OPINION OF THE ECONOMIC AND SOCIAL COMMITTEE on ' the Economic Situation 1995 - Cyclical and Structural Aspects of Employment'
Date: 1995-10-26
Institutions: European Economic and Social Committee
Subjects: EU employment policy, fight against unemployment, investment aid, job creation, labour market













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51995AC1167

OPINION OF THE ECONOMIC AND SOCIAL COMMITTEE on ' the Economic Situation 1995 - Cyclical and Structural Aspects of Employment'  


Official Journal C 018 , 22/01/1996 P. 0083 





Opinion on 'the Economic Situation 1995 - Cyclical and Structural Aspects of  Employment'(96/C 18/16)On 30 March 1995 the Economic and Social Committee, acting under  Rule 23(2) of its Rules of Procedure, decided to draw up an Additional Opinion on 'The Economic  Situation 1995 - Cyclical and Structural Aspects of Employment'. The Section for Economic, Financial and Monetary Questions, which was responsible for preparing the  Committee's work on the subject, adopted its Opinion on 27 September 1995. The Rapporteur was Mr  Ramaekers. At its 329th Plenary Session (meeting of 26 October 1995), the Economic and Social Committee  adopted the following Opinion by a majority, with 23 votes against and 40 abstentions. 1. Introduction1.1. As we approach the century's end the reduction of unemployment  appears to be the principal challenge facing the European economies. Emerging in the wake of the  first oil crisis in 1973, it has steadily worsened from 3 % of the European labour force to more  than 11 % in 1994. Besides the under-utilization of production capacity and wastage of human  resources which it represents, unemployment today threatens the cohesion of the European social  model and the structural stability of democracy. Furthermore, it jeopardizes the success of the  single market and, in the end, the achievement of Economic and Monetary Union. 1.2. The growth of unemployment is due to the combined influence of a whole series of  socio-demographic, technological and economic factors acting on the increase in the working  population and the capacity of growth to create jobs. The rationalization and modernization of  production plant in many sectors has led to an under-utilization of human resources, but without  compensatory creation elsewhere of the jobs necessary to absorb unemployment; however, the present  situation is also due to an insufficient propensity to invest in job-creating production. 1.3. Despite the favourable economic prospects for the coming two years, there is a risk of  Community unemployment stabilizing at excessively high levels: if the economic recovery progresses  as predicted, the cyclical element in unemployment (estimated at 2 % of the labour force) will be  absorbed within two years. In other words, in 1997 9 % of the Community labour force will still be  without a job. 1.4. The economic and social strategy set out in the White Paper and reiterated in the 'Broad  guidelines of the economic policies of the Member States and of the Community' is therefore still  relevant. The significant reduction in unemployment between now and the year 2000 presupposes  non-inflationary medium-term growth in a sound, investment-led macroeconomic framework. At the same  time, structural reform aimed at boosting the endogenous growth potential of the Community  economies and making the labour market more efficient will have to be implemented to generate a  more employment-intensive growth mode. 1.5. The ESC welcomes the decisions taken by the European Council in Essen in December 1994, which  signalled readiness to give priority to combatting unemployment by defining the major features of  an employment action plan. The ESC calls on the Member States -  in their multiannual action  programme to combat unemployment - to give tangible expression as soon as possible to their  intentions with regard to the five pillars of structural reform defined at Essen. The multilateral  surveillance procedure for employment trends and policies in the Union - proposed by the Commission  to the Council pursuant to Treaty Article 103 () - is calculated to enhance the effectiveness and  overall cohesiveness of current policies and make employment the main plank of European economic  policy. Hence the ESC endorses the Commission proposal for establishing a new approach which  encourages closer cooperation between the Commission and the Member States in respect of analysis,  research, cooperation and action in the field of employment (). 1.6. The reduction in unemployment will also depend on a continuation and spread of world economic  growth. In this connection, the recent turbulence on the foreign exchange markets highlights the  need for better international cooperation on both economic policies and trade. As far as  liberalization of trade and investment flows are concerned, only international cooperation is a  prerequisite for sustainable, job-creating growth. 'Non-cooperative' policies play into the hands  of speculators, weaken economic policy instruments and inhibit growth. 1.6.1. The open trading system, therefore, must be strengthened and rapid solutions found within  the framework of the WTO to defuse specific trade disputes. In particular, steps should be taken to  counteract moves towards unilateral intervention and discriminatory bilateral trading practices -  which still occur too frequently, - and open up national markets. 1.6.2. In the case of the financial markets, the multilateral surveillance system must be  reinforced and more light shed on the financial situation of both private and public operators so  as to forestall crises and improve the performance of financial systems. Finally, emergency  financing mechanisms must be established to stabilize the economic situation in countries which are  prey to financial crises. To this end the G7 meeting in Halifax from 15 to 17 June 1995 instructed  the IMF to identify potential financial crises and decided to double its emergency intervention  fund to 50 million dollars. 1.7. At European level the monetary upheavals have shown that the achievement of Economic and  Monetary Union - while providing no guarantee against turbulence at world level is the best way of  ensuring long-term strong, stable and sustainable growth in the Member States. 1.7.1. The ESC therefore urges improved monetary cooperation and calls on the Member States to  implement policies aimed at achieving the preconditions for transition to the final stage of  Monetary Union. However, such monetary cooperation depends on the establishment within the EMS of  parities which accurately reflect the relative economic positions of the different Member States. 1.7.2. Although the single market needs to have a single currency if it is to be viable, the ESC  would warn against the deflationary impact of the rigorous monetary and fiscal policies  accompanying the convergence process. This impact should be counteracted by the rapid  implementation of the investment programmes identified as priorities at the Essen Summit. 2. Current economic situation and macroeconomic policies2.1. Since the publication in late 1994  of the Commission's 1995 Annual Economic Report () the international and Community economic  situation has changed considerably, bearing out the ESC's forebodings. In its Opinion of 30 March  1995 on the 1995 Annual Economic Report (), the ESC tempered the Commission's optimism, pointing  out that the prerequisites for sustained growth in 1995 and 1996 had not been achieved. In  particular it highlighted the impact of the monetary turmoil on the external component of growth in  Europe and the uncertainty over the dynamism of the internal component, especially personal  consumption, which was supposed to offset the slowdown in external demand, which up to now has been  the driving force of growth. 2.2. The monetary upheavals which shook the foreign exchange markets have weakened the rate of  growth in Europe and are potentially capable of splitting the internal market. But even more than  the monetary disorder, it is the lower than expected trend in consumer spending which the OECD  mentions as the reason for revising downwards its growth forecasts. 2.3. Although the Commission and the OECD predict only a slight deceleration in economic growth in  1996, the ESC regards the present economic situation as worrying in several respects: - Firstly, the pressure on certain currencies in the EMS seems to be linked to a decline in the  markets' confidence in the economic policies pursued, in particular the lack of credibility of the  budget adjustment programmes and the low inflation targets. - Secondly, the behaviour of the foreign exchange markets has revealed the lack of coordination of  economic policies at both European and international level. At European level, the Member States  must treat their exchange rate policy as a matter of common interest. 2.4. The most worrying aspect of this monetary disarray for the European economy is that it could  ensure that the growth cycle is too short to create a lasting increase in unemployment.  Consequently, at this stage in the economic cycle the ESC considers that economic policy must be  focused first on forestalling trends liable to compromise the pursuit of growth and job creation. 2.4.1. On the fiscal front the ESC endorses the broad guidelines of the economic policies of the  Union and calls for more credible fiscal policies, in particular in those Member States whose  currency has depreciated. In these countries fiscal policy will have to help reduce inflationary  expectations and exchange rate instability so as to set the stage for a fall in real short and  long-term interest rates and thus promote investment and jobs. The ESC is still convinced, however,  that in the medium term the credibility of reform policies, and compliance with the Maastricht  criteria in general, are dependent on the degree of real convergence between the Member States:  improved economic performance and less unemployment would give greater credence in the eyes of the  financial markets to the political determination of some Member States to undertake the adjustments  needed to move on the third stage of EMU. 2.4.2. The ESC reiterates its appeal to all Member State governments to seize the opportunity  presented by sustained economic growth and the fall in real long-term interest rates to undertake  the necessary structural adjustments to their budgets in order to restore their indebtedness to  sustainable levels in the medium term. The effort to reduce structural deficits will be all the  easier to bear because it is undertaken at a time when economic activity is expanding, even though  such periods automatically bring deficits down and thus lessen the incentive to take such action. 2.4.3. The ESC stresses that these reforms should be socially balanced. All income brackets must  contribute to the reform drive and the worst off must be protected. Nor must levels of social  protection be jeopardized. The ESC recognizes the need to adapt the operation of social protection  schemes to new demographic, technological and economic realities so as to ensure a secure life for  all and avoid rupturing the solidarity which is essential for social cohesion. The worsening  demographic imbalance and the endemic nature of mass unemployment have highlighted the difficulty  of maintaining solidarity models financed solely by payroll taxes. Alternative sources of funding  will have to be found, which, in a world of European economic and monetary integration, means that  social and tax policy must be better coordinated. 2.5. The ESC considers, moreover, that the economic policy mix must take account of the specific  situation of each country. 2.5.1. The ESC therefore welcomes the general fall in interest rates in those countries whose  currency has appreciated and where inflation is less of a risk. These countries should utilize the  available room for manoeuvre to underpin growth and thus facilitate a reduction in their PSBR and  unemployment. If the fall in short-term interest rates takes place in a gradual and orderly manner,  the credibility of monetary policy is not called into question and the external value of the  currency can even be strengthened in the process. 2.5.2. What is more, as things are now the trend in real disposable income, while keeping  investments profitable, should boost personal consumption and thus underpin growth and job  creation. In fact it is clear that in these countries, where long-term real interest rates have  eased appreciably and firms still have considerable self-financing capacity, investment decisions  will be based primarily on the probable trend in demand, especially consumer demand. 2.5.3. In the short term therefore, adoption of more expansionary policies by Member States with a  stable currency should counter-balance and facilitate restrictive, rigorously anti-inflationary  policies in those countries whose currency has depreciated. Of course, at this stage these  countries are benefiting greatly from the devaluation of their currency (primary products - steel,  manufactured goods, tourism, etc.) so it will be difficult to persuade them to change direction.  Nevertheless, it is essential to accept the argument that the macroeconomic policy mix, tailored to  the specific situation of each Member State, should lead to a balance which safeguards the level of  European economic growth in the medium term and facilitates the adjustments needed for the  transition to the third stage of EMU. 2.6. Finally, the ESC would agree with the conclusions of the report on 'A Coherent Employment  Strategy for the European Union' drawn up by the EP's ad hoc Committee on Employment (Rapporteur:  Mr Ken Coates), and stress the need to offset the deflationary effects of complying with Maastricht  by expanding the EU's financial instruments, particularly the European Investment Fund, so as to  achieve an investment policy aimed at making the European economy more competitive and creating  jobs in the long term. 3. Employment in Europe: situation and outlook3.1. During the period 1991-1994 the EU lost half  of the 10 million jobs created between 1985 and 1990. Europe had never known such massive job  losses since the war: thus, despite the slower growth of the working population during the same  period - due to the longer time spent in the educational system, to policies to encourage early  retirement and a rise in the number of 'discouraged' unemployed - the EU's unemployment rate  reached a record 11,2 % of the working population in 1994. 3.2. In its Opinion on the 1995 Annual Economic Report the ESC said the employment market had  plateaued despite the steady cyclical improvement since the end of 1993. The situation on the  labour market stabilized in mid-1994. Since then unemployment has remained more or less constant,  fluctuating between 11 % in April and 10,7 %: in July 1995 , only just below the all-time peak of  spring 1994. This is partly explained by the rise in the activity rate in the months following the  recovery in net job creation on the labour market. This phenomenon is accompanied by a rise in the  size of the working population, which limits the impact of job creation on unemployment. 3.3. It seems in fact that the EU economy's capacity to translate economic recovery into jobs has  not changed very much over the last twenty years: with an estimated annual productivity gain of 2 %  and with a supposed 3 % growth in EU GDP, the Commission forecasts an increase in the number of  jobs of around 1 % a year for this year and next, which represents a net creation of around 3  million jobs over the two years. As half of these new jobs would be absorbed by the increase in the  working population, the recovery should enable around 1,6 million unemployed persons to get a job,  which translates into a fall in unemployment from 11,2 % in 1994 to 10,1 % in 1996. 3.4. These averages mask big differences between Member States and age, sex or skill groups. Thus,  the unemployment rate varies from 24 % in Spain and 18 % in Finland to less than 4 % in Austria and  Luxembourg (where the pattern of unemployment is not typical), these national figures in their turn  mask quite large differences between regions. 12,9 % of working women are unemployed, but only 9,7  % of men. More than 20 % of young people between the ages of 18 and 25 have no job and there are  very big differences between countries: in Germany the unemployment among young people is barely  higher than the national average (8,6 % compared with 8,4 %), while in Spain it is twice as high  (45 % compared with 24,1 %). 3.5. The ESC is aware that comparisons between Member States must be interpreted with caution,  since statistics cannot take account of national features such as the number of discouraged workers  who are no longer listed as unemployed, the number of workers on compulsory part time or the  dissuasive effects of the laws and tax rules in some Member States facing married women wishing to  work. However, the disparity between these situations underlines the need for the States of the  Community to implement measures which are adapted to the specific features of their employment  system and the structure of their unemployment (sectors of activity and people affected) if they  wish to help reduce unemployment substantially. 3.6. Finally, national statistics do not reflect regional differences, which are often very marked:  thus, in Italy unemployment is 7 % of the working population in the north but 20 % in the south; in  the new German Laender unemployment sometimes reaches 15 to 20 % of the working population. 4. Structural policies for combatting unemployment4.1. Supporting investment, boosting  competitiveness, helping SMEs4.1.1. Full utilization of idle production capacity by 1997 will, at  the most, eliminate the cyclical component in unemployment, estimated at 2 % of the working  population. So, while this form of growth is necessary, it will not be sufficient to achieve the  goal set by the White Paper: creating the 15 million jobs necessary to halve unemployment by the  year 2000. The reduction of 'classic' unemployment, estimated at 9 % of the working population,  will require new jobs to be created by boosting production capacity. 4.1.2. Consequently, macroeconomic policy must provide a favourable environment for innovating and  job-creating investments by seeking to guarantee profitability while permitting sufficient growth  in final demand to create the climate of confidence which investment needs. 4.1.3. In the longer term, industrial policy must continue the structural reforms which seek to  strengthen the endogenous growth potential of the European economy. With this in mind, the ESC  considers that the priority investment programmes adopted at Essen must be implemented more  rapidly. Also, innovating industries which invest in high-tech markets must be encouraged. The ESC  notes here the Council's wish to push ahead with its action plan for an information society. The  ESC urgently stresses the need to develop special projects enabling SMEs to access new sources of  information. As part of the development of the information superhighways, the EU's action to help  SMEs should fit in with the initiatives developed by the G7 countries. Since the legal aspects of  disseminating information and data via the information superhighways are still unclear, the ESC  approves the Commission's decision to start a debate on, for instance, intellectual property rights  in the context of the information superhighways, on the basis of a recent Green Paper. 4.1.4. The ESC supports the implementation of structural measures designed to boost the EU's  endogenous growth forces; but it would emphasize that technological progress, while necessary in  the long term, does not by itself provide sufficient support for growth and jobs. The improved  competitiveness and market flexibility necessary to permit the redistribution of productivity gains  between sectors and finance job creation in low productivity sectors will have to be socially  acceptable, so the strengthening of market machinery should be carried out within the framework of  a social dialogue. Moreover, as the White Paper points out, one must not concentrate exclusively on  how to produce. Technological progress offers opportunities for growth and employment on condition  that one anticipates new needs and the new products resulting from the upheavals to social life,  family life and urban civilisation. 4.1.5. Finally, SMEs have a growth and job creation potential which must be exploited, for instance  through tax measures designed to make it easier to set up, develop and transfer small businesses,  reduce their administrative costs and facilitate their involvement in training and research  programmes. The ESC is therefore pleased that the Council has asked the Commission to draw up a  report on current policies in these areas and on ways of making them effective (). The ESC would  point out here that SMEs operate locally and many tax laws and administrative requirements are  still the province of the Member States, so moves to promote SMEs will initially have to come from  the Member States and local authorities. The Commission will have to try and publicize practices  and prevent the introduction of new formalities. 4.2. Labour-market policies4.2.1. Some of the workless do not have the skills needed for  newly-created jobs. Vigorous medium-term growth backed up by investment and improved  competitiveness will not reduce this structural component in traditional unemployment. 4.2.2. Consequently, and in parallel with policies to support 'tangible' investment in sectors with  a high growth potential, industrial policy must also promote 'intangible' investment to improve the  quality of the labour force: in other words, vocational training must focus more on eliminating  specific skills' shortages. Steps must be taken to promote on-going training and improve workers'  skills. With this in mind, gangways must be created between schools and business life and tax and  quasi-tax incentives provided to encourage on-going training and apprenticeships in firms.  Industrial apprenticeships, together with basic and on-going training in the form of sandwich  courses, will also allow people immediate access to a job, whatever the skill level required. 4.2.3. Such action to enable people to fulfil their potential is a long-term matter: as the  Commission says, the thing is to correct the inadequacy of current educational and training systems  so as to face the challenge of competitiveness in the long term. However, unemployment is a reality  right now, hence the need to implement measures which will work quickly and visibly against the  destruction of jobs in order to restore citizens' confidence. 4.2.4. Measures to boost the jobs' component of growth are thus part of a shorter term approach.  Here the European Council in Essen has identified three fields for action: reduction of indirect  labour costs; reduction and redistribution of working time together with the expansion of part-time  work; and the development of new job fields. 4.2.4.1. The Member States frequently reduce non-wage labour costs in order to encourage hiring.  The policy is based on the observation that high labour costs push companies exposed to  international competition to either relocate to low-wage economies or replace labour by capital.  Measures to reduce labour costs generally concern unskilled workers, who are the most threatened by  relocation and substitution. Unskilled labour costs are reduced through exemptions from social  security contributions. While such measures are widely used today, they still give rise to certain  questions: 4.2.4.1.1. First, the reduction of payroll taxes must not jeopardize social protection levels.  Wage-based financing has to be replaced by a broader based system of alternative funding whose  impact on competitiveness, growth and jobs will have to be assessed. The ESC notes that the general  trend in the EU is to offset cuts in social security contributions by increasing indirect taxes,  especially VAT. While VAT has the double advantage of being deductible on exports and easier to  apply within countries because it is less noticeable than direct taxes, it has more impact on  lower-income households, which are harder hit by the increased cost of essential goods. This  applies even more to large families, the unemployed and those on minimum incomes. Moreover, VAT  feeds through directly to prices, so there is a risk of inflation with its accompanying monetary  and interest rate effects. What is more, pay claims aimed at offsetting loss of purchasing power  may, in the medium term, offset falls in the cost of labour. 4.2.4.1.2. Second, it is not obvious that lower labour costs will lead to a big increase in new  jobs in either the short or long term. The replacement of people by machines is a long-term trend  resulting from technical progress and heightened by ever keener competition. While higher labour  costs have probably helped to accelerate this process, it is not certain that lower labour costs  will bring it to a halt. Moreover, in the short term, measures targeted at reducing social security  contributions themselves may have a 'substitution effect' which lessens their yield in terms of net  job creation. 4.2.4.2. The ESC considers that productivity gains must, as a priority, go towards creating jobs.  The reduction and distribution of working hours is one way of increasing the number of jobs created  by growth, provided that they bring about a real improvement in the quality of life of workers and  do not involve additional costs for businesses (). With this in mind, the management of working  time must be designed to achieve a better balance between on the one hand workers' desires to  achieve a better balance between working, social and family life and, on the other hand, the  demands of corporate competitiveness. 4.2.4.2.1. In some sectors it is conceivable that shorter working hours; a reorganization of  working hours, higher capacity utilization and lower social security contributions, will provide  ample scope for negotiation. The ESC feels that a policy based on shorter working hours with a  compensatory increase in jobs is one way to achieve consensual results which will be beneficial to  employment. 4.2.4.2.2. The ESC notes that in several European countries, since the beginning of the 1980s, work  sharing has been introduced almost entirely by expanding part-time work, with the daily duration of  work remaining the same for those holding full-time jobs. However, part-time work is done mainly by  women, concentrated in the services sector and limited to low-skilled and poorly-paid jobs. In  addition, part-time work and other non-typical forms of employment, such as temporary work, are  deficient in terms of social protection and are often associated with a high level of instability  and flexibility and a lack of promotion prospects. The ESC wants part-time work to be freed from  its 'second class' image; to do this, the social status of the part-time worker must be improved,  with a view to abolishing all forms of penalization associated with the choice of part-time work.  In particular, special social security regulations should be prepared for part-time workers, and  unemployment benefit schemes should guarantee full-time workers who choose to work part-time a wage  which is always higher than their unemployment benefit. In addition, policies to encourage work  redistribution by promoting part-time work should include incentives both for the employer and for  the employee, so that part-time work is really 'chosen' and not 'imposed'. Such policies should be  backed up by public information campaigns. 4.2.4.2.3. Several European countries have experimented with 'career-break' schemes accompanied by  compensatory hirings, especially in the public sector. The current arrangements should be expanded,  particularly in the private sector, for instance by introducing new types of part-time career  breaks or extending the maximum length of career breaks. However, it is important that such systems  do not involve extra costs for firms. Where there is an obligation to use an unemployed person as a  replacement, some of the money saved on unemployment benefit could be used to incentivize employers  by offsetting the extra costs involved in hiring new workers, and encouraging this type of formula  for redistributing working time. 4.2.4.2.4. Finally, schemes to phase out the end of a person's working life or phase in retirement  may be used to combine work redistribution and training for young workers. Recent ILO studies  stress the cost and inefficiency in job-creation terms of full-blown early retirement, because the  vacancies created cannot be filled by unemployed young people who are unskilled. One way of  overcoming this problem could be a scheme where access to early retirement on half-time would be  tied to the hiring of a young unemployed person half-time. During the period necessary for the  transfer of knowledge and know-how, the public authorities would bear the extra cost to firms of  replacing one full-time worker with two half-time workers. 4.2.4.3. The development of labour-intensive services in sectors not exposed to 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: minding of  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 already feature significantly in  these new alternative fields: by taking over and establishing community 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. It is necessary to ensure that expansion of employment in  these areas does not entail social deregulation or 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, they will have to be structured and quality  standards will have to be laid down in order to meet consumer expectations. 4.2.5. The ESC would stress the fundamental role of the public sector in creating jobs. With the  prospect of the information society, intervention by the public authorities is necessary to ensure  that the new forms of communication are accessible to the entire population. With this in mind, the  potential for job creation in a redefined and consolidated public sector of the future is  considerable. 4.2.6. Finally, the ESC thinks that the implementation of multi-year employment programmes should  be accompanied in each Member State by a follow-through and evaluation procedure in order to assess  the impact of the steps taken to cut unemployment and, if necessary, progressively improve  employment action plans. Done at Brussels, 25 October 1995. The Presidentof the Economic and Social CommitteeCarlos FERRER() Follow-up  to the Essen European Council on employment (COM(95) 74 final of 8. 3. 1995).  () COM(95) 250 final of 13. 6. 1995.  () COM(94) 615 final of 13. 12. 1994.  () OJ No C 133, 31. 5. 1995.  () European Council in Cannes, Conclusions of the Presidency (SN 211/95, point 1.3).  () The whole question of working hours is considered in greater detail in the Own-initiative  Opinion CES 166/95 (Rapporteur: Mrs van den Burg, Co-Rapporteur: Mr Whitworth) adopted by the ESC  at this same Plenary Session (meeting of 25. 10. 1995). APPENDIX to the opinion of the Economic and Social CommitteeRejected amendmentThe  following amendment was rejected but received more than 25 % of the votes cast: Replace the entire text by the following: '1. Introduction1.1. As we approach the millennium, mass unemployment in the developed nations  appears to be a specifically European phenomenon. Since 1974, the first year for which statistics  are available in respect of the then newly-enlarged Community of twelve, it has grown inexorably  from 2,5 % of the European labour force to more than 11 % in 1994, the last year prior to the  enlargement to a Community of fifteen. These figures not only represent an appalling waste of valuable human resources but constitute a  source of insupportable human misery and a potential threat to the survival of the European social  model. They are an indictment of the way in which the European nations, jointly and severally, have  managed or, rather, failed to manage, their economies. 1.2. Despite the favourable economic prospects for the coming two years which have been projected,  unemployment in the European Union is expected to stabilize at excessively high levels and even the  most optimistic targets for reducing it fail to achieve anything approaching the improvement which  is required and which the citizens of Europe are entitled to expect. 1.3. The Commission is projecting an increase of about 1 % in the number of jobs for each of the  years 1995 and 1996, which implies a net creation of some 3 million jobs. As the increase in the  active working populating in that period is predicted to be 1,4 million, this represents a fall of  just 1,6 million in the number of people unemployed. 1.4. The ESC has already pointed out, in its Opinion of 30 March 1995 on the Annual Economic  Report, that the prerequisites for sustained growth in 1995 and 1996 have not been achieved and  this must call into question the realism of the Commission's target for job creation. 1.5. The Commission's White Paper sets a target of creating 15 million new jobs by the year 2000;  even if the net increase predicted for 1995-96 is achieved, this will still leave 12 million  further jobs to be created between 1997 and the end of the century. A simple extrapolation of  figures is sufficient to demonstrate that this is a demanding, and perhaps unrealistic, target  which could only be achieved by a combination of exceptionally favourable economic circumstances,  sustained over the whole of that period, and the implementation of effective strategies to curb  unemployment. 1.6. In the unlikely even that this goal can be met, the net reduction in unemployment, after  taking into account the anticipated increase in the active working population over the same period,  is only 6,4  million. This would still leave some 12 million people, or 7 % of the working  population, unemployed. That figure is far too high; we must aim for much more ambitious reductions  in the level of unemployment if the social cohesion of Europe is to be maintained. 1.7. In reality, it is all too likely that even these inadequate targets will fail to be met. As  has already been indicated, they depend, amongst other things, on sustained growth in the European  economies, which in turn requires the continuation and spread of world economic growth. A growth  cycle sustained over such an extended period would be an unusual, if not unprecedented, phenomenon  and there is no justification for assuming that this will occur unless the right policies are  adopted to ensure that it takes place. 1.8. There is another aspect to this situation which needs to be taken into consideration. It has  been clearly demonstrated in recent years that economic growth does not always produce a  commensurate increase in jobs and, in fact, the capacity of the EU's economy to translate recovery  into jobs has not changed very much over the last twenty years. Although unemployment fell in the  second half of 1994 it had risen again by April 1995 to a level only slightly below its historical  high. 1.9. It has already been stated that mass unemployment, at least amongst the developed nations of  the world, is a European phenomenon. It therefore seems logical, in seeking a cure for this chronic  disease which is crippling a continent, to look to what is happening in other economies which have  been more successful in combating this scourge. In particular, the example of the United States  offers many lessons from which we could usefully learn. 2. Comparisons between the USA and the EU2.1. The economies of the United States of America (USA)  and the European Union (EU) are, in many respects, broadly comparable. Although the USA is slightly  ahead, citizens in both the EU and the USA enjoy living standards which are amongst the highest in  the world. In terms of material prosperity, the citizens of Europe can almost match their American  cousins. 2.1.1. Population is also not too dissimilar. In 1994, it was about 260 million in the USA and 350   million in the EU. The population in both communities is ageing, but rather less so in the USA  where the birth rate is higher than in the EU. 2.1.2. Then again, both economies have had to undergo substantial structural change in the recent  past as competition, first from Japan, then from other industrializing countries on the Pacific Rim  and now from China, has forced the pace. 2.2. So we can see that there are some important similarities between the two economies but there  is one key aspect of their performance over the past twenty years which is marked by contrast  rather than similarity; while unemployment in the EU rose from 2,5 % in 1974 to 11,5 % in 1994,  unemployment in the USA fell from 5,7 % to 5,6 % in the same period. 2.2.1. In 1974, the level of unemployment in the EU was less than half that of the United States;  by 1994 it was more than double; or, to put in another way, over the 20-year period unemployment in  the USA showed no discernible trend because it fluctuated around the level of 6 %, whereas the EU  level more than quadrupled and showed a steadily-rising long term trend. 2.2.2. Social scientists must be concerned about long-term trends in the wrong direction which show  no signs of abating. These trends are charted on page 41 of the European Commission's White Paper  of December 1993, 'Growth, Competitiveness, Employment'. When two economies which have so many  similarities exhibit such a marked difference in performance in this one key area, the conclusion  is inescapable that this must result from the differing employment policies pursued in those two  economies. 2.2.3. In fact, the figures quoted understate the extent of the EU's unemployment crisis. One  reason for this is that the EU employment rate, at 58 % in 1993 (according to 'Employment in Europe  1994', published by the European Commission), is considerably lower than the rates in other  developed countries, including the USA where it was just over 70 %. A low employment rate implies  that there are many people of working age (especially women) who would like to work but cannot do  so because the opportunity does not exist. Most of these people would not appear in the  unemployment statistics. 2.2.4. A second reason is that when unemployment rises, so too, in Europe, does the rate of  long-term unemployment and the rate of youth unemployment. In 1992, the EU long-term unemployment  rate was 43 % and the rate of youth unemployment was 21 %; in the USA the comparable figures were  11,2 % and 6,5 %. 2.2.5. A true measure of an economy's employment/unemployment situation has to be based on a  combination of the percentage unemployed and the employment rate. Such a measure indicates that the  EU's situation has deteriorated so seriously since 1974 that, in the 1990s, the EU is not facing an  unemployment problem, it is experiencing a major employment crisis. In marked contrast, over the  same period the USA had a roughly stable unemployment level, while its employment rate improved  from 63 % to 71 %. We must ask ourselves how this was achieved. 2.3. Quite simply, the main reason why the USA has a much lower unemployment level today than the  EU is that the American economy has created vastly more jobs. The OECD Jobs Study, published in  June 1994, gives the following revealing figures: >TABLE>2.3.1. Thus, while both economies generated 5 million extra jobs in the public  sector the USA generated 31 million additional jobs in the private sector while the EU generated  zero. In other words, the EU's failure to generate extra private sector jobs during a period in  which the working population was rising, was total. This suggests: i) that serious errors of employment policy have been made in the EU, andii) that EU policy-makers  could learn some useful lessons from their counterparts in the USA. 2.4. It will be readily understood that the acute nature of the EU's employment crisis, with its  attendant misery for more than twenty million would-be workers and their dependents, a total of  about 100 million European citizens, means that only the most radical changes of policy will  provide an adequate remedy. 3. The labour market in the USA3.1. A strong case could be made for saying that today the essence  of the employment scene in the USA is the numerous statutory (federal and state) regulations which  affect it. Others might argue, with equal force, that behind those regulations the 'hire and fire'  philosophy still holds sway. Whichever of these two views is held, it must be accepted that the  recent job-creating record of the US economy indicates that the labour market there is working far  more effectively than in the EU. 3.2. It is an accepted fact that the primary source of job creation is the Small and Medium-sized  Enterprises (SME) but the extent of the role which they play in the job-creation process has not  been fully recognized. Recent research shows that, at least in the USA, they have played an even  more important part than was previously imagined. 3.2.1. In late 1991, the Office of Advocacy of the Small Business Administration (SBA) contracted  with the Economic Surveys Division of the Bureau of the Census to produce linked longitudinal data  files on an enterprise basis to cover the non-farm, private sector economy. By the autumn of 1994,  such files had been produced for the years 1989, 1990 and 1991. 3.2.2. The period 1989-91 showed a modest employment gain of 681 500 in this sector of the economy.  It was made up as follows: >TABLE>3.3. Critics of American employment policies have sought to diminish the  undeniable success of the US economy in creating jobs by stigmatizing the jobs created as 'McJobs',  implying that they are low-paid, short-term, fast-food jobs. These criticisms will not stand up to  investigation. 3.3.1. A paper produced by the Center for Economic Performance showed that over the ten-year period  from 1983 to 1992 the percentage of the working population engaged in this type of job actually  fell from 12,1 % to 11,9 %; in that period, the employment category which exhibited by far the  greatest growth was 'Professional/Managerial'. This category, which includes most of the best-paid  jobs, grew from 27,9 % to 31,2 %. 3.3.2. The 'Report on the American Workforce' issued by the US Department of Labor in 1994 stated  that 'The vast majority of jobs being created are not the short-term, burger-flipping positions so  popular in the mythology of the modern economy. Indeed, most of the overall job gains have been in  relatively high-paying classifications. The occupations that have shown the most rapid growth over  the past decade are those that require high levels of education, training and specialized  knowledge.'3.3.3. A further criticism which is often levelled at the new American jobs is that  they are less secure than the old jobs. In fact, the Employee Benefit Research Institute in  Washington reported recently that, on average, 'American workers are staying in the same job for  longer than they did 20 or 30 years ago'. This means that greater insecurity for American workers  is as much a figment of the imagination as the notion that most of the new jobs are in fast-food  restaurants. 3.4. Another key area in which Europe is lagging behind America is in the mobility of labour.  Despite the fact that the EU has consistently sought to improve this element and notwithstanding  the advent of the Single Market which was supposed to facilitate it, the position of the EU  relative to the USA has actually deteriorated drastically over the period under review. Labour  mobility in the EU is currently 25 % of labour migration in the USA; in the 1970s it was 50 %. 4. The need for de-regulation4.1. Contrary to popular conception, the US labour market is highly  regulated. The following are just some of the federal statutes which are currently in force in  relation to private-sector employees: >TABLE>4.1.1. It will be seen that, firstly, some regulations go distinctly beyond those  which apply within the EU and, secondly, that the regulatory process has continued in recent years.  Also, it must be remembered that each of the fifty individual states can, and does, legislate in  the employment field and the regulations which apply to many states are more extensive than the  base position created by federal law. 4.2. The EU is rightly proud of the social protection which is given to workers in its Member  States and any proposed solution to the present employment crisis which involved the dismantling or  curtailment of this system would be unacceptable to a majority of people. However, the above  examples show that a high measure of social protection and dynamic job-creation performance can  co-exist within a single economy. 4.3. There is widespread agreement amongst European legislators, economists, politicians, scholars  and businessmen about the importance of the role played by SMEs in job creation. This has been  acknowledged by the European Commission, who stated in their 1993 White Paper 'Growth,  Competitiveness, Employment' that 'Member States should address existing barriers to maximizing the  job-creation potential of SMEs and areas of new employment growth and activity by a range of  measures aimed at anticipating and accelerating SME and new jobs growth'. 4.4. Small firms in both the USA and the EU are creating jobs at a faster rate than larger firms.  It is also the case that small firms are more consistent creators of jobs, in the sense of being  less influenced by macro-economic conditions. The US experience suggests that it is the  micro-businesses (those with less than five employees) which are the primary job-creators and,  therefore, in any strategy to reduce the level of unemployment, it is essential to differentiate  between these micro-businesses and the larger firms which currently fall within the European  definition of an SME. It also means that research using a database which omits these  micro-businesses, (as many studies do) is either irrelevant or dangerously misleading and any  conclusions drawn from it must be flawed. 4.5. It is patently obvious that, while small businesses are the major source of job creation in  both the USA and the EU, those in the United States have been considerably more successful in  fulfilling this role than their European counterparts. The only discernible difference which would  account for this disparity is the fact that in the United States almost all federal employment  regulations and many state regulations have an exemption clause for small or micro-businesses. 4.5.1. One of the reasons - perhaps the main reason - why Congress has exempted all  micro-businesses and some small businesses from these regulations is that it wants to stimulate job  creation and economic development and has recognized the key contribution which small and very  small firms are making to these desirable aims. Another reason could be the understanding that  complex regulations bear far more heavily on the proprietor of a small firm than on the specialist  manager of a larger organization. 4.5.2. The exemptions are quite varied. They may be based on annual turnover or the numbers  employed in the business and there are different levels of exemption for different statutes. These  exemptions have been granted partly because of the disproportionate contribution of small firms to  job creation. Now that they exist, it seems probable that they encourage the establishment and  growth of small firms. Thus, they might reasonably be seen as both the cause and the effect of  small business success in the USA. 4.5.3. It could be argued that these exemptions give small firms an unfair advantage vis-à-vis  their larger competitors. Certainly, the exemption limit is not just a hurdle to be crossed as the  business grows; it is, rather, a dividing line between safe (regulation-free) ground and the  minefield which is created by the mass of complex regulations which exist in the employment field  and in other areas. 4.5.3.1. To argue that small firms have an unfair advantage is to miss the point altogether.  Instead, attention should be focused on the disadvantages for larger firms which stem from  excessive regulation. The real regulatory burden on US businesses may be less than that on their EU  counterparts but the evidence suggests that there is scope for a considerable measure of  deregulation in the USA - and a great deal more in the EU. 5. Comparison with other nations5.1. Other nations have had considerable success in controlling  the level of unemployment. Notable amongst these is Japan, where the Commission's White Paper of  December 1993 showed that unemployment had not exceeded 3 % of the labour force at any time in the  past 35 years. It might be argued that this outstanding record is a reason for basing European  employment policies on the Japanese model but it must be acknowledged that this success has been  based, at least in part, on the fact that Japan has been allowed to sustain an imbalance in its  foreign trade which the EU could not expect to emulate and there are also major cultural  differences between the Japanese and European peoples which would make it difficult to replicate  Japanese working conditions in a European environment. For these reasons the Japanese experience is  not considered to be a viable role model for European employment policies. 6. The basic objective of economic policy6.1. The more prosperity there is, the more can be done  to relieve specific social and environmental problems and to satisfy the wider aspirations of  Europe's citizens. Without economic growth, even existing levels of general welfare and social  provision are at risk, particularly given the adverse demographic trends facing all EU Member  States. 6.2. The basic objective of economic policy, whether at national or European level, must therefore  be to achieve the highest sustainable rate of real growth in the economy, in order to maximize  individual welfare and facilitate the realization of wider social aims. Only in this way can the  future of the Social Contract be protected. 6.3. The essential elements underpinning a sound basic framework for the economy are: i) sound money - that is, effective, control of the money supply and low inflation. ii) sound government finances - that is, keeping budget deficits and the level of outstanding  government debt within prudent limits. 7. Current economic situation and macroeconomic policies7.1. Since the publication, at the end of  1994, of the Commission's 1995 Annual Economic Report, the international and Community economic  situation has changed considerably, bearing out the ESC's forebodings. In its Opinion of 30 March  1995 on the Annual Economic Report, the Committee tempered the Commission's optimism, pointing out  that the prerequisites for sustained growth in 1995 and 1996 had not been achieved. In particular,  it highlighted the impact of the monetary turmoil on the external component of growth in Europe and  the uncertainty over the dynamism of the internal component, including consumption by households,  which was supposed to take over from external demand as the driving force of growth in 1995 and  1996. 7.2. The monetary upheavals which shook the foreign exchange markets have weakened the European  growth rate but, even more than the exchange-rate instability, it is the lower than expected trend  in consumer spending which the OECD pinpoints as the reason for revising its growth forecasts  downwards. This phenomenon almost certainly has its origins in the continued high level of  unemployment and the consequent lack of a 'feel-good' factor in the population at large; people are  not inclined to spend money if their main concern is doubt about their future job security. 7.3. Although the Commission and the OECD predict only a slight deceleration in economic growth in  1966, the ESC regards the present economic situation as worrying in several respects. 7.3.1. Firstly, the pressure on certain currencies in the EMS reflects a decline in market  confidence in the economic policies pursued by those countries and, in particular, the lack of  credibility of their budget adjustment programmes and their low inflation targets. The risk of new  pressures within the EMS will increase as the transition to the third stage approaches if the  Member States do not, in the meantime, demonstrate a clear political will to undertake the  necessary reforms. 7.3.2. Secondly, the behaviour of the foreign exchange markets has reflected the lack of  coordination of economic policies at both the European and international levels. At European level,  the Member States must treat their exchange rate policy as a problem of common interest. At  international level, full and fair implementation of the agreements reached in the Uruguay Round of  the GATT negotiations is necessary if the world is to realise the promise of increased trade and  prosperity rather than face the spectre of regionalization, protectionism and being plunged into  renewed trade wars. 7.4. The most worrying aspect of this situation for the European economy is that it could initiate  a growth cycle too short to stimulate employment over the long term. Consequently, at this stage in  the economic cycle, the ESC considers that economic policy must be focused first on preventing any  trend which could compromise the pursuit of growth and job creation. 7.4.1. On the budgetary front, the Presidency Conclusions of the Cannes European Council stated  that 'Rolling back unemployment means implementing stability-orientated monetary and budgetary  policies, in line with the broad guidelines for economic policies. The European Council emphasizes  that such macroeconomic policies directly benefit jobs threatened by the weight of public deficits.  A rigorous budgetary policy - over and above its favourable impact on the stability of the  macroeconomic framework - helps to bring down interest rates, boost investment and stimulates  growth'. The ESC endorses this position; it is convinced that in the medium term the credibility of  reform policies is dependent on the degree of real convergence between the Member States; improved  economic performance and lower unemployment would give greater credence in the eyes of the  financial markets to the political determination of some Member States to undertake the adjustments  needed to progress to the next stage of EMU. The ESC reiterates its appeal to all Member State  governments to seize the opportunity presented by sustained economic growth and the fall in real  long-term interest rates to undertake the necessary structural adjustments to their budgets in  order to restore their indebtedness to sustainable levels in the medium term. 7.4.2. The key to achieving, and sustaining, these levels of indebtedness is the reduction of  public expenditure. In every country within the EU the level of public expenditure, expressed as a  proportion of GDP, is currently far too high. A substantial reduction in this figure would not only  reduce public indebtedness to acceptable levels but would permit tax rates to be lowered. This  would stimulate economic growth by leaving a greater proportion of the national resources in the  hands of the wealth-creating private sector of the economy and by increasing the spending power of  consumers. This, in turn, would create jobs and produce a significant improvement in the  unemployment situation. The beneficial effects of this on public sentiment and the creation of a  'feel-good' factor would act as a further stimulus to consumer spending. 7.4.3. The ESC stresses that these reforms should be socially balanced. The reductions in public  expenditure which are being advocated need not, and should not, be made at the expense of the  provision of essential public services and social protection. In every country the cost of  administering these services is being inflated by the over-manning and time-consuming bureaucratic  procedures which are inseparable from public-sector provision. The greater the percentage of GDP  which is diverted to the public sector, the higher the proportion of that money which is consumed  in administering it. The exemptions from current employment legislation for small businesses which  the ESC proposes would, alone, contribute to a substantial reduction in public expenditure by  eliminating the need to administer the statutes and monitor compliance with them. Apart from this,  there is ample scope for cost reduction in any public-sector service. 7.4.4. Increases in real disposable incomes which are achieved by reductions in the rates of tax  are not, in themselves, inflationary, as corresponding increases achieved by wage rises would be,  but monetary policies should be aimed at controlling any inflationary tendencies by using interest  rates to keep the money supply in check. 7.4.5. Experience across the world has demonstrated quite clearly that low-tax economies are  high-growth economies and high-growth economies are low-unemployment economies. In other words, low  tax equals low unemployment. Conversely, high tax regimes, and particularly those where excessive  taxation is compounded by excessive regulation, are characterized by high levels of long-term,  structural unemployment. 8. Labour market policies8.1. The ESC advocates moves towards more flexible labour markets. 8.2. It also reiterates its insistence on the importance of the training and education element in  any structured approach to labour market policy and on the encouragement of an entrepreneurial  culture. Efforts to create jobs and improve the skills of the workforce must be coordinated;  training without job creation will merely result in a large number of highly-skilled, unemployed  workers; job creation without training will be self-defeating because of the lack of suitable  labour to fill the newly-created vacancies. 8.2.1. Labour market policy must promote investments to make labour more 'employable'; in other  words, the link between supply and demand in the area of vocational training must be improved in  order to answer the basic needs of industry. Steps must be taken to promote on-going training and  improve workers' skills. With this in mind, gangways must be created between schools and business  life and incentives provided to encourage on-going training and apprenticeships in firms.8.2.2. Such policies to up-grade human resources are a long-term measure; as the Commission says,  the thing is to correct the inadequacy of current educational and training systems so as to face  the challenge of competitiveness in the long term. However, unemployment is a reality right now;  hence the need to implement measures which will work quickly and visibly against the destruction of  jobs in order to restore the confidence of Europe's citizens in the ability of the EU to deliver  and sustain the standard of living to which they aspire and to which they feel that they are  entitled. 8.2.3. Measures to boost the jobs component of growth are part of a shorter-term approach. Hence,  the European Council at Cannes placed particular emphasis on 'the need to foster growth of a kind  that will create jobs, to step up measures to bring young people and the long-term unemployed back  into the world of work and to make labour markets perform better, in particular by reducing  indirect labour costs. 8.2.3.1. The ESC supports the strategy of reducing non-wage labour costs. Anything which reduces  the cost of employing labour will tend to increase the amount of labour employed. Employers hire  labour mainly because they expect to receive a surplus (profit) from the revenue product of that  labour. The theory of wages, which is supported by practical experience, is that more labour will  be hired at a lower price (wage) and less will be hired at a higher price (wage), other things  being equal. Thus, in making a decision on whether to hire, an employer will take into account all  the costs of his decision. These will include the cost of state taxes on employment; they could  also include the cost of firing. No private sector employer can guarantee the demand for his  product or service indefinitely and, if the demand declines, he will have to shed labour as an  alternative to going out of business. As the OECD Jobs Study pointed out, legislation which is  designed to discourage dismissals by raising the cost to employers of releasing workers 'can also  make employers more reluctant to hire new workers'. 8.2.3.2. Labour market policies in the field of working time must reflect the way in which working  patterns are developing, both inside and outside the EU. By the end of the century, the  conventional five-day/forty-hour week is likely to be the exception rather than the rule; workers  will increasingly wish to tailor their working patterns, throughout their working lives, to their  changing personal circumstances and family commitments. Flexibility and adaptability will therefore  be the keynote for industrial relations in the future and these qualities will need to be  demonstrated by employees, employers and legislators alike. The tailoring of individual working  hours to individual requirements can best be achieved by individual negotiation and by arrangements  voluntarily entered into by both workers and employers. 8.2.3.3. The development of new job fields is the product of an expanding economy and this can only  be achieved if governments ensure that they pursue macroeconomic policies which are conducive to  economic growth and, in particular, create a climate which is favourable to the establishment and  development of micro-businesses. 8.2.3.3.1. It is necessary to remember that governments, whether national or European, do not, and  cannot, create jobs; neither can they 'protect' jobs; both of these activities are exclusively the  function of business. Job creation is the natural product of successful commercial operations  conducted in an Enterprise Culture which is conducive to entrepreneurial activity and the best  contribution which governments at all levels can make to job creation is to foster an Enterprise  Culture. Attempts by governments to intervene in this process by the introduction of well-meaning  legislation designed to create jobs, discourage job losses or rectify perceived inequalities  between specific groups or categories of workers have been invariably counter-productive. 8.2.3.3.2. Advancing technology brings with it the promise of new jobs as well as posing a threat  to the continuance of old ones. It is important that labour market policies should take a positive  attitude to new technologies, which are only inimical to net job creation if they are viewed in the  context of old-fashioned and rigid concepts of social organization. Attempts to prolong the life of  'sunset' industries because they are seen as being an accepted part of the existing social pattern  can only hasten their decline and lead to further rises in unemployment. The future role of the EU  should be to open the doors to opportunity. 9. The Organization for Economic Cooperation and Development9.1. The OECD in its paper, 'Jobs  Study - Facts, Analysis Strategies' published in mid-1994, made nine key policy recommendations.  These were: - Set macro-economic policy such that it will encourage growth and, in conjunction with good  structural policies, make it sustainable. - Enhance the creation and diffusion of technological know-how by improving frameworks for its  development. - Increase flexibility of working time (both short-term and lifetime) voluntarily sought by workers  and employers. - Nurture an entrepreneurial climate by eliminating impediments to, and restrictions on, the  creation and expansion of enterprises. - Make wage and labour costs more flexible by removing restrictions that prevent wages from  reflecting local conditions and individual skill levels, in particular of younger workers. - Reform employment security provisions that inhibit the expansion of employment in the private  sector. - Strengthen the emphasis on active labour market policies and reinforce their effectiveness. - Improve labour force skills and competencies thorough wide-ranging changes in education and  training systems. - Reform unemployment and related benefit systems - and their inter-action with the tax system -  such that societies' fundamental equity goals are achieved in ways that impinge far less on the  efficient functioning of labour markets. 9.2. The ESC explicitly endorses these recommendations. 10. Summary10.1. This summary can be relatively brief because all that is needed here is a drawing  together of the existing threads into a coherent policy for the return to work of a significant  proportion of Europe's army of unemployed. 10.2. First, the policy objective has to be plainly stated. It is quite simple: the EU should  create, over the business cycle, an average of two million additional jobs (full-time or part-time)  each year - not just for the next five years, or for the next decade, but well into the  twenty-first century. Nothing less will remedy the very serious employment crisis which now exists  and which, as well as creating economic and social problems, threatens the political stability of  the EU. 10.2.1. A prerequisite for this is the maintenance of sound money and sound government finances at  national and European level. 10.2.2. Budgetary deficits must be tackled by reducing public expenditure; in many Member States  this is the only way in which they can be reduced to the necessary convergence levels within the  time-scale set for European Monetary Union. 10.2.3. Consumer spending must be stimulated by increasing disposable incomes. There are only two  ways of doing this; by increasing wages or by cutting taxes. The former would be inflationary  because it would increase the overall money supply; if it were not matched by commensurate  increases in productivity, it would also reduce the competitiveness of European firms and, by  increasing the cost of their products, would tend to be self-defeating because the additional money  in people's pockets would be offset by higher prices and there would be little or no increase in  their effective spending power; alternatively, the additional income would be spent on lower-priced  products from more competitive nations and would therefore tend to suck in imports, to the  detriment of the European trade balance. Cutting taxes, by contrast, is not inflationary because it  does not increase the total money supply but simply redistributes it from the wealth-consuming  public sector to the wealth-creating private sector, to the advantage of economic growth. 10.2.4. Taxes on labour which, whether levied on the employee or the employer, are taxes on  employment, must be reduced. 10.3. The over-riding policy aim must be to create a climate in which small firms can thrive and  grow. Governments are over-spent and many large firms (even when they are profitable) are shedding  jobs. It follows that most of the jobs to be produced will have to be created by small firms and  micro-businesses. 10.3.1. These organizations have a growth and job-creation potential which must be exploited. The  European Council at Cannes emphasized that 'small and medium-sized enterprises (SMEs) play a  decisive role in job creation and, more generally, act as a factor of social stability and economic  drive. It calls upon the Commission to submit a report to it on policies currently being conducted  in this field and on ways of improving their effectiveness through measures, particularly of a  fiscal nature, aimed at promoting the creation of SMEs, reducing the administrative burden on them  and facilitating their participation in training and research programmes. The European Council  emphasizes the importance of developing investment in research, development and education at  national and Community level. It likewise emphasizes that, in order to stimulate employment,  competitiveness and innovation, it is important to combat excessive regulation'. 10.3.1.1. The ESC supports this strategy of the European Council and calls for active measures to  assist SMEs, and particularly those which may be defined as micro-businesses. It believes that, in  order to achieve this, it is necessary to introduce tax measures designed to make it easier to set  up a small business, reduce red tape and facilitate their involvement in training and research  programmes; in short, to create an Enterprise Economy. An Enterprise Economy is a low-tax,  de-regulated economy, which means that existing entrepreneurs are free to expand and potential  entrepreneurs are encouraged to enter the market with a reasonable chance of achieving business  success. 10.3.2. Central to this strategy is the effective de-regulation of SMEs and micro-businesses. They  should be set free from most of the numerous employment obligations with which they have been  burdened in recent years; job creation must be given priority over job protection. This programme  should be concentrated initially on firms with less than 50 employees and, within that limit, there  might well be differing scales of exemption, with the highest level of de-regulation being reserved  for those with less than five employees. 10.4. The European Council at Cannes concluded that 'the proper functioning of the internal market  is fundamental to a dynamic economy and thus to job creation. The Community and its Member States  must therefore give priority to the effective working of the internal market'. The ESC agrees with  this conclusion. 10.5. The recommendations set out in the OECD report, 'Jobs Study - Facts, Analysis, Strategies'  should be implemented. 10.6. Europe's unemployment problem is not insoluble but unless radical policy changes are adopted  in place of the tired and discredited 'remedies' which have so signally failed to provide a  solution to date, it will not be solved. One thing must be clearly understood: if the EU cannot  produce a solution to this problem it will not survive - and it will not deserve to. VotingFor: 51, against: 105, abstentions: 8.