Opinion of the Economic and Social Committee on "Comparative macro-economic performance studies"
Date: 2001-03-01
Institutions: European Economic and Social Committee
Subjects: Economic and Monetary Union, economic growth, economic policy, macroeconomics

11.5.2001

EN

Official Journal of the European Communities

C 139/51

Opinion of the Economic and Social Committee on ‘Comparative macro-economic performance
studies’

(2001/C 139/12)

On 2 March 2000, the Economic and Social Committee, acting under Rule 23(3) of its Rules of Procedure,
decided to draw up an opinion on the ‘Intensification of country-by-country comparative macro-
economic performance studies focusing on the economy and employment’.

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 8 February 2001.
The rapporteur was Mrs Konitzer.

At its 379th plenary session, held on 28 February and 1 March 2001 (meeting of 1 March 2001), the
Economic and Social Committee adopted the following opinion by 91 votes to three with one abstention.

1.

Starting point

1.1.
The economic conditions for increased growth and
employment in Europe have shown a clear improvement in
recent years. On the one hand, this is due to the ongoing
endeavours to make structural improvements to the operation
of the markets in goods and services and the labour and capital
markets. On the other hand, the macro-economic conditions
for growth and employment, in particular, have also been
decisively strengthened. The reduction of government deficits,
the achievement of lower rates of inflation, and a macro-
economic wage trend which has facilitated a reduction in
the rate of inflation and a significant improvement in the
profitability of job-creating investment, have all helped to
create monetary conditions which are favourable to growth
and employment. It is essential to sustain the progress achieved
in the 1990s. Steps must therefore be taken to ensure that the
slight and,
in principle, temporary increase in the rate of
inflation — brought about by the hike in the price of oil and
exchange rate trends — does not have a spin-off effect on
internal costs in the EU.

1.2.
The achievement of economic and monetary union
(EMU) has made a substantial contribution to progress in the
above-mentioned fields. Those EU Member States which have
not yet signed up to EMU have also benefited to some extent
from this achievement as they, too, have successfully pursued
the goal of attaining convergence. In the future, too, EMU will
prevent international pressures from causing internal currency
upheavals; over the last thirty years such currency upheavals
have frequently disrupted or interrupted the process of growth.
A major macro-economic obstacle to growth has thus been
removed. EMU also helps to lessen the risk of conflict between
budgetary policy, wage policy and monetary policy, and it
creates the stable framework needed for healthy macro-
economic policies and developments. In future it will thus be
easier to avoid macro-economic errors which have in the past
had a very damaging effect time and again on growth and
employment. EMU thus provides a new opportunity to pursue
a healthy macro-economic policy.

greater understanding of macro-economic orders of magnitude
and relationships so that they can engage in an objective
dialogue more easily and thereby achieve a larger measure of
agreement on the appropriate macro-economic action and
policies. The learning process required for this purpose needs
an economic policy approach on which agreement can be
reached and an empirical survey based on as many data as
possible.

A large number of Commission documents, in particular those
drawn up in the wake of the White Paper on Growth,
Competitiveness and Employment (and especially its chapter
on macro-economic aspects) and many Council documents
such as the annual ‘Broad guidelines of the economic policies
of the Member State and of the Community’, provide a rich
source of material for a basic approach to economic policy on
which a large measure of agreement can be reached (1).

However, the empirical and as highly quantified as possible
illustration of macro-economic variables is less developed. The
best way to illustrate such variables is to compare different
periods and different countries. An analysis of long series of
figures and a comparison between the situation in the EU and
the USA and between individual EU Member States does in
fact reveal significant differences not only with regard to
employment and unemployment but also in respect of major
macro-economic parameters which determine growth and
employment. In this context it can also be demonstrated how
institutional
factors influence macro-economic policy and
macro-economic development in individual countries. A num-
ber of benefits can be achieved by comparing and analysing
these factors: the issues can be more readily understood;
objective dialogue can be promoted; and, under certain
circumstances, reference or target variables can also be worked
out (benchmarking).

1.4.
Efforts to achieve a better understanding of macro-
economic trends and a greater agreement on macro-economic
policies are therefore important for ensuring that the improved
basic conditions for increased growth and employment are
fully exploited. It will only be possible to resolve the employ-
ment problem facing the EU in a reasonable medium to

1.3.
If this opportunity is to be fully exploited, however, all
major economic and social groups will have to acquire a

(1) The ESC adopted an opinion in February 2001 on the 2000 broad

economic policy guidelines (OJ C 14, 16.1.2001).

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longer-term timeframe if the current cyclical upturn can be
transformed into a sustained period of higher growth, despite
increased oil prices. Such a development is also necessary if
the ambitious goals set by the Lisbon European Council are to
be achieved (1).

It is, of course, not possible for this opinion to be
1.5.
extended and made into a comprehensive study in which
detailed country-by-country comparisons of macro-economic
parameters are presented and assessed. However, the opinion
can and will set out key macro-economic orders of magnitude
and relationships (Chapter 2) and discuss the major contri-
butions to be made by economic players (Chapter 3), thereby
giving the Commission and the Committee the opportunity to
reconsider these matters in greater detail at a later date in
studies and opinions. The ESC has decided to draw up this
opinion for two reasons: firstly,
it wishes to promote an
objective dialogue on macro-economic issues between all
socio-economic groups which goes beyond the institutional-
ised macro-economic dialogue (Cologne Process); and sec-
issues
it wishes to make its views on these crucial
ondly,
known to the Commission and the Council.

2. Key orders of magnitude and relationships

2.1. Framework and instruments

The purpose of the orders of magnitude and relationships set
out in this chapter is to facilitate an objective dialogue on
macro-economic matters between the various socio-economic
groups. These data, which are largely based on earlier Com-
mission analyses, should be reconsidered, taken further and
examined in greater detail in future Commission studies and
ESC opinions. (One example which may be quoted here is the
appendix on Ireland accompanying the ESC’s opinion on the
economic situation in the EU in 1999 (2).)

2.2. Manpower reserve

2.2.1. O b s e r v a t i o n s

o n

e m p l o y m e n t

a n d

u n e m p l o y m e n t i n d i c e s

The rate of unemployment is the simplest and most frequently
used yardstick for gauging the employment situation in a given
country. However, even if Eurostat’s harmonised definition is
used, this yardstick is of limited value for making comparisons
over time and between countries. One of the reasons for this
is the varying levels of undeclared work, part-time working
and particular forms of subsidised employment. It is, therefore
not only important to note the breakdown of unemployment

(1) Looking ahead to the Lisbon European Council, the ESC drew up
an Opinion entitled ‘Employment, economic reform and social
cohesion — Towards a Europe of innovation and knowledge’ (OJ
C 117, 26.4.2000, p. 62).
(2) OJ C 140, 18.5.2000, p. 44.

according to, for example, age, gender, level of education,
duration, etc., but the analysis should also include the trend in
the participation rate, employment rate and working time, in
particular part-time work, and migratory movements. The
trend in the employment rate expressed in full-time equivalents
is a particularly important indication of the overall situation.
If, for example, a fall in unemployment is accompanied by a
marked increase in the employment rate, it may be assumed
that the employment situation in the country concerned has
undergone a healthy improvement and cannot be attributed
either to a fall
in the participation rate caused by the
discouragement of potential workers or to a redistribution of
work. In the 1990s such a positive trend was observed above
all in Ireland and also, to a lesser extent, in countries like
Denmark. More detailed analyses of the relations between
these factors may be found, in particular, in the European
Commission’s employment reports.

2.2.2. S i z e o f t h e m a n p o w e r r e s e r v e

Closer analysis of the trend in the employment and unemploy-
ment indices clearly indicates that the EU’s manpower reserve
considerably exceeds the level of unemployment recorded in
statistics. Whenever growth produces new jobs, this leads to a
tremendous surge of people on to the labour market who were
not previously included in the unemployment statistics. This
means that
the
population of employable age represented by economically
active persons (3)) increases with the employment rate (percent-
age of the population of employable age represented by
persons in gainful employment), and the incentive to immi-
grate is also increased.

the participation rate (the percentage of

On the basis of the above observations and taking account of
plausible figures for the employment rates (broken down by
age and gender), the Commission estimates the manpower
reserve of the current EU-15 at some 30-35 million persons.
This figure is approximately twice the number of unemployed
persons and it is almost equivalent to the total employment in
Germany at present. If jobs are to be created within ten years
for the people making up this manpower reserve, employment
will have to increase by between 1,8 % and 2 % per year; the
corresponding increases for a fifteen-year period would still be
between 1,2 % and 1,4 % per year. Whilst these orders of
magnitude are considerable, it is perfectly possible for them to
be achieved. The expected enlargement of the EU and the
possibility of increased migration across the internal and
external frontiers of the EU further underlines the need to
create jobs for the persons making up the EU’s extensive
manpower reserve as quickly and as far as possible.

(3) Economically active persons = persons in gainful employment

plus unemployed persons.

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2.2.3. I s t h i s m a n p o w e r r e s e r v e a v a i l a b l e f o r

e m p l o y m e n t ?

The objection is sometimes raised that, because the persons
concerned are not sufficiently well trained,
it will not be
possible to create jobs for all the persons making up the
manpower reserve. The skill level of the workforce, lifelong
learning, together with the mobility of the workforce and its
readiness to take up available jobs are all important issues
of labour market policy. Tax systems and social security
contributions may also have a bearing, either positive or
negative, on the availability of manpower. The ESC has
repeatedly given its views on all these matters (1). In the case of
the present opinion, however, the primary consideration is to
pinpoint
the chief bottlenecks in the process of macro-
economic growth. The following observations may be made
in the light of a study published by the Commission back in
1995 (European Economy No. 59, Study No. 3 — see
especially graph 3):

New entrants onto the labour market (young people and the
‘latent’ manpower reserve) generally have an adequate basic
training which, however, will have to be built on once they
take up employment. The chief bottleneck is not the level of
skills but the shortage of new jobs, as a result of which many
people cannot undergo further training at the workplace to
keep abreast of economic and technical developments.

The majority of unemployed persons still clearly form part of
the labour market. Here, too, the problem is not primarily one
of ‘employability’ but rather the fact that there are not enough
jobs available for everyone. This problem not only affects the
relatively small number of cyclically unemployed who will be
able to find jobs once there is an economic upturn: in this
case, workers are available and jobs do physically exist. A
shortage of jobs is also the problem facing a large proportion
of the victims of ‘non-cyclical’ unemployment; many of these
persons were in employment a few months ago; it would be
possible for them to find lasting employment once again
(perhaps after a small amount of retraining) if enough new
jobs were to be created.

Even the approximately 4 to 5 % of economically active
persons comprising the long-term unemployed in the EU must
not necessarily be ‘written off’. It is true that neither of the two
criteria are met in this case: there are not enough actual jobs
and some of the workers also do not have the requisite skills.
Experience has, however, shown that if growth generates
sufficient jobs, retraining and other measures can enable many
long-term unemployed persons to find employment again.

(1) The ESC regularly sets out its views on issues relating to the
labour market and EU employment strategy; attention may be
in particular point
drawn here to the following documents:
3.1.2.2; OJ C 29, 22.7.1999, p. 60; OJ C 368, 20.12.1999, p. 31;
OJ C 19, 21.1.1998, p. 108 and OJ C 355, 21.11.1997, p. 64.

The abovementioned points do not set out a case against
vocational training and further training, which is essential if
the EU’s human resources are to be strengthened over the next
few years. These measures will
improve not only overall
economic productivity and competitiveness but also the career
prospects of individuals. These measures — some of which are
expensive — will, however, only achieve their full effect if the
economy can generate, in the course of a prolonged period of
economic growth, the number of jobs required to mop up the
EU’s employment potential. Training measures must therefore
go hand in hand with the creation of jobs, as part of a long-
term process.

2.2.4. W h e r e c a n t h e n e w j o b s b e c r e a t e d ?

It is also often argued that it is impossible for the EU to absorb
its manpower reserve as jobs are constantly being lost as a
result of technical progress and globalisation. This claim is too
sweeping and not conducive to a constructive consideration
of the issue.

increase productivity and reduce workforces.

What is right is that, within the growth process, technical
progress and globalisation lead to ongoing structural change.
Considerable pressure is brought to bear to step up competi-
tiveness,
In
sectors with high productivity gains, strong international and
intra-Community competition is leading to a reduction in
relative prices (and, in a number of cases, also in absolute
prices). These sectors frequently shed labour, and employment
is increasing only in (a) a number of particularly innovatory
the
areas which need to build up their workforces (e.g.
manufacture and distribution of new electronic products, such
as computers and mobile phones) or (b) cases where aggregate
growth is so strong that traditional industrial sectors, too, (e.g.
motor vehicle manufacture) are able to employ more people.
However, the fall in relative prices undoubtedly strengthens
the competitiveness of these sectors and a large part of their
productivity gains is passed on to the other sectors of the
economy via the price mechanism. This extensive transfer of
purchasing power brought about by market forces makes it
possible for relative prices to increase in sectors where
productivity gains are lower and there is less pressure of
competition but where demand is rising as part of the growth
process. As a result a large number of jobs become profitable
and can thus be created in these sectors (e.g. a large number of
personal services, restaurants, etc. and also services linked to
new products and media).

This is a long-term, macro-structural process which can be
statistically proven. The prerequisite is that the price mechan-
ism works well. This condition is largely met as a result of the
opening-up of markets. If the process is to provide sufficient
jobs, a number of further conditions do, however, need to be
fulfilled, namely:

— the process of structural change at sectoral level must be
able to proceed as unhindered as possible and must be
socially acceptable;

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— overall economic growth must be high enough to ensure
that more jobs are created than are destroyed at sectoral
level and that the balance is sufficiently large to cut
unemployment.

mainly attributable to a higher number of women in gainful
employment and to a general
increase in the numbers of
persons in gainful employment in the 50-55 and under 30 age
groups.

The two latter conditions are mutually dependent. The greater
the number of jobs created through growth, the smaller the
pain caused by structural change at sectoral level and the more
palatable such change can be in social terms.

In the course of this process, new jobs are created both in
areas using and applying new technologies in products and
also, above all, in high-value and correspondingly well-paid
service industries which are becoming profitable and finding
markets as a result of both the operation of the relative price
mechanism and also the growing employment and incomes in
the economy as a whole (cf. the ESC’s Opinion on New
knowledge — new jobs) (1).

The more effectively the above mechanism based on growth
and changes in relative prices operates, the less pressure will
be exerted by market forces to open the wage scale downwards,
which would result in jobs being created above all in service
industries with low rates of productivity and low wage levels.
This occurred on a large scale in the USA in the 1970s and
1980s (but to a lesser extent in the 1990s), and also explains
the low growth in aggregate productivity in the USA in the
1970s and 1980s.

2.2.5. P o s s i b l e s o c i a l a n d e c o n o m i c e f f e c t s
r e s e r v e
i n t e g r a t i n g t h e m a n p o w e r

o f
i n t o t h e l a b o u r m a r k e t

The manpower reserve could be integrated into the labour
market as part of a medium to long-term process lasting about
ten (to fifteen) years (2). This process must, however, get under
way during the current economic upturn.

Integration of the manpower reserve into the labour market
would mean, by definition, a return to full employment
(Lisbon European Council) or to the ‘high level of employment’
set as a goal
in Article 2 of the EC Treaty. There would
therefore be a low unemployment rate and a high employment
rate.

Even though it may not be possible fully to achieve the low
rates of unemployment of the period 1960 to 1973 (EUR 15:
2,4 %; Germany: 0,7 %) since we may now have a higher
level of frictional unemployment, it would nonetheless seem
legitimate to regard rates of the order of 3 % as achievable
(Netherlands — 2000: 2,4 %!). The employment rate could
gradually increase from the current level of between 61 % to
62 % to a level of 70 % to 75 %, which is comparable with the
figure for the USA and Japan. This increase would be

(1) OJ C 14, 16.1.2001.
(2) To simplify matters, this scenario applies to the present EU-15. It

would also apply, mutatis mutandis, to an enlarged EU.

Such an increase in the number of persons in gainful employ-
ment and in the possibility of finding a job would greatly
reduce the threat of social exclusion facing large groups of the
population. There would also be a marked improvement in
the situation of social security schemes (3):

— unemployment insurance: there would be an increase in
the number of persons paying contributions and a sharp
decline in the number of persons receiving benefits;

— sickness insurance: there would be an increase in the
the
number of persons paying contributions, whilst
number of persons in receipt of benefits would probably
remain unchanged;

— pensions insurance: an increase in the number of persons
paying contributions would probably be accompanied by
a slower increase in the number of persons receiving
pensions (because of a drop in the number of persons
taking early retirement).

It would be very interesting to carry out comparative studies,
in particular, into the impact on pension-insurance schemes
of a sharp increase in the employment rate.

Integration of the manpower reserve into the labour market
will, of course, also have a decisive effect on growth and
prosperity in the EU. If, against the background of a more or
less stable overall population, employment increases by 30 to
35 million — i.e. well over 20 % of the current level of
employment or almost 10 percentage points measured in
terms of the overall population of the EU — this will result in
a considerable jump in GDP, which would then probably be
well above US GDP. Prosperity, measured in terms of per
capita GDP, would also move closer towards the US figure (4).

2.3. Macro-economic prerequisites for sustainable growth in GDP

and employment

2.3.1. S i m p l e r e l a t i o n s h i p s b e t w e e n g r o w t h ,

p r o d u c t i v i t y a n d e m p l o y m e n t

The EU’s manpower reserve is therefore a major potential
source of growth and prosperity. In order to unlock this
potential, GDP must, over a prolonged period, grow at a faster
rate than productivity per gainfully employed person. Growth
in employment implies a growth in GDP over and above
the growth in productivity.
is
accompanied by a fall in the level of unemployment and an

If growth in employment

(3) The ESC has recently expressed its views on the subject of
demographic trends and older workers (OJ C 14, 16.1.2001).
(4) The extent to which relative levels of prosperity can change as a
result of sharp growth in GDP and employment is demonstrated
by the example of Ireland: per capita GDP in purchasing power
standard (PPS): 1986: 65.3; 2000: 114.3 (EU 15 = 100).

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increase in the employment rate (measured in terms of the
number of persons in full-time employment), per capita GDP
will increase at a faster rate than productivity per gainfully
employed person. A return to full employment would therefore
enable the EU to tap into the major reserve of prosperity which
the USA, for example, has already exhausted to a large extent.
There are also significant differences within the EU in this
respect which should be analysed (cf. the situation in countries
such as Luxembourg, Ireland and Spain). The differences are
even greater if the comparison is extended to the applicant
states.

Productivity growth remains the source of competitiveness and
prosperity. It is ultimately based on economically incorporated
technical progress (together with the requisite training of the
workforce) and on the substitution of capital for labour. The
concept of ‘productivity’ is however extremely complex and is
often used imprecisely. A distinction should be drawn between,
for example,
the level of productivity and the trend in
productivity per gainfully employed person or man hour, etc.
There are significant differences in this respect between the
USA and the EU and between EU Member States. It would be
interesting to investigate why levels of productivity differ and
why productivity growth has speeded up in the USA in recent
years and slowed down in the EU.

Whilst a faster increase in productivity would be welcome, it
would only help to resolve the employment problem if it were
matched by a still faster increase in GDP. High growth in
employment is required if (1) there is a sharp rate of increase
in the population of employable age (USA) and/or (2) there is
a large manpower reserve which needs to be integrated into
the economic process (EU). The economic determinants for
growth in productivity and employment are different. Further
analysis and information is required.

The provision of additional capital widening investment for
creating jobs is particularly important for promoting growth
in employment. If adequate investment is to be made, the rate
of return needs to be sufficiently high and there needs to be a
favourable trend in demand (without inflationary pressures).
In this respect it should also be borne in mind that capital
widening investment also incorporates technical progress;
observations have clearly shown (EU: 1986-1990; IRL: 1994-
2000) that capital widening investment speeds up the rate of
growth of total factor productivity whilst, at the same time,
reducing the substitution of capital for labour.

2.3.2. A n i l l u s t r a t i v e r e f e r e n c e s c e n a r i o f o r

t h e n e x t f i v e y e a r s ( 2 0 0 1 - 2 0 0 5 )

Growth and employment cannot be brought about by decree.
Politicians can and should, however, create favourable con-
ditions. It would be useful, in this context, to have an idea
about how growth could and should develop in order to
enable the manpower reserve to be exploited gradually without
giving rise to inflationary pressures.

Supply side: The current annual rate of growth in GDP in
Euroland and the EU as a whole is approximately 3,5 %.
Productive potential is growing at an annual rate of some
2,5 %, whilst spare productive capacity is decreasing by
approximately 1 percentage point of GDP (1). A sustained
annual growth rate of 3 %-3,5 % for GDP would nonetheless
appear to be possible if investment in plant and machinery
were to increase by some 7 %-8 % per year (EU-11 2000:
8,1 %). If this trend continues, the growth in productive
potential will increase by some 0,2 to 0,3 percentage points
per year; i.e. productive potential will grow by 3,5 % per year
within five years at the latest. Sustained growth of 3,5 % can
then be achieved without fuelling inflation. In the intervening
period growth of between 3 % and 3,5 % per year is possible,
provided that capacity margins can be exploited and provided
that budgetary policy and wage policy does not result in a
cost-driven increase in inflation. With productivity growing at
about 2 % per year, the above scenario would lead to an
annual increase in employment of some (1 % to 1,5 %) 1,3 %
per year (perhaps rising later to 1,5 % or more per year). This
would be a good start towards reintegrating the manpower
reserve into the labour market over a period of ten to fifteen
years.

Demand side: Such growth can of course only be achieved if it
is supported by a corresponding increase in demand without
this leading to inflationary pressures. Such a scenario appears
to be perfectly possible and plausible. Following the inter-
national crisis in 1998 and 1999, export-driven demand in
the year 2000 has stimulated the economy to a certain extent
(rate of exchange for the euro, growth in non-EU countries);
this stimulus was, however, in part blunted by the loss of
purchasing power caused by the oil price hike. Over the next
few years the impact on demand of net exports could however
be neutral. Under these circumstances growth would be
supported by an increase in consumer demand (as a result of
the increase in real wages plus an increase in employment) and
investment activity, which is itself an important factor in
determining demand.

In this way a dynamic equilibrium could be achieved, based
on an annual increase in GDP of between 3 % to 3,5 %, an
annual increase in private consumption of between 2,7 % and
3 % and a 7 %-8 % annual increase in investment in plant and
machinery.

In such a scenario government deficits would, other things
being equal, be transformed into a moderate surplus, the
investment ratio would rise appreciably and the external trade
balance would be safeguarded (cf. developments in Ireland
over the last ten to fifteen years). As long as the rate of inflation
does not increase as a result of demand overheating or costs
rising too rapidly, there would be no reason to introduce a
restrictive monetary policy to stem the process of growth.

(1) It should also be pointed out in this context that it is very difficult
to measure the growth in productive potential using statistics.
Various observations (such as those made in the USA in the
1990s) and plausibility studies (relating to the ‘new economy’, the
development of the service sector, improved level of adaptability
of the economy, increased productivity of capital, etc.) point to
the fact that the level of growth in productive potential is perhaps
higher than has generally been assumed. This would allow for a
higher rate of growth of GDP without inflationary pressures. It
would, in the ESC’s view, be particularly interesting to carry out
comparative studies in this field.

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2.3.3. O b s t a c l e s t o g r o w t h n e e d t o b e o v e r -
c o m e o r , w h e r e p o s s i b l e , a v o i d e d

Whilst
the reference scenario outlined above borders on
the minimum requirements for resolving the unemployment
problem in the EU, it would, however, appear to be somewhat
optimistic, bearing in mind the results obtained in the
Community in the 1990s. Despite this, there are a number of
reasons for considering that it would be plausible to achieve
such a scenario, assuming that an appropriate economic policy
is pursued and that the key players, and in particular the social
partners, behave accordingly. At the beginning of this opinion
attention was drawn to the sharp improvement in the econ-
omic conditions for increased growth and employment in
Europe. The analysis of past figures, however, also support the
hypothesis that the European economy could spontaneously
grow by more than 3 % per year if certain obstacles to growth
were overcome.

A growth rate of GDP (3,3 % per year), employment (1,3 %
per year) and investment in equipment (7,3 % per year)
bordering on the figures set out in the reference scenario was
achieved in the period 1986-1990. In the periods of economic
recovery in 1994/95, 1997/98 and 1999/2000, too, invest-
ment in plant and machinery grew by 7 %, 8 % or 9 % per year
in response to an increased growth rate for GDP of the order
of 3 % per annum or above.

It was mainly macro-economic events which interrupted the
periods of growth and recovery, namely:

— inadequate growth in productive potential in comparison
to the trend in productivity, aggravated by mistakes in
macro-economic policy, led to capacity bottlenecks and
higher rates of inflation (1989-1991);

— a stability conflict (1988-1992) between monetary policy,
budgetary policy (1989-1991 — method of financing
German reunification) and wage trends (1990-1992)
brought on a recession (1992/1993);

— a lack of confidence in budgetary consolidation in a
number of countries aggravated or caused intra-com-
munity currency upheavals (in 1995 and also in the
1970s and 1980s).

Growth and employment in the EU have also recently been
curbed, however, by other events outside the EU, such as the
Asian crisis in 1999 and (perhaps) the oil price hike in 2000.

The opportunities for either avoiding or overcoming macro-
economic obstacles to growth have increased considerably as
a result of EMU in Europe (see points 1.1 and 1.2 above).

The important thing for the future is:

— to avoid bottlenecks in productive capacity with their
attendant inflationary pressures (corporate investment,
profitability, public investment);

— to avoid skill shortages on the labour market (need to
promote the training of human resources: wherever
possible this training should be market-oriented and bad
investments should be avoided);

— to monitor the way in which balance is achieved between
savings and investment (higher rate of investment —
higher rate of savings; a stable level of private savings
makes it necessary to increase the level of public savings
and public capital formation); stability pact; the need to
avoid pressure on the current account balance and long-
term interest rates;

— to reconcile employment, growth and protection of the

environment;

— to avoid new threats to stability which trigger new
monetary policy restrictions (short-term objective: to
prevent the oil price trend from having knock-on effects;
ongoing tasks: to secure an appropriate wage trend in the
EMU, stability and employment pact, macro-economic
dialogue).

Difficult problems remain to be solved in all of the above areas
but the requisite conditions needed for finding solutions have
showed a marked improvement.

3.

The contributions to be made by economic players

3.1. Macro-economic conditions for growth and employment and

macro-economic policy players

The question of whether the macro-economic policy-mix
pursued in the monetary union as a whole is conducive to
growth and employment basically depends on the interaction
between, on the one hand, the common monetary policy and,
on the other hand, the average budget and wage trends in the
monetary union’s member countries. Three separate groups of
players are generally identified on the basis of their responsi-
bility for these three major policymaking variables.

1.

2.

3.

the Central Bank, and the European System of Central
Banks, which are responsible for monetary policy;

the governments of the countries participating in monet-
ary union, which are responsible for budgetary policy;

the social partners, which are responsible for wage/in-
comes policy.

in its capacity as the representative of

The EU-level dialogue being held under the ‘Cologne Process’
between these three groups of players (together with the
the
Commission,
interests of the EU) builds on the successful efforts made in a
number of Member States to achieve consensus between the
social partners and the government on key economic policy
issues (e.g. the economic miracle being experienced in Ireland
since the mid-1980s would have been inconceivable without
such a consensus!).

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This EU-level macro-economic dialogue is designed above all
to help improve the interaction between the three major
macro-economic policy-making variables.

Generally speaking, the more the stability objective of monet-
ary policy is underpinned by an appropriate budgetary and
wage policy, the more monetary conditions — including the
exchange rate and long-term interest rate — can develop in
support of growth and employment.

This, of course, considerably simplifies matters: inflation rates
do not have to be the same in all countries and regions of
the monetary union. On the contrary, market forces make
differences necessary within particular limits. An appraisal of
the impact of or need for divergencies between countries (and
regions) of the monetary union provides considerable material
for comparative country-by-country studies.

Putting the macro-economic players in three groups (which
are not homogeneous) also represents a certain simplification.
Although the three groups are responsible for trends in the
the
three major macro-economic policymaking variables,
conditions for growth and employment also depend on the
overall economic and social climate which is, in turn, shaped
by all the economic and social groups concerned. This is
particularly true when it comes to overcoming the deeply-
rooted growth pessimism in the EU (a pessimism which has
existed for 25 years and which can virtually be regarded as a
barrier to growth and employment in itself). As the representa-
tive of all of these groups, the ESC could play a special role in
this field.

Consequently, this chapter will contain proposals for more
detailed country-by-country comparative studies in respect of
the three major macro-economic policy variables and the
problem of growth pessimism.

3.2. The classic areas of macro-economic policy

The three sub-sections below (3.2.1 to 3.2.3) suggest a number
of aspects which could be addressed in the comparative studies
and the public debate.

3.2.1. M o n e t a r y p o l i c y a n d t r e n d s

Studies in this field should, of course, respect the independence
of the Central Bank. There is, however, no conflict between
respecting this independent status and conducting an objective
and well-informed debate on how the Central Bank can best
ensure stability and how it can best support the general
economic objectives of the EU (see Article 105(1) of the EC
Treaty), without prejudice to the objective of ensuring stability.

Examples of possible subjects for study and discussion:

a)

Comparison between EU and US monetary policy in the
pre- and post-EMU introduction phases in the economic
cycle;

b) Has an appropriate reference value been set for the
development of the euro money supply, in the light of
the development in productive potential and surplus
productive capacity?

c) How are overall monetary conditions developing and
what divergent trends are apparent in the countries
participating in monetary union; how should these trends
be assessed?

d) How is the Central Bank to react to budgetary or wage
trends in the EMU as a whole and in individual countries?
Should and could the Bank seek to bring its influence to
bear on the way in which the oil price hike impacts upon
wage and budgetary trends?

e) What differences in inflation rates occur between EMU
member countries and which criteria can be used to
assess whether such differences are the result of necessary
developments in the market economy (cf. for example,
Ireland and the Netherlands)?

3.2.2. B u d g e t a r y p o l i c y a n d d e v e l o p m e n t s i n

t h e f i e l d o f p u b l i c f i n a n c e

This field provides ample scope for comparative macro-
economic studies. Both studies setting out straightforward
factual information on trends and orders of magnitude and
studies describing policy options and the quantitative impli-
cations of such options would make a major contribution
towards bring objectivity to the economic policy dialogue.

Examples of possible subjects for study and discussion are set
out below:

a) How have the budgetary deficits in the individual
countries been reduced since the early 1990s: cuts in
expenditure; increases in taxes and duties; mechanical
effects such as reduction in the interest burden brought
about by EMU itself; cyclical increases in tax revenue?
How should these developments be assessed?

b)

c)

In the course of the consolidation process there was a
clear drop in the proportion of GDP represented by
public investment; what are the statistical problems in
this field? How should public investment develop if the
EU embarks on a period of sustained growth which is
sufficient to resolve the employment problem in the
medium to long-term?

The Stability and Growth Pact provides for almost zero
budget deficits or slight surpluses in the Member States
in the next few years. Will this target be sufficient in the
medium to longer-term if the EU embarks on a period of
much higher,
investment-driven growth which will
require a significant rise in the rate of investment (in the
in the USA rose by
1990s the rate of
4 percentage points of GDP, whilst in Ireland it increased
by 10 percentage points)?

investment

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It should be borne in mind in this context that (a) the
proportion of GDP represented by private savings (private
households and enterprises) is traditionally very stable in the
EU (approximately 21 % of GDP) and (b) the EU is highly likely
to avoid having a significant and lasting current account deficit
(current account balance in the US in 2000: - 4,1 % of GDP; in
the EU-15: + 0,1 % of GDP).

d) What have been the reasons in the EU and in the
Member States for the sharp increase in social insurance
contributions and benefits, measured as a percentage of
GDP, since the beginning of the 1970s: more generous
benefits, a decline in the number of persons paying
contributions or an increase in the number of persons
receiving benefits in relation to the total number of
persons of employable age? If the EU were to achieve, in
the medium to longer term, the employment levels laid
down by the Lisbon European Council as reference
figures, what impact would this have, other things being
equal, on the level of social insurance contributions and
benefits, as a percentage of GDP?

e)

Reforms — some of which are extensive — are taking
place in the field of public finance in virtually all EU
Member States; these reforms concern the structure of
income and expenditure and the proportion of GDP
represented by the public sector. How can these reforms
be summarised? Are they compatible with the ‘broad
economic policy guidelines’? What are the arguments for
and against greater coordination of these reforms at EU
level?

3.2.3. W a g e p o l i c y a n d t r e n d s i n w a g e s a n d

w a g e c o s t s

(i.e.
Overall wage costs, as defined in national accounts,
including all social insurance contributions) in the EU make
up some 50 % of GDP; as a macro-economic variable, overall
wage costs are therefore approximately of the same order of
importance as the budgets of public authorities. Wage trends
are, however, also an important factor in determining aggre-
gate demand and, in particular, private consumer demand. The
trend in overall wage costs is essentially determined by
independent social partners, albeit with differences between
countries. It is in the general interest to monitor and assess the
development of
their macro-
economic importance and the interdependence between these
variables and monetary and budgetary policy, inflation, growth
and employment.
In the joint opinions which they have
adopted over the last ten to fifteen years, the European social
partners have reached a high level of agreement on how
wages should develop in the overall economic context. The
recommendations set out
in the broad economic policy
guidelines of the Community have also been generally respect-
ed, but the economic debate has often been marked by a lack
of understanding of
the facts, orders of magnitude and
relationships and of the problems which exist.

these variables in view of

a)

b)

c)

Concise factual description of macro-economic wage
adjustment in the EU and the Member States between the
1960s and the early 1980s (reaction to oil price hikes,
the slow-down in productivity increases and currency
upheavals); similar presentations in respect of: the adjust-
ment to lower rates of inflation; the effect of higher
ancillary wage costs on net wages; the increase in profit
margins; and the sharp rise in profitability in the 1980s
and 1990s. Measured as a percentage of GDP, the macro-
economic wage adjustment was even more significant
than the process of budgetary consolidation in the 1990s
(EU-15: 5-10 percentage points of GDP; Ireland: 15-20
percentage points of GDP).

Comparative analysis of the trend in profitability in the
EU, the EU Member States, the USA and Japan in the
period 1960-2000; analysis of the determining factors
labour costs, capital productivity), and of
(real unit
convergence within the EU (exceptions:
Ireland and
Luxembourg) and vis-à-vis the US; discussion of the
arguments for and against a further significant rise in
profitability in the EU.

Presentation, supported by figures, of a simple diagram
for assessing macro-economic wage trends in the EMU
(impact of per capita wages and nominal unit wage costs
on prices, impact of changes in real wages (together with
changes in the level of employment and the rate of
savings) on consumer demand; impact of relative nominal
unit wage costs on competitiveness; and impact of real
unit wage costs on profitability).

d) What divergences

in macro-economic wage trends
between the countries participating in monetary union
are possible and economically justified? (Examples: differ-
ences in productivity; the need to adjust the level of prices
and costs in some individual EMU countries; the need to
catch up in real terms; and the relative price of services
(IRL)). What are the possible consequences of unjustified
divergences in wage trends?

e)

Investigation of the impact of wage bargaining systems
and the way in which the social partners are organised
(social partnership) on macro-economic wage trends;
progress made in the discussion on the need for a greater
wage differentiation according to regions, skills and,
possibly, sectors. Examples from the EU and the USA.

3.3. Overcoming the general pessimism as regards growth and

employment

In its capacity as the body representing all the key economic
and social groups, the ESC could make an important contri-
bution in its own right to resolving this problem. The origins
of growth pessimism should be considered:

Examples of possible subjects for fact sheets and specific
analyses:

— a well-founded growth pessimism: until such time as this
or that fundamental problem has been solved, adequate
growth is not possible (Is this still true? — Hardly!);

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— a naive growth pessimism: why should the EU be able to
achieve over the next 10 years something that has been
beyond its grasp over the previous 25 years? (Is this a
rational attitude to take?);

— scepticism towards growth on environmental grounds.

How can this pessimism be overcome?

— by recognising that the most important obstacles have

been overcome;

— by recognising the opportunities now present for society
as a whole and for individual economic and social groups
(tasks of the individual groups: SMEs, development of the
service sector, etc.).

— If

the scepticism towards growth on environmental
grounds is to be overcome, it is particularly important
that Agenda 21 (Rio) be implemented in a firm and
credible way;
future growth, based on
services and the use of new technology, will be less
harmful to the environment than traditional growth
based on industrial output.

furthermore,

4. Recommendations of the ESC

Within the EU setup, the ESC is the forum where the interests
of the various economic and social groups are expressed and,
wherever possible, reconciled to achieve a consensus. Since
the ESC represents not only employers and workers but also,
in its Group III, a broad range of civil society, it is in a position
to play an extensive integrating role.

This opinion sets out a large number of proposals for
‘comparative macro-economic performance studies’ as part of
the overall approach to economic policy. If such studies are
carried out, this would generate a better understanding of
macro-economic relationships and orders of magnitude, bring
greater objectivity to the dialogue between and within the
various groups and achieve a larger measure of agreement
on the appropriate macro-economic action and policy (see
point 1.3 above).

Progress in this direction would not only further enhance the
quality and impact of ESC opinions but would also have a
favourable effect on the overall climate for implementing a
sound macro-economic policy in the EU.

The ESC will in future endeavour to take greater account of
these aspects in its opinions on general economic policy and
macro-economic policy. It urges the Commission to regularly
seek the opinion of the ESC on all key economic policy
documents in time for its opinion to be forwarded to the
Council too.

The ESC plans to hold regular discussions with the Com-
mission about which ‘comparative macro-economic perform-
ance studies’ are to be given special priority in the work
programmes of the Commission departments concerned.

The ESC also intends to arrange hearings with experts and
hold seminars on these matters which should be attended by
not only representatives of the Commission, the European
Parliament and the Council but also by high-ranking experts
advising the social partners and top academics.

The ESC channels information in two directions: (1) it rep-
resents the interests of its members vis-à-vis the EU institutions,
such as the Commission, Council and the European Parliament,
and, at the same time, (2) it relays information to its own
organisations and associations on issues, debates and joint
ideas at EU level.

The ESC believes that, if macro-economic issues are debated
both in public and by professional bodies, this will improve
the chances of achieving lasting growth, greater prosperity and,
ultimately full employment, within the stability framework
provided by the EMU; this would in turn have a wide-ranging
positive impact on both social policy and policy in general.

Brussels, 1 March 2001.

The President

of the Economic and Social Committee

Göke FRERICHS