Report from the Commission - Overview of EU action in response to the events of the 11 September and assessment of their likely economic impact
Date: 2001-10-17
Institutions: European Commission
Subjects: United States, economic consequence, international affairs, report, terrorism

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 17.10.2001
COM(2001) 611 final

REPORT FROM THE COMMISSION

Overview of EU action in response to the events of the 11 September and assessment of
their likely economic impact

I

OVERVIEW OF THE EU’S RESPONSE TO THE EVENTS OF 11 SEPTEMBER

Since  the  tragic  events  of  the  11  September,  the  European  Union  has  acted  with
speed and determination both at home and on the international stage. It has shown its
solidarity with the Government and the people of the United States and stressed its
support for the military action now underway. All thirteen candidate countries were
quick in lending their support to the positions expressed by the Union.

The  Commission  and  the  Council  have  been  fully  engaged  in  developing  a
comprehensive set of responses on the diplomatic, economic, financial, political and
security  fronts.  There  have  been  ministerial  meetings  with  the  United  States  and  a
Summit  with  Russia.  President  Prodi  and  Prime  Minister  Verhofstadt  travelled  to
Washington  following  the  extraordinary  meeting  of  the  European  Council  on  21
September.

The  EU  Troika  visited  Pakistan,  Iran,  Saudi  Arabia,  Egypt,  and  Syria  as  part  of  a
concerted effort by the Union, alongside the activity of individual Member States, to
forge the international coalition against terrorism.

The European Parliament has twice debated the developing situation and has backed
up  political  solidarity  by  action.  It  approved  the  proposed  regulation  freezing  the
assets of organisations and individuals suspected of supporting or financing terrorist
activities within just two days of its adoption by the Commission.

The  full  extent  of  all  the  actions  underway  is  set  out  in  the  roadmap  of  the  EU’s
response to the events of 11 September agreed by the General Affairs Council. This
is a living document which is being constantly updated.

The European Union has risen to these events with great determination and purpose.
Working closely together and developing a single, coherent response covering a wide
range of activities, the Union has contributed to the shaping of the new international
agenda.  In  responding  to  the  concerns  of  the  citizens  in  both  current  and  future
Member States, this is helping to restore confidence and reduce economic instability.

WHAT IS BEING DONE BY THE EUROPEAN UNION

Stabilising financial markets

–  The European Central Bank (ECB) took steps immediately to ensure liquidity of markets
in the aftermath of the attack and cut interest rates by 0.5% in parallel with other central
banks on 17 September.

–  The Council and the European Council actively sought to boost market confidence in their

conclusions in the days immediately following the 11 September.

Common approach towards counter-terrorism

–  A  comprehensive  action  plan  has  been  agreed  by  Justice  and  Home  Affairs  Ministers,
and  the  Commission  has  already  proposed  legislation  for  a  common  legislative
framework  for  terrorism  (definition,  penalties),  and  for  a  European  arrest  warrant  to
replace national extradition procedures.

–  Agreement  to  strengthen  urgently  intelligence  and  police  co-operation  (Europol  and

Eurojust) both inside the EU and with third countries, notably with the US.

2

–  The Commission has proposed measures reinforcing the security features of the common

visa.

–  Consideration  is  being  given  to  how  existing  EU  legislation,  (for  example  related  to

asylum or to financial markets), can be made “terrorism proof”.

Financing of terrorism and financial crime.

–  An  EU-wide freeze on assets of individuals and organisations suspected of financing  or
supporting  the  terrorist  attacks  has  been  implemented  in  line  with  UN  Security  Council
resolutions.

–  Work  has  accelerated  on  finalising  agreement  on  changes  to  the  Money  Laundering
Directive. These changes extend the scope of the transactions covered and the range of
professions subject to a reporting obligation.

–  Work  is  accelerating  on  the  proposed  directive  on  market  abuse,  in  order  to  prevent

financial markets being misused by terrorist or other criminal groups.

–  Peer  review  exercises 

the
Commission  will  look  at  how  candidate  countries  are  putting  anti-money  laundering
measures into place. This will be in the framework of the regular examination of how they
are implementing financial services rules.

financial  supervisors  and 

involving  Member  States 

–  The  Commission  will  play  a  leading  role  in  reinforcing  the  international  Financial  Action
Task  Force  (FATF),  notably  to  update  its  mandate  and  existing  recommendations  to
address the financing of terrorism.

–  Reflections are underway concerning how custom controls might be placed on large cash
movements across the external frontiers of the Union. This may be needed to overcome
gaps in money laundering legislation.

Humanitarian assistance

–  Aid  amounting  to  over  €310  million  (over  €100  million  from  the  Commission)  has  been
mobilised  by  the  Union  to  relieve  the  suffering  of  the  Afghan  people  over  the  coming
months.

–  As an  immediate reaction, the Commission has released €5.5 million  in  emergency  aid.
Following  the  request  of  the  Commission,  the  European  Parliament  and  the  Council
authorised  the  release  of  an  additional  €40  million  in  humanitarian  assistance  and
supported  the  Commission  making  a  request  for  an  additional  €10  million.  Further
requests may be necessary as the international situation evolves.

–  The  Commission,  through  its  humanitarian  aid  office  (ECHO)  has  put  co-ordination

machinery in place in order to maximise the overall impact of European relief aid.

–  An additional €6 million food aid has been released to World Food Programme.

Air safety and security.

–  The  Commission  has  proposed  a  regulation  to  introduce  uniform  EU-wide  security  and
safety standards.  Further  measures  on  airline  and  airport  security  will  be  put  forward  in
the light of the report of the high level group of experts which was presented to Transport
Ministers on 16 October.

–  The Commission has also outlined measures which can be taken to assist EU airlines to
face  the  direct  consequences  of  the  attacks  including  the  impact  on  passenger
confidence  (e.g.  higher  insurance  premiums,  narrower  cover,  lost  revenue  while  US
airspace was closed, additional security costs).

3

–  The  Commission  will  accelerate  its  efforts  to  develop  a  trans-Atlantic  common  aviation
area.  As  a  first  step  pending  a  negotiating  mandate  from  Council,  the  Commission  will
seek  to  establish  a  Code  of  Conduct  with  the  US  in  order  to  ensure  equal  competitive
conditions.

– 

to 

rules  governing  airport  and  airline  security,
In  order 
recommendations have  been made to the International Civil Aviation Organisation. That
organisation will, on the initiative of the EU, now take this issue forward.

international 

tighten 

–  The peer review of airport safety  is being put together by  the  Commission  following  the
request  of  the  European  Council.  Member  States  are,  however,  reluctant  to  provide
inspectors for this task. A senior level group is being set up with the US to co-ordinate air
safety  measures  as  well  as  support  measures  for  the  airline  industry  in  order  to  avoid
distortion of competition.

Strengthening the international legal framework

–  The  European  Council  on  21  September  called  for  rapid  implementation  of  the  existing
conventions  on  terrorism  and  supported  the  Indian  proposal  on  a  general  framework
convention against international terrorism. Work is underway to accelerate the conclusion
of the existing UN instruments in the EU Member States and in third countries. However,
these specific conventions need to be strengthened and completed. The EU is playing an
active role in the work on the Indian initiative which started in New York on 15 October.

Civil Protection

–  The  Commission's  Civil  Protection  unit's  24h/24h  alert  system  was  activated  on  11
September.  The  unit  mobilised  a  number  of  areas  for  support  to  be  offered  to  the  US,
including  search  and  rescue  teams,  medical  assistance,  identification  teams  and
psychological assistance.

–  Directors  General  for  civil  protection  of  the  Member  States  met  on  12  October.  They
confirmed their  intention  to  increase  co-operation  between  civil  protection  authorities  on
major  terrorist  attacks,  within  the  framework  of  the  Community  mechanism  for  civil
protection which should be in place by the 1 January 2002.

Threats from biological and/or chemical agents

–  The Commission and the Member States are  developing  an  EU  system  on  surveillance
and control of communicable diseases, including an early warning and response system.
Community law already provides for control of animal communicable diseases, including
those which can be transmitted to humans.

Securing critical infrastructures and supplies

–  Work  is  already  underway  within  the  Commission  which  is  looking  at  the  need  for
increased co-operation at EU level to ensure the security of key supplies and networks.
This complements the consultation on last year’s Green Paper on the security of energy
supplies  which  will  shortly  be  concluded.  In  December  Council  will  consider  steps  to
tighten  up  the  security  of  communications  networks  following  the  Commission’s
Communication last Spring.

The  events  of  11  September  are  redefining  the  foreign  policy  landscape  and
presenting the Union with new challenges. The General Affairs Council has already
started addressing these issues. Immediate measures have been taken with regard to
the  crisis  situation  in  Afghanistan  and  the  neighbouring  countries  as  well  as  at  the
multilateral  level.  The  Commission  has  prepared  some  first  elements  for  a  broad
reflection on the appropriate medium and long term policy responses in the area of
external relations which the Presidency has initiated.

4

The implications in terms of priorities both for action and for resources at EU level
are far-reaching. For example:

(cid:1)  The  crisis  provides  a  new  impetus  for  dialogue  with  the  Arab  and  Islamic

worlds;

(cid:1)  In the Middle East Peace Process, the Union, working closely with the US, must
insist  that  the  Mitchell  Report  is  implemented  and  that  a  longer  term  political
perspective  is  offered  to  the  parties  by  resuming  negotiations  on  both  the
Palestinian and Syrian tracks;

(cid:1)  The crisis provides a further reason to increase the momentum of the Barcelona
Process  notably  in  areas  such  as  democratisation,  social  equity,  institution-
building and governance, which are all the more important in the present context.
This will help to speed up and deepen reforms aimed at improving development
performance and advancing democracy;

(cid:1)  The EU’s neighbourhood policy has sought as a first priority to promote stability
through the prospect of membership for the candidate countries. Looking beyond
the Union’s future borders to the wider Europe, new forms of relationship should
be  examined  that  are  neither  a  conveyor  belt  to  membership,  nor  the  basis  for
future resentment and tension between privileged insiders, and excluded outsiders.
The  Barcelona  Process,  for  example,  may  serve  as  a  demonstration  of  what  is
possible.

(cid:1)  More  generally,  the  framework  for  our  trade  and  co-operation  with  Pakistan,
India  and  Iran  as  well  as  with  Saudi  Arabia  and  the  Gulf  States  should  be
strengthened.  With  Pakistan,  the  Union  has  agreed  a  comprehensive  package  of
trade  measures  first  proposed  in  March  this  year.  They  are  designed  to  improve
access  for  Pakistani  exports  to  the  EU.  The  Union  must  continue  to  review  its
trade  and  co-operation  with  Pakistan.  For  Iran,  negotiations  on  future  trade  and
co-operation  should  be  now  opened  on  the  basis  of  a  mandate  which  the
Commission  will  present  later  this  year.  In  the  Gulf,  the  Union  should  aim  to
make rapid progress in the EU/Gulf Co-operation Council free trade negotiations,
for  which  a  new  mandate  was  recently  approved.  This  should  be  complemented
with a broader political dialogue.

(cid:1)  Central  Asia  will  be  profoundly  affected  by  developments  over  the  coming
months,  and  the  Union  will  need  to  follow  developments  there  with  close
attention, seeking to build its support, especially for regional projects and Justice
and  Home  Affairs  co-operation  (notably  in  the  fields  of  drugs  and  border
controls).

(cid:1)  The events have also led to a renewed interest in multilateral action, at the UN and
elsewhere.  The  need  for  rapid  WTO  progress  has  been  thrown  into  sharp  new
relief.  These  events  have  proved  that  co-ordinated,  international  action  can
achieve results which would not have been possible for individual States acting on
their own.

(cid:1)  It  now  seems  to  be  recognised  that  efforts  to  stamp  out  international  terrorism
must  be  underpinned  by  policies  addressing  some  of  these  sources  of  radical
discontent - not that these can ever justify acts of terrorism. These sources touch

5

the  undemocratic  behaviour  of  governments,  as  well  as  an  unacceptable  divide
between the rich and the poor; environmental degradation, and crime, corruption,
drugs and health issues. For the Union, there is a chance to promote co-operation
on these new cross cutting issues on the international agenda, such as poverty
and migration, environment, crime, drugs, and infectious diseases, as well as the
security issues of weapons proliferation and terrorism.

(cid:1)  Equally, the Union’s bilateral political dialogue with third countries, which has
often  focused  on  human  rights  and  democracy,  must  be  complemented  with  a
more  substantive  exchange  on  regional  development  and  security,  including
terrorism and its causes.

(cid:1)  Finally, the Commission believes that recent events have highlighted the need to
refine the EU’s crisis management procedures, including making fuller use of the
Rapid  Reaction  Mechanism.  It  should  operate  with  the  same  speed  and
flexibility as ECHO does in the area of Humanitarian relief.

Against this background, this Working Paper now focuses on the potential economic
impact  of  recent  events  and  presents  policy  recommendations  for  future  action.  It
represents  a  first  report  on  the  follow  up  to  11  September.  The  Commission  will
continue to monitor the situation and make recommendations as appropriate.

II

IMPACT OF THE EVENTS OF 11 SEPTEMBER ON THE EU ECONOMY AND ON SPECIFIC
SECTORS

The global economic situation prior to 11 September

Before  the  dramatic  events  of  11  September,  all  major  regions  in  the  world  were
experiencing  a  slowdown.  At  the  origin  of  the  slowdown  is,  first,  the  hike  in  oil
prices  in  1999/2000  fuelling  inflation  to  which  central  banks  reacted  by  increasing
interest rates. Second, there  was  the bursting  of the dot.com bubble and the related
dramatic fall in share prices. As a result a compounding factor was the slowdown in
international  trade,  which  expanded  in  real  terms  by  13%  last  year,  and  slowed  to
less than 2 % this year.

The  transmission  of  these  shocks  has  been  very  rapid  due  to  the  globalisation  of
financial markets and the internationalisation of firms.

Consequently, despite strong  fundamentals, the EU  had not  escaped  the  slowdown.
In particular, the rise in oil prices, aggravated by the weakness of the euro, and the
sudden  rise  in  European  food  prices,  dented  real  disposable  income  and  private
consumption in the EU. GDP growth came almost to a halt in the second quarter of
this year.

The impact of the slow-down on employment was already felt in the second half of
2000  in  some  Member  States  and  to  a  varying  extent  in  different  sectors  of  the
economy.  Unemployment  stopped  falling  in  Spring  2001  and  has  since  started  to
rise.  It  is  expected  to  continue  to  do  so  in  2002.  Employment  growth  in  2001  and
most of 2002 is expected to be flat or even negative.

6

The short term impact of 11 September

The  events  of  11  September  and  the  subsequent  political  developments  further
reinforce  the  uncertainty  that  was  already  being  felt  by  markets,  businesses  and
consumers.

The direct damage to US infrastructure from the attack is limited, given the size of its
economy.  However,  the  toll  in  human  lives  was  huge  and  taken  together  with  the
military action now underway creates a feeling of insecurity, not only in the US, but
world wide. Risk aversion has increased and  confidence has  fallen.  Most  observers
incorporate  in  their  forecasts  for  the  US  2-3  quarters  of  contraction  starting  in  the
third quarter of this year.

Japan, already suffering from deflationary and structural problems, is likely to face a
longer period of stagnation.

The  EU  economy  is  free  of  major  external  imbalances  and  structural  reforms  have
made it more resilient. Nevertheless, growth is now expected to be around 1 ½ % this
year and a temporary contraction of GDP cannot be excluded.

The  resilience  of  the  EU  economy  is  shown  by  levels  of  business  and  consumer
confidence,  which  though  declining  sharply,  are  still  above  the  levels  observed
during previous recessions.

Impact on specific sectors

Financial  markets  suffered  significant,  albeit  temporary,  disruption,  which  has
resulted  in  more  risk  aversion  and  potentially  less  liquidity  and  higher  spreads.  In
reaction to the events, central banks around the world cut interest rates with both the
US Federal Reserve and the ECB cutting rates by half a percent, with a subsequent
cut in US rates on 1 October to their lowest level since 1962. Nevertheless, there are
renewed fears about earnings and lower share prices may have an important impact
on consumer spending.

There  has  also  been  an  impact  on  the  global  insurance  and  reinsurance  sector.
Estimates of total claims range from $20 to $80 billion. While the actual claims as a
result  of  the  attacks  are  generally  not  expected  to  create  major  problems  for  the
financial  situation  of  the  sector  concerned,  the  impact  of  falling  equity  markets  is
more important. It was already causing some problems before 11 September (equities
represent approximately 30% of the investments made by insurance companies).

In  air  transport1,  there  has  been  a  10%  reduction  in  the  number  of  passengers
carried in Europe, and 5% cut in fleet capacity since 11 September. This is having a
severe  impact  on  European  airlines,  already  facing  difficulties  even  before  the
attacks in the US. The reduction in passenger numbers and fleet capacity is likely to
feed through to other related sectors, though its precise impact will be closely linked
to the length of any downturn and to the broader political situation.

1

Communication  on  the  economic  situation  in  the  aviation  industry  following  the  attacks  in  the  USA,
COM(2001) 574, final, 10.10.01

7

                                                
Both the tourism industry and tourism destinations are likely to  be  affected,  but
the  impact  will  be  varied.  Tour  operators  and  travel  agents  selling  holidays  in
overseas  destinations  affected  by  current  events,  long-haul  air  tickets  or  higher
standard  hotels  in  capital  cities  are  among  the  most  affected.  However,  the  precise
impact of  events  is difficult to predict,  as  is  the  extent  to  which  Europeans  will  be
encouraged to travel in the Union rather than holidaying farther afield in 2002.

III

OUTLOOK FOR 2002

The conditions for a recovery in 2002 exist providing the political situation does
not deteriorate further

Sound  economic  fundamentals,  largely  due  to  the  efforts  made  in  the  context  of
economic and monetary union and the  arrival of the euro, mean that  the  conditions
for a recovery in 2002 exist.

The state of Member States’ public finances allows some flexibility and the current
account of the balance of payments is in equilibrium. In contrast to the United States,
private  households  are  less  indebted  and  save  more.  Over-investment  in  the
information  and  communication  technologies  sector  (ICT)  was  less  important,
limiting European exposure, beyond the specific sectors concerned, to the changing
fortunes of the Internet and ICT world. After the downward adjustment, it should be
possible for businesses to rebuild their inventories in anticipation of stronger demand
ahead.

Furthermore, macro-economic stability has enabled inflation to decline rapidly. From
a  peak  of  3.4 %  in  May  it  has  dropped  to  2.5 %  in  September  in  the  euro  area.
Inflation  is  expected  to  continue  to  fall.  The  increase  in  unemployment  should
remain contained in 2002 thanks to the prospects for a recovery.

Against  this  background  spending  by  individuals  and  households  should  pick  up,
helped by the tax cuts which have been made or announced by many Member States
over the last  year. As spare capacity in the economy remains limited and given the
current low interest rates, investment  is  likely to resume once  demand  returns.  The
annual growth rate in 2002 is therefore likely to be around that achieved in 2001.

The case for cautious optimism is closely linked to the evolution of political events
and their impact on business and consumer confidence. Should private consumption
in the US fall sharply, the EU outlook would be much bleaker and growth might be
even weaker.

However, policy responses should be based on the more likely scenario of a recovery
beginning  in  the  second  half  of  next  year  and  an  annual  growth  rate  around  that
achieved in 2001.

IV

POLICY RECOMMENDATIONS

In the light of this brief analysis the Commission believes that it is essential for the
Union  to  address  the  economic  and  political  consequences  of  the  attacks  in  the
United  States,  principally  through  action  focused  on  restoring  confidence  and
pursuing vigorously the long-term economic goals for the Union.

8

IV.1

A balanced policy mix in the EU.

The  ECB,  like  other  central  banks  immediately  added  liquidity  to  stabilise  market,
and reduced its key interests rates by 50 basis points on 17 September to a level of
3.75  %.  Monetary  conditions  in  the  euro  area  seem  appropriate  under  the  current
circumstances. If inflation continues decelerating and wage settlements are moderate
– important wage negotiations are scheduled for the beginning of next year -, there is
probably further room for manoeuvre for monetary policy.

Fiscal policy is already helping to stabilise the economy. Thanks to the stability and
growth  pact,  past  consolidation  efforts  have  created  some  room  for  manoeuvre  for
budgetary policy without jeopardising the medium-term goal of having government
balances in equilibrium or in surplus. Maintaining this medium-term goal is a crucial
part of the response to the downturn. Otherwise, long-term interest rates may rise.

Several Member States implemented substantial tax cuts in early 2001 amounting to
0.5% GDP for the EU as a whole. An overall fiscal impulse of some 0.3% was given
to the EU economy, the first time since 1993.

On  top  of  this,  there  is  the  operation  of  the  so-called  automatic  stabilisers.  Slower
growth  will  be  reflected  in  shortfalls  in  government  tax  revenues  and  in  additional
expenditure  (e.g.  unemployment  benefits).  Latest  estimates  imply  a  government
balance in 2001 of –1 % of GDP in the euro area and -0.5% of GDP in EU-15, some
-0.4/0.3% of GDP weaker than the level aimed for in last year’s updated stability and
convergence programmes.

The budgetary implication of the slow down will also be felt in 2002. To the extent
that  growth  in  2002  falters  automatic  stabilisers  will  work  again  with  appropriate
differentiation at a country-by-country level.

In the context of budgetary consolidation, investment in human and social capital is
important  to  increase  the  EU’s  growth  potential.  If  the  slow-down  becomes  more
protracted fiscal policies should allow for increased financing of pro-active policies,
in  particular  those  accelerating  the  achievement  of  the  objectives  of  the  Lisbon
Strategy. Such an evolution could only occur within a jointly agreed framework and
in a manner which fully respects the stability and growth pact.

IV.2

Structural reforms and the Lisbon strategy:

The  Lisbon  Strategy  emphasises  the  positive,  mutually  reinforcing  interaction
between  economic,  employment  and  social  policies.  With  its  focus  on  building  a
competitive, dynamic and cohesive knowledge-based economy the Strategy remains
valid.

Economic  and  labour  market  reforms  and  modernising  social  policies  are  already
improving  the  way  the  Union’s  economy  and  labour  markets  function.  The
continuation  of  such  reforms  is  all  the  more  important  now  that  the  Union  faces
economic  conditions  very  different  from  the  ones  prevailing  when  the  Lisbon
Strategy was launched.

Structural  reforms.  Too  often  in  times  of  economic  difficulty,  these  medium-term
reforms  are  wrongly  perceived  as  an  additional  burden  rather  than  as  part  of  the
solution  to  current  conditions.  Doubts  have  been  expressed  by  the  business  world

9

about  the  willingness  in  the  face  of  the  US  slowdown  and  short-term  electoral
considerations  to  press  ahead  with  key  reforms  completing  the  internal  market,
including  for  energy,  transport,  and  financial  services,  as  well  as  rolling  back  red
tape.

Structural reforms are  now  needed  more  than  ever.  In  particular,  efficient  financial
markets underpinned by robust prudential supervision will help the Union becoming
a pole of stability. It will reinforce its ability to respond to external shocks. This will
allow the Union to reap the full benefits of the euro. A sound and stable regulatory
framework is also of paramount importance to cope with risks to stability that  may
emerge in an enlarged Union.

However,  doubts  have  been  compounded  by  the  slow  progress  on  key  proposals
currently  on  the  table  of  Council  and  the  European  Parliament,  and  by  the  mixed
quality of implementation of the measures which have already been agreed.

In the present context, the European Union must renew its commitment to its long-
term  goal  and  the  reforms  needed  to  achieve  it.  This  would  support  fiscal  and
monetary policies and increase the room for manoeuvre for them.

To put this into practice, the European Council should recommit itself to achieving
the Lisbon Strategy in line with the timetable already agreed. But that commitment
must  be  backed  up  by  rapid  progress  on  certain  key  measures  before  the  Spring
European Council in Barcelona next year.

In order to give a real and credible signal of the Union’s willingness to change, the
European  Council  should  instruct  Council  to  accelerate  work  to  achieve  final
agreement before Barcelona on the telecoms package, the Community patent, and
in  financial  services,  the  UCITS  directive,  rules  on  the  cross-border  payments  and
the market abuse directive.

Furthermore,  political  agreement  should  be  achieved  before  Barcelona  on  the
Single  European  Sky  package,  the  pension  funds  directive,  the  new  framework  for
trans-European networks, and the proposed public procurement package.

In addition, Member States must boost confidence by actually applying European
rules  which  they  have  agreed,  such  as  those  introducing  greater  competition  in
local  telecoms  markets  which  came  into  force  last  January,  or  the  new  rules  on  e-
commerce  which  will  apply  from  January  2002.  Applying  these  rules  consistently
across  all  Member  States  should  give  a  boost  to  the  development  of  a  knowledge-
driven economy.

The  steps  to  complete  the  internal  market  must  go  hand  in  hand  with  efforts  to
improve the quality for the public of services of general economic interest – many of
which assume greater importance in times of an economic downturn.

The  European  Investment  Bank  also  has  an  important  contribution  to  make  in
supporting the Lisbon Strategy (See IV.4 below).

Employment.  The  Lisbon  Strategy  provides  the  basic  orientations  which  Member
States should pursue to reach its employment objectives and to face the employment
consequences of the current slowdown. Labour market reforms envisaged in Lisbon

10

and  in  the  follow  up  policy  recommendations  for  2002  need  to  be  pursued
vigorously.

In  pursuing  such  reforms,  policies  should  aim  to  manage  change  with  a  balance
between  flexibility  and  security.  Furthermore,  the  Commission  will  launch  an
additional initiative before the end of the year seeking to improve employability and
adaptability of the workforce in the event of mergers and restructuring of businesses.

Tax  and  benefits  system  reforms,  active  employment  policies,  promoting  mobility,
and investing in human capital particularly though life long learning, continue to be
the  policies  to  apply.  A  strong  emphasis  should  be  placed  on  implementation  of
concrete measures which can ensure that policies are delivering the expected results
in terms of increased participation and employment rates. Member States should not
revert to early retirement schemes to combat rising unemployment.

The  Union  must  also  ensure  that  the  Lisbon  commitment  to  combating  social
exclusion and ensuring access for all to the labour market and to society is fulfilled.
The  modernisation  of  social  protection  and  pension  systems  should  continue,
notwithstanding the downturn in order promote social cohesion. This must also take
account of the need for financial sustainability.

Finally, increased investment in life long learning, and on health and social services
as  well  as  underpinning  social  inclusion,  can  also  contribute  to  creating  new  job
opportunities  in  sectors  where  employment  growth  has  been  particularly  slow  in
some Member States.

If the Member States and the Union follow these policy orientations, in particular as
expressed  in  the  employment  guidelines  for  2002,  this  will  help  to  stabilise
expectations and limit the rise in unemployment and long-term unemployment while
preparing the labour force for the next upswing. It will contribute to adjusting labour
market policies in the Union.

IV.3

Sectors in specific difficulties.

It  is  clear  that  a  number  of  sectors  which  were  already  feeling  the  effects  of  the
economic  downturn  prior  to  11  September  have  been  affected  severely  by  these
events. The European Union must be open to flexible ways of assisting these sectors,
providing any help given is compatible with the rules of the EC Treaty.

The Commission has indicated in relation to the airline industry that it will look in a
favourable  light  at  support  given  by  Member  States  to  compensate  losses  incurred
during  the  four  day  closure  of  US  airspace  and  the  subsequent  direct  impact  on
passenger  confidence;  it  will  also  consider  the  continuation  of  support  to  meet
insurance costs beyond the 30 days currently allowed or to provide such cover up to
the end of the year, if the conditions on the insurance market so justify. Furthermore,
the Commission will examine on a case by case basis, the treatment of increased co-
operation  between  airlines  with  a  view  to  maintaining  a  regular  service  on  less
frequented routes or to co-ordinated schedules during off peak periods.

Nevertheless, recent events must not be used to take action at a national level which
undermines the competitiveness of the Union or its industry. In particular, in the case
of  the  airline  industry  it  should  not  call  into  question  the  basis  on  which  the  last

11

round of state aid to the sector was  allowed. At the  same  time,  the  situation  of  the
European  aviation  sector  in  the  current  climate  will  be  carefully  monitored.  Any
other approach would simply put on hold a  necessary  process of  consolidation in a
number of key industries. Such  consolidation is important if businesses, employees
and consumers are to feel the full benefits of the internal market and of the structural
reforms currently underway.

Finally,  it  will  be  important  in  responding  to  the  economic  impact  of  the  crisis  on
specific  sectors to  monitor  action  in  other  parts  of  the  world.  A  framework  for  co-
ordinating  any  responses,  notably  with  the  US,  is  essential  to  ensure  that  EU
businesses  are  not  discriminated  against  and  there  is  no  distortion  of  international
competition.  As  a  first  step,  such  a  framework  could  take  the  form  of  a  Code  of
Conduct.

IV.4. Contribution from the EIB

The EIB is the EU’s leading provider of long term finance. It channels savings into
investment  in  the  key  sectors  of  the  economy,  including  investments  in  favour  of
small and medium-sized businesses. The Commission invites the EIB to step up its
actions in support of the Union’s efforts to sustain economic activity in Europe. This
should particularly focus on providing finance for infrastructure projects, to support
the  knowledge  economy  and  to  help  stabilise  long-term  investment  in  sectors
particularly badly affected by the down turn.

The EIB should accelerate the implementation of infrastructure projects and maintain
a proactive stance towards lending in sectors particularly hit by adverse conditions,
including  telecommunications  and  air  transport.  It  should  also  speed  up  the
mobilisation  of  instruments  to  finance  operations  involving  higher  levels  of  risk,
inter  alia,  to  support  Europe’s  drive  for  a  knowledge-drive  society.  By  taking  risk
alongside  the  private  banking  sector,  the  EIB  would  contribute  to  maintaining
confidence in the financial sector.

IV.5

Confidence  building,  including  economic  co-operation,  in  the  international
sphere

Pressing  on  with  enlargement.  Enlargement  of  the  European  Union  is  a  powerful
instrument  to  create  a  zone  of  stability,  security  and  prosperity  on  the  European
continent. The efforts of the candidate countries and the Member States to create the
enlarged Union must be sustained, both in the negotiations and in the pre-accession
efforts. The solidarity of the candidate countries with the Union in the aftermath of
the  attacks  on  the  US  has  shown  that  they  stand  ready  to  co-operate  in  the
international efforts in the fight against terrorism.

Launching  a  new  trade  round.  The  successful  launch  of  a  new  trade  round  in
November  will  also  be  an  important  confidence  building  measure  –  not  only  for
business  throughout  the  Union,  but  for  developed  and  developing  countries  around
the  globe.  The  current  economic  uncertainty  means  that  trade  liberalisation
associated  with  a  real  development  dimension  is  more  important  than  ever,
economically and politically.

The European Union must re-confirm its commitment  to the  rapid  launch of  a  new
round  and  take  an  even  more  proactive  position  centred  on  multilateralism,  while

12

also  seeking  to  reinvigorate  regional  arrangements,  particularly  the  Barcelona
Process with our Mediterranean neighbours.

Development and poverty reduction. Any political or military response to the events
of  11  September  must  go  hand  in  hand  with  action  to  address  the  economic  and
social  impact  which  they  will  have.  A  coalition  against  terrorism  must  be
complemented by a coalition for development. This linkage is already a component
of EU policies for peace building and conflict prevention. Development co-operation
is helping to reduce ethnic, social and regional tensions.

While the impact of recent events is significant within the Union, the impact beyond
the  Union,  and  particularly  in  the  developing  world  may  be  much  more  marked.
Slower world growth, reduced international private investment flows and the risk of
resources  being  diverted  from  development  assistance  to  other  priorities  are
substantial causes of concern.

This combination of events highlights the need for the European Union to provide a
response which can help these countries and ensure that globalisation contributes to
growth and social justice around the world. The Union must:

–  Examine the priorities and funding levels in EU external action.

–  Fulfil  promises  and  boost  their  implementation  in  order  to  meet  the  seven  main

International Development Targets agreed by Heads of State for 2015.

–  Address at the upcoming UN Conference on Financing for Development (March

2002) the question of official developing assistance (ODA).

–  Tackle  the  need  for  developing  countries  to  achieve  sustainable  development  in

view of the Rio +10 Conference in Johannesburg, September 2002.

International  judicial  and  police  co-operation.  Recent  events  have  added  a  new
“security” dimension to the European Union’s international perspective. The  Union
should take the lead. It must, looking beyond the immediate horizon, try to develop
instruments  which  will  extend  effective  co-operation  between  police  and  judicial
authorities  to  the  international  level.  Such  a  development  will  help  in  the  fight
against terrorism both inside the Union and in the rest of the world. It will also help
to  integrate  all  countries  into  a  global  system  offering  security,  prosperity  and
improved prospects for investment and development.

An  enlarged  European  Conference,  bringing  together  the  Union,  the  associated
countries,  the  EFTA  countries  and  the  countries  involved  in  the  stabilisation  and
association process , will meet immediately following the Gent European Council at
Foreign Minister level.  It  will address some of  these  issues of  security  and  judicial
co-operation in the context of the fight against terrorism. In addition, Russia, Ukraine
and Moldova have been invited to the subsequent working lunch addressing the same
issues.

Humanitarian Assistance. With respect to the Afghan situation, the European Union
has  mobilised  over  €310m  (over  €100m  from  the  Commission)  in  response  to  the
humanitarian crisis affecting the Afghan civilian population. These pledges together
with those made by US and other States will ensure adequate funding for the coming
months  for  humanitarian  operations  planned  by  the  UN,  the  Red  Cross/Crescent

13

movement and Non Governmental Organisations, (even in a  worst-case scenario of
up to  1,5 million refugees fleeing Afghanistan). The European  Union  must  quickly
transform its pledges into confirmed  contributions in order to support humanitarian
efforts in a timely manner.

The  European  Union's  humanitarian  assistance  must  remain  guided  only  by  the
fundamental  humanitarian  principles  of  neutrality,  transparency  and  impartiality.
This  is  essential  for  the  access  and  safety  of  both  relief  workers  and  the  assisted
populations.

Depending on the evolution of the situation not only in Afghanistan, but also in the
whole  region,  the  European  Union  should  be  ready  to  contribute  further  funding,
notably  by  allowing  the  Commission  to  draw  extra-funding  from  the  Community
Budget's emergency reserve.

Finally the European Union must watch out for the potential humanitarian fallout of
the attacks in the US in other "sensitive" parts of the world. This is especially true in
those countries where there is already a difficult political and humanitarian situation
or civil violence. Such conditions are ones in which terrorist activity can thrive and
contribute to further destabilisation. Should  such situations occur,  the Union  would
need  to  apply  the  same  determination  and  energy  including  on  the  humanitarian
front, as is currently applied to the Afghan crisis.

V

CONCLUSIONS

The  European  Union  has  responded  effectively  and  rapidly  to  the  consequences  of
the events of 11 September. The challenge now will be to maintain the  momentum
behind the Union’s action and to develop a  strategy to  meet the medium and long-
term political and economic challenges ahead.

Current  economic  conditions,  and  in  particular,  the  unprecedented  level  of
uncertainty are serious, It is therefore important that certain key messages guide the
European Union’s response:

(cid:1)  While  the  Union  faces  a  serious  situation,  sound  economic  fundamentals  mean
that  it  is  in  a  good  position  to  face  the  current  crisis.  Subject  to  there  being  no
further  deterioration  in  the  political  climate,  there  are  causes  for  cautious
optimism  that  a  recovery  may  start  to  be  seen  in  the  second  half  of  2002.  It  is
important  to  maintain  those  sound  fundamentals  by  following  the  right  policy
mix.

(cid:1)  The  European  Union  must  reinforce  its  focus  on  its  medium  and  long-term
objectives set out in the Lisbon strategy. This should backed up by decisions on
key proposals currently before Council and European Parliament before the next
Spring European Council.

(cid:1)  The  impact  of  current  events  on  individual  sectors  must  be  kept  under  review.
However, measures (particularly generalised aid packages ) which harm the long-
term  prospects  for  growth  and  competitiveness  must  be  avoided.  Particular
attention  must  be  paid  to  managing  the  social  and  employment  impact  of  the
deteriorating economic situation.

14

(cid:1)  The  European  Investment  Bank  should  step  up  its  contribution  by  providing
lending, particularly to infrastructure projects, to support the knowledge economy
and to help stabilise long-term investment, including in sectors particularly badly
affected by the down turn.

(cid:1)  Building  global  confidence  is  also  important.  The  successful  launch  of  a  new
trade  round  must  be  a  key  component  of  building  that  confidence.  At  the  same
time the Union must make best use of its co-operation and development policies,
in  particular  with  those  partner  countries  around  the  world,  which  are  more
vulnerable  to  the  present  conditions.  A  coalition  against  terrorism  must  be
complemented  by  a  coalition  for  development  with  the  Union  playing  a  leading
role in setting this in motion.

(cid:1)  The  range  of  actions  designed  to  improve  co-operation  in  the  fight  against
terrorism,  and  to  enhance  security  and  protection  of  European  citizens  (such  as
those identified in Roadmaps of the General Affairs and Justice and Home Affairs
Councils),  must  be  vigorously  pursued.  Consideration  must  also  be  given  to
additional  measures  updating  and  adapting  EU  rules  currently  in  place  or
proposed before the events in the US, such as the new rules on money laundering,
or provisions relating to asylum.

(cid:1)  The  Union’s  capacity  to  respond  to  incidents  involving  biological  or  chemical
agents which threaten  human  health  should  be  rapidly  strengthened,  building  on
the experience of the much stronger system already in place relating to threats to
animal health.

(cid:1)  A far reaching reflection on medium and longer-term political and foreign policy
responses of the Union must be set in train with the aim of strengthening global
governance world-wide in order to ensure sustainable and equitable development,
as well as promoting dialogue between civilisations.

The Commission will continue to monitor and report on the evolution of the current
situation  and  to  make  recommendations  in  the  light  of  its  assessment.  Its  annual
economic  report  and  Autumn  forecasts  due  later  this  year  should  offer  a  further
opportunity to assess economic developments as  more  solid data on the  reaction of
markets,  businesses  and  people  to  the  aftermath  of  the  11  September  becomes
available.

15