Opinion of the Economic and Social Committee on "Coordination of economic policies as a consequence of EMU"
Date: 2001-03-01
Institutions: European Economic and Social Committee
Subjects: Economic and Monetary Union, domestic market, economic policy, monetary policy, single market

C 139/60

EN

Official Journal of the European Communities

11.5.2001

Opinion of the Economic and Social Committee on ‘Coordination of economic policies as a
consequence of EMU’

(2001/C 139/13)

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 ‘Coordination of economic policies as a consequence of EMU’.

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 12 December
2000. The rapporteur was Mr Nyberg.

At its 379th plenary session (meeting of 1 March 2001) the Economic and Social Committee adopted the
following opinion by 87 votes to one.

1.

Introduction

1.1.
EU economic integration has made considerable prog-
ress, thanks to the single market and the introduction of the
single currency. This has also created new opportunities for a
successful economy. Now that the effects of those political
decisions are starting to be felt, however, the outstanding
problems become clearer. How can the single market and the
single currency be best exploited for growth and employment?

1.2.
Through its dedicated Observatory, the ESC regularly
issues opinions on how the single market is progressing. Final
completion of the single market is a pre-requisite for the
success of all other policies. Several ESC opinions have also
addressed various aspects of the single currency. They describe
the difficulties which have arisen during the convergence
process, including unemployment and missed growth targets,
but also the achievements made in reining in inflation and the
budget deficit. This now provides an excellent opportunity
to achieve sustained growth and boost employment. The

continuous friction over fluctuating exchange rates has ceased
for the euro 12 — to the benefit of cohesion — and been
replaced by discussions of euro exchange rate trends. The
present opinion attempts to complement earlier opinions by
looking specifically at the need for further coordination of
macro-economic policy as a consequence of the introduction
of the euro.

In opinions from March 1998 (1) and March 2000 (2),
1.3.
the Committee refers to the exchange rate fluctuations in the
dollar and the yen: ‘The fact that over the last 20 years the rate
of the ecu against the dollar has fluctuated between 1,7 and
0,6 would suggest that recent trends are far from exceptional’.
The following diagram illustrates the euro’s fluctuation against
the dollar thus far. Although the increases in the value of the
dollar are not unique as far as size is concerned, they have
happened very quickly. This, however, is not a matter for the
present opinion.

(1) OJ C 157, 25.5.1998, p. 65.
(2) OJ C 117, 26.4.2000, p. 23.

Figure 1: The value of the euro in relation to the US Dollar

1,2

1,15
1,1

1,05

1
0,95

0,9
0,85

0,8
0,75

0,7

N
A

J

9
9
9
1

R
P
A

L
U

J

T
C
O

N
A

J

0
0
0
2

R
P
A

L
U

J

Source: ECB Monthly Bulletin (October 2000).

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1.3.1.
Another aspect mentioned in the 1998 opinion was
that a positive effect of monetary union was ‘that the external
dependence of the Member States will diminish greatly as the
bulk of trade between the participating countries will be
transacted in euros. The external value of the euro will
therefore be much less significant than hitherto ...’. This was
reiterated in an opinion on the economic situation 2000 (1): ‘it
must be remembered that one of the features of the euro zone
is the strong dependence on domestic demand which accounts
for 90 % of GDP’. This was developed further in an opinion
on Europe as an economic entity — a political challenge (2).

The year 2000 opinion (3) also remarks that the ECB’s
1.3.2.
current anti-inflation policy could ‘slow down the economic
turnaround that had only just begun in some countries’. This
is the starting point for our discussion of the importance
of economic policy coordination. The discussion is also
underpinned by the fact that ‘unemployment remains the
Committee’s overriding concern and it has previously
expressed the view that the EU must have a medium-term
growth objective of at least 3,5 % if a satisfactory reduction in
unemployment is to be achieved’ (1). The Committee con-
sidered it important to coordinate political processes (4) in ‘an
appropriate macroeconomic policy mix, embracing fiscal,
monetary and wages policy, in order to create a climate of
confidence to stimulate consumption and investment and thus
to boost employment in a durable way’ (5).

An opinion on EMU and cohesion (6) discussed
1.3.3.
how stronger competition resulting from EMU would yield
productivity gains, but with a potential risk of job losses.
‘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’.
One effect of EMU which makes it easier for the Member
States to implement such an active policy is the lower interest
rate, which reduces the interest payments on the national debt
and thus improves the balance sheet.

(1) OJ C 140, 18.5.2000, p. 44.
(2) OJ C 284, 14.9.1998, p. 60.
(3) OJ C 117, 26.4.2000, p. 23.
(4) The Cardiff Process on structural policy, the Luxembourg Process
on labour market policy, and the Cologne Process on macro-
economic dialogue.

(5) OJ C 209, 22.7.1999, p. 53.
(6) OJ C 368, 20.12.1999, p. 87.

2.

Background

2.1. We start from the premise that EMU is a reality. We do
not intend to discuss possible constitutional changes such as
the distribution of power between the ECB, the Council of
Ministers and Parliament. On the basis of the Maastricht rules
and convergence criteria, together with the pact for stability
and growth, we will examine how economic and political
coordination can enhance the benefits of EMU (7). The Amster-
dam Treaty and the Lisbon Council are also important factors
here.

2.2.
In accordance with the provisions of the Treaty, the
ECB conducts interest rate policy. In practice, it sets the short
rate to meet its inflation targets, but it also takes account of
growth and employment,
in so far as the price stability
objective is not affected (8).

The ESCB (9) controls the common currency reserves
2.2.1.
and, consequently, the euro exchange rate instrument. How-
ever, the (euro 12) Council of Ministers must be informed if
the instrument is to be used. How this interplay actually works
in practice perhaps warrants specific discussion.

2.2.2.
In order to achieve the third stage of EMU — the
introduction of the single currency (the euro) — convergence
criteria were adopted for the Member States to follow. For
those Member States which have not yet proceeded with the
third stage, the criteria are, in the main, still valid.

2.3.
For the 12 countries which have adopted the euro,
however, interest rates and inflation are no longer just features
of national policy objectives, since the ECB sets the targets
according to average levels. For the ECB, inflation must be
kept below 2 per cent. The Council requires the euro exchange
rate to be monitored. National policies still have to respect the
budgetary balance and national debt aspects of the conver-
gence criteria. These are now enshrined in the Stability and
Growth Pact. With regard to national debt, the upper level is
still 60 % of GDP. The budgetary balance criterion has been
tightened considerably. While the maximum permissible deficit
remains unchanged (- 3 per cent of GDP), the Pact contains a

(7) The pact formally comprises the Amsterdam Council Resolution
of
the
June 1997, the Regulations on the strengthening of
surveillance of budgetary positions and the surveillance and
coordination of economic policies (1466/96), and on the excessive
deficit procedure (1467/97).

(8) Article 105 of the Treaty: ‘The primary objective of the ESCB shall
be to maintain price stability. Without prejudice to the objective
of price stability, the ESCB shall support the general economic
policies in the Community with a view to contributing to the
achievement of the objectives of the Community as laid down in
Article 2’.

(9) European System of Central Banks.

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reference to the desirability of a balanced budget or a budget
surplus. The reason is stated clearly — so that there will be
sufficient resources to stimulate the economy during an
economic downturn without risking reaching the — 3 per
cent threshold. In reality, the EU does not set any budgetary
balance target as such; the objective is to create sufficient
resources to stimulate the economy during an economic
downturn.

Although incomes policy is framed at national
level, the
European organisations have an important role to play in
discussions with the ECB, the Ecofin Council and the European
Parliament. The Cologne process formally recognised dis-
cussions — covering both technical and political dialogue —
between governments, the ECB and the social partners.

2.4.
Article 99 of the Treaty formally requires the Member
States to coordinate their economic policies: ‘Member States
shall regard their economic policies as a matter of common
concern and shall coordinate them within the Council’. With
regard to Member States’ anti-recession policy, there is in fact
only one lower threshold (- 3 % of GDP), with the possibility
of sanctions as long as it is not just a temporary blip in GDP.
With regard to the budget surplus, the aim is to build up the
necessary financial reserves as soon as the economic situation
allows. Here neither the Treaty nor the Pact set any fixed
criteria or sanctions. The desired trend for the coming year is
worked out using the Broad Economic Policy Guidelines
(BEPG). These are not formally binding rules, but they have
already proved to be a strong influence over economic policy.

3.

The players and what they can achieve

3.1. With the entry into force of the Maastricht Treaty, the
Ecofin Council became the most important player in EU
economic policy. The convergence criteria laid down require-
ments for both these areas. The instruments used are the BEPG,
and the corresponding convergence and stability programmes.
National governments have control of economic policy instru-
ments such as national income and expenditure. But these do
not only impact on economic developments; they are also
affected by them in turn. This means that a policy which is
intended to dovetail with these programmes can both over-
shoot and undershoot the target, depending on economic
trends.

3.2.
On 1 January 1999, the ECB assumed sole responsi-
bility for monetary policy, which formally became a common
monetary policy. The principal instrument is the short-term
interest rate. However, shared responsibility for the exchange
rate remains. We will return later to the ECB’s ‘control’ over
interest rates and economic trends.

Incomes policy is the third strand of broad economic
3.3.
policy. This is the prerogative of the national labour market
partners, sometimes in cooperation with governments. There
are several examples at national level showing how social
pacts, for example, have been used to achieve a solid basis for
employment and growth. The first signs of de facto coordi-
nation between the social partners can also be seen at EU level.

3.4. Wage trends in neighbouring countries have become
more important than was previously the case. It is no longer
enough to ensure proper coordination of wage bargaining
between the national partners. Attention must also be paid to
what is happening at European level.

3.4.1. With the common monetary policy, more flexible
wage bargaining procedures are needed when one country’s
economic cycle is out of step with the rest. There are examples
of the social partners agreeing on funds to deal with such
situations, whereby money is set aside from wage settlements
during good times for use when times are bad. When
government finances are healthy, there is a further opportunity:
the State can temporarily top up social insurance contributions
for the social partners, to help prop up wage levels during a
downturn.

3.4.2.
Countries used to be able to resort to devaluation to
deal with more long-term changes in competitiveness. Now
that this is no longer possible, new methods need to be
developed. Another option could be lower wage increases than
in other countries. In a common currency area, however, this
has the same negative effect as devaluation, i.e. the onus to
adapt is partly offloaded onto other countries.
If several
countries engage in a wage-cut battle to regain competi-
tiveness, we would be back to the situation caused when
devaluation was used for the same purpose. This must be
avoided at all costs.

On the contrary, incomes policy must be both respon-
3.5.
sible and dynamic, if it is to help achieve continued growth.
Consequently, productivity is the only appropriate criterion
for wage bargaining. Productivity gains which are higher
than the eurozone average provide grounds for better wage
settlements. Conversely, weaker productivity gains in the long
term must be reflected in national wage settlements. Policies
to boost productivity would, of course, be desirable here.
Training policy and increased investment are key planks in
such a policy. Given the greater degree of policy coordination
required as the EU economies knit together, it would be wrong
to embark on more decentralised wage bargaining procedures.

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4.

EMU and interest rate policy

Interest rates and the money supply affect demand in
4.1.
the economy. The Central Bank controls these by varying the
interest rate. The higher the interest rate, the weaker the
demand, and vice versa. The ECB’s main yardstick for economic
activity is the inflation rate. This year’s large oil price rises pose
a dilemma for the ECB, as the overall inflation rate is no longer
an indication of domestic activity.

Apart from the direct domestic impact of interest rate
4.2.
changes, foreign financial investors can also be tempted by the
high interest rates, and consequently high yield. In order to
achieve this, they buy euros. The result is that the exchange

rate rises. The reverse occurs when interest rates fall
in
comparison with other currency areas. Thus, the exchange rate
is also linked to interest rates and the money supply. An
excessive money supply results in inflationary pressure; market
players will then try to dispose of their holdings in euros, and
the exchange rate drops. Labour, goods and services become
cheaper for the outside world, but at the same time, import
prices rise.

4.3.
In the short term, nominal price and wage movement
will be sluggish. On the other hand, the ECB refi rate can be
used effectively to stimulate or limit demand in the economy,
as it directly affects short-term interest rates. As the table
below shows, there is a strong correlation between refi and
short-term rates.

Figure 2: The short-term rate and the ECB’s refi-rate

Refinancing rate

3-month deposits*,
money market rates

%   5
4,5
4
3,5
3
2,5
2
1,5
1
0,5
0

9
9
/
1
0

9
9
/
4
0

9
9
/
1
1

0
0
/
2
0

0
0
/
3
0

0
0
/
4
0

0
0
/
6
0

0
0
/
9
0

Month, year

* The money market rate for 01/99 and 04/99 is a yearly average. The figures for 09/00 refer to the refi rate as of

6 September and the market rate as of 8 September.

Source: ECB Monthly Bulletin (September 2000).

4.4.
Long-term rates are affected by the short-term rate and
economic policy expectations. As the diagram below illustrates,
the relationship between the refi and long-term interest rates is
not the same as that above. On the contrary, in some months
long-term rates have fallen as the refi rate has risen. This shows

that the financial markets believe that monetary policy will
be tightened, in order to avoid inflationary pressure. The risk
premium and interest rates are therefore lower than they would
have been if monetary policy was expected to be loosened up,
with greater risks of inflation and overheating.

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Figure 3: The long-term rate and the ECB’s refi rate

%  6

5

4

3

2

1

0

Refinancing rate

Government bond
yields, 10 years*

9
9
/
1
0

9
9
/
4
0

9
9
/
1
1

0
0
/
2
0

0
0
/
3
0

0
0
/
4
0

0
0
/
6
0

0
0
/
9
0

Month, year

* The money market rate for 01/99 and 04/99 is a yearly average. The figures for 09/00 refer to the refi rate as of

6 September and the market rate as of 8 September.

Source: ECB Monthly Bulletin (September 2000).

4.5.
Although the ECB is officially independent, in practice
it is not able to dictate policy alone. World exchange markets
are dominated by the US dollar, and international capital can
be transferred immediately. Different investment yields in
Europe and the US impact directly on capital flows. The ECB
cannot therefore merely take account of the demands of the
economic situation in the EU when setting interest rates. Lower
interest rates and capital yields in the EU lead to flights of
capital to the USA (1). Figure 4 shows the different real rate

trends in the USA and in the eurozone recently. The impact of
the financial market’s heavy international dependence has to
be balanced out against the desire to boost the economy
through low interest rates, given that investment capital is
needed to achieve that stimulation.

(1) Cf. ESC Opinion on Challenges posed by EMU to financial

markets, OJ C 367, 20.12.2000.

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Figure 4: Real rate trends in the euro-area and in the USA

%  8

7

6

5

4

3

2

1

0

USA

Euro area

Year

1
0
0
2
s
n
o
i
t
c
e
j
o
r
P

3
8
9
1

5
8
9
1

7
8
9
1

9
8
9
1

1
9
9
1

3
9
9
1

5
9
9
1

7
9
9
1

9
9
9
1

Source: Economic Outlook 67, OECD 2000.

4.5.1. What seems to give most cause for concern in the
current statistics is the impact on the exchange rate, which
affects both overall competitiveness and inflation through
higher import prices. If we look at earlier fluctuations between
the US dollar and European currencies, we see that they have
been even greater than those seen in 1999 and 2000. This
means, on the one hand, that fluctuations are normally large
and often change direction fast and, on the other, that the
impact on inflation can be appreciable.

4.5.2.
Thus the ECB’s ability to manage the economy is
affected by the economic situation and economic policy in
other countries, the USA in particular. In other words, there
are not three, but at least four, players — the ECB, the Ecofin
Council, the social partners and their counterparts in the USA.
There are increasingly calls for measures to make economies
less vulnerable to the violent fluctuations of the international
financial market.

inflation and the economic cycle. If all the Member States had
the same inflation rates and were at the same stage of the
economic cycle, then an interest rate policy to keep inflation
at the desired level would also suit the prevailing economic
policy in all those countries.

4.6.1.
This is not the case. The difference in economic cycle
and rates of inflation in the various Member States is the main
reason why EMU and a common monetary policy cannot
work properly unless it goes hand in hand with economic
policy coordination. Economic policy is needed as a short-
term correction to the common monetary policy. The kind of
policy this coordination should lead to depends entirely on the
current differences between the countries.

However, the interest rate is not only decisive for
4.6.
future inflation trends — it also crucially affects economic
activity within the economy. There is a strong link between

4.6.2.
The big difference compared to the previous situ-
ation, now that there is a common monetary policy, is that,
instead of being based on the national inflation rate, it is now
based on the average inflation rate (calculated according to
individual countries’ GDP).

 
 
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4.6.3.
The worst possible way to coordinate would be to
establish a single common economic policy for all participating
countries. Any such harmonisation would exacerbate the
problems which the common monetary policy causes where
there are differing inflation rates and economic cycles.

4.6.4.
On the contrary, coordination must mean agreeing
on the domestic economic policy differences which can best
counteract the negative impact of a common monetary policy
on countries which deviate. If each country were simply left to
act as it sees fit in a given common monetary policy, then
conflict can be expected since, given the close economic ties
in the EU, one country’s policies affect all the other countries.
Coordination efforts must therefore allow recommendations
to be made for each country, and factor in the likely effects of
the policy on the other countries. The policy must go one step
beyond wholly voluntary cooperation, and embrace proper
coordination.

5.

The great significance of the single market

The Commission,

5.1.
the Council and the ESC have
pointed out that EU GDP is circa 90 % domestic. With
enlargement, the EU’s external trade as a percentage of GDP

will fall even further. In the long term, relations with the rest
of the world in terms of international competitiveness trends
— which are decisive for the 10 % of trade with the rest of the
world — will be of vital importance. In the shorter term, the
other 90 % provide scope for economic policy coordination
to compensate for some of the common monetary policy’s
impact.

5.1.1.
For the eurozone, the Commission has produced
figures (1999 Annual Economic Report) to shed light on the
degree of openness towards the rest of the world and on the
interdependence of the then 11 countries. Here, the four
countries which were not in the euro-area in 1999 are included
in the ‘rest of the world’. Trade with the rest of the world
accounts for 13 % of the collective GDP of the euro-area
countries. Trade between the 11 countries — which from a
euro-perspective should be seen as internal trade — accounts
for a similar percentage of GDP. There are, however, significant
differences from country to country. Dependence on internal
trade is, then, much more an EU than a euro phenomenon.

There is considerable dependence on EU internal trade
5.2.
as a whole. Internal cross-border trade makes up approx. 16 %
(export) and 15 % (import) of the EU area’s GDP. The share
varies widely from country to country, with the smaller
countries quite naturally having the largest share.

Table 1: EU domestic trade as a percentage of GDP

% of GDP, 1999

B/L

DK

D

EL

E

F

IRL

I

NL

A

P

FIN

S

UK EU-15

Export

Import

48,6 15,9 14,4

4,4

13,2 12,8 50,4

43,8 17,7 12,3

14

15,5 12,3 28,6

11

11

37,6 18,3 17,7 18,3 19,9 10,5 15,7

24,4 22,9 26,8 16,3 19,4 11,5 14,7

Source: European Economy No 69.

The combination of external

independence and
5.3.
internal dependence means that the economic policy of an
EU country affects the rest of the world to a very small
degree. With regard to trade patterns, for most countries
influence is also slight. On the other hand, one
external
country’s economic policy has a major impact on the other
EU countries.

5.4. We asked the Danish ‘Erhvervsrådet’ (1)
to use its
highly respected econometric model for the euro area to
help us to appreciate the scale of the interaction. The table
below thus calculates the impact of a 1 % GDP increase in
public investment.

(1) Economic Council of the Labour Movement.

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Table 2: Increase in public investment

The total effect in the third year (2000-2002)

(Austria, Ireland, Portugal and Luxembourg are not included in the model)

Increase in each country separately of inv.
(1 % of GDP)

A co-ordinated increase of inv.
(1 % of GDP)

A
Effect on the country itself

B
Effect on the other 6 countries

C
Effect on each country

GDP
(percentage
points)

Employment
(1 000 persons)

GDP
(percentage
points)

Employment
(1 000 persons)

GDP
(percentage
points)

Employment
(1 000 persons)

1,2

1,6

0,9

0,9

1,1

1,6

1

256

26

29

75

252

157

125

920

0,2

0

0

0

0,2

0,1

0,1

125

10

31

38

123

93

55

2

2,7

2

2,1

1,7

2,4

1,7

2

429

43

69

168

374

224

220

1 527

1 676

Germany

Finland

Belgium

Netherlands

France

Italy

Spain

SUM

Euro-countries total

Source: Economic Council of the Labour Movement, Denmark.

The figures show the impact on GDP and employment after
three years. Unfortunately, it was only possible to include 7 of
the 12 euro countries in the survey. Had all 12 been included,
the effect would have been greater. Part A of the table shows
the effect of unilateral action on the country itself. Part B
shows the effect of increased investment in all 6 of the other
Increased investment in Germany, for
countries surveyed.
example, boosts GDP in the other countries by an average
0,2 %. Finally, part C gives the figures for coordinated
expansion, when all 7 countries increase their public invest-
ment together. The impact on GDP is thus roughly twice as
great as when a country acts in isolation.

The table gives a clear picture — without attaching too
5.5.
much importance to the accuracy of the figures — of how
coordinated action enhances policy effectiveness. It also shows
that one country’s economic policy can benefit other countries
at the same stage of the economic cycle, whilst making things
more difficult for countries which are at a different stage of
the cycle.

6. Coordination is increasing rapidly

6.1.
The European Council has on a number of occasions
argued for closer coordination of economic policy. Since the
Community budget as a share of collective GDP is very limited,
there is virtually no scope for it to provide economic stability.
However,
there are circumstances in which the EU can
help countries which are experiencing considerable economic
difficulties (1).

6.2.
Since the Helsinki Council (December 1999), the basic
principles for coordination of national policies have been:
1) Subsidiarity — while budget policy must be governed by
the Treaty and the stability and growth pact, there is scope for
national political choices. 2) The various players — ECB, the
social partners and governments — are independent. 3) The
Member States have a duty to consider economic policy as a
common concern (Article 99).

(1) Article 100(2):

‘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 unani-
mously on a proposal from the Commission, grant, under certain
conditions, Community financial assistance to the Member State
concerned’.

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6.3.
Coordination is restricted to the policy’s general frame-
work, and this includes the requirement to avoid damaging
competition. On the other hand, ‘best practice’ is an important
part of the process of learning from each other’s achievements
and failures.

first step involves devoting more time to reaching a consensus
on the cyclical and structural aspects of budget policy. More
reliable statistics are needed to achieve this.

There is already a raft of coordination methods:
6.4.
‘best practice’ discussions, basic
exchanges of information,
‘peer review’ and joint actions. The
common policy rules,
specific policy area will decide which options are available.
What is lacking is a common policy orientation to provide a
better grip on this package of measures.

6.5.
The economic guidelines provided for in Article 99 of
the Treaty are the current starting point for coordination.
The guidelines must also take on board other processes
(Luxembourg, Cardiff and Cologne) and they both round off
one year’s political proceedings and start the next. Over the
years, the Broad Economic Policy Guidelines (BEPG) have
become more specific and have focused more on structural
issues. The reports presented by the Commission, among
others, in connection with all these processes, in particular
prior to the introduction of the BEPG, provide a blueprint for
how economic policy coordination can be implemented. In
order to put this policy on a sounder footing, there will have
to be better, quicker input of data from the Member States.

6.6.
In addition to the formal Treaty and pact provisions,
the Euro-12 ministers regularly discuss their opinions of
budget policy. The ESC believes it is important that the role of
the Euro-12 ministers — i.e. those responsible for guiding that
policy — should be clarified further.

6.7.
The results of the Cardiff process are being incorpor-
ated into the BEPG, and since 2000, coordination of the
employment ministers’ work provided for under the Luxem-
bourg process has been taken further, so that the ministers
now discuss the BEPG. Macroeconomic dialogue has created
opportunities for discussion to improve coordination of
monetary, economic and wage-related policies. In addition to
this, the Lisbon Summit provided fresh impetus when it
launched annual summits to discuss employment and the
information society in particular.

6.9. More specific BEPG are the next step. Moreover, they
should focus more on long-term objectives and pay greater
attention to implementation. The specific plans for each
country must be detailed and comparable, so that it is possible
to monitor the way they are put into practice. When the
presentation of national budgets does not coincide with the
submission of convergence and stability plans, it should be
ensured that they tie in as closely as possible with these plans.
The consequences of an ageing population must also be
factored into these plans and budgets. Effective coordination
must also be underpinned by openness and a willingness to
take advice and change policies.

6.10.
the Member States can implement the policy effectively.

These recommendations will be essential in ensuring

7. Differences in the economic cycle

7.1.
Discussions of the problems which might arise within
a common currency area have been dominated by the
‘asymmetric shocks’ issue (1). These are certainly possible, but
the experience of recent decades shows rather that the shocks
(e.g. oil price rises) which occur affect most countries, i.e. they
are symmetric, with impact varying only to a small degree.
Finland’s loss of trade with Russia is perhaps the nearest we
have to an asymmetric shock. A safeguard in the form of EU
assistance
above-mentioned
Article 100(2) is available for extreme situations in which only
one or a couple of the Member States are affected.

provided

under

the

for

7.2. While asymmetric shocks are unusual, discrepancies
between national economic cycles are of considerable conse-
quence. This is the crux of the common monetary policy’s
need for economic and political coordination. In order to
decide the type of coordination needed, and which is likely to
be most effective, more information is needed about the actual
variations in economic cycles.

A report from the Ecofin Council to the Helsinki
6.8.
European Council describes various steps to improve coordi-
nation, including by means of indicators and benchmarks. The

(1) OJ C 368, 20.12.1999.

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Official Journal of the European Communities

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7.3. We have studied the economic cycle variations between
EU Member States over the last few years. On the one hand,
we can look into how big the variations are normally, and
whether they are sometimes large and sometimes small; and
on the other, how the variations in one country compare to
the others. Is it always the same countries which lead the
economic cycle, and others which always deviate most? There
are several ways of measuring the economic cycle in a country.
We chose the simplest: variations in GDP.

7.4.
The diagram below is based on OECD figures, and
shows that economic cycles in the euro-area countries have
tended to converge in recent years. However, some countries
do deviate from this pattern, e.g. Ireland, Finland and, in the
wake of re-unification, Germany. Convergence is probably a
consequence of the single market and the convergence criteria,
and this shows their importance for a future economic policy,
where economic policy and coordination can generate higher
growth and employment.

Figure 5a: Real GDP changes

Real GDP

3
8
9
1

5
8
9
1

7
8
9
1

9
8
9
1

1
9
9
1

3
9
9
1

5
9
9
1

7
9
9
1

9
9
9
1

Figure 5b: Real GDP changes

Real GDP

8

6

4

2

0

-2

-4

-6

-8

12

10

8

6

4

2

0

-2

3
8
9
1

5
8
9
1

7
8
9
1

9
8
9
1

1
9
9
1

3
9
9
1

5
9
9
1

7
9
9
1

9
9
9
1

Source: OECD.

France

Germany

Italy

UK

Denmark

Finland

Sweden

Austria

Belgium

Greece

Ireland

Luxemburg

Portugal

Spain

Nederlands

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8. Automatic stabilisers

8.1.
If there are no new policy decisions to deal with a
national economy that is out of step, that economy will
anyway eventually catch up with the others via an inbuilt
adjustment mechanism. The problem is that it takes too long,
and the process has negative side effects. When the economy
is doing well, higher levels of economic activity lead to
inflation. Owing to dependence on international markets,
competitiveness is compromised, and this eventually causes a
reduction in economic activity. For the EU countries, the bulk
of this adjustment comes through the single market. Moreover,
a price-led adjustment in the eurozone would be accompanied
by a tighter monetary policy, which would constrain economic
activity in general.

Since this sort of price mechanism works through
8.2.
negative effects on employment and growth, and since these
largely come via other countries, this type of adjustment is not
acceptable. Instead, increases and cuts in public sector revenue
and expenditure have traditionally been used to speed up the
process and bring the economic cycle back to ‘normal’.
However, our economic systems have been designed to include
various inbuilt mechanisms which, if exploited to the full,
automatically cope with the adjustment needed where there
are minor variations in the economic cycle. These include the
following important examples:

— Unemployment benefit. The fact that the unemployed
can maintain part of their previous disposable income
during a period of unemployment, softens the negative
impact on demand when unemployment rises.

— Labour market programmes to encourage the unem-
ployed to maintain their skills compensate for the
negative impact on the market during times of unemploy-
ment. The labour supply and employment rates are basic
preconditions for growth; hence the need to ensure there
is a sufficient labour supply at the ready when the
economic cycle changes.

— Progressive taxation and welfare safety net. These limit
exclusion and, consequently, any fall
in purchasing
power. They depress demand during an economic upturn
by transferring resources to the public sector.

— Income-related allowances and, for example, inexpensive
childcare, likewise help to maintain purchasing power
during an economic downturn, and reduce state expendi-
ture during an upturn.

— Skills levels. In times of structural change, skilled workers
find it easier to retrain in jobs where there is a shortage
of manpower, with the result that there is a good supply
of skilled labour for when the economy improves.

— The purpose of buffer funds — as used in Finland (and
for which the social partners are responsible) — is that
they are amassed when times are good, and used when
they are less good. This is done by setting aside part of a
wage settlement when the economic cycle is good, and
using it to cover a share of labour costs when there is a
downturn. The advantage with this kind of system is that
real wage increases are more even over time, and it does
not result in inflationary pressure.

9.

The right economic solution is not always politically
viable

9.1. With EMU,
interest rate policy is not affected by
upcoming general elections. Conversely, interest rate policy is
not independent of day-to-day political considerations —
particularly in the run-up to a general election — then it will
seldom be the correct policy for the economic cycle. When the
economy is strong in the run-up to a general election, the
government has little scope to use economic policy to
introduce the economic restrictions the situation requires.
Politicians prefer to win the election rather than manage the
economy properly and lose. It is difficult to find an opposition
which would not be prepared to exploit the situation to
criticise a restrictive economic policy. If all elections took place
when there was a downward trend in the economy, then the
politically desirable would also be the best solution from an
economic point of view. But the reality is quite different. When
several EU countries now have a balanced budget or even a
budget surplus, cutting taxes in the run-up to an election
regardless of the general state of the economy could be a good
political tactic. The Council should therefore provide greater
incentive for what is currently a desirable political develop-
ment.

9.2.
After the Lisbon European Council, the Commission
presented a number of possible economic policy rules appro-
priate to the current situation. Previously, there had long been
talk of the need for tax cuts. In these rules the Commission
says that the current economic situation is not conducive to
such changes, but that if any are nevertheless planned, certain
Commission guidelines should be respected. The current
strong economic performance means that the different econ-
omies can scarcely cope with any further stimulation without
leading to inflation. The Commission points out that the
current situation provides ample reason to work for the long-
term objective of boosting the treasury so that the economy
can be stimulated in a later economic downturn. Even given a
different economic situation, income tax cuts in particular
must be considered in relation to the national debt and future
demographic trends. Such tax changes can only be part of a
package of social security system reforms. All this is contained
in the Commission’s report on public finances, which, at the
time of writing, has not yet been formally addressed by the
Council.

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10. Coordination guidelines

10.1.
There are then, many reasons for stepping up econ-
omic policy coordination, and all coordination options should
be based on a common core of principles. The ESC believes
that this coordination should take the following direction:

Firstly,

10.2.
‘direction’ is the important thing here, and
whether it is restrictive or expansionary, rather than exactly
what measures should be taken. Given the same economic
cycle, a change in revenue could be the correct measure both
economically and politically in one country, while in another,
changes to government expenditure in the opposite direction
could be more appropriate. If tax cuts are preferred in two
countries, then it might be more appropriate to cut income
tax in one country, and cut VAT in the other. Direction, then,
is the key factor, whereas the actual measures takes second
place.

Secondly,

in addition to direction, a further joint
10.3.
assessment must be carried out before specific measures are
launched. The assessment should focus on the extent to which
various measures affect all the Member States. The particular
economic cycle will decide whether to select those which have
a considerable impact on the others, or those which have
little impact. If most countries are in the same situation,
coordination should involve choosing measures which have a
big impact on other countries. A different VAT rate, for
example, could be more effective in such a situation since
this impacts directly on private consumption (as it affects
disposable incomes) and consequently also impacts on
imports. Large-scale adjustments to public expenditure, how-
ever, only impacts indirectly and to a lesser degree on private
consumption and imports. If, on the other hand, a country is
‘out of step’ with the others then it can decide to review this
type of expenditure which only impacts on other countries to
a modest extent

10.4.
Thirdly, in view of these considerations, it should be
left to the Member States to discuss their choice of measures.
The absence of joint decisions need not, however, mean there
is an absence of joint discussions at Council
level. Such
discussions should be central to efforts to frame a coordinated
economic policy. Since, politically, it is considerably more
difficult to enshrine this in the Treaty, it should be possible to
achieve it via the existing structure. The formal arrangements
are less important than the actual form coordination takes.
Moreover, a knowledge base must be compiled to illustrate the
effectiveness of various measures in different economic cycles,
thus enabling Council of Ministers discussions to be informed
by the good and bad experiences of individual countries.

It is consequently very important to bear in mind
10.4.1.
that an instrument can be effective in one country, without
necessarily being so in all the others. Because of factors such

as the structure of the industrial economy, the size and shape
of the welfare system, and the extent of economic inequality,
a measure can be effective in one economic context but not in
another.

10.5.
Fourthly, the main concern is the impact on the
economic cycle itself, since the aim of economic policy
coordination is to boost the joint impact of economic and
monetary policy on stability, growth and employment. While
there may be other reasons for wanting more similar economic
systems, the rules for the annual coordination of economic
policy should not make these a priority. The reasons may be
levels of taxation and expenditure, and the allocation of
different forms of taxation and expenditure. Such changes can
the fixed coordination structure we are
only be part of
recommending here if they have direct bearing on economic
policy itself.

If,

for example,

Such connections do exist.

10.6.
the
intention is to narrow the variations in VAT rates, and
consequently reduce the scope for VAT fraud, this can be done
gradually by exploiting the fact that different countries are at
different stages of the economic cycle. An individual country
experiencing a period of prosperity and with a lower than
average VAT rate should therefore opt for a higher rate. A
country experiencing an economic downturn and with a high
VAT rate should likewise take the opportunity to cut it. This
and other examples show that a coordinated economic policy
can also have a long-term impact on overall economic
coordination, and help reduce the discrepancies which can
also lead to problems for the single market.

One area where economic variations should par-
10.6.1.
ticularly be harnessed to iron out differences is taxes where the
tax base can move easily between countries. A country with a
booming economy and low taxation on income from capital,
low corporation tax and also low taxes on environmentally
hazardous activities, should exploit this to iron out the tax
discrepancies. Conversely, a country with high levels of
taxation in these areas, and with a deflated economy should
take the opportunity to lower them. The positive side effects
of this type of policy shift will in future be a more level playing
field and more similar fluctuations in the economic cycle.

10.7.
Finally, it is worth reiterating the fact that all these
discussions about coordination of economic policy take for
granted that restraint will be exercised when times are good.
In the absence of restraint, we would be back to the situation
of the 1990s when the need to restore some order to the
public finances made it impossible to spend aggressively
during a recession. Restraint should not, however, be practised
to excess. The growth opportunities provided by an economic
boom must be exploited. A balance must be struck between
exploiting the scope for expansion and avoiding the emergence
of bottlenecks which give rise to inflationary pressures.

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10.8. We would call on all economic policy players —
governments, the ECB, the Commission and the social partners
— to draw on the above analyses and recommendations to

develop economic policy coordination in the EU, and allow
the favourable climate created by EMU to achieve its full
potential for growth and employment.

Brussels, 1 March 2001.

The President

of the Economic and Social Committee

Göke FRERICHS

Opinion of the Economic and Social Committee on the ‘2000 Broad Economic Policy Guidelines’

(2001/C 139/14)

On 13 July 2000 the Economic and Social Committee decided, under Rule 23(3) of its Rules of Procedure,
to draw up opinion on the 2000 Broad Economic Policy Guidelines.

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 Mr Putzhammer.

At its 379th plenary session of 28 February and 1 March 2001 (meeting of 1 March 2001) the Economic
and Social Committee adopted the following opinion by 81 votes to one, with one abstention.

1.

Introduction: the growing importance of the econ-
omic policy guidelines for the EU

1.1.
The Economic and Social Committee recognises that
the broad guidelines of the economic policies of the Member
States and of the Community are of fundamental and para-
importance for a growth- and stability-orientated
mount
economic policy within the EU that is aimed at restoring full
employment while at the same time preserving price stability
and social coherence. The guidelines clearly tie in the issues
they address with the three employment processes (Luxem-
bourg, Cardiff and Cologne) which operate side by side.

more and better jobs — by securing the transition to the
information and communication society. This was to be
achieved by, among other things, creating a friendly environ-
ment for starting up and developing innovative businesses,
especially SMEs, stepping up the process of structural reform
and completing the internal market. In Lisbon, the heads of
state and government officially announced the target of full
employment in the EU; the Economic and Social Committee
will take this as an opportunity to judge them by their actions.

1.2.
The guidelines have acquired increased significance
this year in view of the Council report on economic policy
coordination adopted by the Helsinki European Council and
against the backdrop of the Lisbon European Council con-
clusions, under which the European Council of the EU is in
future to hold an annual spring meeting devoted to the issues
of employment, economic reform and social cohesion. At the
Lisbon European Council, the Union set itself a new strategic
goal for the next decade, namely to replace the USA as the
world’s most dynamic region, to boost competitiveness and to
realise the potential for sustainable economic growth — with

In this connection, the Economic and Social Com-
1.3.
mittee welcomes the new inclusive procedure adopted this
year for the drafting and delivery of the guidelines. This
procedure involves the Commission, the European Parliament,
the various Council formations (i.e. for the first time not only
Ecofin), the spring meeting of the European Council and a
number of different hearings of the social partners. This enables
a comprehensive, transparent, democratic and coordinated
procedure to be set in place as a kind of ‘rolling consultation
mechanism’ for the Ecofin Council to draw on when adopting
the broad economic policy guidelines in line with Articles 98
and 99 of the Treaty.