Opinion of the Economic and Social Committee on "The Impact of implementing EMU on economic and social cohesion"

(1999/C 368/22)

On 25 February 1999, the Economic and Social Committee, acting under the third paragraph of Rule 23 of its Rules of Procedure, decided to draw up an opinion on "The impact of implementing EMU on economic and social cohesion."

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 29 September 1999. The rapporteur was Mr Dock.

At its 367th plenary session of 20 and 21 October 1999 (meeting of 21 October) the Economic and Social Committee adopted the following opinion by 101 votes to 7 with 5 abstentions.

1. Introduction

1.1. A monetary union comprising eleven Member States came into being on 1 January 1999. Such an outcome was highly positive, and represented the fruition of a convergence process launched several years before. Most countries undertook considerable efforts to be ready in time, particularly in terms of balancing their public finances.

1.2. The euro is not an end in itself, but rather a valuable tool enabling the Member States to develop the single market further and conduct a coordinated monetary policy. The single currency must now be used to stimulate a dynamic process strengthening Europe and boosting solidarity.

1.3. The single currency is not only of interest to specialists. It is destined progressively to affect all EU citizens. Citizens will measure the euro's success by very down-to-earth criteria.

1.3.1. The euro will gain in appreciation if the EU shows that it can use this tool to encourage job creation and bring greater prosperity to all the EU's countries and regions.

1.4. Article 2 of the EU Treaty declares that "The Union shall set itself the following objectives:- to promote economic and social progress and a high level of employment and to achieve balanced and sustainable development, in particular (...) through the strengthening of economic and social cohesion and through the establishment of economic and monetary union ...".

1.4.1. Union policies as a whole must enable progress to be made towards the goal of strengthening economic and social cohesion.

1.5. Just a few months after the launch of the third phase of Economic and Monetary Union, it is in many ways hazardous to attempt an analysis of the impact of EMU on cohesion. However, despite the short period elapsed, it is possible to make some comment, given that - for most Member States - the impact of EMU could be felt before 1 January 1999.

2. Cohesion in the European Union

2.1. Article 158 of the EC Treaty defines economic and social cohesion as a means of reducing "disparities between the levels of development of the various regions and the backwardness of the least favoured regions or islands, including rural areas".

2.2. In order to analyse the progress made in achieving economic and social cohesion, in November 1996 the Commission presented its First cohesion report, on which the Committee issued an opinion(1). More recent data, shedding further light on progress towards cohesion, are set out in the Sixth Period Report on the social and economic situation and development of the regions of the European Union(2).

2.3. The advantage of approaching cohesion from the standpoint of regional trends is that more detailed analyses can be made. Trends in national averages can conceal widely varying circumstances between smaller territorial units.

2.4. Is cohesion being strengthened? The statistics set out in the Commission reports do not permit a definite "yes".

2.4.1. Two ways of looking at this merit particular consideration: per capita GDP and unemployment.

2.5. The Commission notes a process of catching up in terms of per capita GDP. Between 1986 and 1996 the per capita GDP of the 25 poorest regions rose from 52 to 59 % of the Union average.

2.5.1. Although this is encouraging, it represents only a relative success. Catching up is, for example, far more pronounced in certain regions, such as the capitals of the cohesion countries. Progress is much slower in the rural regions of these same countries.

2.5.2. Another cause for concern is that regional disparities within national borders, measured by per capita GDP, are growing in most Member States.

2.6. Turning to unemployment, the picture is bleak. A high average unemployment level remains a depressing feature of the Union, at roughly 10 % (according to the ILO definition).

2.6.1. Divergence from the average is enormous. Some regions have almost no employment problem. The 25 regions with the lowest unemployment rates have experienced virtually no increases in under-employment for the last 10 years. Their unemployment rate remains at around 4 %.

2.6.2. In contrast, the level of unemployment in other regions is unacceptably high. The rate has even increased significantly over a 10-year period (1987-1997) in the 25 worst-affected regions, rising from 20,1 to 23,7 %.

2.7. The relative closing of the gap in terms of the wealth produced has little impact on unemployment. Under these conditions, cohesion between regions cannot be said to have advanced substantially.

3. Why the European Employment Pact must succeed

3.1. Any progress on greater economic and social cohesion is closely linked to the dynamism of the economy. Similarly, success in convincing the public of the merits of EMU will depend largely on the EU's ability to pursue a growth and employment strategy. In this respect, the Cologne Summit's adoption of a European Employment Pact is of great importance.

3.2. The Pact aims to enhance cooperation between the various economic and social players, and to provide for more effective coordination of economic policy, both at macroeconomic and structural level. As a recent ESC opinion(3) emphasized, "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."

3.3. The plan adopted in Cologne is still a blueprint. It now has to be put into practice. The Committee believes that all stakeholders, including, of course, governments, but also the social partners and the European Central Bank, must be fully committed to ensure that, within the confines of their own area of competence, they each help to bring about the successful implementation of the three key strands of the European Employment Pact: labour-market policy measures (Luxembourg process); measures for reform of the market in goods, services and capital (Cardiff process); and macroeconomic measures (Cologne process).

3.4. The Committee would stress once again that all three strategies are interdependent. There is no point trying to improve the labour market if growth is too weak to allow jobs to be created. The reverse also holds true. The same can be said of reform of the market in goods, services and capital.

3.5. The Committee would reiterate the call made in previous opinions for all Member States - in view of the ageing population - to modernise their social protection systems (pensions, healthcare, etc.), both in terms of funding and benefits, in order to safeguard their crucial role in the European social model.

4. The potential impact of EMU on the Member States

4.1. The third stage of EMU was launched just a few months ago. Consequently, many of the effects of monetary union remain largely invisible. A number of changes are expected, and some can already be seen.

4.2. Monetary union is part of the drive to establish a large single market in Europe. The disappearance of national currencies takes us one step further towards removing the borders between the Member States. In this respect, monetary union - thanks in particular to the greatest possible price transparency - will increase competition throughout the European Union. Corporate activity (cross-border link-ups, mergers, etc.), which is already encouraged by the single market, will receive a further boost.

4.2.1. The increase in competition is potentially beneficial since it is likely to yield quality and productivity gains. What must be avoided, however, is a situation in which each Member State engages in unbridled competition against its neighbours. This could happen in areas such as the environment, taxation or working conditions. Monetary union makes an even more pressing case for harmonisation or coordination in a number of areas. This applies particularly to the projects currently under discussion concerning taxation on savings and corporation tax.

4.2.2. Stronger competition will certainly enable productivity gains to be made, gains which in theory constitute one of the pillars of growth and improved well-being. At the same time, there could be concern in some quarters as to whether these productivity gains might lead to job losses in Europe. Such a risk does exist. However, if EU players manage to coordinate their economic policies, demand could be sufficiently healthy. Should this be the case, the net impact on employment could be positive. Productivity gains in some sectors are likely to lead to lower prices, and the knock-on effect could be increased demand for a large number of products and services. Once again, the key to success would seem to lie in the successful implementation of the European Employment Pact mentioned in the previous section.

4.3. With monetary union there can no longer - by definition - be any exchange rate upheaval caused by currency speculation, for example. Some countries were exposed to this during the early nineties. The whole continent then suffered from distortions of competition which, at the end of the day, led to weaker results in terms of employment and growth.

4.3.1. Moreover, the Committee welcomes the fact that the eurozone countries were protected from the exchange rate shocks of 1998. This is a fundamental achievement, and one which can already be added to the euro's credit.

4.3.2. As Wim Duisenberg, governor of the ECB, again stressed in his latest meeting with ESC representatives, one of the euro's basic aims is to be a factor for internal stability.

4.4. It is risky to venture any precise forecast of interest rate trends in the euro area. One achievement should, however, be highlighted: the elimination of exchange rate risk in the euro area impacts positively on public finances. Before the advent of the single currency, the financial markets - worried about a possible devaluation - imposed a public borrowing risk premium on certain countries. With the removal of the exchange rate risk, those countries are now able to borrow at a more favourable rate. All things being equal, interest charges will be lower, and if the policy continues unchanged, the balance sheet will automatically improve. Countries which are heavily indebted stand to gain considerably from the removal of the risk premium imposed to compensate for exchange rate fluctuation.

4.5. As 1 January 2002 approaches (and even more so afterwards) the euro will play an increasingly important role in commercial transactions. Exchange from one currency to another will thus be less frequent in the euro area. This should allow economic players (companies, consumers) to make considerable savings on their transaction costs. Commission estimates put the savings at 0,5 % of GDP for the larger countries. For the smaller countries, the savings could be as much as 1 %.

4.5.1. These savings on transaction fees can sometimes provide a considerable boost to European corporate competitiveness.

4.5.2. A further valuable aspect of the euro is that it is increasingly set to become a reference currency at world level, alongside the yen and the dollar. An initial pointer is the proportion of bonds issued in euros. Having a currency of world importance offers numerous advantages. Clear, one of these is enhanced protection against the impact of fluctuations of other currencies.

4.6. In addition to the accepted obligations and the promises made since the launch of the euro, the single currency imposes a number of behavioural changes on the participating countries. Now that the EU has a single currency, it is vital that it should move towards economic and political union. Analysing this shift raises a number of questions, dealt with in other Committee opinions(4): economic policy coordination, taxation, etc.

4.6.1. In this opinion, the Committee would like to dwell on two particular aspects: budget policy and incomes policy.

4.7. It is essential that the participating countries respect the budget aspects of the provisions of the Stability and Growth Pact. Several Member States need to push ahead with an overhaul of their public finances. The aim is for all EU countries to have sufficient room for budget manoeuvre in order to deal with any deterioration in the economic climate.

4.8. Incomes policy also changes with monetary union. It is no longer possible to use devaluation to bridge a competitive gap. The social partners involved in negotiating wage settlements therefore have increased responsibility.

4.8.1. In a previous opinion(5), the Committee felt it was important that the socio-occupational organisations should manage to achieve better coordination of the different wage bargaining levels and fora. This is necessary if the social partners are to be able to contribute to a growth and employment momentum without feeding inflation.

5. EMU and choice of investment location

5.1. Monetary union will undoubtedly impact on the choice of location for investment in Europe. One aspect can already be highlighted: direct foreign investment in the euro area is now completely protected from any participating country exchange rate fluctuations, and is consequently safer.

5.2. Numerous scientific studies have attempted to pinpoint the reasons for choosing an investment location. While it is clearly not the aim of this opinion to debunk these studies, the Committee would reiterate that it is not in Europe's interest to try to compete with low-wage economies and undercut their comparative advantage. Scientific studies have shown that there are other decisive factors in attracting investment which yields high value-added: dynamic research, expertise, a skilled workforce, and the social climate are all important elements.

5.2.1. If we are to safeguard prosperity throughout the European Union, Europe will have to pursue strategies which are underpinned by quality goods and high productivity.

5.3. In addition to private investment, public investment is also an important factor in ensuring all EU regions are able to develop in harmony.

5.3.1. A recent Commission report(6) indicates that government investment has fallen from 3 % of GDP in the early 1990s to little more than 2 % today. One of the main reasons for the reduction has been compliance with government deficit criteria. Privatisation of a swathe of services and the transfer to the private sector of the relevant investments is another.

5.3.2. This situation could have a negative impact on regional development, particularly investment in new technology, which is of crucial importance. It is essential that care be taken to ensure that privatisation does not lead to disinvestment in the less developed regions, in keeping with the economic profitability imperative. This must be tracked carefully in the future.

5.3.3. The financial perspective, as endorsed by the Berlin European summit of March 1999, will entail a scaled-down Union intervention in regional terms. Future investments by the public authorities in their less developed regions are therefore assuming even greater importance. The Committee would argue strongly that assessment of compliance with the Stability and Growth Pact must be able to take this into account.

5.3.4. It is imperative to avoid repeating the experiences of the past. Economic and social cohesion would be damaged if, in the event of a crisis or shock, government investment were to be the first area to suffer cuts, as was the case in the transition to the third phase of economic and monetary union and is generally the case with significant budgetary adjustments.

6. Asymmetric shocks - a threat to cohesion

6.1. A classic problem in any monetary union is the capacity to react to an asymmetric shock: in other words, an unexpected event impacting directly or indirectly on the socio-economic parameters of employment, production and inflation.

6.1.1. "Asymmetric" means that the shock does not affect the entire territory of the monetary union equally.

6.2. The risk of asymmetric shock can be measured using multiple parameters.

6.3. One of these is the degree of openness to trade. Trade outside the euro area accounts for only approximately 13 % of the GDP of the euro area countries. This is, of course, an average: the figure for some countries is considerably higher. This does, however, illustrate that the health of the short-term economic situation inside the euro area depends primarily, and to a large extent, on internal factors.

6.4. A second approach is to observe the progress of short-term economic cycles.

Table 1

Correlation of GDP growth with the euro area((The correlation coefficient of GDP growth in each country with that of the eleven countries which joined the EMU in 1999. The correlations are based on six-monthly figures.))

>TABLE>

Source: OECD

6.4.1. These figures show that economic cycles in the countries of the euro zone are drawing closer to each other. In other words, periods of short-term growth and slow-downs are tending to coincide more closely. Economic cycles in the euro-11 are moving towards greater symmetry. It is to be hoped that this closer alignment of economic cycles will be confirmed in the future - a realistic hope provided that progress can be made in coordinating economic policies.

6.4.2. These results must, of course, be interpreted with due caution. They certainly do not bear out the conclusion that there is no danger of asymmetric shock, but they do put the risks into perspective.

6.5. Recent economic studies suggest that asymmetric shocks can often be of a regional, or multi-regional, rather than national character. A brief analysis of the productive structures of various Member States reveals regional differences in the production and/or services fabric.

6.6. Some see interregional migration as a possible solution in the event of a specific shock or continuing unemployment. Studies reveal that a mix of factors restrict such mobility, prominent among them housing opportunities. It is worth stressing that in the event of a temporary shock, emigration of a part of a region's qualified potential will, in the medium term, do more to jeopardise economic recovery than to encourage it.

6.7. The Committee would reiterate the need for the Member States to comply with the provisions of the Stability and Growth Pact. It is vital that Member State public finances should be healthy enough to respond to unexpected shocks. In such a scenario, a country should be able to rely on its own resources.

6.8. At the same time, recourse to European solidarity - as provided for in Article 100(2) of the Treaty, which states that "where a Member State is in difficulties or is seriously threatened with severe difficulties caused by exceptional occurrences beyond its control, the Council may, acting unanimously on a proposal from the Commission, grant, under certain conditions, Community financial assistance to the Member State concerned" - must also be an option.

6.8.1. The Committee believes that the EU should now begin discussing plans for machinery to counteract asymmetric shocks. Several important European leaders - including the Commission President, Romani Prodi, have broached this subject. The European Parliament has, for its part, adopted a report along these lines(7). The Committee regrets that the issue has not yet been discussed at an Ecofin Council meeting. The aim would be to prepare responses anticipating an event which cannot be assumed to be impossible.

6.8.2. As the European Parliament points out, a legal framework is needed now: otherwise time will be lost in developing one if such an event occurred. The Committee agrees with the proposal to set up an early-warning system through which the risk of asymmetric shock could be evaluated twice a year.

6.8.3. Temporary financial transfers could help regions to recover their growth potential. The goal of such a mechanism would not be redistribution but to help the Member State in question to withstand the shock (at national or regional level). It would work as a sort of insurance.

6.8.4. Among ways of building up a fund to counterbalance asymmetric shocks, some observers suggest considering use of the surplus reserves held in the national central banks. This is an approach which remains to be explored.

7. Conclusions

7.1. The arrival of the euro is a milestone in the European venture. Europe now has a valuable tool at its disposal. It is crucial that the dynamic generated by the single currency project be maintained, as the euro is not an end in itself. It must serve as a lever for further progress towards a stronger Europe, capable of responding to its citizens' fundamental aspirations.

7.2. Just a few months after the launch of the third phase of EMU, economic and social cohesion between the regions of the EU is still largely incomplete. While some progress has been made between rich and poor regions as far as wealth-creation is concerned, little success has been achieved on the employment front.

7.3. The Committee places much faith in the European Employment Pact, which was instigated by the German presidency. EMU will work for growth and employment if there is real coordination of the Luxembourg strategy (labour market policy measures), the Cardiff strategy (reform of the market in goods, services and capital) and the Cologne strategy (macroeconomic measures). Across-the-board participation - involving the social partners in particular - is vital to the success of this process.

7.4. The establishment of Economic and Monetary Union involves a number of upheavals, some of which have yet to surface. Monetary union offers new potential: increased competition, security for foreign investment, lower transaction costs and greater internal stability.

7.5. It also forces the participating countries to be more disciplined. This is particularly true of budget policy. The social partners have the onerous task of coordinating wage bargaining in such a way as to bolster demand without any risk of causing the economy to overheat and feeding inflation.

7.6. The Committee feels that one of the threats to cohesion in EMU is the appearance of an asymmetric shock in some regions of the EU. Both the individual Member States and the European institutions should prepare to deal with such a risk. The ways and means exist. The Committee insists that no time be wasted in preparing instruments to enable the EU to react as soon as such a shock occurs.

Brussels, 21 October 1999.

The President

of the Economic and Social Committee

Beatrice RANGONI MACHIAVELLI

(1) OJ C 206, 7.7.1997.

(2) OJ C 329, 17.11.1999.

(3) OJ C 209, 22.7.1999.

(4) See, in particular, the opinions on the 1999 Annual Economic Report, in OJ C 209, 22.7.1999, and on Fiscal policy, (in progress).

(5) OJ C 40, 15.2.1999.

(6) Government investment in the framework of economic strategy, COM(1998) 682 final of 2.12.1998.

(7) OJ C 98, 9.4.1999.