Opinion of the European Economic and Social Committee on ‘budgetary policy and type of investment’
Date: 2004-02-26
Institutions: European Economic and Social Committee
Subjects: European Central Bank, European Investment Bank, budget policy, convergence criteria, economic policy, stability pact

30.4.2004

EN

Official Journal of the European Union

C 110/111

Opinion of the European Economic and Social Committee on ‘budgetary policy and type of
investment’

(2004/C 110/19)

On 21 January 2003 the Economic and Social Committee, acting under Rule 23(3) of its Rules of Proce-
dure, decided to draw up an opinion on the Budgetary policy and type of investment.

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 9 February. The rapporteur was
Ms Florio.

At its 406th plenary session (meeting of 26 February 2004), the Economic and Social Committee adopted
the following opinion by 98 votes to 38 with three abstentions.

1. From Maastricht to the Stability Pact

balance’ is concerned, no country has yet revealed exactly what
an acceptable percentage might be for the eurozone.

1.1
The Maastricht Treaty was signed in 1992. The Treaty
criteria, which brought the first countries (followed later by
Greece) into the single currency, were essentially based on a
drastic reduction of the budget deficit, public debt and on low
inflation. The quantitative criteria underpinning it are set out in
Treaty Article 104 (ex Article 104 c) and in the appended
Protocol on the excessive deficit procedure, which establishes
the stages and timeframes for reviewing it.

The same criteria were later applied to the Stability Pact.
1.2
the Maastricht Treaty gave the
However, unlike the Pact,
Council a certain leeway with regard to the implementation
and nature of penalties. Moreover, it did not establish any dead-
lines for the various steps towards the declared objectives (1).

1.3
The Stability and Growth Pact, adopted in 1997, will go
down in the history of Treaties and Agreements as one of the
most
important steps towards the policy of coordination
sought by the European Union. The Pact sets itself three main
objectives: strengthening control of budgetary policies, coordi-
nation of economic policies, and support for economic policy
monitoring procedures.

The Pact requires each national government of the euro-
1.6
zone countries to present a ‘stability programme’, while the
other countries are to adhere to (national)
‘convergence
programmes’. The Council decides when and how to issue
recommendations and ‘early warnings’. Unlike with the Maas-
tricht criteria, the specific deadlines set by the Stability and
Growth Pact enable decisions to be taken rapidly in cases of
excessive public deficit.

1.7
Economic growth has fallen far short of expectations,
and this has prevented France and Germany – and to some
extent Portugal – from respecting the agreed criteria. Under
Treaty Article 104(8) and Regulation 1466/97 of the Stability
and Growth Pact, this should have triggered drastic adjustment
measures and possible sanctions for failure to respect
the
agreed criteria. However, the Ecofin Council of 25 November
2003 decided to suspend the infringement procedures against
France and Germany.

The Pact states that,

in the short–medium term, the
1.4
budget must be ‘close to balance’. It is this same mechanism
which should enable the automatic stabilisers to be triggered
more effectively during a recession.

1.8
Generally speaking, the Maastricht Treaty has achieved
significant and positive results, not least the introduction of the
euro in 12 countries of the Union: to such an extent that, soon
after the Treaty was signed, i.e. from 1993, the budget deficits
of most EU countries started to fall (in 1993 the budget deficit
in the eurozone had reached its historical maximum: 5.5 %).

The deficit

is excessive if

1.5
it exceeds 3 % of GDP.
However, there is an ‘exceptionality clause’ that can be called
upon to address external factors that are beyond the control of
the Member States (natural disasters, etc). As far as ‘close to

1.9
Since 1997 the EESC has adopted several opinions on
budget policies, notably the Opinion on the Pact for Stability
and Growth (2)

(1) Marco Buti,

‘Maastricht's Fiscal Rules at Ten: An Assessment’ Vol.

40, no. 5 – December 2002

(2) OJ C 287 of 22.9.1997, p. 74

C 110/112

EN

Official Journal of the European Union

30.4.2004

2. The Stability Pact in the current European and interna-

tional economic climate

for the last four-month period of 2003 show eurozone GDP
growth of 0.4 %, the same as in the EU 15 area.

2.1
A discussion of budgetary policies and potential invest-
ments to re-launch the European economic system must
include an appraisal of the current situation, the direction it
might take and the instruments needed to pull back from the
brink of stagnation/recession.

2.2
In Japan, the US and the EU, the interest rates set by the
major central banks are already at historically low levels: 2.5 %
for the ECB, 1.25 % for the American Federal Reserve and
0.5 % for the Bank of Japan (figures for July 2003). The Euro-
pean Central Bank (ECB) argues that there is little room for
manoeuvre on interest rates. Moreover, the single interest rate
could turn out to be too high for some and too low for others.
This is probably why the ECB moves so cautiously compared
to the speed with which the Federal Reserve intervenes (3).

2.2.1
However, in practice a monetary policy that is more
reactive to the difficulties involved in achieving recovery and
growth and swifter to respond could be a useful factor (but not
necessarily the only one) in kick-starting the EU economy.

2.2.2
The European Central Bank could have exercised its
room for manoeuvre on interest rates, particularly with a view
to benefiting EU external trade as a whole and giving some
breathing space to national economies under
stress. But
although the ECB President said, in the immediate aftermath of
the Council decisions, that recent events would weaken confi-
dence in the euro, causing inflation to resume, and that the
ECB would therefore have to intervene by raising interest rates,
this does not seem to be an imminent threat.

2.3
The particularly critical state of public finances in the
major industrialised countries would appear to make economic
and financial recovery difficult in terms of new expenditure
(investment), particularly in the eurozone. The budget deficit in
France was 3.1 % of GDP in 2002; Germany, with a negative
balance of 3.6 %, is in an even worse state. In the United States,
the ambitious plan to kick-start the economy with an injection
of 674 billion dollars over 10 years, announced at the begin-
ning of the year, has ended up increasing the budget deficit,
which has naturally worsened owing to the military expense of
the war in Iraq. This has now been partially offset by the with-
the tax cuts promised to American
drawal of
taxpayers. In Japan, the forecast is circa 8 % of GDP for 2003,
i.e. the same level as in 2002.

some of

2.4
In its most recent report, published in April 2003, the
World Bank forecast global growth of 2.3 % for the second half
of 2003 (2.5 % in the US, 1.4 % in the eurozone and 0.6 % in
Japan). However, more recent data suggest there are signs of a
slow recovery of the United States economy, but this has yet to
be confirmed. Cyclical estimates confirm the current phase of
almost imperceptible growth in the economy: Eurostat figures

(3) Fitoussi ‘La règle et le choix’, Seuil 2002

2.5
Over the last few months the conflict in Iraq has aggra-
vated the global mood of uncertainty (political and military).
Oil prices in the wake of the conflict have not reacted as
expected, and tension has risen with the Arab countries and in
the Middle East, with a significant intensification of the conflict
between Israel and Palestine.

2.5.1
Economists believe that the difficulties in the global
economy are not a result of a shortage of credit, but of a lack
of confidence, which is further aggravated by the international
crisis.

In Europe, the greatest obstacle to a real economic
2.5.2
recovery is undoubtedly the widespread lack of certainty in
economic and industrial circles, and in public opinion in
general, as to the future of the European Union's strategy on
economic and budgetary policy, combined with slow imple-
mentation of the Lisbon Strategy and doubts about the Stability
Pact. If the reference point continues to be the rate of growth
of the US economy, the European economy will not take off of
its own accord.

2.5.3 What then, are the ‘ghosts’ we need to lay in order to
speed up economic recovery? First and foremost, weak internal
demand throughout the EU system (low growth, stable unem-
ployment, low take-up capacity for human resources).

3. Should we re-interpret the Pact?

3.1
The European Commission believes that the fact that
some major countries such as France and Germany have failed
to comply with the Maastricht Treaty and Stability Pact criteria
(3 % and 60 %) could be an obstacle to efforts to secure
economic recovery, better coordination of eurozone budgetary
policies and a re-launch of employment promotion policies.
However, many observers see the restrictive use of the Pact and
the lack of a strategy to boost demand and supply in the EU as
perhaps the most serious obstacle to the success of the Pact.

The restrictive way in which the Pact has been used
3.1.1
has led to a worsening economic situation in some countries,
such as Portugal, where cutbacks in current public spending,
mainly in investment, which are necessary in order to reduce
the deficit, have aggravated the economic situation and thrown
thousands of people out of work. Application of the Pact
should allow for counter-cyclical use of public finances.

The European Commission has often argued that

3.2
if
implementation of the regulatory measures needed to achieve
the declared objectives is postponed, the instrument itself is
viewed with suspicion, especially at a time when unexpected
stagnation/recession puts the Pact in further difficulty.

30.4.2004

EN

Official Journal of the European Union

C 110/113

3.3
It is not enough: major international organisations such
as the IMF and OECD have suggested raising the inflation
threshold from 2 % to 2.5 %. More importantly, however,
almost all economic and financial circles recognise that mone-
tary instruments are not the only realistic way of securing a
chance of economic recovery.

4. The Stability and Growth Pact: an instrument for resol-

ving the crisis

The Pact must be maintained by policies designed not
4.1
just to control
inflation, make adjustments and to limit the
public debt, but also to provide greater stimulus to internal
demand and encourage the public and private investment
needed to revive the economy in the context of the objectives
laid down by the Lisbon Strategy, as the EESC has argued in a
number of documents.

4.2
Now that the ‘dividend’ effect from the introduction of
the euro has worn off, the priority instruments we need to acti-
vate in order to stimulate growth, development and employ-
ment are those aimed at boosting macroeconomic policies,
which should focus chiefly on relaunching the Lisbon Strategy
and aim for full employment, the creation of high-quality jobs,
and stimulating supply and demand. Moreover, the automatic
stabilisers designed for an economic downturn could help prop
up demand.

In short, the EESC takes the view that employment poli-
4.3
cies should be one of the basic assessment criteria for economic
growth, with special reference to economic and social cohesion
policy. This should become a criterion for assessing economic
growth, enabling cohesion countries to increase their spending
on investment in this area.

4.4
A European Central Bank (ECB) that is the guardian of
monetary policy and price stability but also pays heed to
economic growth and employment could play an even more
important role than that laid down in the Treaty. This presup-
poses
constant dialogue with the European institutions
(Council, Commission) and the social partners. The European
Investment Bank (EIB), for its part, could fulfil
its remit by
harmonising its activity with that of the other European institu-
tions and with national government plans to boost develop-
ment and secure greater economic and social cohesion for the
EU.

infrastructure, which is already planned, and more especially in
service
for
terms of
reforms.

research and civil

training,

support

It is essential to shore up the Stability and Growth Pact
4.6
with a comprehensive information campaign,
including by
involving the intermediate levels of society (principally the
social partners, but also consumer organisations, etc.), as was
the case with the introduction of the single currency. Sharing,
co-responsibility, and a large-scale public information campaign
were the key to the success of the Maastricht Treaty and of
joining the single currency. This was not done in the case of
the Stability and Growth Pact.

It would also be advisable to review the definition of the
4.7
in which countries can exceed the
‘exceptional circumstances’
Pact's 3 % threshold,
thus providing a breathing space for
economies that are experiencing difficulties or negative annual
growth.

should

‘Exceptional

circumstances’

4.7.1
particular
include setting a long-term ceiling for increases in public
the situation in each individual
spending which reflects
country, accompanied by European-level monitoring. Targets
would thus be adjusted to each country's short-term economic
situation and position in the economic cycle.

in

4.8
A genuine European strategic plan must retrace the path
embarked upon more than ten years ago by the Delors White
Paper, working towards boosting the Lisbon objectives and
supporting the Stability and Growth Pact in the political arena.
A rethink of the way the Pact is run will mean reconsidering
the case for a common EU growth strategy, and using tax
policy as one of the ways of achieving it. To this end, the
Committee would reiterate the need for a suitably flexible
approach towards any departure from the ‘close to balance’
rule, in order to permit investment in activities that are condu-
cive to growth. Infrastructure is certainly necessary to a market
extending to 25 countries, but the keystone is investment in
human resources and the future of the EU: hence, research but
also school and university education, designed for the new
generations and for the challenges of competition, then lifelong
learning etc.

4.4.1
Furthermore, the main task of the ECB as a financial
instrument is to help to achieve EU objectives and policies.
Multiannual programming of budget resources, coordinated
with the Commission, would make it possible to optimise the
impact of these measures in order to bolster EU economic and
social cohesion within the framework of the new financial
perspectives.

4.5 Moreover, the accession of ten new countries will make
further demands on the economy in terms of investment in

5. Investments of European interest designed to achieve
the objectives set in Lisbon should be excluded from
the calculation of the public deficit

The missed forecasts and a relative lack of investment
5.1
could also widen the development gap of the new Member
States, which – if they do not receive adequate assistance to
achieve growth and create new competitive, skilled jobs, could
feed dangerous pockets of poverty and exclusion that the EU's
economic and social system would find difficult to sustain.

C 110/114

EN

Official Journal of the European Union

30.4.2004

5.2
A rethink of the way the Pact is run would require flex-
ible, expansionist budgetary policies that include a common
growth and cohesion strategy and that remove strategic invest-
ment and investment for growth from the budget deficit books,
and leave it to the Council, with the agreement of the Commis-
sion, to decide what is meant by ‘strategic investment’ in the
European interest, as set out in the Delors White Paper and the
Lisbon objectives.

As

5.3
stated in the Report which the Commission
presented in preparation for the Spring European Council in
March 2003 (Going for Growth), there is a need to encourage
all aspects of the knowledge chain – from basic education to
advanced research – and to provide funding for corporate
management skills.

Consequently, it is important to secure harmonisation of
5.4
tax regime criteria, with a universal guarantee of the principles
of equity, proportionality and efficiency policed at European
level and endorsed by European citizens.

A good national tax regime, monitored at European
5.5
level, not only ensures a healthy current expenditure environ-
ment, but could also be key to providing public investment to
revitalise the whole national and European economic and
employment system.

5.6
A healthy tax policy restricts as far as possible recourse
to one-off measures, tax amnesties, etc., which could encourage
irresponsible forms of management of national budgetary poli-
cies.

5.7
Here, we need to indicate what type of investment is
useful for growth. Common criteria will naturally have to be

Brussels, 26 February 2004.

agreed for all EU countries, with due regard, of course, for
differing circumstances and growth requirements. This could
also require a rethink of the role of the ECB as no longer just
the ‘guardian’ of monetary policy, but as a strategic instrument
for growth and economic development, and as a helpmate for
the Commission, which would have a beefed-up role in terms
of ex ante and ex post monitoring and assessment of strategic
investments.

The European Economic and Social Committee believes
5.8
for economic and employment
then that all
growth must be ensured, whilst still maintaining macroeco-
nomic stability, especially in the eurozone.

the potential

The investment needed for this will call

5.9
for closer
macro-economic cooperation, consensus, common standards
and harmonised best practice from national governments. At
European level, the open coordination method could provide
one of the more flexible means of determining the type of
intervention needed for a recovery in the economy and in
employment.

5.10
The objective is to go for growth and economic and
social cohesion on the basis of a common understanding,
worked out between all the social players (national and supra-
national institutions, governments, social partners and interest
groups), while complying with Community rules.

5.11
The European Economic and Social Committee can
play an important part, thanks to its accepted, established role
as a consultative body and monitoring agency, for the course
set out by the Stability and Growth Pact.

The President

of the European Economic and Social
Committee

Roger BRIESCH

30.4.2004

EN

Official Journal of the European Union

C 110/115

APPENDIX

to the opinion of the European Economic and Social Committee

The following amendment was put to a vote and rejected in the course of the discussion (Rule 54(3) of the Rules of
Procedure):

Point 5.2

Replace this paragraph by the following:

A reconsideration of the rules of the Pact, and the application of the rules, should take account of the requirement for
adequately flexible budgetary policies supportive of a common medium-term growth and cohesion strategy. The
amended rules should give a clear definition of what constitutes a budget deficit in a way that allows borrowing to
finance strategic investment to take place within the application of discretionary counter cyclical macro-economic policy
and is external to the short-term disciplines on the permitted scale of current deficits.’

Result of the vote:

For: 43, Against: 61, Abstentions: 8.