commission has shown its will to involve the social partners in drawing up the 'Broad Guidelines of the economic policies of the Member States and of the Community'.

1.2. Since the Treaty on European Union came into force on 1 November 1993, the Economic and Social Report is no longer sent to the Council for its approval. The Commission's role in coordinating economic policy has been significantly reduced, since it is now confined to submitting recommendations which may then be amended by the Council; the Commission used to enjoy an exclusive right of initiative and it put forward proposals, after ascertaining the views of the European Parliament and the Economic and Social Committee. The Council could only amend these proposals by a unanimous vote.

1.3. A further consequence of the new procedure is that the ESC Opinion, which was hitherto drawn up in response to a request from the Council, is now no longer mandatory; furthermore, under Article 103(2) of the Treaty on European Union, the Council is to inform the European Parliament of the 'broad guidelines', but no mention is made of the Economic and Social Committee.

1.4. On a number of occasions - including the recent Essen Summit - the Council has underlined the importance of the social dialogue for the successful introduction of the radical structural changes being considered in Europe with a view to creating new jobs and strengthening Europe's position in the world economy, whilst preserving the social objectives of the European model. The success of the European objective depends on a broad consensus secured via wide-ranging consultations between governments and social partners. It is for this reason, and with an eye to the review of the institutional provisions in the Treaties in 1996, that the Committee would urge that it be consulted on a mandatory basis when the broad guidelines of economic policy provided for in Article 103 of the EU Treaty are being drawn up.

2. The 1995 Annual Economic Report: stocktaking and outlook

2.1.

The economic upturn - strong but varying in nature from Member State to Member State

2.1.1. Following the recession in 1992 and 1993 - which was the worst one for decades (0.4% year-on-year fall in GDP) - in 1994 the EU Member States once again recorded strong economic growth in excess of the forecast level (2.6% annual increase in GDP).

2.1.2. The EU economy benefitted from the strong economic upturn in its main exports markets. External demand was also consolidated by improved competitiveness, brought about by increased productivity, and wage restraint policies.

2.1.3. Strong exports boosted investment which has increased in the sectors geared to external markets. The level of investment rose by 2.5% in 1994, despite the sharp increase in longterm interest rates during the year: the improved financial situation of business and the increase in intra-EU trade seem to have cushioned the effect of the high cost of capital on gross fixed internal asset formation.

2.1.4. The increase in private consumption was more modest; it did, however, rise by 1.5% at a time when the level of real disposable income was more or less stagnant. This increase was funded by a fall in the rate of household savings, which, as the Commission points out, reflects the recovery in consumer confidence and the slight drop in the level of unemployment.

2.1.5. In the Committee's view, however, a question mark still hangs over the strength of the economic recovery as it is in part based on temporary factors.

2.1.5.1. As the Commission's report points out, after two years of severe recession the vigorous growth recorded in 1994 was in part due to a number of 'catching-up' factors: restocking accounted for half a percentage point of GDP growth in 1994 (i.e. equivalent to that represented by fixed asset formation); private consumer spending was bolstered mainly by purchases of household durables, prompted, in part, by an attempt to cater for demand which had not been satisfied during the years of recession.

2.1.5.2. The Committee would, however, draw attention to the fact that private consumption remains patchy. In those Member States where an upturn has occurred, it was very frequently bolstered by fiscal incentives (France, for example, introduced the 'Balladur premium' to encourage motorists to replace old motor vehicles) or temporary budgetary measures designed to cushion the impact of the recession (e.g. measures taken in Denmark). Although surveys point to a revival of confidence, this is not reflected in a clear increase in consumer expenditure throughout the EU.

2.1.6. Generally speaking, the Committee notes that the nature of the economic upturn varies from Member State to Member State: a distinction may thus be drawn between those States in which there has been a clear-cut improvement in the level of internal demand, investment and/or private consumer spending (France, Denmark, Ireland and Germany) and those States in which the level of internal demand has remained lack-lustre and in which growth continues to be founded on increased exports (Belgium, Netherlands), sometimes helped by devaluations (Spain, Italy, Portugal). The UK, for its part, represents a special case: the growth in exports, bolstered by successive devaluations of sterling over the last two years, has encouraged private consumption and investment.

2.2.

Progress towards achieving convergence

2.2.1. Progress towards the achievement of real convergence, measured on the basis of per capita GDP, remains patchy. Ireland's relative position has improved, while Portugal and Greece have taken a step backwards and the situation in Spain has remained unchanged.

2.2.2. Despite the strength of the recovery, it has not resulted in an inflationary spiral (the GDP deflator was 2.7% in 1994). Capacity utilization rates which remain relatively low, the pursuit of a policy of wage restraint, increases in productivity and the weaker dollar have all helped to curb inflation.

2.2.3. Almost all EU Member States have achieved these good performances. There has thus been a higher level of convergence in respect of rates of inflation and this in turn has had a knock-on effect on exchange rates and long-term interest rates. The latter are, however, still very high in view of the inflationary outlook.

2.2.4. The economic upturn has automatically brought about a reduction in budgetary deficits. In the Committee's view, however, Governments should not, however, be content with these cyclical improvements as this would merely repeat the mistakes made in the second half of the 1980s. The Committee calls upon the Governments to take advantage of the favourable economic climate in order to undertake the budgetary restructuring measures required to bring the level of public debt down to a tolerable level in the medium term; social welfare should not however be jeopardized. The Committee recognizes that this task will be particularly problematic in states where tax levels are high.

2.3.

The short-term prospects (1995-1996)

2.3.1. In the short-term, the consolidation of growth in the EU fundamentally depends upon an internal upturn in private demand. The Annual Economic Report points to a slowdown in the growth of external demand, in particular in the US, where the gradual tightening of monetary policy is beginning to work through. In this context, the Committee would in particular express its concern that the crisis in Mexico and the chronic indebtedness of American households may at a later stage lead to a depreciation of the dollar against the EU currencies. If the fall in the value of the dollar brings about lower commodity prices this will have an effect on the competitiveness of EU enterprises vis-à-vis enterprises not only in the US but also in all those states whose currencies are linked to the dollar.

2.3.2. The Commission forecasts that investment will be a driving force for growth in 1995 and 1996 (+ 6%), whereas the level of consumption, which accounts for almost two-thirds of EU GDP, is also expected to rise, albeit modestly over the next two years (2% and 2.5% in 1995 and 1996 respectively).

2.3.3. The Committee would, however, draw attention to the fact that two highly significant obstacles are bound to dampen the overall mood of optimism, namely:

2.3.3.1. The situation on the labour-market remains unchanged. The Commission acknowledges that in spite of economic growth, unemployment did not fall between 1993 and 1994. As there is always a certain time lag between economic growth and shorter dole queues, unemployment figures actually continued to rise during the first few months of 1994, before bottoming out by the end of this period. Unemployment among the working population in the EU over 1994 as a whole was running at 10.9% compared with 10.6% in 1993. The Commission also points out that the level of growth expected in 1995 and 1996 (approximately 3%) will not be enough to cut unemployment significantly, bearing in mind the rise in the number of jobseekers. Although it is declining, unemployment is therefore likely to remain very high in the next few years (a rate of 10.4% is forecast for 1995, compared with 8.8% for 1991).

2.3.3.2. There is no clear picture as regards the trend in interest rates, particularly long-term interest rates.

2.3.3.2.1. Short-term interest rates appear to have bottomed out, after a steady fall since 1993. In particular, the fact that the German Federal Bank has continued to restrict M3 growth between 4% and 6% in 1995, reflects its view that it is no longer necessary to support the recovery by relaxing monetary policy. Furthermore, the gradual tightening of US monetary policy will leave European Central Banks little room for manoeuvre. The Committee would nonetheless urge that this room for manoeuvre be utilized over a period of time, insofar as this is compatible with the goal of maintaining stable exchange rates.

2.3.3.2.2. In this context, the Committee wonders whether it would be possible to decouple US and EU monetary policies. Over the last ten years there has been a very sharp rise in capital flows and this has severely curtailed the autonomy of governments in conducting monetary policy. Exchange rate fluctuations have increased and rates are no longer in step with the economic fundamentals. Against this background and in the absence of better economic coordination at international level, the Central Banks will not be in a position, by themselves, to establish a credible framework for a stable exchange rate policy.

2.3.3.2.3. If the economic upturn is to be underpinned by internal demand, and in particular by investment, as forecast by the Commission, it is a matter of priority that the rise in long-term interest rates which occurred in 1994 does not reoccur in 1995. With this aim in view, it will be necessary to establish a credible framework for price stability based on a prudent monetary policy and ongoing measures to improve the budgetary situation. It is also essential to pursue the same policy in the latter field in order to prevent attempts to boost investment from being thwarted by a shortage of savings at national level, which could put long-term interest rates under pressure and ultimately affect external balances.

2.3.4. Against this background, Commission forecasts of a revival of private consumption financed by reductions in the proportion of incomes going into household saving, would seem to be optimistic. Leaving aside the fact that the situation on the labour market remains stationary, a variety of factors seem to suggest that 1) the growth of real disposable incomes may be reduced, in some Member States, by changes in fiscal policy and 2) changes in income distribution will tend to increase, in aggregate, savings out of disposable income by households. Among the factors which may have the effect of maintaining or even increasing levels of savings, reference may be made to a) the additional measures to improve public finances which will need to be taken by a large number of the Member States; b) the uncertainty surrounding social welfare schemes, in particular pensions; c) continuing high real rates of return on the debenture markets; d) the widening gap between, on the one hand, wages and salaries and on the other hand, income from property. Income from the latter source tends to generate a lower level of consumption. In this context the Committee is concerned about the possible implications which the growing and persistent imbalance between, on the one hand, wages and salaries and, on the other hand, investment income could have for social cohesion and the sustainability of growth in the long term.

2.3.5. In conclusion, whilst the Committee welcomes the return to growth and low rates of inflation in the EU Member States, it would point out that the prerequisites for sustained growth in 1995 and 1996 do not seem to have been achieved: it would refer in particular to the temporary nature of certain factors which pushed up growth rates in 1994; the persistent high level of unemployment; and the fact that there is likely to be a slow-down in the rate of increase in household purchasing power or the level of purchasing power may even stagnate. Furthermore, although it accepts that the monetary policy pursued by the Member States is geared, above all, to holding down inflation, the Committee is concerned about the economic and social implications of maintaining high interest rates in the long term.

3. The policies required for transforming the economic upturn into a lasting process, in the medium term

3.0.1. Despite the upswing in economic activity, unemployment is not decreasing sufficiently quickly. The challenges taken up a year ago in the White Paper on Growth, Competitiveness and Unemployment under the broad guidelines of the economic policies of the Member States, as defined in the Council Resolution of 22 December, are still of current concern. What we have to do is to implement both macro- and micro-economic policies which will make it possible to turn the economic upturn into a lasting phenomenon in the medium term and to consolidate the employment component of growth so as to substantially trim unemployment by the year 2000.

3.1.

A macro-economic framework for lasting, non-inflationary growth

3.1.1. The macro-economic framework must provide a fair balance between ensuring price stability - which is essential in order to strengthen the competitiveness of the European economy, maintain the profitability of investments and pave the way for cheaper public debt servicing - and promoting the achievement of the level of growth required to boost employment.

3.1.2. If lasting growth is to be maintained in the medium term, a favourable climate for investors must be created. Up to now, investment levels have been bolstered by an expansion of external demand and a high level of profitability, but there will need to be a fall in long-term interest rates and a gradual upturn in consumption, based on a restoration of consumer confidence, if investment levels are to be maintained. The restoration of consumer confidence in the medium term is contingent on an improvement in the situation on the labour market. In the short term, wage policies should benefit from the room for manoeuvre created by the considerable fall in levels of inflation and the major productivity gains achieved over the last two years.

3.1.3. It is all the more important to restore the level of internal demand, in particular private consumption, in view of the fact that the non-export sectors have so far failed to benefit from the economic upturn. These latter sectors comprise a large number of SMEs which are not directly subject to international competition, which appear to have the highest job-creation potential.

3.1.4. In the longer term, both growth and employment would be losers if the role of the internal demand factor were to be disregarded by implementing policies which solely affected the supply side.

3.1.5. The Committee points out that coordination of budgetary, wage and monetary policies has improved over the last few years. Successful budgetary policies and the fact that rates of increase in real wages have been kept below the levels of productivity gains have made it possible to relax monetary policy, whilst maintaining inflation levels which are very low in relation to the growth rates achieved in 1994.

3.1.5.1. In this context, the measures taken in a number of States to make the Central Banks independent will promote monetary stability; they also represent a step towards establishing a credible framework for price stability.

3.1.5.2. Although additional measures will be required to reduce the impact of the structural components of the budgetary deficit and thereby foster lower interest rates in the long term and encourage investments, the Committee has its doubts about the ability of some Member States to fulfil the objectives and abide by the guidelines imposed by the convergence strategy whilst, at the same time, maintaining the levels of growth recorded in 1994. The Committee does, however, recognize that this inability should not cast doubt on the principles of coordinating, monitoring and promoting Member States' macro-economic policies which are necessary to secure cohesion in the EU. This same cohesion however may well be jeopardized by the limited room for manoeuvre which national governments have for regulating economic policy. By virtue of the constraints which they impose on the populations of some Member States, the criteria in the Treaty of Maastricht have now become a major electoral issue. The recent fluctuations on the European exchange rate markets and the discrepancies in both short and long-term interest rates between the 'core' currencies of the European Monetary System and the 'weak' currencies (Italian Lire, Peseta, Portuguese Escudo) are clearly indications of this new financial danger which has been brought about by political considerations.

3.1.6. In conclusion, the Committee would urge that the fruits of economic growth be shared out in such a way as to strengthen internal demand and improve the situation on the labour market, without creating inflationary pressures.

3.1.6.1. In particular, wage-moderation policies must not hold back growth. Political and social factors must be taken into account in implementing these policies. If wages fall too far behind income from capital, the economy may have to contend with compensatory measures and with social conflicts which may jeopardize growth and employment.

3.1.6.2. Economic policy should also provide a framework for redistribution in order to safeguard the purchasing power of low income households, which are the very ones with the highest propensity for consumer spending. If we are to avoid higher labour costs and action which will run counter to the policies to improve the budgetary situation, the recipients of all forms of income should show solidarity towards the victims of the economic recession.

3.2.

A trade policy conducive to cooperation

3.2.1. As we move towards a world market and burgeoning competition, the Committee echoes the appeal made by the former EC Commission President, Jacques Delors, for a European economy which is open but not defenceless. With this aim in view, the Committee welcomes the ratification of the conclusions of the Uruguay Round by the EU Member States. Furthermore, the establishment of the World Trade Organization on 1 January 1995 has led to the revitalization of the multilateral relations framework, which has been brought into line with the introduction of a worldwide economy. Within the framework of the World Trade Organization, the European Union will have to ensure that the multilateral trade system is strengthened and, in particular, trade with the industrialized countries must be managed on a basis of reciprocity. Steps must be taken to check the all too frequent trend towards unilateral intervention and discriminatory, bilateral trade and to open up national markets. The Committee calls upon the European Union to help to find a solution to these problems within the WTO with a view to establishing genuinely fair conditions for international competition.

3.2.2. Against a background of the proliferation of preferential regional agreements and cooperation agreements on the American continent and in South-East Asia, EU trade policy must foster an increase in trade with the countries closest to the EU's border, namely the Central and Eastern European and the Mediterranean countries. The 'pre-accession' strategy in relations to the countries of Central and Eastern Europe, officially set in train at the European Summit in Essen, represents a considerable step forward in the process of rapprochement and development of these countries' economies. The decision to grant improved access to the EU market for these countries' products must go hand in hand with economic and social development assistance. In addition to the financial commitment, the EU must participate actively in the reconstruction of these countries, offering advice in various fields such as technological know-how, administration and education in order to enable these countries to overcome the difficulties which they are encountering during their transition to market economies.

3.2.3. Although there is every justification for giving priority to cooperation with the countries of Central and Eastern Europe, we must not disregard the Mediterranean countries which are still much more closely interdependent on the EU in the energy, environment, migration and investment spheres. These countries are not viewed as future EU members but the EU must nonetheless help them to get their economies off the ground so as to prevent the growing prosperity gap from exacerbating political and social instability in these regions.

3.2.4. Looking to the shorter term, the EU should take advantage of the dynamism of the thriving markets of South-East Asia. The economies of these states are going from strength to strength and this is part of the reason for the good export figures recorded in 1994. Over the next two years the Commission forecasts that the rate of increase, in real terms, in imports into the dynamic economies of Asia is likely to hold firm at a level in excess of 12%.

3.2.5. Although the Committee advocates an open, international economic area which is the only long term means of giving a new boost to growth through a fairer redistribution of the world's resources, it nonetheless regrets that the cultural, social and environmental dictates of these countries have not been heeded in framing multilateral trade rules.

3.2.5.1. The Committee considers in particular that the opening-up of trade must help to secure social progress in countries which are becoming industrialized. Current GATT rules do not make provision for the application of International Labour Organization Conventions. The Committee therefore urges that these issues be tackled as a matter of priority by the new World Trade Organization, working in collaboration with the International Labour Office, and that measures be taken to promote the ratification of ILO Conventions.

3.2.5.2. Furthermore, the Committee calls upon the European Union, working through the Trade and Environment Committee, to endeavour to secure the establishment and effective implementation of environmental protection criteria which are non-discriminatory in respect of international trade.

3.3.

The need to take advantage of the economic upturn to introduce structural reforms boosting competitiveness and the number of jobs created by economic growth

3.3.1. The Commission has estimated that the sustainable level of growth of the European economy at the end of this century is between 3% and 3.5%; such a level of growth would make it possible to trim unemployment to approximately 7% of the EU workforce. The 5% target set in the White Paper presupposes measures to remedy the structural weaknesses of the European economy from the angle of competitiveness and operation of the labour market.

3.3.2. One of the key objectives is to exploit the economic potential of the internal market by dismantling trade barriers as well as by establishing trans-European networks in the transport, energy and telecommunications sectors. Here the Committee urges that the investment programmes in respect of the 14 major projects selected for priority action at the Essen Summit be implemented without delay in order to preserve the opportunity to stimulate the economies of the Member States. In the Committee's view, direct financial involvement by the EU is warranted not only on the grounds of these projects' trans-national dimension, but also in view of the major spin-off benefits that these networks may produce for the economies of EU Member States. Finally, there is every likelihood that an EU initiative would provide the necessary guarantees for the capital markets so that the project would cost less than would have been the case if funded by national loans.

3.3.3. The Committee recognizes that a long-term boost to the competitiveness of the EU Member States presupposes a number of qualitative improvements: the EU would have to develop an efficient, innovative industrial sector and invest in high-technology areas with a high growth potential. With this aim in view, the achievement of greater competitiveness requires the implementation of policies to promote investment in human resources, in particular training and apprenticeships, in order to enable Europe to benefit to the full from the productive potential of its labour force. Steps must be taken in particular to secure a better match between supply and demand in the field of vocational training in order to meet the specific requirements of industry. Bridges need to be built between school and enterprises and tax incentives should be introduced to promote ongoing training and inservice apprenticeships.

3.3.4. These technological changes will make it necessary to redeploy a large number of relatively highly skilled jobs in high-productivity sectors and these changes will lead to the relocation of labour-intensive activities. For this reason the White Paper correctly points out that we must not concentrate our efforts solely on how we are to organize production; we should also anticipate the new requirements of both the individual and society triggered by the demographic and socio-economic changes taking place as we draw to the end of the century, in order to prevent the drive for greater competitiveness from leading to a net labour-shedding in the economy as whole.

3.3.5. With this aim in view, the European Council held in Essen on 9 and 10 December 1994, underlined the urgent need to introduce structural measures to improve the employment situation. The Council highlighted the important role of 'the dialogue between the social partners and politicians' in implementing these measures. The Council also identified five other types of action to combat unemployment in Europe, namely: the promotion of investment in vocational training; measures to increase the number of jobs created by economic growth; the reduction of indirect wage costs; a more effective labour market policy; and consolidation of measures to help the most vulnerable workers.

3.3.5.1. The Committee is convinced that in the longer term, education and on-going training represent the best ways of improving the professional mobility of the workforce and its ability to react to the changes brought about by technological progress, thereby striking a balance between supply and demand on the labour market. With this aim in view, education is not only a key factor in the achievement of growth in the longer term, but also as a means of distributing wealth. The current educational systems are, however, no longer capable of meeting the new requirements, not only for budgetary reasons but also because the jobs of the future will require workers to go on improving their skills throughout their working lives. In point 3.3.3 above, attention was drawn to the fact that in order to improve qualifications - a necessary step in order to meet the challenges posed by competitiveness - it would be necessary to create synergies between schools and the world of business. In this context the Committee welcomes the Commission's decision to carry out a study, without delay, and having regard to the principle of subsidiarity, of the scope for providing incentives to encourage businesses and individuals to invest in ongoing training.

3.3.5.2. In the medium term, the Committee notes that the non-wage costs of labour, particularly with regard to unskilled jobs must be cut, in order to promote substitutions which will benefit employment. Reductions in statutory charges on wages and salaries, must not, however, jeopardize levels of social protection which, moreover, play a positive role in promoting growth and employment by redistributing income. Measures will have to be taken to replace funding from wages and salaries by broader based, alternative funding arrangements. Whatever alternative funding arrangements are adopted, their implications for the redistribution of income and for growth and employment must be assessed. The Committee would also point out that economic and monetary union cannot be achieved against a background of social fragmentation. The reforms required to ensure the future viability of social welfare systems in the various Member States should be coordinated in order to help secure the desirable alignment of social security provisions and to avoid 'social dumping'.

3.3.5.3. Changes in the working hours of individual workers are undoubtedly an attractive way of increasing the number of jobs created by economic growth, provided that they bring about a real improvement in the quality of life of workers and do not involve additional costs for businesses. In some sectors the increased productivity brought about by shorter working hours, together with lower capital costs as a result of higher equipment utilization factors and lower social contributions could provide some scope for negotiation. In the Committee's view, a policy based on shorter working hours, together with a compensatory increase in jobs will make it possible to achieve consensual results which will be beneficial to employment.

3.3.5.4. The development of labour-intensive services in sectors which are, by their very nature, shielded from international competition is a further attractive approach. Changes in lifestyle, demographic changes and higher participation rates, etc. have created new social needs, which have yet to be satisfied: supervisory services for sick children, health and social service facilities for the elderly, assistance for young people who are in difficulty, daily help for pupils with their school work, protection of the environment and the natural heritage, etc. These are all services which are genuinely beneficial in economic, social and cultural terms but which have been discontinued or have never been provided. 'Social economy' (cooperative, mutual and non-profit sector) enterprises have already featured significantly in these new alternative fields: by taking over and establishing caring services, social economy enterprises will be able to play an active role in the overall policy of combatting social exclusion, as defined in the White Paper. The extra jobs in these areas should provide adequate guarantees against social deregulation and an increase in the number of insecure jobs. These services must, first and foremost, be seen and recognized as genuine jobs and be regarded as such by the workers concerned. A solution will also have to be found to the inability of the persons requiring these services to pay for them: the cost will either have to be geared to the income of the user or reduced by lowering the social security contributions charged in respect of the service. If these services are to be developed, the supply side will have to be structured and quality standards will have to be laid down in order to meet consumer expectations.

3.3.5.5. The Commission plans to draw up assessment and monitoring procedures to gauge the effectiveness of employment policies; the Committee welcomes this initiative. The Committee points out that measures to help vulnerable groups, in particular, frequently lead to substitution measures which do not bring a net increase in jobs.

3.3.5.6. In the Committee's view, the principles of fair treatment which underlie European society must continue to apply when the labour market is being reorganized. With this aim in view, the level of flexibility on the labour market must remain compatible with the European social model - the steps taken must not lead to rampant deregulation.

Done at Brussels, 30 March 1995.

The President

of the Economic and Social Committee

Carlos FERRER