Opinion of the Economic and Social Committee on 'The Impact of implementing EMU on economic and social cohesion'
Date: 1999-10-20
Institutions: European Economic and Social Committee
Subjects: EU employment policy, Economic and Monetary Union, economic and social cohesion, investment policy

20.12.1999

EN

Official Journal of the European Communities

C 368/87

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

(1999/C 368/22)

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

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was
responsible for preparing the Committee’s work on the subject, adopted its opinion on 29 September
1999. The rapporteur was Mr Dock.

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

1.

Introduction

2. Cohesion in the European Union

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

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

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

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

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

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

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

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

it

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

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

Is cohesion being strengthened? The statistics set out

2.4.
in the Commission reports do not permit a definite ‘yes’.

2.4.1.
ation: per capita GDP and unemployment.

Two ways of looking at this merit particular consider-

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

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

(1) OJ C 206, 7.7.1997.
(2) OJ C 329, 17.11.1999.

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

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

they each help to bring about

social partners and the European Central Bank, must be fully
committed to ensure that, within the confines of their own
area of competence,
the
implementation of the three key strands of the
successful
European Employment Pact: labour-market policy measures
(Luxembourg process); measures for reform of the market in
goods, services and capital
(Cardiff process); and macro-
economic measures (Cologne process).

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

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

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

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

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

3. Why the European Employment Pact must succeed

4. The potential impact of EMU on the Member States

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

The Pact aims to enhance cooperation between the
3.2.
various economic and social players, and to provide for
more effective coordination of economic policy, both at
macroeconomic and structural level. As a recent ESC opin-
ion (1) emphasized, ‘The labour market policy measures advo-
cated in Luxembourg, as supplemented by the structural
programme launched in Cardiff, should accompany the appro-
priate macroeconomic policy mix, embracing fiscal, monetary
and wages policy, in order to create a climate of confidence to
stimulate consumption and investment and thus to boost
employment in a durable way.’

The plan adopted in Cologne is still a blueprint. It now
3.3.
has to be put into practice. The Committee believes that all
stakeholders, including, of course, governments, but also the

(1) OJ C 209, 22.7.1999.

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

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

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

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

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

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

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

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

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

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

4.6.
In addition to the accepted obligations and the prom-
ises made since the launch of the euro, the single currency
imposes a number of behavioural changes on the participating
countries. Now that the EU has a single currency, it is vital
that it should move towards economic and political union.
Analysing this shift raises a number of questions, dealt with in
other Committee opinions (1): economic policy coordination,
taxation, etc.

4.6.1.
on two particular aspects: budget policy and incomes policy.

In this opinion, the Committee would like to dwell

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

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

In a previous opinion (2), the Committee felt it was
4.8.1.
important that the socio-occupational organisations should
manage to achieve better coordination of the different wage
bargaining levels and fora. This is necessary if the social
partners are to be able to contribute to a growth and
employment momentum without feeding inflation.

5. EMU and choice of investment location

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

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

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

(2) OJ C 40, 15.2.1999.

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

6. Asymmetric shocks — a threat to cohesion

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

6.1.1.
the entire territory of the monetary union equally.

‘Asymmetric’ means that the shock does not affect

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

The risk of asymmetric shock can be measured using

6.2.
multiple parameters.

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

A recent Commission report (1) indicates that govern-
5.3.1.
ment investment has fallen from 3 % of GDP in the early
1990s to little more than 2 % today. One of the main reasons
for the reduction has been compliance with government deficit
criteria. Privatisation of a swathe of services and the transfer to
the private sector of the relevant investments is another.

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

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

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

(1) Government investment in the framework of economic strategy,

COM(1998) 682 final of 2.12.1998.

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

A second approach is to observe the progress of

6.4.
short-term economic cycles.

Table 1

Correlation of GDP growth with the euro area (1)

1977-1986

1987-1992

1992
(2nd half)-
1996

0,89

0,72

0,93

0,65

0,51

0,17

0,30

0,76

0,48

0,28

0,85

0,65

0,71

0,92

0,68

0,65

0,60

0,43

0,93

0,99

0,92

0,85

0,97

0,88

0,76

0,89

0,41

Germany (*)

France

Italy

Austria

Belgium

Finland

Ireland

Netherlands

Portugal

Spain
0,21
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
0,48
United Kingdom

0,62

0,94

0,53

0,57

Denmark

Greece

Sweden

0,33

0,65

0,27

− 0,07

0,36

0,61

0,54

0,83

0,90

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

(*) Figures for the 1987-1992 period are affected by German unification.
Source: OECD

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

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

Recent economic studies suggest

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

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

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

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

6.8.1.
The Committee believes that the EU should now
begin discussing plans for machinery to counteract asymmetric
shocks. Several important European leaders — including the
Commission President, Romani Prodi, have broached this
subject. The European Parliament has, for its part, adopted a
report along these lines (1). The Committee regrets that the
issue has not yet been discussed at an Ecofin Council meeting.
The aim would be to prepare responses anticipating an event
which cannot be assumed to be impossible.

6.8.2.
As the European Parliament points out, a legal
framework is needed now: otherwise time will be lost in

(1) OJ C 98, 9.4.1999.

developing one if such an event occurred. The Committee
agrees with the proposal to set up an early-warning system
through which the risk of asymmetric shock could be evaluated
twice a year.

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

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

7. Conclusions

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

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

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

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

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

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7.6.
The Committee feels that one of the threats to cohesion
in EMU is the appearance of an asymmetric shock in some
regions of the EU. Both the individual Member States and the
European institutions should prepare to deal with such a risk.

The ways and means exist. The Committee insists that no time
be wasted in preparing instruments to enable the EU to react
as soon as such a shock occurs.

Brussels, 21 October 1999.

The President

of the Economic and Social Committee

Beatrice RANGONI MACHIAVELLI