Opinion of the Economic and Social Committee on 'Europe as an economic entity - a political challenge'
Date: 1998-07-02
Institutions: European Economic and Social Committee
Subjects: EU employment policy, European Community, economic growth, economic policy, job creation

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Opinion of the Economic and Social Committee on ‘Europe as an economic entity —
a political challenge’

(98/C 284/13)

On 29 January 1998, 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 ‘Europe as an economic
entity — a political challenge’.

The Section for Economic, Financial and Monetary Questions, which was responsible for
preparing the Committee’s work on the subject, adopted its opinion on 9 June 1998. The
rapporteur was Mr Nyberg.

At its 356th plenary session (meeting of 2 July 1998) the Economic and Social Committee
adopted the following opinion by 87 votes to one, with three abstentions.

1. Background

1.1.
The Cannes European Council, meeting in June
1995, decided to order a report on Europe as an economic
entity. This resulted in an interim report, followed by a
final report which was presented at the European
Council meeting in December 1996. A follow-up report
was compiled for the December 1997 European Council
meeting, when it was decided that such reports should
be compiled on a regular basis.

Underpinning the Cannes decision to order a
1.2.
report was the European Council’s view that
the
European Union as an economic entity offered additional
room for manoeuvre and a specific added value con-
ducive to the creation of sustainable employment.

The Economic and Social Committee is currently
1.3.
drafting an own-initiative opinion partly because of the
EU Institutions’ failure to date to draw the economic
and political conclusions of the facts contained in the
reports; and partly because the Amsterdam Treaty’s
employment chapter and employment policy guidelines
have provided a Community instrument for dealing
with employment policy, education policy and other
structural policies. Whilst this will have a positive effect
on employment, it is not enough. An economic policy
to increase demand in the European economy as far as
possible but without triggering inflation, is also needed.
The present opinion does not address the anticipated
challenges of the changing global economy, but focuses
on the benefits of a coordinated economic policy, and
how we can more fully exploit the EU’s inherent demand
potential.

‘The best way to achieve a renewed economic upturn
is increased investment, driven by increased demand.
The technical conditions needed to boost investment,
viz. low long-term interest rates, are a reality in
almost all Member States. (...) Continued application
of the policy based on moderate wage agreements
(...) should be accompanied forthwith by measures
to stimulate demand. Demand must be supported
by a wage increase in real terms which does not
exceed productivity gains, by measures to stimulate
exports and to boost innovative capacity, as well as
by an increase in employment. Given the linkage
between demand, employment levels and investment
trends it is essential to avoid falling into a vicious
circle.’ (1)

2.2.
The ESC’s two opinions in the run-up to the
November 1997 Employment Summit contain ideas
which can serve as the starting point for this opinion (2).

‘In the future context of EMU, an ideal policy mix
requires an optimal interplay between the social
partners who are responsible for a sound wage-
development, the budgetary authorities that commit-
ted themselves to the Stability and Growth Pact, and
the European Central Bank that will decide about
monetary policy. Thus, monetary policy should not
only focus on price stability, but also support the
general economic objectives of the Community as
defined in Article 2,
including “sustainable and
non-inflationary growth respecting the environment
(...) a high level of employment and of social
protection”. The European Central Bank is to take
the revised title of the Growth and Stability Pact
seriously, and should adopt an approach to monetary
policy that does not exclusively focus on price
stability.’

2. The ESC on a coordinated economic policy

2.1.
In its April 1997 Opinion on the Commission’s
annual economic report, the Committee dealt with the
economic links as follows:

(1) OJ C 206, 7.7.1997.
(2) ESC opinion of 1.10.1997 on the European Council on
Employment; OJ C 355, 21.11.1997 and ESC opinion
of 30 October 1997 on the Communication from the
Commission on the Proposal for guidelines for Member
States, employment policies 1998, OJ C 19, 21.1.1998.

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3. EU internal demand = 92 % of GDP

the help of appropriate macro-economic and labour-
market policies, provide real potential for substantial
economic growth.

3.1.
The Report on Europe as an economic entity,
presented to the Dublin Summit, consists of three parts:
employment performance in the EU; economic statistics
for Europe as a whole, using the same model as that
used for individual Member States; and a discussion
of the mutually reinforcing effects of coordinating
economic and structural policies.

3.2. Employment in Europe

3.2.1.
The report deals only with the most significant
employment trends. Despite the fact that 8 million jobs
have been created in the EU over the past 20 years,
unemployment has risen and employment levels have
fallen because the working age population has risen by
28 million.

3.2.2.
The problem is that not enough new jobs have
been created, owing to weak demand for labour. When
discussing this, the report blames both structural factors,
such as fragmented product and service markets, insuf-
ficient competition and high labour costs for certain
types of work; and broad economic issues, including a
lack of investment, unstable macro-economic policies
and exchange-rate instability.

3.3. EU GDP

3.3.1.
This is the central, innovative section of the
report. If we compare, as the report does, the GDP of
the various Member States, it emerges that 92 % of the
EU’s GDP consists of consumption and investment
within the EU, while only 8 % comes from demand from
third countries. By way of comparison, the foreign trade
figures for the USA and Japan are 8,3 % and 8,6 %
respectively. This new perspective overturns the existing
picture of an individual’s country’s demand being
heavily dependent on exports, including exports to other
Member States. Table 1 of the report, which contains
the external trade figures for Europe as a whole, and for
the 15 Member States, illustrates this difference.

Exports, including exports to other Member States,
account for 23 % of GDP. Unfortunately, different
calculation methods are used for individual countries
and for total exports. The figures for exports as a share
of GDP are inflated, as they include the imported
element of exports. For example, if goods are exported
to another country for processing, and then imported
for finishing before being exported definitively, they
actually show up twice in the statistics (1).

3.3.2.
stable element in relation to growth.

The report states that consumption is the most

3.2.3.
The greatest job losses have occurred in manu-
facturing industry. Agriculture has been declining slow-
ly. The services sector, however, has seen sustained
employment growth even throughout recession periods.
This has produced a significant employment shift
towards the services sector, whose share of the jobs
market has increased from 50 % to 65 % over the last
20 years. At the same time, female employment has risen
from 43 % to 50 %. These changes are bound to
continue.

3.3.3.
Investment as a share of GDP has fallen from
24 % to 19 % in just over 20 years. Temporary growth
can be created through other measures, but sustainable
growth can only be achieved if the investment rate also
rises. One of the reasons given for the falling investment
rate is that profitability has decreased. The report has
nothing to say, however, about the more difficult periods
of the 1980s and 1990s, when profitability rose again
but was not accompanied by any increase in the
investment rate.

3.2.4.
The low level of employment in the EU (approx.
60 %) is not wholly negative, in so much as it provides
room for growth. In addition to the 18 million unem-
ployed, an estimated 9 million would enter the workforce
if jobs were available. Compared to previous years, the
next few years will not see any large increase in the
working age population. On the other hand, there will
be a shift in the age composition, with a decrease in the
number of younger workers, who are better equipped
to adapt to current labour-market demands. There will
be an increase in the older generation, which, although
more experienced, will require further training for those
who are already part of the workforce. The upshot is
that the existing and potential labour force can, with

3.3.4.
EU external trade, albeit only 8 % of GDP, has
been beneficial to both employment and growth. This
is perhaps particularly true of the early 1990s when an
increase in exports compensated for a reduction in

(1) The figures in the report on Europe as an economic entity
refer exclusively to trade in goods. Calculations for the
next version indicate that exports to third countries are
closer to 9 %. Moreover, the inclusion of trade in services
takes the total third country share to approx. 11 %. Since
these figures do not significantly alter our analysis, we
have based the report on published figures.

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domestic demand. International competition does, how-
ever, require continuous changes in production,
if
comparative advantages and new technology are to be
exploited.

3.4. Competitiveness

3.4.1.
In the EU as an economic entity, the key factor is
productivity growth, which determines competitiveness
and hence better real wages and higher profits. There-
fore, a positive view of competitiveness calls for more
focus to be put on productivity and investment issues.

Despite this, negative measures are often sug-
3.4.2.
gested to counter a drop in national competitiveness
— devaluation, lower social standards, tax cuts designed
to boost competitiveness or more state subsidies. Whilst
these measures can no doubt provide temporary relief,
in the long term they may even curb both the pressure
for change and investment. According to the report,
competitiveness should therefore be a matter for com-
panies rather than countries.

3.4.3.
Around half of the average 2 % productivity
growth is estimated to have come from technical progress
and the rest from substitution of capital for labour. The
report gives a few feasible explanations for the decline
in productivity growth over the last 20 years. There has
been a slow-down in technological innovation, and the
market for manufactured goods may have reached
saturation point. There could be productivity gains in
products such as computers, but these may have been
reported incorrectly. Business horizons have been fore-
shortened, and this has led to lower investment.

3.5. The growth potential of the workforce

3.5.1.
In addition to the 18 million unemployed and
the 9 million people who would join the workforce if
work were available, the workforce could swell further
if the number of women in paid employment continues
to rise. Even if there was enough work, not everyone
would be able to walk straight into a job. The biggest
problem is the level of training and expertise needed for
today’s labour market, in tandem with issues such as
child care, transport, etc.

Improvements in the quality of the labour force
3.5.2.
are seen as the key to sustainable economic growth and
higher productivity.

3.6. Economic and political convergence

3.6.1.
The economic policies of the Member States
have progressively moved closer together. This is mainly
due to the single market, which has provided bigger

markets, more competition and higher productivity. In
addition to the sharp increase in cross-border trade,
direct investment has also risen.

3.6.2.
The road to EMU has also led to more uniform
economic policies, which, according to the report, has
produced low rates of inflation, a reduction in the
budget deficit, large productivity gains, high levels of
profitability, a trade surplus, reasonable wage settle-
ments and a reduced risk of instability and currency
turbulence.

The convergence in incomes per head and
3.6.3.
growth in the cohesion countries mentioned in the report
is of less significance.

The deregulation of financial markets world-
3.6.4.
wide has facilitated capital mobility, and this could lead
to a better distribution of resources. However, this
imposes stricter discipline on companies and govern-
ments.

3.6.5.
As the report points out, together these changes
have created new macro-economic conditions for the
Member States’ economic policies.

3.7. The report’s conclusions

3.7.1.
The report’s overall conclusion is that a coordi-
nated, macro-economic and structural approach can
boost growth without fuelling inflation.

3.7.2.
The report aims to focus on the interplay
between macro-economic and structural policies. The
former is to provide the general framework for growth,
whilst the latter should improve market efficiency, in
terms of goods and services, and of the labour market.

The 1997 follow-up to the report states that
3.7.3.
domestic demand currently seems to be self-sustaining,
and hence the levels of growth expected for 1997-1999
will lead to both increased consumption and investment.
It says that macro-economic policy must be coordinated
if the favourable climate is to be sustained.

3.7.4.
The follow-up emphasizes that the exigencies
of competitiveness will require investment in human
resources and an active labour market policy to be backed
up by investment in infrastructure. Public expenditure on
labour-market policy is estimated at 1,5 % of GDP, of
which less than one third comprises active measures.
Public investment as a share of GDP has declined from
4 % to 2,3 % over the last 20 years.

4. The picture of the European economy is incomplete

4.1. 18 million unemployed and 57 million living in

poverty

The approximately 18 million unemployed
4.1.1.
make up over 10 % of the labour force. The debate has

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focused on the scale of unemployment and the strain it
places on public expenditure in particular. However,
there is a ‘social’ cost to pay for every unemployed
person. Besides the economic implications for the public
purse, the effects of unemployment are unacceptable in
the social system we aspire to in Europe.

4.2.2.
The poverty issue gives considerable food for
thought. The way countries use their incomes depends
on the size of the income. A low income means less
saving, greater demand for basic necessities, and heavier
dependence on the public sector. This has a knock-on
effect on investment, output and the size of the public
sector.

4.1.2.
For the national budget too, the problem grows
from merely providing unemployment benefit, to include
provision for the families of the unemployed. It is a safe
bet that most of the EU’s currently estimated 57 million
poor people come from families where one or more
members are unemployed. Social expenditure in general,
lost tax revenue, and also the cost of dealing with crime
also weigh on public expenditure, and are directly linked
to unemployment.

4.2.3.
These brief comments make a clear case for
putting income distribution back on the agenda. EU
level discussions have been dominated by the need to
get inflation and public finances under control, but the
fight against unemployment through pro-active labour
market policies and skills development should, increas-
ingly, take priority. If we are to solve the problem in the
long-term by boosting demand, then income distribution
must also be back on the agenda.

4.1.3.
The figure of 57 million is based on the number
of people with less than half of the average national
wage. According to this definition, there are poor people
everywhere, but poverty levels differ according to
national income levels. For each country, the figure
depends on how incomes are distributed. Unemployment
is the most common cause of poverty. Diagram 2 gives
the 1992 calculation of Member State poverty levels (1).

4.2. Poverty and demand

4.2.1. Whilst the immediate economic consequences
of poverty are considerable, the repercussions in terms
of lost demand are perhaps even greater. This self-evident
side-effect of poverty is hardly ever addressed. What
impact does it have on growth and employment? More
than 10 % of the EU’s population have a lower level of
income than they would if all were in work. In order to
assess how much demand is lost because of this, we
need to know how much lower their incomes are than
they would be if they were in work. By way of example,
a jobless poor level of 10 % which is missing out on
20 % of their potential income, knocks 2 % off GDP.

4.2.1.1.
According to this calculation, half of a
potential increase in demand from the poor would
however, end up in the public purse in the form of taxes.
This means that at least 1 % of the 3 % budget deficit
existing in most countries is a result of this income
distribution problem.

4.3. The urgent need for education and training

4.3.1.
The modern labour market needs employees
with more training than ever before. The Commission
regularly publishes figures according to which 10 % of
all technology is replaced by new technology every year,
whereas the natural turnover in the workforce is around
2-3 % (newcomers and retirement). The extent to which
the figures are realistic or reliable is not the issue, but
rather that they highlight a problem on a scale which
most definitely warrants political initiatives.

4.3.2. Newcomers must have the training which the
labour market requires. Relations must therefore be
improved between the education authorities and the
labour market. Action must, however, focus on those
already in work and on the unemployed.

4.3.3.
The current consensus is that labour-market
policy must be active, and draw heavily on training
measures. This is in the spirit of the guidelines which
were framed at the Employment Summit. Clearly,
training initiatives must be directed first and foremost
at the unemployed.

4.3.4. However, the same need for training holds
good for most of the remaining 90 % of the workforce
— i.e. those in work. Important skills development
initiatives of
this kind have been launched under
Objective 4 of the Structural Funds. The scope of current
action is therefore clearly inadequate, particularly in
view of the Commission’s requirement assessments.
The situation calls for powerful initiatives within the
framework of the employment guidelines.

4.4.

Investment scope and trends

(1) For a detailed account of poverty calculation methods, see
the ESC’s Opinion of 1 July 1998 on the Costs of poverty
and social exclusion in Europe, rapporteur: Mr Burnel.

There has been a clear decline in investment as
4.4.1.
a share of GDP, from 24 % to 19 %. Private investment

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has fallen from 20 % to barely 17 %, and public
investment from 4 % to barely 2.5 % of GDP. The
reduction in private investment has thus had double the
impact on GDP growth compared to the reduction in
public investment. On the other hand, the latter has
fallen by almost 50 %. The reduction in public invest-
ment could be due — in part — to privatization.

4.4.2. We need however to know what kind of
investment has been reduced, or increased, whether
private or public. It is important to know why the
changes came about and what impact they had. It is
often a good idea to reduce investment in sunset
industries, whereas sunrise industries need more. Is this
a feature of the current development scenario?

4.4.3.
The statistics show that public investment has
had to shoulder its share of the spending cuts needed to
meet the convergence criteria. This is unfortunate,
importance of investment for
considering the vital
growth and employment. The Committee therefore calls
on the Commission to encourage the Member States to
look into ways of avoiding this negative impact on
investment.

4.4.9.
The reason why, in spite of the above consider-
ations, a decline in fixed capital investment is unaccept-
able, is quite simply that the need for such investment is
still evident. One example is trans-European networks.
Others include refurbishment of the housing stock, with
provision of running water, sewerage pipes, etc., and
healthcare for the elderly. Since productivity has
increased more quickly than economic growth, it has
been difficult to create enough jobs. This is a further
argument for more investment.

4.4.10.
In conclusion, the Commission should address
the urgent need for new investment statistics. Even
without them, however, it is clear what direction political
initiatives should take. Fixed investment should be
increased from the current 19 % of GDP, and an
education and training investment campaign should be
promoted. Investment is also needed to speed up the
innovation-to-market process.

5. The emergence of a more coordinated economic

policy

4.4.4.
The Member States need to view public invest-
ment in the light of its impact on employment and
productivity. It is needed to boost general demand:
more investment would also increase economic capacity
without inflation giving cause for concern.

5.1. EMU

4.4.5.
Although public investment (e.g. in infrastruc-
ture) is a key element for competitiveness, it must be
accompanied by an increase in private investment if the
correct investment/GDP ratio is to be restored.

4.4.6.
It is even more difficult to get hold of reliable
statistics for investment in education and training, for
both the public and corporate sectors. Only trend
statistics for this type of investment, and statistics
showing the need for investment in various skills, will
make it possible to assess what remains to be done.

4.4.7.
This would enable us to determine whether the
decline in traditional investment should, in fact, give
cause for concern. It could be that investment in human
resources has taken over from investment in fixed
capital. If this is the case, then the decline in fixed capital
investment could be acceptable. However, it is too early
to draw any conclusions, until reliable statistics and
analyses are available.

5.1.1.
The achievements made in the run-up to
EMU form the basis for the next stage. Meeting the
convergence criteria has involved sacrifices, e.g. in the
form of unemployment. The effects were aggravated by
policies which were ill-suited to the climate of recession
in the early 1990s.

5.1.2. Once convergence is achieved, the situation
changes. There will be no new negative side-effects for
the EU, whereas the achievements will provide positive
spin-offs. These include low interest rates, which means
that firms do not need to devote the same effort to
planning for exchange rate fluctuations and they can
act more effectively whenever more general economic
turbulence arises. All these stability-based gains favour
growth and employment. Tangible factors thus affect
investment decisions more than was the case with high
inflation and unstable exchange rates. To some extent,
the influence of currency and financial markets over
policy has declined.

4.4.8.
Another feature is that the growth in services
leads to less fixed investment and more intangible
investment, which does not show up in the statistics
either.

5.1.3.
Several ESC opinions have discussed the differ-
ent aspects of EMU. Here we only wish to highlight
the connection between public investment and budget
calculations, and the extended need for further economic
cooperation in the wake of EMU.

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5.2. More ambitious employment targets

6. Opportunities for increased output and employment

in Europe

5.2.1.
For several years, employment has been at the
top of the European Council’s agenda. If the ambitious
targets are to translate into concrete action, they must
influence the general work of the Council of Ministers.
A first step was taken in this direction following
the Essen European Council, with the multi-point
programme which was set out for the Member States.
The decisive steps were, however, only taken with the
new draft Treaty in Amsterdam, and the subsequent
special Employment Summit.

The most important feature of the new pro-
5.2.2.
visions of
the Amsterdam Treaty, currently being
applied, is that, whilst the Member States continue to
be responsible for implementing measures to combat
unemployment, it is the Council of Ministers which
frames the guidelines for the measures. Furthermore,
the Council has to check on what the Member States
are doing, and recommend appropriate action wherever
there is room for improvement. The EU has therefore
acquired a new role in framing and policing employment
policy.

5.2.3.
For many years EU policy has also been geared
towards employment, via the Structural Funds. Money
is channelled through the various Objectives to enable
Member States to improve the employment climate. The
impact on job creation has been less effective than
planned. Accordingly,
it has been decided to make
job-creation a priority. The Structural Funds differ
essentially from the employment chapter of the Amster-
dam Treaty in that they allocate money directly to
national employment measures. This direct influence
over job-creation measures constitutes a more ambitious
policy for the EU.

5.2.4.
The next section reflects on whether, and in
what way, better coordinated economic policies could
provide for more ambitious employment targets. We
believe that the bulk of the practical arrangements for
increased coordination should be carried out by the
Member States. However,
the EU institutions can
usefully harness the Structural Funds to channel EU
funding through to the Member States, and the EIB and
the EIF should step up funding for national projects. But
to involve the EU further in the practical implementation
arrangements is hardly the best way forward. We believe
that the method provided for in the Amsterdam Treaty’s
employment chapter — discussion of policy direction
and monitoring of policy as implemented in the Member
States — provides the most feasible way. However, we
do not believe that the Amsterdam Treaty provides for
optimum exploitation of this method.

6.1.
Can output and employment be increased in
Europe? What can be done with regard to current
industrial capacity? What can be done to boost it? We
will focus on the way the labour market is organized
and how capacity is utilized.

6.2. Utilization of capacity

6.2.1.
Diagram 3 shows the post-1970 industrial
capacity trend in (West) Germany, which averaged
84 %. It is now 87 %, which is where it was in the 1960s.
That decade was characterized by full employment and
relatively high demand and output, whereas (West)
Germany today has high unemployment and relatively
low demand and output.

The 1990s employment situation in Germany
6.2.2.
and Europe is thus not a result of under-utilization of
capacity, but rather of low demand. European output
and employment cannot, then, be boosted merely by
improving utilization of capacity. This does not mean
that it is impossible to boost output by improving
capacity take-up.

6.2.3. We can also speak of utilization of capacity
with reference to the national economy, if we take into
account the savings surplus in the private sector and
unemployment. There is a large savings surplus in the
EU. It is put at 5 % of EU GDP, which is equal to
approx. ECU 350 billion (16 % of Germany’s GDP).
Besides the uncertainty about the future which is behind
the wish to save, large public budget deficits have made
a high degree of private saving necessary.

6.2.4. When the deficit is cut, it becomes necessary
to ‘activate’ the savings surplus in order to boost output
and employment in Europe. If one succeeds in increasing
investment it has a positive impact on output capacity
and, consequently, potential growth. However, certain
conditions must be observed. The most important is
price stability. This puts the spotlight on the workings
of the labour market and hence labour-market policies.

6.3. The European labour market

6.3.1.
The main aim of monetary policy is to achieve
price stability. Rising employment in Europe puts
pressure on wage settlements and inflation; a tighter
monetary policy is then introduced to offset this,

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thus undermining any gains in employment. European
labour-market practice is thus decisive in ensuring that
employment gains do not trigger such a policy.

6.3.2.
There are large discrepancies in the proportion
of long-term jobless in total unemployment figures.
Youth unemployment also stands out. In some countries
there are large differences between various sections of
the labour market. These discrepancies show that what
is the best employment policy for one country is
not necessarily the best for another though, generally
speaking, education and training initiatives are vital in
all European countries. Their impact is both short- and
long-term.

6.3.3.
In the first place, the needs of industry can be
better catered for through education and training, thus
avoiding bottlenecks and the attendant pressure on
wages and inflation. Since unemployment is not equally
distributed across the labour market, a lack of certain
categories of manpower could block job-creation initia-
tives. At the same time, there can be high unemployment
amongst uneducated groups.

6.3.4.
Secondly, an educated worker is more prepared
to try new kinds of work. This is important for the
European labour market. Just as with an efficient social
system which combines adequate security with an
incentive to work, better education can encourage
voluntary mobility in the workplace.

6.3.5.
Thirdly, growth prospects are improved.
Higher education and training levels lead to increased
productivity. Education standards are a decisive factor
in the long-term prosperity of a nation. The boost
in productivity provided by education and training
measures also make higher wage rises possible.

An important factor, when discussing structur-
6.3.6.
al unemployment,
is the speed and distribution of
job-creation. ‘Natural’ unemployment (NAIRU — non-
accelerating inflation rate of unemployment) is not
constant. If unemployment falls sharply, bottlenecks
could lead to inflationary pressure even with relatively
high levels of unemployment. The same happens when
jobs are created only in certain sectors and unemploy-
ment remains high. If, however, employment gains are
evenly distributed, the labour market and education and
training policies can respond, and satisfy industrial
demand for new manpower. Bottlenecks are thus avoid-
ed in a situation of high unemployment. There can also
be a positive impact on NAIRU if it is adapted to the
type of changes occurring in the labour market.

In order to impact positively on NAIRU,
6.3.7.
economic policy must be combined with structural

policy measures. Labour market structural policy is
most effective in times of increased employment. It does
not, in itself, create jobs, but does help protect them. If
labour-market flexibility can be enhanced through
structural policy initiatives, then it must also be possible
to avoid an economic upturn being ruined by bottlenecks.

6.3.8.
These are topical considerations, since more
and more European countries are beginning to experi-
ence falling unemployment. This can be seen in Diagram
4, showing OECD unemployment figures for 1994-1998.

In 1977,

As mentioned earlier, there are discrepancies
6.3.9.
in Member State labour markets. However, there are
also important similarities, e.g.
inter-country wage
pressure.
the Danish Arbejderbevegelsens
Erhvervsråd attempted to calculate international wage
pressure, and concluded that wage increases in trading
partner countries have a considerable influence on wage
settlements. This means that, besides the direct impact
of trade within the EU, economic and political measures
in one country can impact on the wage structure of the
others. A successful anti-bottleneck policy therefore
affects not just wage trends in the particular country,
but also those of EU countries in general. This further
reduces the need to adopt a compensatory monetary
policy.

6.4. The link between growth and inflation

6.4.1.
The Arbejderbevegelsens Erhvervsråd has cal-
culated an international economic model which effec-
tively illustrates the effects of increased demand on
employment. The main question is what impact does
labour market reaction have on employment and
growth (1).

(1) The normal scenario assumes that wage rises will be just
as high as they have been historically. The ‘flexibility
scenario’ is characterized by a more flexible labour market,
e.g. as a result of active labour-market policies and
skills-development initiatives, for example. This leads to
lower wage increases than in other situations, when
unemployment falls. There is less need for a compensatory
monetary policy response, and less damage is done to
European competitiveness. Accordingly, the impact on
growth and employment is enhanced. In the ‘bottleneck
scenario’, the labour market is unable to react in time, thus
producing bottlenecks, and compensatory monetary policy
initiatives as a consequence of impaired competitiveness.
It has been calculated that this scenario would produce
wage increases of a quarter of one per cent per annum.

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TABLE 1

Impact of a coordinated increase in public investment equal
to 1 % of GDP on three labour-market scenarios

Increased
flexibility

Normal

Bottlenecks

GDP (%)

Employment (millions)

1,9

3,0

1,2

2,1

0,5

1,1

NB: The increase is for 1998 and continues through 1999 and 2000.
The table shows the impact on the EU for the year 2000.
Monetary policy is the same in all three cases.

6.4.2.
The table shows that a considerable number
of jobs is at stake — almost 2 million, depending on
labour-market reaction. A strategy which combines
financial policy initiatives with structural policy
measures to improve impact on the labour market will
boost employment. This will be particularly effective in
times of rising employment.

The connection does not just apply to coordi-
6.4.3.
nated financial policy and structural policy. The impact
on growth and employment of an increase in general
demand in the private sector is likewise dependent on
labour-market reaction. This is shown in Table 2, where
the initial measure is a reduction in private sector savings
surplus. The impact of this increase in demand thus
depends on whether the labour market can keep pace
with the changes.

TABLE 2

Reduction in private sector savings surplus as a result of an
increase in demand equal to 1 % of GDP in 1998 with
reference to three different labour-market scenarios

Increased
flexibility

Normal Bottlenecks

GDP (%)

Employment (millions)

Budget balance (% of GDP)

3,0

3,6

1,5

2,3

2,7

1,1

1,6

1,8

0,7

NB: Figures for the year 2000.

the public debt servicing requirement. In times of
increasing growth and employment, structural policy
can also impact positively on the budget.

6.4.5.
In practice, structural policy and cyclical policy
are mutually dependent. An economic upturn will only
be sustainable if it is backed up by structural policy.
Similarly, there must also be an upturn in production
and employment,
if structural policy is to have a
noticeably positive effect.

7. Political options

7.1.
At the Employment Summit, the Heads of State
and Government declared that employment policy must
be built on three pillars: mobilization of all Community
policy areas, coordination of Member State employment
policy, and coordination of macro-economic policy (1).

As an example of the political debate, we will
7.2.
summarize some comments made by Franco Modigliani,
Nobel prize winner for Economics, and by the Italian
politician, Giorgio La Malfa:

— The EU must make a speedy assault on unemploy-
ment by means of massive investment. The future of
EMU depends on this.

— Labour market inflexibility is one reason for the
problem, but not the sole reason, and probably not
the main one either. Countries which have the lowest
unemployment figures often have lower than average
inflation.

— The EU must set an employment objective which
can be achieved through a gradual but comprehensive
increase in investment. This can be funded, in the
long-term, from savings on unemployment benefits.

— Agreements must be concluded between employers,
the workforce and government to avoid any impact
on inflation when employment rises.

— The Member States must implement this policy
together, since increased investment in one country
has a considerable impact on the others.

6.4.4.
The labour-market situation is of central
importance to the budget balance. The public budget
variations in Table 2 reflect the impact of both employ-
ment and interest-rate levels. The greater the impact on
employment, the more is saved on transfer payments,
and the more tax revenue increases. The lower the
impact on inflation, as a result of wage settlements, the
weaker the impact on interest rates, which also reduces

(1) ‘Continuation and development of a coordinated macro-
economic policy, underpinned by an efficient internal
market, which will lay the foundations for sustainable
growth, new dynamism and a climate of confidence
conducive to boosting employment ... With regard to the
macro-economic context, it is essential for the Union to
pursue a policy of growth geared to stability, sound public
finances, pay restraint and structural reform.’

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7.3. All for one and one for all

TABLE 4

The following econometric calculations show
7.3.1.
the difference between a go-it-alone expansionist policy
and a common expansionist policy. In 1981, France
embarked on a job-creation policy by encouraging
private consumption and both public and private invest-
ment. The key instruments were an increase in the
minimum wage and social transfers. The tax regime was
changed to encourage investment. The aim was to
reduce unemployment in the wake of the second oil
crisis. Owing to the exchange rate policy, the Franc
plummeted.

TABLE 3

French economy 1981-1983

1981

1982

1983

Budget balance (% GDP)

Balance of payments (% GDP)

- 1,9

- 0,8

- 2,8

- 2,2

- 3,2

- 0,9

(Percentage increase)

GDP

Private consumption

Exports

Imports

1,2

2,1

3,7

2,5

3,5

- 1,7

0,7

0,9

3,7

- 2,1

2,6

- 2,7

7.3.2.
EU growth for the same period was 0,2 %,
0,8 % and 1,6 %. Despite a year-on-year increase in
employment in the French public sector, private sector
employment decreased, so the overall result was
negative. Unemployment climbed even higher because
the labour supply increased.

7.3.3.
The new French policy had no equivalent in
the other Member States, and led to a deterioration in
the balance of payments. Upbeat consumer confidence
was vital to the development of the economy.

7.3.4.
In order to demonstrate the different scenarios
resulting from a unilateral policy change and an EU-level
policy change (9 countries in this particular case),
the Danish Arbedjerrörelsens Erhvervsråd’s economic
model provides a simulation in which the policy change
is an across-the-board increase in investment equal to
0,5 % of GDP. The French policy change involves certain
other factors.

Impact on France of go-it-alone expansion, and across the
board EU expansion — 1982

French
policy
change

EU
policy
change

Differ-
ence

% GDP increase

1,3

1,5

+ 0,2

Balance of payments (% of GDP)

- 0,3

- 0,1

+ 0,2

Budget balance (% of GDP)

- 0,4

- 0,3

+ 0,1

7.3.5. With a common expansionist policy, growth
increases and the balance of payments and budget
balance deteriorate less. An expansionist financial policy
is effective mainly because an increase in demand leads
to an increase in output, and, consequently, to rising
incomes. If consumer confidence is also affected, the
impact is even greater. This is what happened in France
in 1982. The example shows that in the case of unilateral
French expansion, increased consumer confidence raised
GDP by a further 0,7 %, aggravated the balance of
payments deficit by a further 0,2 %, and improved the
budget balance by 0,4 %. In reality, these gains were
offset by an increase in transfers, as a consequence of
rising unemployment and high interest rates.

The example also shows the impact

7.3.6.
the
accompanying devaluation of the Franc had on employ-
ment in the other countries. In France, the weaker franc
created 82 000 jobs in the short term, according to this
calculation. In Germany, there were 34 000 job losses,
18 000 in Italy, 12 000 in Great Britain and 12 000 in
other EU countries. This means that almost all the gains
made in France were offset by losses in other EU
countries, and that these were unfairly distributed, as
they followed trade patterns.

In short, when a nation boosts its economy
7.3.7.
single-handedly, it is the balance of payments which
suffers most. If there is a common expansionist policy,
the economy is boosted, and this largely compensates
for the impact on the balance of payments. The French
example also shows how an expansionist financial policy
can put a stop to a downward spiral: by increasing
consumer confidence. It also shows how what might be
seen as a rash policy for a single country, can be effective
if implemented in common.

7.3.8.
The effects produced by exchange rate fluctu-
ation will not be an issue when EMU takes off. What
remains is the effect in terms of an increase in output in

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an individual country as a result of expansion abroad.We
have therefore carried out further research , based
on the current economic situation and current EU
membership. The figures are based on the assumption
that there will be expansion equal to 1 % of GDP.
The table below shows clearly that cooperation is
worthwhile. The more countries take part in expansion,
the greater the beneficial impact on GDP and employ-
ment, and the negative impact on the national budget
and the balance of payments is contained somewhat.
The best employment results will be achieved by
stimulating the EU’s considerable demand capacity.

TABLE 5

Impact (in the year 2000) of a 1 % of GDP increase in 1998

% GDP increase

Employment

Budget balance (% of GDP)

Balance of payments (% of GDP)

French
expansion

EU-wide
expansion

1,2

1,6

213 000

278 000

- 0,6
- 0,4

- 0,4
- 0,2

7.4.
Economic policy has been underpinned by the
fact that individual countries compete with each other.
Growth must thus be export-led, i.e. from demand from
other countries. They have acted like private companies.
This situation has partly changed with the single market
and EMU. But there is still often a defensive approach
to competitiveness, in the shape of measures directed at
neighbouring countries.

7.4.1.
It is hoped the corporate environment will be
characterized by the fullest and fairest competition
possible, but it often attempts to avoid competition by
means of cartels, for example. It is hoped the Member
States will embrace cooperation, as opposed to compet-
ing in trying to take production and employment from
each other. EU competition law is extremely important,
but there should be a more level playing field between
countries to make fair competition between companies
possible.

8. Economic convergence — not just monetary?

8.1. We have seen how wage agreements in one
country impact on other countries. That this is not
merely theoretical can be seen in Diagram 5. Wage
settlement discrepancies have gradually diminished for
the countries covered in the diagram — mainly EU
countries — until very small variations remain in the

1990s. This change has taken place without any formal,
trans-national agreements, but the alternative to wage
rises in line with neighbouring countries is unemploy-
ment.

It is not just the differences between countries
8.2.
which have changed dramatically, but also the level of
wage increases. Time after time, wage rises have
been smaller. This means that, besides convergence on
inflation, we can also say that wage settlements have
converged. Inflation and nominal wage increases have
both fallen steadily. The extent to which lower pay
settlements have brought down inflation, or low inflation
has led to lower pay settlements,
is for others to
determine. What is important is to note that both
inflation and pay settlements seem to have stabilized at
a low level.

This is positive for goods- and labour-market
8.3.
stability. But even here, certain relationships between
different economic factors must be maintained if the
economies are to function satisfactorily and unemploy-
ment is to fall. The relationship between inflation and
pay settlements is vital to demand and employment
trends (consumption accounts for 60 % of GDP). Growth
economies must have real pay rises if growth is to
be sustained. Moreover, in order to encourage more
investment, the existence of consumer demand must be
accompanied by the knowledge that
investment is
profitable. This means that productivity, both in the
current economic climate and over a longer period, must
rise faster than real wages.

8.4.
Despite the convergence on wage increases, there
are large differences in the way they are negotiated. In
recent years there has been a link between positive
employment trends and nationwide tripartite or other
agreements on wages, etc. Examples include Ireland, the
Netherlands, Denmark, Austria, Norway and Finland,
although the type and scope of the agreements differ.

8.5. We would point out that there is convergence in
labour law, environmental and tax policy, in the form
of minimum levels.

8.6. When the minimum rules method is used, these
are decided at EU level. However, the minimum rules
rarely establish the level which will be applied in the
various countries, as a higher level is permitted. The EU
decides which direction the regulations shall take, but
not how far they must go.

8.7.
As regards the run-up to EMU and employment
guidelines, the EU establishes the guidelines but not the
measures to be implemented. The EMU convergence

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criteria set targets, but do not say how these should
be reached. The employment guidelines establish the
direction ‘structural’ measures should take in 19 points.
The Member States choose the type of measure, and
only when it is considered at EU level that the measures
have not gone far enough can the choice of measure be
criticized.

8.8.
The convergence which has been achieved with
the help of the convergence criteria will now be followed
by greater convergence in those areas — viz. labour-
market policy and education and training — which are
covered by the employment guidelines. But even in the
future, Member States will continue to differ greatly in
terms of economic development, economic structure
and social regulations; their position in the economic
cycle can also vary. Important political decisions will
thus continue to be taken at Member State level.
Decisions
income/expenditure
measures, targeted or general measures, or whether it is
preferable to implement initiatives in the public sector
or encourage private sector activity, will all still be taken
at Member State level, even in a future, more coordinated
economy.

concerning

public

9. Conclusions

If unemployment

is to be cut significantly,
9.1.
then the economy must grow. This growth must be
sustainable from environmental and other standpoints.
Increased growth goes hand in hand with lower unem-
ployment. But how can this be achieved? The political
debate has played increased demand off against labour
market flexibility. Instead what is needed is interaction
between increased demand and structural changes in the
form of an active labour-market policy and education
and training initiatives. Policy must not be used to
reduce the economic pressure which causes structural
changes in the economy. What is needed is cost pressure
so as to switch production from non-profitable industry;
and profitability, so that industry will be attracted to
sunrise sectors.

9.2.
Labour-market policy, and education and train-
ing initiatives put the individual in a stronger labour-
market position. However, growth which is not demand-
led does not create new jobs. The opposite is more
likely, as a more efficient workforce meets existing
demand with fewer workers. The pitfalls in pursuing
demand-led growth policy at national level are obvious.
However, it is possible to pursue such a policy at EU
level, thanks to economic integration. Problems of
balance which occur when a country — e.g. France in
1982 — pursues an expansionist economic policy, level
out the more countries follow suit. If all countries

follow suit, there is maximum gain and minimum
inconvenience.

9.3.
According to some estimates, massive coordi-
nated public investment throughout the EU15 could
create some 5 million jobs. Thus the problems which
individual countries which pursue a demand-led expan-
sionist economic policy have to deal with in terms of
budget balance,
trade, and capital
outflows can be solved by coordinating policy at EU
level. One problem remains, however: inflation.

the balance of

9.4.
Inflation and budget balance assessments are
carried out first of all by the central banks, which
have independent status. The global financial market
strengthens this policy. In the short-term, besides bring-
ing about considerably lower pay settlements and
keeping inflation down, the policy of austerity has, in
practice, generally resulted in even more unemployment.
By the same token, a more expansive economic policy
reduces unemployment, but there is a risk that it will
push up inflation again unless accompanied by other
action.

Seen in this light, it is not possible to combat
9.5.
tackled simul-
inflation is
unemployment unless
taneously. Therefore, a demand-led sustainable growth
policy must be combined with anti-inflation measures.
No realistic, reliable analysis can escape this. Politicians
must put forward an alternative which makes it possible
to combine demand-led growth with anti-inflation
measures.

9.5.1.
It is sometimes pointed out that inflation no
longer poses any real problem. But the important thing
is how inflation has been brought under control, i.e. via
a policy of low demand, with high unemployment as a
side-effect. This is why, given basically the same eco-
nomic climate, the central banks will not allow inflation
and the accompanying rapid rise in employment. Simi-
larly, a side-effect of a policy reversal to halve unemploy-
ment would be high inflation.

9.5.2.
It is thus necessary to find other ways of
keeping down inflation. The only alternative which
would not inflict unacceptable human and social damage
on the European social model
is to change wage
bargaining and settlement arrangements, so that current
pay increase rates could be maintained even if unemploy-
ment were cut by half.

9.5.2.1.
The social partners thus have a key role to
play in the fight against inflation. Labour costs account
for the lion’s share of production costs, if earlier stages
of the production chain are taken into account. This is
why wage increases which outstrip productivity gains
over a long period of time always lead to higher prices.

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9.5.2.2.
This is why the Member States should report
consistently — not just in the ‘Broad Economic Guide-
lines’, but also in the annual employment plans — on
what government, the social partners and industry are
doing to keep down inflation.

9.5.2.3.
It is, first and foremost, up to the social
partners to share responsibility for keeping pay settle-
ments, in the long-term, within the framework provided
by low inflation, productivity increases and sufficient
demand. The method consists in keeping real wage
increases down to low nominal levels in order to increase
purchasing power whilst keeping down inflation.

9.5.2.4.
Legislation is needed both to enable the
social partners to cary out their wage bargaining
responsibilities, and to ensure that wage bargaining can
be conducted in the public interest (1).

9.5.2.5.
The convergence criteria have already led to
a high degree of Member State harmonization on wage
settlements, inflation and budget deficits. The social
partners are thus obliged to step up exchanges of
information prior to the negotiations. The ESC therefore
calls on them to look into the possibility of setting up,
within the framework of the social dialogue and in
addition to existing committees on economics, the
labour market, and education and training, a joint
committee to discuss wage structures. This should,
of course, be done without direct encroachment on
negotiations at national level.

9.5.3.
Countries which do not manage to achieve
stable wage settlements will have to cope with dwindling
job security, shrinking unemployment benefits, failure
to cut unemployment and, eventually, lower real wages.
Reduced competitiveness inevitably impacts on the
employment conditions available to the workforce.

(1) Cf. ESC opinions on Employment policy and the role of
socio-professional organizations in the third phase of
economic and monetary union (rapporteur: Mr Dock)
(currently being drafted) and on Employment and the euro
(rapporteur: Mr Geuenich) (currently being drafted).

Brussels, 2 July 1998.

When devaluation is not an option, governments are
forced to concentrate on the real circumstances.

This, however, is not enough. The structural
9.6.
problems inherent in the labour market must also be
addressed. The EU labour market is out of synch, as the
demand for specialist knowledge and skills is not met
by the education system. This is the biggest obstacle to
greater labour market flexibility.

9.6.1. When there is an upturn in investment and
economic activity, the skilled workforce supply/demand
disparity not only hinders growth; it also leads to higher
inflation and bottlenecks.

9.6.2.
The individual’s stronger position vis-à-vis the
labour market, thanks to better skills and qualifications,
means he/she is ready to risk trying new jobs. Public
investment in education has probably decreased during
the convergence process, so it is important to start by
restoring it to previous levels. It should be increased in
the long-term.

The new Treaty provides greater scope for
9.7.
common action in the fight against unemployment. But
it is not enough to fight on one front only, viz. via a
structural policy with low nominal wage settlements
and low inflation. A demand-led, expansionist economic
policy is also required. The two approaches can provide
an excellent combination. To paraphrase the econo-
mists, we could say that a policy of this kind would cut
NAIRU, thus enabling the central banks to allow
demand to increase without slamming on the brakes.
This is providing we can stop regarding the foreign
trade total — i.e. 23 % — as a policy constraint, and
base our actions on the considerably lower limit of 8 %.

9.8.
Everyone has an important part to play here: the
industry,
social partners and other interest groups,
governments and the EU institutions. In this context,
tripartite cooperation within the framework of the social
dialogue should be extended into a partnership for jobs
in which employees, employers and industry face up to
their responsibilities, and governments and the EU
commit themselves to seizing the opportunity to pursue
a more expansive economic policy with a view to
boosting employment.

The President

of the Economic and Social Committee

Tom JENKINS

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STATISTICAL APPENDIX

to the opinion of the Economic and Social Committee

1. European trade — Exports of goods at current prices — Foreign Trade Statistics

Trade with other Member States and outside the EU % of GDP

Member States

Europe as an Economic Entity

Trade outside the EU

Export market 8 % of GDP

Source: Commission services. No year is given for the figures.

Single market 92 % of GDP

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2. Poverty rates as a proportion of the national or union average disposable income, 1992

(There are no figures for Austria).

Source: ECHP 1994 and Nordic SLCs.

3. Utilization of capacity — German industry (in %), 1960-1997

Source: EcoWin.

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4. Development of unemployment (in %), 1994-1998

Source: OECD’s Economic Outlook, No 62.

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5. Hourly wage in manufacturing industry

Average 1976-1980

Average 1981-1985

Average 1986-1990

Average 1991-1995

Source: OECD’s Economic Outlook, No 62.