Opinion of the European Economic and Social Committee on the Broad economic policy guidelines and economic governance — The conditions for more coherence in economic policy-making in Europe
Date: 2006-10-26
Institutions: European Economic and Social Committee
Subjects: coordination of EMU policies, economic growth, economic policy, governance, inflation, monetary policy, pay policy, stability pact

30.12.2006

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Official Journal of the European Union

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Opinion of the European Economic and Social Committee on the Broad economic policy guidelines
and economic governance — The conditions for more coherence in economic policy-making in
Europe

(2006/C 324/21)

On 19 January 2006 the European Economic and Social Committee, acting under Rule 29(2) of its Rules of
Procedure, decided to draw up an opinion on the Broad economic policy guidelines and economic governance —
The conditions for more coherence in economic policy-making in Europe

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 7 September 2006. The rappor-
teur was Mr Nyberg.

At its 430th plenary session, held on 26 October 2006, the European Economic and Social Committee
adopted the following opinion by 86 votes to 9 with 10 abstentions.

Summary and recommendations

The EESC has decided not to comment on the three-yearly
economic guidelines in this year's opinion on economic policy.
Instead it will address the formal basis for the guidelines. The
basis for European Union action in monetary and fiscal policy
matters is to be found in the Treaty rules on the single currency
decided upon in Maastricht, in the Stability and Growth Pact
and in the Treaty rules on economic policy guidelines. The
objective is to arrive at rules that can impact as positively as
possible on the overarching objectives of price stability, growth
and employment.

In order to avoid one policy area imposing too tight constraints
on the other, the European Central Bank and ECOFIN should
consider the same set of policy objectives. It is especially impor-
tant for the ECOFIN euro group and the ECB to take the same
approach.

The opinion is divided up into different subject areas: monetary
policy, the Stability and Growth Pact, the economic guidelines,
wage formation and the link between inflation and growth.
However, we have chosen to make our
recommendations
according to who is expected do what: the European Central
Bank, ECOFIN, the Commission and the social partners.

used, as it does not include price changes that the ECB
cannot influence or which may be temporary. It is more an
indication of the price change trend. Moreover, when asses-
sing price changes, the ECB should consider whether they
might be a result of tax changes.

— The price stability requirement for common currency candi-
dates must be reviewed. Officially, this requires a change to
the Treaty. However, given that such a change was not even
included in the Constitutional Treaty, a flexible interpreta-
tion of the Treaty would be appropriate, so that eurozone
entry would depend on respecting the spirit rather than the
letter of the requirement. The logical solution would be to
for eurozone
set
members.

the same price stability objective as

— Stability and a credible monetary policy are not dependent
on keeping inflation below 2 %. A somewhat higher level as
a measure of price stability would not be a threat to stability.
It is more important to know that the authorities are willing
and able to control inflation, so that the chosen target can
be achieved.

— The ECB should publish the minutes of its meetings.

The ECB

ECOFIN

— The price stability objective should become a symmetrical
objective, e.g. 2 percent +/- 1 percentage point. An objective
with a midpoint makes it easier to judge how close to the
objective we are, and can also be useful if you want an equal
response from the ECB when the inflation rate changes
because of falling or rising demand.

— If a policy aims to take greater account of the connection
and fiscal policy
between monetary policy measures
measures, then core inflation is the measure that should be

— There is little call for a pro-cyclical policy as long as capacity
utilisation has not yet reached a level likely to give rise to
inflationary pressure. Unemployment is still at unreasonable
levels and there is considerable scope for more labour
market participation. In years when the economic climate is
healthy, economic policy should focus on planning for the
economic problems that will flow from demographic trends.
The general EU budget and deficit objectives are not enough
when the economy is on an upward trend. Member States
that have already achieved these objectives cannot rest on
their laurels.

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— The EESC believes that the indicators for budget balance and
national debt should be maintained, but the discussion must
be taken a step further,
taking the real objectives of
economic policy into account.

— The main focus of

the three-yearly economic guidelines
should be a minimum level of economic growth, a down-
ward trend for unemployment and the Lisbon Agenda
percentage objective for the workforce. National objectives
should be set, although these must not be lower than the
objectives for the EU as a whole.

— Finance ministers must be consistent: they cannot say one

thing in Brussels and then do another at home.

The social partners and the Cologne Process

— The interval between Cologne Process meetings should be
the

used to carry out
joint studies on economic links,
impact of various policy measures and similar questions.

— The Cologne Process could be the appropriate forum for
applying sufficient weight to the requirement for all parties
to fulfil their obligations on economic statistics.

— Prior to each meeting the European Parliament should adopt
a resolution on the economic situation and the policy
required.

— Both ECOFIN and the euro group should be present in order
to provide input from Finance Ministry circles and from the
Finance Ministers that are directly responsible for the fiscal
policy that is to be combined with the European Central
Bank's monetary policy.

The Commission

proposed measures on the same three objectives, they are forced
to look at all the consequences of their proposals. This produces
a more unified policy that gives a better overall result.

1. Introduction

1.1
The European Union's economic guidelines — Broad
Economic Policy Guidelines — are now set for a three year
period. This year's guidelines contain only minor changes to the
2005 guidelines.

1.2
The EESC has therefore decided not to comment on
these changes in this year's opinion on economic policy and to
address instead the formal basis for the guidelines. A study such
the
as this cannot be restricted to the formal content of
economic guidelines; it also has to address monetary policy and
its links with fiscal policy.

1.3
The basis for European Union action in monetary and
fiscal policy matters is to be found in the Treaty rules on the
single currency decided upon in Maastricht, in the Stability and
Growth Pact and in the Treaty rules on economic policy guide-
lines. Following the changes introduced in 2005, these guide-
lines are dealt with under the annual Lisbon Process.

The aim is to look at the interplay between these rules
1.4
and their impact on actual policy both in the European Union
as a whole and nationally. In order to get a comprehensive
analysis, wage formation will also be addressed. The analysis
will necessarily be somewhat theoretical in nature, in order to
advance the debate and improve policies. The objective is to see
whether the current rules are having the best possible impact
on the broad objectives for price stability, growth and employ-
ment.

— A further analysis should be carried out for core inflation. A
more detailed study of the specific policies pursued by coun-
tries with a good inflation/growth ratio (i.e.
low inflation
compared to the growth rate) should provide a basis for
future benchmarking.

1.5
Our recommendations, however, are not confined to
current policy but also address rule changes. These changes can
be implemented immediately, particularly those relating to the
conduct of decision makers. Only in one case do our recom-
mendations involve changes to the Treaty.

— It might be useful to carry out an analysis of, for example,
the extent to which productivity changes have been respon-
sible for the differences in growth rates? How far do produc-
tivity gain differentials depend on different levels of invest-
ment and innovation? What methods are generally available
for increasing productivity? The EESC therefore calls on the
Commission to look into the link between the primary
for example,
growth and employment objectives and,
productivity gains and inflation levels.

Conclusion

Better coordination between monetary and fiscal policy is
achieved when price stability, growth and employment are valu-
able objectives for all economic policy decision-makers:
the
European Central Bank, the Commission, ECOFIN, the social
partners and the Member States. When all the players base their

2. Maastricht and the common monetary policy

2.1
The European Central Bank's primary objective is price
stability. The Treaty rules adopted in Maastricht set a second
objective, namely that the European Central Bank is to support
growth when price stability has been achieved. In this context, a
comparison is usually made with the US Federal Reserve, whose
objective is based more on a global view of price stability as
well as employment and growth. The wording used might
appear to imply only a difference of degree but the differences
are clearer in terms of the actual monetary policy pursued. The
Federal Reserve is more likely to use employment trends as a
reason for interest changes. For the European Central Bank,
price stability seems to be the only basis for interest changes.

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In addition to actual monetary policy measures, the way
2.2
the objective is worded is, consequently, also important to its
impact on overall policy.

impacting directly on the European Central Bank's policies.
Notwithstanding the likely long-term increase in energy prices,
temporary oil price rises can never be offset by interest rate
changes, which are only thought to have an impact after 1-
2 years.

2.3
In a complete picture of economic policies — including
both monetary policy and fiscal policy — it is not just interest
rate policy that is crucial to how fiscal policy can be pursued;
the choice of monetary policy objectives is equally important. A
Finance Minister probably often thinks,
‘If I do this, will it be
countered by interest changes to curb its impact?’ In order to
avoid one policy area imposing too tight constraints on the
other, the European Central Bank and ECOFIN should consider
the same set of policy objectives. It is especially important for
the ECOFIN euro group and the ECB to take the same approach.
The monetary policy objective should be set with the long term
in mind. The European Central Bank has often stated that the 2
percent objective was based on previous ECOFIN positions.
Opinions as to what might constitute a desirable level of infla-
tion do not differ significantly, but the objective and measures
must be respected by all.

2.4 When the European Central Bank set the objective for
price stability, an inflation level of
less than 2 percent was
chosen. Already in 2003 the objective was changed to below
but close to 2 percent. The objective is thus somewhat more
realistic since the first objective of under 2 percent could mean
that even deflation was acceptable.

the best

formulation of

2.5
There remain, however, two problems with this defini-
tion: it is almost impossible to decide how far we are from the
objective and what distance is acceptable. A symmetrical objec-
tive leaves a space around the most desirable rate of inflation.
Given the European Central Bank's call for a level close to 2
percent,
the objective would be 2
percent +/- 1 percentage point. Such an objective would also
remove some of
the concerns that arise around occasional
changes at promille level. The EESC believes there is every
reason to change the European Central Bank's objective to a
symmetrical objective. An objective with a midpoint can also be
useful if you want an equal response from the ECB when the
inflation rate changes because of falling or rising demand. In
the past,
the interest rate rose quickly when the European
economy was doing well before the turn of the millennium,
whereas rates fell considerably more slowly when there was a
downturn a couple of years later.

type of

The remaining problem is, what

inflation is
2.6
being measured? The European Central Bank's formal objective
uses the HICP (Harmonised Index of Consumer Prices), i.e.
it
measures the overall
level of inflation. Items such as energy
prices or food prices can be removed from this in order to
produce inflation levels that can be considered to be more sensi-
tive to monetary policy and that do not depend on factors
beyond our control. This is mainly to offset the impact of oil
price increases, which are temporary changes which can head
off in the opposite direction quite suddenly. A modified price
to avoid temporary changes
index is necessary in order

is usually referred to as ‘core inflation’

2.7 What
is the
measure of inflation trends in the domestic economy (the euro
area for the European Central Bank). These price level changes
are more symptomatic of trends, and it these that the European
Central Bank needs to work on most. The most direct impact of
interest rate changes on the rate of price increases ought logi-
cally to be found between this inflation measure and the Euro-
pean Central Bank's interest rate policy. If the European Central
Bank accepts a rate of inflation above its stated objective then
this is most probably because it has also taken one of these
reduced inflation scenarios into account. If core inflation is also
referred to, the ECB will find it easier to get its policy across. If
a policy aims to take greater account of the connection between
monetary policy measures and fiscal policy measures, then core
inflation is the measure that should be used. This would make it
easier for macro-economic policy to impact more positively on
growth and employment.

A comparison between the official

2.8
inflation rate
according to the HICP and the measures that apply to core infla-
tion shows (see Appendix) only small variation. The only appre-
ciable difference was in 2005, when energy prices impacted on
general prices. A comparison of inflation with the European
Central Bank's target shows that core inflation only came in
well below target in 2000 and 2005. If a core inflation target
had been set, policy in 2005, for example, should have been
less restrictive.

Another factor that affects the inflation level, without
2.9
being a direct consequence of domestic demand, is changes to
taxes and duties. If, for example, the Member States increase
VAT in order to reduce the budget deficit, inflation also rises.
This could induce the European Central Bank, if using the HICP
to measure inflation, to raise interest rates. But VAT increases
stifle consumer demand and should therefore, taking a holistic
approach to economic policy, actually be accompanied by a cut
in interest rates. In situations such as these, e.g. when Germany
raises VAT from 16 % to 19 % at the end of this year, the Euro-
pean Central Bank should look closely at the causes of inflation
and remember that a one-off event will not result in a trend
towards higher inflation. Furthermore,
if the ECB allows this
type of tax hike in one country to influence monetary policy, it
will also have a negative impact on all the other eurozone coun-
tries.

2.10
In order to join the single currency, the Member States
that are not yet part of the eurozone must, according to the
Treaty, have an inflation rate that is ‘close to that of, at most,
the three best performing Member States in terms of price stabi-
lity’. ‘Close to’ means a maximum differential of 1.5 %. ‘Best’ in

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this context means the lowest inflation level. This objective is
not as logical today as it was at the start of the 1990s. Given
the situation over the last few years, this could mean a lower
inflation rate than in the eurozone countries. The requirement
is even more absurd given that it is based on inflation in the EU
Member States rather than just on that in the eurozone coun-
tries. In recent times, non-eurozone members have been the
three to follow for the price stability requirement for countries
that wish to adopt the euro. The price stability requirement for
single currency candidates therefore needs reviewing. Officially,
this requires a change to the Treaty. However, given that such a
change was not even included in the Constitutional Treaty, this
change would take so long that most eurozone applicant coun-
tries would be forced to try to meet the current requirement. A
flexible interpretation of the Treaty would therefore be appro-
priate, so that eurozone entry would depend on respecting the
spirit rather than the letter of the requirement. The logical solu-
tion would be to set the same price stability objective as for
eurozone members. If this objective were to be adjusted to 2
percent +/- 1 percentage point, then the same should apply to
euro candidates.

2.10.1
A more flexible approach to price stability might also
be needed in countries with rapid economic growth. Ireland, for
instance, is an example of the need for somewhat higher infla-
in a strongly expanding
tion as a necessary adjustment
economy.

Inflation is a statistical measure needed to underpin
2.11
economic policy, but
the public sees price rises differently,
reacting strongly to rises in rent, food and petrol prices, etc.,
whereas few people even notice that some goods have come
down in price. What is more serious, however, is the fact that
different people are affected in very different ways. When it is
chiefly basic essentials that rise in price, it is the poor that suffer
the most, as a general price rise of 2 %-3 % can mean a signifi-
cant increase in their cost of living. Politicians must take note of
these effects and counteract them by means of various policy
measures. This is not so much a question of
the scope of
budget policy as its specific content.

Given the economic developments following the review
3.2
of the Pact, it is logical that it has not had any visible effect.
Most of the changes introduced referred almost exclusively to
periods of major economic problems, whereas we have just seen
a revival of the economy and improvements that can also be
discerned in the Pact's indicators.

3.3
Economic expectations for 2005 and 2006, particularly
in the light of more positive developments in Germany, point to
a generally improved compliance with the Stability and Growth
Pact indicators. The fact that this is taking place against a back-
drop of very high oil price rises shows that the economic
improvements are quite robust. The extent to which oil price
rises will impact on individual countries will depend on how far
they are dependent on oil
imports. Even in ‘good’ years,
however, some countries are still some way from achieving the
budget balance target. They should benefit from the positive
trend in other EU countries.

3.4
In most countries, however, the growth rate achieved or
expected is not at a level that would call for the Pact's more
stringent stance on budget measures during economically ‘good’
years to come into effect. There is little call for a procyclical
policy as long as capacity has not reached a level likely to give
rise to inflationary pressure. Unemployment is still at unreason-
able levels and there is considerable scope for more labour
market participation. The interplay between fiscal policy and
monetary policy is under fresh strain compared to the very
weak economic situation of previous years. In years when the
economic climate is healthy, economic policy should focus on
planning for the economic problems that will flow from demo-
graphic trends.

3.5
The general EU public sector budget and debt objectives
are not enough when the economy is on an upward trend.
Member States that have already achieved these objectives
cannot rest on their laurels. It is important that they should use
the national objectives in accordance with the new Stability and
Growth Pact to improve their economic situation.

3. The 2005 Stability and Growth Pact

3.1
Have Member State policies changed since the Stability
and Growth Pact was reviewed, and has the Commission's and
subsequently the Council's assessment of the countries changed?
It would seem that only Lithuania has clearly used the new
Pact's explanations for a deficit. Nevertheless the new Pact has
resulted in all Member States establishing medium/long-term
for public finances. The objectives are
national objectives
framed according to the individual country's actual situation.

In addition to the fact that the difficult economic situa-
3.6
tion prior to 2005 was the main source of problems in clari-
fying the Pact's indicators, there are statistical explanations that
are seldom noted. When there is low inflation in the economy,
national debt retains its value. Specific measures are needed to
reduce it. When growth is strong the national debt as a percen-
tage of GDP is reduced without any need for action, and budget
balance improves. When inflation is high, the cost of the public
sector's economic subsidies as a share of GDP falls, giving a
improvement in budget balance and national debt.
statistical
When there is growth, revenue increases without any need to

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raise taxes. To some extent then, the difficult statistical impact
on national debt and budget balance in recent times has been
succeeded by positive statistical effects.

economy at some later date. The EESC considers that the indica-
tors for budget balance and national debt should be maintained,
but the discussion must be taken a step further, taking the real
objectives of economic policy into account.

3.7
Another of the consequences of the bad years is that
saving has been unusually high. The lack of investment opportu-
nities in Europe has given rise to capital flight to the US. With
the growing confidence in the economy that comes with better
times, it is to be expected that reduced concern about the future
will mean that people will save less. A virtuous circle could be
created through even stronger demand.

3.8
Finally, it can be said that EU level fiscal policy has a
special problem, i.e. that the people responsible for framing it
and ensuring it is complied with are constantly changing. It can
happen that a quarter of finance ministers are changed in any
one year, and the new ministers do not feel the same sense of
responsibility for
the previous incumbents.
ECOFIN therefore needs more long-term decisions so that a new
set of ministers cannot stymie a policy that is already up and
running. The constant change of ministers also makes it difficult
to implement a
to get an ECOFIN with the political will
common policy.

the policies of

4. The Economic Guidelines and the Lisbon Process

4.1
The Broad Economic Policy Guidelines have existed since
1993. They initially dealt with fiscal policy only, but employ-
ment issues were included later and since 2005 they have been
grouped together with the employment guidelines and the
Lisbon Agenda as part of a comprehensive process. This is basi-
cally a national policy matter, where the Commission and the
Council provide guidelines. There is nothing about pecuniary
sanctions, unlike with the Stability and Growth Pact.

4.2
Ever since EMU was created, the discussion has been
dominated by the imbalance between a central monetary policy
and a fiscal policy that continues to be national. The Stability
and Growth Pact is a ‘hybrid’ that also contains elements of
common policies and pecuniary sanctions, while the economic
guidelines are underpinned by recommendations.

4.3 What avenues are open for developing the economic
guidelines? In order to find them, we need to distinguish clearly
between the establishment of economic policy objectives and
the means used to try to achieve them.

4.5
The broad objectives for all economic policy — both
monetary and fiscal — are price stability, growth and full
employment. These objectives must be formulated. Price stability
has already been addressed. The basis for the economic guide-
lines should therefore be that the European Union also defines
desirable growth and full employment. In practical terms, there
are real problems associated with this. If the objectives are to be
realistic, they must be seen in relation to the current economic
situation. This means that they may need revising rather often,
and not be set for such a long term as the price stability objec-
tive.

It is debatable how far growth can be used as a measure
4.6
of economic development. The measures normally used do not
take social and environmental effects into account. However,
when considering purely economic growth, there are two estab-
lished measures: an increase in real GDP per inhabitant and the
same measure in terms of purchasing power parity (PPP). The
latter attempts to equate the actual economic situation in
various countries. It does not matter which measure is used as it
is the rate of increase that is targeted. It hardly differs from year
to year depending on which type of GDP is measured. Some
years ago attempts were made to establish the rate of increase at
which unemployment starts to fall. The objective then was to
achieve that growth rate for GDP (approximately 3 %) at the
very least. However, this type of growth objective can vary over
time, as it can between different economies. In view of the
problems in reducing unemployment, it is, however, difficult to
imagine a growth objective that is lower than when unemploy-
ment
is starting to fall. Not many countries have actually
achieved a minimum growth level such as this in recent years.

4.7 When comparing countries and growth-oriented policy
options, its is important to make a distinction between the two
chief methods to secure growth. Either growth increases when
more is produced using the same technology, usually by
employing a bigger workforce; or through productivity gains,
where more is produced using the same workforce. Over the
next few years it will still be possible to use the first method,
whereas a few years hence only the latter method will be avail-
able, owing to demographic trends.

4.4 With regard to the Stability and Growth Pact, budget
balance and government debt as a proportion of GDP have, in
the general debate, come to be considered as objectives.
However, these two elements do not, in themselves, constitute
ultimate objectives. They are more indicators of the direction
policy is taking. A balance or surplus in the official budget is
targeted in order to be able to make use of it in an economic
recession. A budget surplus thus becomes a means to boost the

It is considerably more difficult to find an objective for
4.8
employment. The objective must be twofold: it is partly a ques-
tion of the proportion of the working age population in the
labour market (employment level); and partly of how many are
unemployed. The Lisbon Agenda set objectives for the employ-
ment level as a whole (70 %), for women (60 %) and for people
between 55 and pensionable age (50 %).

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No percentage goals were set

for unemployment. To
4.9
begin with, there are various methods for measuring unemploy-
ment. However, owing to the existence of open unemployment
and the fact that some people are covered by some form of
labour market policy measures, at least two objectives are neces-
sary. Given that very few countries are close to what might be
called full employment (i.e.
just a few percentage points of
unemployment, which is always to be found in a dynamic
economy, where change must be a constant), it might be appro-
priate to set — as an objective for the long term — a certain
percentage reduction in unemployment.

Given this reasoning, the main proposal of the three-
4.10
yearly economic guidelines should be to focus on a minimum
level of economic growth and a downward trend in the unem-
ployment rate. The Lisbon Agenda percentage objective for the
workforce can be maintained until further notice. The situation
that applies to monetary policy — with clear objectives against
which policies can be assessed — is also needed for fiscal policy.

The role of

the economic guidelines should subse-
4.11
quently be more a matter of the Member States reporting what
they are doing to achieve the objectives, with the Commission
and the Council assessing how adequately the objectives have
been achieved. If the objectives have not been reached the EU
should be able to criticise the policies chosen and make propo-
sals based on benchmarking of successful policies pursued in
other countries. Each country must, however, be assessed on the
basis of its circumstances and its current economic situation.

4.12
Since fiscal policy continues to be a national question,
the current emphasis on the broad economic situation within
the European Union is not particularly relevant when assessing
each country's policies. The economic guidelines should there-
fore be amended. Future guidelines should set national objec-
tives for the overall objectives, which should not, however, be
less ambitious than those for the EU as a whole, and countries
should be assessed in terms of how they meet their objectives.

is
Commission and the social partners (ETUC,UNICE/CEEP)
little-known. It has, however, probably played an important role
in raising the awareness of those involved of each other's poli-
cies and their opinions with regard to economic policy.

5.2
These discussions take place on two levels: an expert
level and a high level group. The meetings usually take place
every six months and focus on views of the current economic
situation and the policies needed.

5.3
The discussions and conclusions from 2005 show how
far perceptions and suggested measures diverge. The Commis-
sion highlights the improved economic situation. The European
Central Bank stresses how important it is to have wage modera-
tion, which is, of course, a feature of UNICE's contribution. The
CEEP talks about the need for public investment. The UEAPME
does not only talk about the need to look after small businesses
but also says that higher inflation might have to be accepted.
ETUC highlights the need to stimulate the general economy in
order to kick-start domestic demand, and says that salaries are
not just a cost but the main prerequisite for demand and that
salaried workers have done their bit over the years to keep infla-
tion down through salary increases that are lower than produc-
tivity gains.

Given this scenario, one might wonder whether the
5.4
Cologne Process might be in need of a fresh start. How can it
be moved forward? Thus far, the Cologne Process dialogue has
been a matter of getting together and exchanging opinions. This
could be improved by, for example, using the time between
meetings to draft joint studies on economic relations, on the
impact of various policy measures and similar questions. This
could move the parties closer together in their understanding of
the economic reality that must be the starting point. This
proposal could also tie in with the EESC's earlier proposal for a
body for independent economic studies (1).

individual Member
4.13 With greater emphasis on what
States are doing, based on their economic circumstances, and
with stronger links with the Lisbon Agenda's clearer employ-
ment objectives, the economic guidelines can tie in more closely
with the broad thrust of the Lisbon Agenda. Broad economic
policy could be more of a natural feature of the Lisbon Agenda
national reform programmes, and thus speed up implementa-
tion of the Lisbon Agenda as a whole.

A less ideological question — but one that is nevertheless
5.5
crucial to the choice of policies pursued — is the reliability of
statistics. It goes without saying that all Member States should
manage to make the necessary statistics available at the same
time. To choose policies on the basis of faulty statistics wreaks
havoc. Perhaps the Cologne Process conversations are the best
place to bring home to those involved the need to fulfil their
obligations on economic statistics. The European Parliament has
also repeatedly called for better statistics.

5. Wage formation and the economic guidelines

5.1
The year 1999 saw the creation of what has come to be
known as the Cologne Process. This annual forum for discussing
current policies for ECOFIN, the European Central Bank, the

5.6 With regard to the formal structure, change might also
provide a more lively discussion. The European Parliament's role
could be strengthened.
Instead of a merely formal presence,
prior to each meeting the EP could adopt a resolution on the
economic situation and the policies required. An appraisal such

(1) OJ/2006/88 68 Strengthening economic governance — The reform of

the Stability and Growth Pact.

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as this could be set against the more formal review that the
Commission can be expected to deliver. Both ECOFIN and the
euro group should be present in order to provide input from
Finance Ministry circles and from the Finance Ministers that are
directly responsible for the fiscal policy that is to be combined
with the European Central Bank's monetary policy.

situations can differ, especially where development levels (GDP)
are concerned.
It also has to be ascertained whether some
specific economic policy might have led to high or low growth
when different inflation levels are present. This means that the
focus is often on certain countries so it is perhaps not possible
to draw conclusions about general connections between infla-
tion and growth.

the

advocate

improved cooperation we

5.7
Although each party — the European Central Bank,
Finance Ministers and the social partners — pursues its policies
independently,
is
urgently needed. Independence does not mean absence from the
general debate, nor does it mean not listening to good advice.
Neither is independence undermined if a party goes public
instead of always pointing out that it makes all its assessments
entirely alone and is not influenced by anyone. Finance minis-
ters must be consistent: they cannot say one thing in Brussels
and then do another at home. The European Central Bank
should be able to publish their minutes, as do the central banks
in the United Kingdom and Sweden.

6. The inflation-growth link?

The European Parliament had this to say about the inte-
6.1
grated guidelines for growth and jobs on 26 May 2005:
‘…
growth in the euro area and the 25-member European Union is
failing to achieve its potential on a sustained basis and is still too
weak, particularly in the four leading economies in the euro area; …
household consumption is still faltering and the economic outlook for
2005 and 2006 continues to be unsatisfactory, contributing to a
continuing high level of unemployment which will decline only slowly;
… despite the lowest interest rates since the Second World War, there
is little willingness to invest.’

6.2
The classic dichotomy in economic literature is inflation
and unemployment. A good result for one seems, statistically, to
lead to a poor result for the other. We have decided, using inter
alia scenarios such as that described by the European Parliament,
to try instead to establish relationships between inflation and
growth.

In a given economic situation it is possible to compare
6.3
growth in countries with low inflation and in countries with
high inflation. We can also see how growth varies in a country
in various situations when inflation varies. Our tables may not
be scientific, but they do point clearly to the fact that an aware-
ness of the relationship between inflation and growth is impor-
tant in order to find the right policy mix.

6.4 When we see countries with relatively high inflation and
high growth and, on the other hand, countries with low infla-
tion and low growth, it would seem only logical to ask whether
there is more than a statistical connection between inflation and
growth. In order to see whether these really are causal connec-
tions, some statistical correction is first necessary, as economic

The growth rate is a real problem, at least for the ‘old’
6.5
EU-15 countries. According to Commission statistics,
their
growth has been so low that they have lost approximately half
of one percent of GDP per year compared with other industria-
lised countries (1995 — 2005) (2).
(N.B. a reference to the
Commission document
is needed below.) During the same
period, domestic demand in these countries fell by around one
percent compared to other industrialised countries. The rela-
tively good years after the turn of the millennium were entirely
dependent on increased demand for European products from
other countries. An analysis of the reasons behind this almost
catastrophic growth rate must be carried out in order to find a
better policy for the future.

6.6
This description of the ‘costs’ of low inflation can be
compared to another description of the costs of high inflation
in a letter from the former ECB president Wim Duisenberg to
the European Parliament: ‘The ECB's quantitative definition of price
stability reflects
criteria. By
allowing for only low rates of increase in the price level, it permits the
minimisation of the costs of inflation, which are well-known to the
general public and which have been extensively documented in the
literature.’

sound and well-established economic

6.7 When searching for the optimum inflation target, it is
important to remember the need to preclude costs induced by
high inflation, as well as those resulting from the difficulty in
securing satisfactory growth. It is also important to realise that
inflation in itself is neither a solution nor a problem; it is rather
a question of the flexibility that a certain level of inflation
brings to the economy and the catastrophic impact of high
inflation on confidence, long-term thinking and incomes distri-
bution.

6.8
The Appendix contains information on inflation (HICP
and ‘core inflation’) and growth (real increase in GDP) for the
EU countries. The figures go back to the year the European
Central Bank became operational.

Generally speaking it was a period of low inflation and
6.8.1
low growth. Only in 2001 and 2002 was the growth rate
almost acceptable, and from 2004 for some countries. For
nearly all of these countries inflation and growth go together.
Following the growth levels seen in the initial years (1999-
2000) as a result of demand from the rest of the world, EU

(2) Commission database AMECO

(http://ec.europa.eu/economy_finance/indicators/annual_macro_eco-
nomic_database/ameco_en.htm). EU15 GDP growth in comparison to
a reference group of industrial countries (comprising the US, Canada,
Japan, Korea, Australia, New Zealand, Norway and Switzerland.

C 324/56

EN

Official Journal of the European Union

30.12.2006

internal demand has been unable to create a satisfactory growth
rate. During those years and since the recent improvement,
inflation has not risen much above 2 %.

the specific policies pursued by countries with a good inflation/
growth ratio (i.e.
low inflation compared to the growth rate)
should provide a basis for future benchmarking.

6.8.2 We could comment on the situation in various coun-
tries, but we will restrict ourselves to the following:

Some countries are at odds with the low inflation/low growth
climate experienced by the majority of countries.
Ireland —
with high inflation and high growth — has been able to main-
tain a higher growth rate while inflation has slowed. Greece
combines high inflation with high growth. In Italy and Portugal
inflation is somewhat too high, while growth is virtually non-
existent. Spain has satisfactory growth, with inflation above
2 %. The Spanish debate reveals that growth is noticed by the
public, but such a high level of inflation only concerns the
economists. Finland is extremely unusual
in combining high
growth in 2004 with zero inflation (partly as a result of
reduced alcohol duty). Slovenia has managed to gradually
reduce the inflation rate while maintaining fairly high growth.
Lithuania has had high growth and low — but rising — infla-
tion. The Czech Republic has
improved growth without
increasing inflation, whilst Estonia has pushed growth even
higher but at the price of rising inflation. Latvia has increased
its growth to the highest level in the EU, but inflation has shot
If inflation is the yardstick against which general
up.6.8.3
demand in the economy is measured, then both of them have
— with a few exceptions — been too low. Given that it is diffi-
cult for the economy to readjust satisfactorily when overall price
changes are small,
inflation has been an obstacle to growth.
This has been too uncomfortable for some to contemplate,
despite the fact that it is generally accepted that a certain level
of inflation is needed to oil the wheels of a dynamic economy.
In the current globalised economy, dynamic changes have
become essential in order to cope with international competi-
tion.

6.8.4
Stability and a credible monetary policy are not depen-
dent on keeping inflation below 2 %. A somewhat higher level
as a measure of price stability would not be a threat to stability.
It is more important to know that the authorities are willing
and able to control inflation, so that the selected target can be
achieved.

6.9
A further analysis can be carried out using time series
for core inflation. With the exception of 2005, the differential
between the consumer price index and price trends excluding
energy prices has been rather small. A more detailed study of

Brussels, 26 October 2006.

6.10
The Appendix also contains figures for labour produc-
tivity per hour worked. The figures do not refer to individual
national trends but to performance as compared to the EU15
average. The table shows how close a country is to the average.

6.10.1
There ought not be any rapid change in the ranking
over a six-year time period, and this is true for most countries.
There are, however, a few exceptions. Greece, with low produc-
tivity, is rapidly catching up with the rest. Ireland is now above
average and continues to see productivity gains. During the
same period Italy has fallen behind the rest, as has Portugal,
which started off from a low base.

6.10.2
A more detailed analysis could be useful here, too.
For example, to what extent have productivity changes been
responsible for the differences in growth rates? How far do
levels of
productivity gain differentials depend on different
investment and innovation? To what extent do different educa-
tion systems lead to innovation differentials? What methods are
generally available for increasing productivity? The EESC there-
fore calls on the Commission to look into the link between
overall growth and employment objectives and, for example,
productivity gains and inflation levels.

6.11
However, a preliminary conclusion that can already be
drawn from the inflation and growth statistics is that there must
be better coordination between monetary and fiscal policy, with
price stability, growth and employment becoming valuable
objectives for all economic policy decision-makers: the European
Central Bank, the Commission, ECOFIN, the social partners and
the Member States. When all the players base their proposed
measures on the same three objectives, they are forced to look
at all the consequences of their proposals. Measures that are
excellent for achieving price stability in one economic situation
can be entirely wrong in another. In certain contexts they can
boost growth and employment, while having the opposite effect
in others.

6.12
The European Central Bank's February 2004 edition of
its Monthly Bulletin seems to point to a new understanding,
which could be a starting point for a new integrated policy
approach. It lists the most important factors for kick-starting
investment: satisfactory profitability, sufficiently available finan-
cing and the right conditions for demand.

The President

of the European Economic and Social Committee

Dimitris DIMITRIADIS