Opinion of the Economic and Social Committee on "The economic policies of the euro-zone countries: convergences and divergences, results and lessons to be drawn"
Date: 2002-03-21
Institutions: European Economic and Social Committee
Subjects: EU Member State, economic policy, euro area

27.5.2002

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Official Journal of the European Communities

C 125/79

Opinion of the Economic and Social Committee on ‘The economic policies of the euro-zone
countries: convergences and divergences, results and lessons to be drawn’

(2002/C 125/17)

On 31 May 2001, the Economic and Social Committee, acting under Rule 23(3) of its Rules of Procedure,
decided to draw up an opinion on ‘The economic policies of the euro-zone countries: convergences and
divergences, results and lessons to be drawn’.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was
responsible for preparing the Committee’s work on this subject, adopted its opinion on 25 February
2002. The rapporteur was Mr Nyberg.

At its 389th Plenary Session (meeting of 21 March) the Economic and Social Committee adopted the
following opinion by 90 votes to one with three abstentions.

1.

Introduction

In an opinion on economic policy (1) coordination as
1.1.
the Economic and Social
a consequence of
Committee stated that such coordination is necessary, and put
forward some possible rules.

the EMU (2)

— The first rule is to choose the correct direction of the
economic-policy measures — expansionary or restrictive.

— The second is in what way the measures affect other
euro-zone countries. Measures which have as much effect
as possible should be chosen if the economies are in the
same business-cycle position. A country which is out of
phase with the others should choose measures with as
little external effect as possible.

there is a convergence or perhaps divergence in some policy
areas. What are the results of the chosen policies on the
economic situation in each country? Are there good examples
to be found already after the first years of the EMU?

1.3.
This opinion can also be seen as a part of the yearly
studies by the Committee on the Broad Economic Policy
Guidelines (BEPG). These studies focus on the general develop-
ment of the economic situation for the EU and the overall
direction of the policies. There has not earlier been any
possibility for more in-depth studies of the separate countries.

1.4.
The figures used in this study are mainly taken
from different publications from the European Commission,
Economic and Financial Affairs and Employment and Social
Affairs Directorate-Generals (3).

— After common discussions on the most favourable policy
mix for each country the exact choice of measures is up
to each individual country.

2. Policy objectives

— If other effects of the measures are considered, e.g. effects
on the tax level, this should only be as a second line of
preferences — the effect on the business cycle is the
primary objective.

— When positive effects on other objectives can be achieved
together with the desired effect on the business cycle,
such measures should of course be searched for.

1.2.
The Committee has decided to draw up an additional
opinion to continue the discussion on economic policy
coordination. This opinion studies the separate economic
policies of the 12 euro-zone countries to find out if in practice

The monetary policy objective is set by the European
2.1.
Central Bank (ECB); the rate of inflation is to be kept under
2 % at a medium term. The measures taken by the ECB, their
rates of interests and open market operations, are not discussed
in this opinion. Instead, the actual situation after the monetary
policy actions is the starting point. But, of course, a low rate
of inflation is one of the main objectives for all policy-makers.

2.2.
The public budget objective is based on the aim to
safeguard the 3 % of GDP deficit ceiling. But this earlier
‘objective’ has been developed into a medium term ‘close to
balance or in surplus’ objective. Economic policy discussions
in the Commission and the Council seem to consider this as
an overall objective.

(1) This opinion deals with those aspects of Economic Policy which
are comprised in the term budgetary policy, both the revenue and
expenditure sides of the public budgets.

(2) OJ C 139, 11.5.2001, p. 60.

(3) European Economy. Reports and studies, No 3, 2000, No 3, 2001

and Employment in Europe.

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The 60 % ceiling for public debt, emanating from the
2.3.
Maastricht criteria,
is still an objective but because of the
reductions during later years it now attracts less interest. In the
coming years only three of the EU countries will have a debt
higher than that ceiling. An increasing interest in this objective
is necessary as the demographic changes will among other
things require that the interest burden be as small as possible.

The Committee will

2.7.
in this opinion on economic
policy not directly consider the inflation rate — a central
objective of monetary policy. The subject is instead the growth
rate as an objective, objectives for unemployment and labour
force participation rates and social welfare as an end result of
growth, employment and other intermediate goals.

2.4.
Discussions on the economic situation and on econ-
omic policy choices are based on the budget balance and
public debt objectives. But increasing interest seems to be
given to the economic growth objective. There is no target
level set for this objective. It is rather seen as a result of the
economic situation and economic policy. When the outcome
in a country is lower than average growth, that country’s
economic policy is not necessarily questioned. Although it is
not an explicit objective, achieving economic growth is
considered central in Commission economic studies. Sustain-
able economic growth should therefore be one primary
objective of economic policy.

3. National economic policies 1999-2001 — a general

perspective

3.1.
The Commission considers that the SGP target of
close-to-balance or in-surplus for the public budget should be
respected. One reason is to enable the Member States in the
future to allow the automatic stabilisers also to work in the
case of an economic slowdown. But it has not been defined
when a situation can be characterised as a slowdown.

In studies dealing with economic policy, employment
2.5.
is often neglected as a variable, both from the perspective of
keeping unemployment down and that of achieving high rates
of labour force participation (1). Apart from being a goal in
itself high economic growth is also necessary for the achieve-
ment of low unemployment and a high rate of labour force
participation. We do not consider the wage policy and its
potential effects on employment and demand in this opinion.
There are of course also important influences on employment
from both the Luxembourg and the Cardiff processes as well
as from the Structural Funds. Employment ought to be at the
forefront as one primary objective for economic policy. The
countries should be judged also according to their achievement
of this objective in BEPG and SGP (2).

2.6.
Achieving high levels of social welfare, according
to the fundamental articles of the European Union (3) of
strengthening social cohesion, is seldom found as an objective.
This can also be seen as an end result of higher economic
growth, in fact, the sought-for real result for all the BEPG and
SGP political actions. The distribution of this welfare is often
lacking as a part of the analysis as are other aspects of the
social systems. Such effects of the economic policy are very
much the competence of the individual Member States and,
therefore, we will not include a social welfare objective in our
analysis. As a part of this we will neither, as is often done,
point the finger at those countries which reduce their taxes
without a concomitant reduction in the social welfare pay-
ments.

3.1.1.
The policy mix at the national level should not only
be appropriate for the economic situation in that country but
also be coherent with the overall fiscal stance for the euro area.

The Commission (4) correctly points to the need to
3.2.
expand the debate from merely focusing on the SGP discipline
to also including the contribution of the public budget to
growth and employment. This is very welcome, but it is hard
to find any recommendations along this line. When they are
found, it is often for countries where they can go hand in hand
with budget stabilisation.

Two main features are now rightfully in the centre of
3.3.
the discussions — the cyclical stabilisation role of budget
policy and to what extent the automatic stabilisers should be
allowed to work. The next step in cyclical policy — discretion-
ary counter-cyclical actions — is taken in some countries but
seldom referred to as ‘discretionary’. Here we can see another
‘hand-in-hand’ example. If they can be described as structural
reforms,
they may very well appear in the Commission
economic reports.

3.3.1.
The Commission in its report on public finances
states that ‘the budgetary outcome for 2000 should have been
better, as some governments gave away part of the higher-
than-expected ’growth dividend’ via tax cuts or expenditure
increases’ (5). But a parallel question to this could be what the
growth prospects would have been for 2001 if the countries
had not used that opportunity?

(1) Labour force participation (activity rate) = employed and unem-
ployed persons as a percentage of the potential labour force.

(2) SGP = Stability and Growth Pact.
(3) EU Treaty, Article 2.

(4) COM(2001) 355 final, p. 3.
(5) Public Finances in EMU — 2001, page 2 (European Economy.

Reports and studies, No 3.2001).

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3.3.2.
In the same spirit it is said that automatic stabilisers
can be used when there is a downside risk for the economic
development, but only insofar as the country has attained the
goal of close-to-balance or in-surplus. The problem becomes
worse when those most in need of such an economic stimulus
are the countries that have not attained that goal.

tightening during 2000. In Greece monetary conditions were
relaxed somewhat. Most other countries, having fairly tight
In
monetary conditions experienced a further tightening.
Ireland monetary conditions lead to increased inflation.

The Commission is rightly concerned about pro-
3.4.
cyclical behaviour. It has occurred frequently, especially during
the 1990s. It was a negative side of the application of the
Maastricht criteria. Currently, some countries experiencing a
slowdown once again follow what can be called a pro-cyclical
policy by strictly adhering to the SGP. They are not criticised.
On the other hand, those who regard the downturn as a cause
for concern and take corresponding measures will be criticised
for not respecting the SGP. The conflict between objectives
should be solved with the experience from the 90s. Adhering
to just one of the objectives should not be the solution. The
emphasis put on different objectives differs between the
Directorates-General of the Commission. This is a matter of
concern when you want to consider the policy in total.

3.4.1.
The situation during 2001 with a reduced growth
rate has worsened the problems. According to the Commission
some countries display inflationary risks, some have not
achieved the budget balance and the rest could let their
automatic stabilisers work. For all but two countries possible
effects from automatic stabilisers are as small as 0,1 or
0,2 percent of GDP. Some countries have taken discretionary
actions. The Netherlands is reducing its surplus, which also
seems recommendable in this situation. Finland, Luxembourg
and Ireland are reducing their very high surpluses. That can be
seen as a relative stimulus and probably not acceptable to the
Commission. Nevertheless, these are small countries, not very
much affecting the total inflation rate. This economic stimulus
could be desirable for countries having greater problems with
the growth rate. Finally, Germany increases its deficit, mainly
by its tax-reduction scheme. Although Germany will be close
to the limit of 3 % deficit, this is explained by the continual
downward correction of growth forecasts.

For 2001, the situation is much more split. Finland,
3.5.1.
the Netherlands, Germany and Ireland have a loosening fiscal
policy. Tightening monetary conditions occur as often as
changes in a loosening direction. If this is seen in the light of
capacity utilisation, only Germany in 2001 still possesses
unused capacity to any significant degree according to the
Commission spring calculations. A change has occurred inter
alia due to the acts of terror on 11 September 2001 with
reduced demand and increased unused capacity in most
interest-rate
countries as well as responses to this, e.g.
reductions.

4. Economic impact

4.1. Overall economic impact

4.1.1.
Assessing economic policies in terms of their impact
on economic growth is a multi-tiered process. An assessment
based on an individual measure, even if it is a dominant one,
is not permissible. The composition and reciprocal effect of
the entire package of measures must be analysed and evaluated.
A definitive judgment is only possible if the time at which the
measures take effect is also covered in the analysis. The
Commission has attempted to make calculations from such
considerations. It has found that expenditure side changes in
the public budgets have a faster impact than actions on the tax
side.

4.1.2.
Actions aiming at the demand side of the economy
will result in changes quicker than those aiming at the supply
side. As tax cuts can have both demand and supply effects this
explains some of the slower response to tax changes.

3.5.
The Commission in a sophisticated way tries to
measure both the economic and the monetary stance, and
attempts to find out if economic and monetary policies have
been neutral, expansionary or contractive during the first two
years of EMU. The economic policy is said to have been neutral
during the first year of EMU but moving in a loosening
direction. Monetary conditions started out as moderately
expansionary, moving in a tightening direction. For individual
euro countries, only Finland experienced a real economic

4.1.3.
All these aspects have to be considered to find a well-
composed economic policy. As an example a tax cut might
not give the wanted response for the employment rate.
Likewise a reduction in child-care fees or improved availability
of child-care facilities might not have as large effect as
expected. These two actions in combination, on the other
hand, might have larger effects than the sum of their separate
effects.

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Another aspect

4.1.4.
that complicates the design and
measurement of economic policy is the difference between the
levels of government
including all
general public budget
and the central government budget. The government and
parliament normally have direct influence only over the central
government budget. In some countries agreements have been
concluded for an alignment of budgets at other levels with the
central government budget. This problem is of course more
complex in federal states. For the ECB and the Commission
the concern is with the general budgets.

a result of faster than expected growth. Furthermore, effects
resulting from lower public interest payments and effects
of automatic stabilisers are separated from the effects of
discretionary measures. The effects of
the discretionary
measures then turn out to be only 0,1% of GDP. The measuring
problems are overwhelming if we were to attempt to measure
the effect of each action separately. The social contribution
rebate in Spain for example corresponded to only 0,1% of
GDP. How could the effect on GDP from this change be
assessed separately when it was taken together with a lot of
other measures?

4.1.5.
It is often said that a heavier burden is put on
economic policy when monetary policy is given. Differences
in economic situation now have to be addressed solely by
economic policy. But, on the other hand, before the common
monetary policy of the EMU there was more spill-over from
an economic policy measure. Not only could the effects
disappear through trade and higher inflation, but also through
higher interest rates and through volatile exchange rates. The
common monetary policy can, therefore, be said not only to
broaden the scope for economic policy but also to make it
more efficient.

4.2. Growth and economic achievements

4.2.1.
Assessing the impact of an economic measure is
tricky, as there are two determining factors – the actual
political measures and the economic situation, mainly growth,
with in turn partly depends on consumers’ and producers’
confidence. This is not a big problem if the economic growth
forecast of the coming year turns out to be accurate. Then it is
possible in advance, after assessing the effects of that growth
rate, to decide upon an expansionary, neutral or contractive
economic policy. During 1999 and 2000 governments tended
to underestimate economic growth.
In a situation where
performance is assessed according to the improvement of the
budget balance and the reduction in public debt, this will place
the governments in a more favourable light than they would
deserve according to the governmental actions. During a year
like 2001 when the growth rate in most countries will be
lower than expected, policies might be judged as appropriate
or turn out to be too contractive.

Furthermore, different political conclusions can be
4.2.3.
drawn from the figures. The Commission finds that the three
countries with persistent large deficits did not improve their
positions during years of good growth. But they do not
explicitly comment that the same countries had among the
lowest growth rates and therefore were in a situation where
economic stimulation could seem justified. If they had not
used the possibilities to stimulate their economies during these
years they would today have a worse economic situation but
on the other hand a better possibility to counteract that.
Assessment of policies is more difficult if both the nature and
timing of measures are considered.

4.2.4. Most countries have reduced their public debts
during the last years. But considering the high growth rates
this was not an especially glorious achievement. We can take
Belgium as an example, with a reduction of 5,5 percentage
points during 2000. Of this, 4,5 percentage points can be
attributed to the mathematical change of the value of the debt
as a percentage of GDP when the growth rate is higher. There
are no figures on how much of the debt reduction in the euro
countries which in fact was real payments of debt. The
Commission comments on the Spanish debt ratio reduction
during 2000, of which 2,5 of 2,7 percentage points was
attributed to the growth rate, but we would like the Com-
mission to provide us with such figures for all countries.

4.2.2.
Furthermore, the growth rate very much depends on
actual policies. A policy that takes away purchasing power
will reduce consumption and,
in the end, growth. Such
interdependencies really make assessment of the policies very
difficult.

4.3. Automatic stabilisers

The Commission makes bold efforts to separate
4.2.2.1.
the effects of growth from the effects of political measures.
The faster than expected overall reduction in deficit was mainly

4.3.1. When the budget deficit is lower than 3 % of GDP
(or rather when budget balance is achieved) the question arises
whether the automatic stabilisers can be allowed to work
freely. But how much of the cyclical stabilisation can come
from the automatic stabilisers? Can they be improved?

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There is a general view that automatic stabilisers (1)
4.3.2.
have the greatest impact when the structural problem (shock)
is on the demand side. For example, some progressive taxes
and unemployment benefits have a smoothing effect both in
an economic downturn and in recovery counteracting the
effects on personal income. They are most efficient for shocks
affecting consumption and less efficient for shocks related to
investments or external demand. Shocks on the supply side
are said to have effects on inflation and output in opposite
directions. A higher oil price e.g. will raise inflation and lower
output. An automatic stabiliser is hard to find when it, in that
case, should be both expansionary and contractive.

4.4.2.
There are large differences between the euro states
concerning both research and development expenditures and
it can hardly be
investment. In spite of these differences,
opposed that all countries should pursue policies which
increase the share of GDP for these expenditures. Although we
cannot judge the impact of recent measures, earlier experiences
provide clear evidence of the efficiency of measures in these
areas. The high expenditures on information technology
(training, networks, usage) and research in this area e.g. in the
USA and the Nordic countries are concomitant with increased
growth rates and levels of employment.

4.3.3.
There are also large differences between countries as
to the sensitivity of the public budget to cyclical changes. An
economy where the public sector is highly affected by cyclical
changes via the automatic stabilisers also has a possibility
to achieve more through its economic-policy changes. The
sensitivity goes both ways — from the business cycle and from
the political actions. These countries often have advanced
social security systems.

4.3.4.
This leads us to the statement that it is impossible to
have any general opinion on the use of automatic stabilisers.
The Commission has made calculations to find appropriate
target levels of budget deficits/surpluses to aim at over the
cycles which differs between the countries. The more volatile
the economy, the higher the surplus which is required. After
the fixing of such minimum levels, new target levels have been
set which would allow for automatic stabilisers to operate
freely.

4.4.

Investments

4.4.1. Many kinds of public spending can have positive
effects on both growth and employment. This is the case for
‘traditional’ expenditures, e.g. on education, health, regional
transfers and social policy. Their quantity and quality provide
the foundation for a modern growing economy. Despite their
importance, most attention is given to research and private as
well as public investments. The Lisbon conclusions, followed
up in Stockholm, outlined the political ambition to improve
these policies. Too short a time has elapsed not only for the
results on growth and employment to be evident, but also for
all proper actions to have been taken. The search for relevant
indicators of these actions is a first step, not yet fulfilled.

4.4.3.
There is a statistical dilemma as statistics of invest-
ments only take account of physical investments. Statistics
should be developed so as to include investments in human
capital. There is a huge problem of measurement, as we then
have to find a dividing line between ‘ordinary’ education
expenditures and education and training expenditures that
increase the production power. One possibility would treat all
education and training costs incurred by the companies
(although it can partly be paid for publicly) as human capital
investment.

The bulk of investments are private and these are the
4.4.4.
main determinants of growth. But turning to public physical
investments, also important for growth and as a complement
to private investments,
there is a complication with the
construction of the SGP. A country with a high percentage of
GDP going to public investments, which is recommendable,
will have a greater problem finding a budget balance as the
reductions in other public expenditures will be larger to
counteract the ‘extra’ public investment expenditures, insofar
as these are not financed from outside the budget and are not
therefore subject to the assessment of the SGP. In such a case
the EMU convergence criteria may reduce public investments.
During the 1990s, reductions in public physical investments
accounted for as much as one third of the reduction in public
budget deficits, thereby reducing their share of GDP from 2,9%
(1991) to only 2,3% (1999) (2). This is economically even more
absurd as such expenditures would increase the growth rate
and in the end make it easier to fulfil the objectives of the
SGP.

4.5. Tax system changes

4.5.1.
The positive effects from research and investments
are hardly questioned, but results for growth and employment
from changes in the tax systems are not always generally
accepted. The taxation system has effects on the willingness to
work, save and invest. The effects do not only come from the
level of taxation but also from its composition. Some examples
are given below but, as the Commission states, the results have

(1) For a discussion on automatic stabilisers, see the ESC opinion in

(2) Gross fixed capital formation of General Government EU15,

OJ C 139, 11.5.2001, p. 60.

Eurostat.

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so far been mixed. Generally it can be said that it takes a long
time — a couple of years — for the effects to appear and the
changes have to be quite substantial to affect our behaviour.

4.5.2.
Furthermore, changes in the taxation systems must
be seen in a broader sense where also the benefit systems are
included. The interaction between taxes and benefits has to be
seen as a whole when the impact on employment and growth
is examined. Moreover, a search for increased employment
through changes in tax and benefit systems requires a concomi-
tant change from passive to active labour-market measures to
make possible an increase in labour-force participation.

4.5.3. We cannot consider the whole problem of the ageing
population in this opinion but we would like to stress the
increased emphasis on debt reduction that it entails. In some
countries this can be said to have made it more difficult in a
downturn to achieve a shift
to more of counter-cyclical
policies.

4.5.4.
During the years before the third phase of EMU,
tightening of economic policy was very pronounced. The tight
policy has continued but the pace has slowed down since the
need diminishes when budgets are almost balanced and since
the reforms are starting to bear fruit. In most countries the
changes have involved both expenditure cuts and tax cuts,
thereby reducing the relative size of the public sector. In some
countries the tax changes have taken the form of changes in
the tax collection system or in tax bases so that tax revenues
have increased without tax rates being raised. The fairness of
tax systems has thereby increased.

4.6.

Employment

4.6.1.
To find statistics on employment trends we have to
turn to publications like ‘Employment in Europe’. This in itself
is a sign that
in summit
conclusions has not found its way into all the Commission
services. Employment effects are not really considered when
the economic policies of the euro countries are judged.

the inclusion of employment

4.6.2.
Spain, Belgium and Ireland experienced a fall of
unemployment of more than 1 percentage point per annum
during the two-year period 1999/2000. Belgium and Ireland
achieved this although they did not start from an especially
high level of unemployment. Eight of the 12 countries fell
short of a possible goal of -1 percentage point per annum and
three (Austria, Luxembourg and Portugal) only came halfway
but they already had the lowest unemployment levels (1).

(1) Luxembourg is a special case where a good development in the
labour market to a great extent affects the neighbouring countries.

4.6.3.
Instead, looking at the development of the labour
force participation rate the fastest increase occurred in the
Netherlands, Ireland, Luxembourg and Spain. The smallest
increases can be found in Austria, Germany and France. There
is no clear relationship between the changes in the activity rate
during these years and the starting point
for this rate.
More factors must be sought for to explain the differing
performances.

Spain appears to be the best performing during these
4.6.4.
years although starting from the highest unemployment and a
low activity rate. Austria has the poorest performance but
starting from a low unemployment and high activity rate (1).
There may be differing reasons for the different trends but
there seem to be a convergence for these aspects of the labour
markets.

4.6.5.
Looking for the reasons for the differences, the
growth rate is a natural explanation. We can also see that high
growth rates are strongly correlated to favourable employment
developments.

But the sometimes contradictory developments for
4.6.6.
the national
labour markets call for deeper studies of the
reasons for good and bad performances on the labour markets.
Some of the explanations can be found in the discretionary
economic policy measures of the 12 countries. A supporting
document drawn up by the study group describing economic
policies country by country led to the conclusion that these
seem to be special for each country.

5.

Inconsistent recommendations

5.1.
If other policy areas are considered, and not only
BEPG, the recommendations in 2001 for some countries are
not consistent with the expansionary policy which the lower
growth rates would justify. In its general assessment of the
economic situation (monetary and cyclical) the Commission
is mainly concerned about
the countries that experience
overheating and inflationary pressure. For the countries with
an inadequate demand for an acceptable economic growth to
evolve there is no outspoken corresponding concern. This
goes for most governments as well. Economic policy can in
general be said to support the common monetary policy in
high growth periods, but there is a risk for conflicts between
them in periods of low growth. This gives us great concerns
about the current economic situation and the corresponding
economic policy recommendations.

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5.2.
There is seldom any consideration of the effects of one
country’s policy on the other countries, only on the general
situation for the euro area. And it seems to be more of a
mathematical relation, summing up the national figures for
inflation etc., than an economic calculation of the factual
relations between the 12 economies. This can be illustrated by
the Irish example. The Ecofin recommendation to Ireland to
pursue a less expansionary policy, can well be defended when
one considers the Irish economy itself. But the effects on the
euro area from that over-expansion are negligible. The Irish
economy is so small that it will not in any recognisable way
influence the inflation target. Irish trade is very much directed
to countries outside the euro area (e.g. the UK) so the trade
impact on its euro partners is also negligible.

5.3.
During years of high growth, good results for unem-
ployment and employment rates are easily achieved, as they
go hand in hand with the growth rates. In a situation of low
growth, it is much more complicated. With growth under
3 %, employment will not automatically increase and with
continued emphasis on the budget balance there is a clear risk
that the policy chosen can lead to higher unemployment.
Therefore, growth rates and employment development must
also be in the centre of economic policy discussions. Actual
economic tendencies are now so clear that this change has to
be reflected in documents from the Commission and decisions
of the Council.

5.4.
Since parts of the objectives of the SGP are included in
the treaty, recommendations emanating from them carry a
greater weight than objectives which are merely adopted at
Council meetings. This difference in legal base should not
have such an impact on actual policy recommendations.
Recommended policy actions ought to be based more on
economic arguments than political considerations.

6.2.
The effect from growth on these objectives is carefully
calculated. What is missing is the impact of economic policy
on growth and employment. That seems to be the main reason
why our recommendations often tend to be more on the
expansionary side. A reduced budget surplus or an increased
deficit might very well be recommended if one’s consideration
is for both the fiscal stance and the growth and employment.
Therefore a medium-term objective of at least 3% growth
stated in summit conclusions could also be included in the
BEPG and the SGP.

6.3.
At Lisbon, a long-term objective for employment was
set — reduce unemployment so as to achieve full employment.
For the employment rate the long-term objectives were set to
70 % for men and 60 % for women. These long-term objectives
should be reflected in SGP as medium-term objectives with the
purpose to stimulate policies which aim at achieving the long-
term objectives.

6.4. With some years of practical experience of the SGP
there can now be time to assess experiences so far and
refine this foundation for economic policy in the euro-zone
countries. In addition to the proposals above, the Committee
would like to underline some principles of flexibility for the
year-by-year policy recommendations:

— the objectives should be considered as medium-term
objectives so that the outcome for each separate year
should be judged accordingly;

— business-cycle considerations should always be taken into

account;

— short-term assessments for each Member State should
always depend on how close it is to the long-term
objectives;

— they should, as well, be considered in relation to the
demographic development of each Member State.

6. A new frame for the objectives

7. Concluding remarks

The Commission reports and Council decisions clearly
6.1.
gives the impression that price stability, budget balance and
debt reduction are the main objectives. In order to draw a
general
lesson from the first years of the euro we find it
important to try to fulfil the set of objectives in the SGP to be
able to build a policy-mix which takes all economic policy
objectives into consideration.

Some general remarks are that

7.1.
there is a strong
need for a more coordinated economic policy, including a
strengthening of the macro-economic dialogue, and also a
need for more flexibility in the policy recommendations in the
SGP process. But we also want to point at some good national
examples, which at the same time fulfil the requirements for
budget balance, debt reduction, inflation rate and growth and
employment targets. And the search for a consistent policy
should also include targets for reforming pensions’ systems so
as to allow for the ageing population and financing public
investments in key areas according to the Lisbon summit.

C 125/86

EN

Official Journal of the European Communities

27.5.2002

7.2.
One obvious implication is that measures to keep the
growth rate high might be more efficient for debt reduction
than measures to actually pay the debt by running up large
budget surpluses. A policy for high growth rates, therefore, is
the best debt-reduction policy.

7.3.
Some of the examples can be classified as structural
reforms, with a long-run effect while others are rather counter-
cyclical measures. In Greece the measure to combat tax fraud
e.g. with a negative income tax, seems to have been efficient.
The tax cuts in Germany, both the income tax and the
company tax, can be considered as good examples of counter-
cyclical actions, although that was not their primary purpose.
In Belgium the expenditure ceilings and the agreement with
regional and local authorities had a great effect on the budget
balance. The Dutch formula for distribution of growth effects
on the public budget between tax reductions and public debt
reductions is interesting to follow. Although perhaps fair from
a distribution perspective it might be questionable as a stability
measure for the business cycle. On the whole, the Finnish
budgetary policy seems well calibrated to keep the tight policy
needed, despite sharp changes in revenues and expenditures,
in a situation of easy monetary conditions and high growth.

7.3.1.
Some countries have introduced changes in the
taxation systems to reduce tax evasion and to increase the tax
bases. These measures have not only turned out to be efficient,
but they have also meant a convergence in the construction of
taxation systems. These kinds of changes are very important
and ought to continue.

7.3.2.
Several countries have introduced reductions in
different tax rates. Because of the high growth rates they have
not resulted in reductions in tax receipts. The receipts have
instead continued to rise. With lower growth rates such
increases will hardly continue and will probably turn into

Brussels, 21 March 2002.

reductions. The demand effect of these tax-rate reductions
might have been realised already but the searched-for supply
effects take some time to materialise. They might unfortunately
appear in an economic setting when it is the demand side that
ought to be supported. This highlights the severe timing
problems of tax changes.

Along with the probable convergence in tax bases
7.3.3.
and reduced possibilities for tax evasion there now seems to
be an actual shift from taxes on labour and income to other
taxes. There is a small but evident tendency to tax systems
convergence both in the constructions of the systems and in
the rates.

7.4.
Some countries have introduced expenditure ceilings
in one form or other. They can solve some problems, e.g. help
to reduce the tendency for public expenditure to be increased
routinely when greater public resources become available. The
system can be said to be ‘election-proof’ as the ceilings often
are decided upon in advance and by unanimity. At the same
time they can create other possible problems such as always
using changes on the revenue side when counter-cyclical
actions are needed, as the expenditure side is fixed beforehand
for several years.
is also more inflexible when some
It
fundamentals behind the ceilings change.

7.5.
These are a few of the ‘good examples’ that can be
found - some specific for a certain country, some quite general.
It must be stressed that although good in one country, they
are not necessarily good in all the others. The economic
situation for one country might differ so much that what is
efficient there might be inefficient or undesirable in another.
Therefore, the examples of policies in this opinion and the
comments for their use in one or several countries are
worth discussing in all euro-zone countries but their actual
application must depend on the situation in each country.

The President

of the Economic and Social Committee

Göke FRERICHS