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C 284/66 EN Official Journal of the European Communities 14.9.

98

Opinion of the Economic and Social Committee on ‘Europe as an economic entity —
a political challenge’

(98/C 284/13)

On 29 January 1998, the Economic and Social Committee, acting under the third paragraph
of Rule 23 of its Rules of Procedure, decided to draw up an opinion on ‘Europe as an economic
entity — a political challenge’.

The Section for Economic, Financial and Monetary Questions, which was responsible for
preparing the Committee’s work on the subject, adopted its opinion on 9 June 1998. The
rapporteur was Mr Nyberg.

At its 356th plenary session (meeting of 2 July 1998) the Economic and Social Committee
adopted the following opinion by 87 votes to one, with three abstentions.

1. Background ‘The best way to achieve a renewed economic upturn
is increased investment, driven by increased demand.
The technical conditions needed to boost investment,
1.1. The Cannes European Council, meeting in June viz. low long-term interest rates, are a reality in
1995, decided to order a report on Europe as an economic almost all Member States. (...) Continued application
entity. This resulted in an interim report, followed by a of the policy based on moderate wage agreements
final report which was presented at the European (...) should be accompanied forthwith by measures
Council meeting in December 1996. A follow-up report to stimulate demand. Demand must be supported
was compiled for the December 1997 European Council by a wage increase in real terms which does not
meeting, when it was decided that such reports should exceed productivity gains, by measures to stimulate
be compiled on a regular basis. exports and to boost innovative capacity, as well as
by an increase in employment. Given the linkage
between demand, employment levels and investment
1.2. Underpinning the Cannes decision to order a trends it is essential to avoid falling into a vicious
report was the European Council’s view that the circle.’ (1)
European Union as an economic entity offered additional
room for manoeuvre and a specific added value con-
ducive to the creation of sustainable employment. 2.2. The ESC’s two opinions in the run-up to the
November 1997 Employment Summit contain ideas
which can serve as the starting point for this opinion (2).
1.3. The Economic and Social Committee is currently
drafting an own-initiative opinion partly because of the ‘In the future context of EMU, an ideal policy mix
EU Institutions’ failure to date to draw the economic requires an optimal interplay between the social
and political conclusions of the facts contained in the partners who are responsible for a sound wage-
reports; and partly because the Amsterdam Treaty’s development, the budgetary authorities that commit-
employment chapter and employment policy guidelines ted themselves to the Stability and Growth Pact, and
have provided a Community instrument for dealing the European Central Bank that will decide about
with employment policy, education policy and other monetary policy. Thus, monetary policy should not
structural policies. Whilst this will have a positive effect only focus on price stability, but also support the
on employment, it is not enough. An economic policy general economic objectives of the Community as
to increase demand in the European economy as far as defined in Article 2, including “sustainable and
possible but without triggering inflation, is also needed. non-inflationary growth respecting the environment
The present opinion does not address the anticipated (...) a high level of employment and of social
challenges of the changing global economy, but focuses protection”. The European Central Bank is to take
on the benefits of a coordinated economic policy, and the revised title of the Growth and Stability Pact
how we can more fully exploit the EU’s inherent demand seriously, and should adopt an approach to monetary
potential. policy that does not exclusively focus on price
stability.’

2. The ESC on a coordinated economic policy (1) OJ C 206, 7.7.1997.
(2) ESC opinion of 1.10.1997 on the European Council on
Employment; OJ C 355, 21.11.1997 and ESC opinion
2.1. In its April 1997 Opinion on the Commission’s of 30 October 1997 on the Communication from the
annual economic report, the Committee dealt with the Commission on the Proposal for guidelines for Member
economic links as follows: States, employment policies 1998, OJ C 19, 21.1.1998.
14.9.98 EN Official Journal of the European Communities C 284/67

3. EU internal demand = 92 % of GDP the help of appropriate macro-economic and labour-
market policies, provide real potential for substantial
economic growth.

3.1. The Report on Europe as an economic entity,
presented to the Dublin Summit, consists of three parts:
employment performance in the EU; economic statistics 3.3. EU GDP
for Europe as a whole, using the same model as that
used for individual Member States; and a discussion
of the mutually reinforcing effects of coordinating 3.3.1. This is the central, innovative section of the
economic and structural policies. report. If we compare, as the report does, the GDP of
the various Member States, it emerges that 92 % of the
EU’s GDP consists of consumption and investment
within the EU, while only 8 % comes from demand from
third countries. By way of comparison, the foreign trade
figures for the USA and Japan are 8,3 % and 8,6 %
3.2. Employment in Europe respectively. This new perspective overturns the existing
picture of an individual’s country’s demand being
heavily dependent on exports, including exports to other
3.2.1. The report deals only with the most significant Member States. Table 1 of the report, which contains
employment trends. Despite the fact that 8 million jobs the external trade figures for Europe as a whole, and for
have been created in the EU over the past 20 years, the 15 Member States, illustrates this difference.
unemployment has risen and employment levels have
fallen because the working age population has risen by
28 million. Exports, including exports to other Member States,
account for 23 % of GDP. Unfortunately, different
calculation methods are used for individual countries
and for total exports. The figures for exports as a share
3.2.2. The problem is that not enough new jobs have of GDP are inflated, as they include the imported
been created, owing to weak demand for labour. When element of exports. For example, if goods are exported
discussing this, the report blames both structural factors, to another country for processing, and then imported
such as fragmented product and service markets, insuf- for finishing before being exported definitively, they
ficient competition and high labour costs for certain actually show up twice in the statistics (1).
types of work; and broad economic issues, including a
lack of investment, unstable macro-economic policies
and exchange-rate instability. 3.3.2. The report states that consumption is the most
stable element in relation to growth.

3.2.3. The greatest job losses have occurred in manu- 3.3.3. Investment as a share of GDP has fallen from
facturing industry. Agriculture has been declining slow- 24 % to 19 % in just over 20 years. Temporary growth
ly. The services sector, however, has seen sustained can be created through other measures, but sustainable
employment growth even throughout recession periods. growth can only be achieved if the investment rate also
This has produced a significant employment shift rises. One of the reasons given for the falling investment
towards the services sector, whose share of the jobs rate is that profitability has decreased. The report has
market has increased from 50 % to 65 % over the last nothing to say, however, about the more difficult periods
20 years. At the same time, female employment has risen of the 1980s and 1990s, when profitability rose again
from 43 % to 50 %. These changes are bound to but was not accompanied by any increase in the
continue. investment rate.

3.2.4. The low level of employment in the EU (approx. 3.3.4. EU external trade, albeit only 8 % of GDP, has
60 %) is not wholly negative, in so much as it provides been beneficial to both employment and growth. This
room for growth. In addition to the 18 million unem- is perhaps particularly true of the early 1990s when an
ployed, an estimated 9 million would enter the workforce increase in exports compensated for a reduction in
if jobs were available. Compared to previous years, the
next few years will not see any large increase in the
working age population. On the other hand, there will
be a shift in the age composition, with a decrease in the
number of younger workers, who are better equipped (1) The figures in the report on Europe as an economic entity
refer exclusively to trade in goods. Calculations for the
to adapt to current labour-market demands. There will next version indicate that exports to third countries are
be an increase in the older generation, which, although closer to 9 %. Moreover, the inclusion of trade in services
more experienced, will require further training for those takes the total third country share to approx. 11 %. Since
who are already part of the workforce. The upshot is these figures do not significantly alter our analysis, we
that the existing and potential labour force can, with have based the report on published figures.
C 284/68 EN Official Journal of the European Communities 14.9.98

domestic demand. International competition does, how- markets, more competition and higher productivity. In
ever, require continuous changes in production, if addition to the sharp increase in cross-border trade,
comparative advantages and new technology are to be direct investment has also risen.
exploited.
3.6.2. The road to EMU has also led to more uniform
economic policies, which, according to the report, has
produced low rates of inflation, a reduction in the
3.4. Competitiveness budget deficit, large productivity gains, high levels of
profitability, a trade surplus, reasonable wage settle-
3.4.1. In the EU as an economic entity, the key factor is ments and a reduced risk of instability and currency
productivity growth, which determines competitiveness turbulence.
and hence better real wages and higher profits. There-
fore, a positive view of competitiveness calls for more 3.6.3. The convergence in incomes per head and
focus to be put on productivity and investment issues. growth in the cohesion countries mentioned in the report
is of less significance.

3.4.2. Despite this, negative measures are often sug- 3.6.4. The deregulation of financial markets world-
gested to counter a drop in national competitiveness wide has facilitated capital mobility, and this could lead
— devaluation, lower social standards, tax cuts designed to a better distribution of resources. However, this
to boost competitiveness or more state subsidies. Whilst imposes stricter discipline on companies and govern-
these measures can no doubt provide temporary relief, ments.
in the long term they may even curb both the pressure
for change and investment. According to the report, 3.6.5. As the report points out, together these changes
competitiveness should therefore be a matter for com- have created new macro-economic conditions for the
panies rather than countries. Member States’ economic policies.

3.4.3. Around half of the average 2 % productivity
growth is estimated to have come from technical progress 3.7. The report’s conclusions
and the rest from substitution of capital for labour. The
report gives a few feasible explanations for the decline 3.7.1. The report’s overall conclusion is that a coordi-
in productivity growth over the last 20 years. There has nated, macro-economic and structural approach can
been a slow-down in technological innovation, and the boost growth without fuelling inflation.
market for manufactured goods may have reached
saturation point. There could be productivity gains in 3.7.2. The report aims to focus on the interplay
products such as computers, but these may have been between macro-economic and structural policies. The
reported incorrectly. Business horizons have been fore- former is to provide the general framework for growth,
shortened, and this has led to lower investment. whilst the latter should improve market efficiency, in
terms of goods and services, and of the labour market.

3.7.3. The 1997 follow-up to the report states that
3.5. The growth potential of the workforce domestic demand currently seems to be self-sustaining,
and hence the levels of growth expected for 1997-1999
3.5.1. In addition to the 18 million unemployed and will lead to both increased consumption and investment.
the 9 million people who would join the workforce if It says that macro-economic policy must be coordinated
work were available, the workforce could swell further if the favourable climate is to be sustained.
if the number of women in paid employment continues
to rise. Even if there was enough work, not everyone 3.7.4. The follow-up emphasizes that the exigencies
would be able to walk straight into a job. The biggest of competitiveness will require investment in human
problem is the level of training and expertise needed for resources and an active labour market policy to be backed
today’s labour market, in tandem with issues such as up by investment in infrastructure. Public expenditure on
child care, transport, etc. labour-market policy is estimated at 1,5 % of GDP, of
which less than one third comprises active measures.
Public investment as a share of GDP has declined from
3.5.2. Improvements in the quality of the labour force 4 % to 2,3 % over the last 20 years.
are seen as the key to sustainable economic growth and
higher productivity.
4. The picture of the European economy is incomplete

3.6. Economic and political convergence
4.1. 18 million unemployed and 57 million living in
poverty
3.6.1. The economic policies of the Member States
have progressively moved closer together. This is mainly 4.1.1. The approximately 18 million unemployed
due to the single market, which has provided bigger make up over 10 % of the labour force. The debate has
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focused on the scale of unemployment and the strain it 4.2.2. The poverty issue gives considerable food for
places on public expenditure in particular. However, thought. The way countries use their incomes depends
there is a ‘social’ cost to pay for every unemployed on the size of the income. A low income means less
person. Besides the economic implications for the public saving, greater demand for basic necessities, and heavier
purse, the effects of unemployment are unacceptable in dependence on the public sector. This has a knock-on
the social system we aspire to in Europe. effect on investment, output and the size of the public
sector.

4.1.2. For the national budget too, the problem grows 4.2.3. These brief comments make a clear case for
from merely providing unemployment benefit, to include putting income distribution back on the agenda. EU
provision for the families of the unemployed. It is a safe level discussions have been dominated by the need to
bet that most of the EU’s currently estimated 57 million get inflation and public finances under control, but the
poor people come from families where one or more fight against unemployment through pro-active labour
members are unemployed. Social expenditure in general, market policies and skills development should, increas-
lost tax revenue, and also the cost of dealing with crime ingly, take priority. If we are to solve the problem in the
also weigh on public expenditure, and are directly linked long-term by boosting demand, then income distribution
to unemployment. must also be back on the agenda.

4.1.3. The figure of 57 million is based on the number 4.3. The urgent need for education and training
of people with less than half of the average national
wage. According to this definition, there are poor people
everywhere, but poverty levels differ according to 4.3.1. The modern labour market needs employees
national income levels. For each country, the figure with more training than ever before. The Commission
depends on how incomes are distributed. Unemployment regularly publishes figures according to which 10 % of
is the most common cause of poverty. Diagram 2 gives all technology is replaced by new technology every year,
the 1992 calculation of Member State poverty levels (1). whereas the natural turnover in the workforce is around
2-3 % (newcomers and retirement). The extent to which
the figures are realistic or reliable is not the issue, but
rather that they highlight a problem on a scale which
most definitely warrants political initiatives.

4.2. Poverty and demand
4.3.2. Newcomers must have the training which the
labour market requires. Relations must therefore be
improved between the education authorities and the
4.2.1. Whilst the immediate economic consequences labour market. Action must, however, focus on those
of poverty are considerable, the repercussions in terms already in work and on the unemployed.
of lost demand are perhaps even greater. This self-evident
side-effect of poverty is hardly ever addressed. What
impact does it have on growth and employment? More 4.3.3. The current consensus is that labour-market
than 10 % of the EU’s population have a lower level of policy must be active, and draw heavily on training
income than they would if all were in work. In order to measures. This is in the spirit of the guidelines which
assess how much demand is lost because of this, we were framed at the Employment Summit. Clearly,
need to know how much lower their incomes are than training initiatives must be directed first and foremost
they would be if they were in work. By way of example, at the unemployed.
a jobless poor level of 10 % which is missing out on
20 % of their potential income, knocks 2 % off GDP.
4.3.4. However, the same need for training holds
good for most of the remaining 90 % of the workforce
— i.e. those in work. Important skills development
4.2.1.1. According to this calculation, half of a initiatives of this kind have been launched under
potential increase in demand from the poor would Objective 4 of the Structural Funds. The scope of current
however, end up in the public purse in the form of taxes. action is therefore clearly inadequate, particularly in
This means that at least 1 % of the 3 % budget deficit view of the Commission’s requirement assessments.
existing in most countries is a result of this income The situation calls for powerful initiatives within the
distribution problem. framework of the employment guidelines.

4.4. Investment scope and trends

(1) For a detailed account of poverty calculation methods, see
the ESC’s Opinion of 1 July 1998 on the Costs of poverty 4.4.1. There has been a clear decline in investment as
and social exclusion in Europe, rapporteur: Mr Burnel. a share of GDP, from 24 % to 19 %. Private investment
C 284/70 EN Official Journal of the European Communities 14.9.98

has fallen from 20 % to barely 17 %, and public 4.4.9. The reason why, in spite of the above consider-
investment from 4 % to barely 2.5 % of GDP. The ations, a decline in fixed capital investment is unaccept-
reduction in private investment has thus had double the able, is quite simply that the need for such investment is
impact on GDP growth compared to the reduction in still evident. One example is trans-European networks.
public investment. On the other hand, the latter has Others include refurbishment of the housing stock, with
fallen by almost 50 %. The reduction in public invest- provision of running water, sewerage pipes, etc., and
ment could be due — in part — to privatization. healthcare for the elderly. Since productivity has
increased more quickly than economic growth, it has
been difficult to create enough jobs. This is a further
argument for more investment.
4.4.2. We need however to know what kind of
investment has been reduced, or increased, whether
private or public. It is important to know why the
changes came about and what impact they had. It is 4.4.10. In conclusion, the Commission should address
often a good idea to reduce investment in sunset the urgent need for new investment statistics. Even
industries, whereas sunrise industries need more. Is this without them, however, it is clear what direction political
a feature of the current development scenario? initiatives should take. Fixed investment should be
increased from the current 19 % of GDP, and an
education and training investment campaign should be
4.4.3. The statistics show that public investment has promoted. Investment is also needed to speed up the
had to shoulder its share of the spending cuts needed to innovation-to-market process.
meet the convergence criteria. This is unfortunate,
considering the vital importance of investment for
growth and employment. The Committee therefore calls
on the Commission to encourage the Member States to
look into ways of avoiding this negative impact on
investment. 5. The emergence of a more coordinated economic
policy

4.4.4. The Member States need to view public invest-
ment in the light of its impact on employment and
productivity. It is needed to boost general demand:
more investment would also increase economic capacity 5.1. EMU
without inflation giving cause for concern.

4.4.5. Although public investment (e.g. in infrastruc- 5.1.1. The achievements made in the run-up to
ture) is a key element for competitiveness, it must be EMU form the basis for the next stage. Meeting the
accompanied by an increase in private investment if the convergence criteria has involved sacrifices, e.g. in the
correct investment/GDP ratio is to be restored. form of unemployment. The effects were aggravated by
policies which were ill-suited to the climate of recession
in the early 1990s.
4.4.6. It is even more difficult to get hold of reliable
statistics for investment in education and training, for
both the public and corporate sectors. Only trend 5.1.2. Once convergence is achieved, the situation
statistics for this type of investment, and statistics changes. There will be no new negative side-effects for
showing the need for investment in various skills, will the EU, whereas the achievements will provide positive
make it possible to assess what remains to be done. spin-offs. These include low interest rates, which means
that firms do not need to devote the same effort to
planning for exchange rate fluctuations and they can
4.4.7. This would enable us to determine whether the act more effectively whenever more general economic
decline in traditional investment should, in fact, give turbulence arises. All these stability-based gains favour
cause for concern. It could be that investment in human growth and employment. Tangible factors thus affect
resources has taken over from investment in fixed investment decisions more than was the case with high
capital. If this is the case, then the decline in fixed capital inflation and unstable exchange rates. To some extent,
investment could be acceptable. However, it is too early the influence of currency and financial markets over
to draw any conclusions, until reliable statistics and policy has declined.
analyses are available.

5.1.3. Several ESC opinions have discussed the differ-
4.4.8. Another feature is that the growth in services ent aspects of EMU. Here we only wish to highlight
leads to less fixed investment and more intangible the connection between public investment and budget
investment, which does not show up in the statistics calculations, and the extended need for further economic
either. cooperation in the wake of EMU.
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5.2. More ambitious employment targets 6. Opportunities for increased output and employment
in Europe

5.2.1. For several years, employment has been at the 6.1. Can output and employment be increased in
top of the European Council’s agenda. If the ambitious Europe? What can be done with regard to current
targets are to translate into concrete action, they must industrial capacity? What can be done to boost it? We
influence the general work of the Council of Ministers. will focus on the way the labour market is organized
A first step was taken in this direction following and how capacity is utilized.
the Essen European Council, with the multi-point
programme which was set out for the Member States.
The decisive steps were, however, only taken with the
new draft Treaty in Amsterdam, and the subsequent
special Employment Summit. 6.2. Utilization of capacity

6.2.1. Diagram 3 shows the post-1970 industrial
5.2.2. The most important feature of the new pro- capacity trend in (West) Germany, which averaged
visions of the Amsterdam Treaty, currently being 84 %. It is now 87 %, which is where it was in the 1960s.
applied, is that, whilst the Member States continue to That decade was characterized by full employment and
be responsible for implementing measures to combat relatively high demand and output, whereas (West)
unemployment, it is the Council of Ministers which Germany today has high unemployment and relatively
frames the guidelines for the measures. Furthermore, low demand and output.
the Council has to check on what the Member States
are doing, and recommend appropriate action wherever
there is room for improvement. The EU has therefore 6.2.2. The 1990s employment situation in Germany
acquired a new role in framing and policing employment and Europe is thus not a result of under-utilization of
policy. capacity, but rather of low demand. European output
and employment cannot, then, be boosted merely by
improving utilization of capacity. This does not mean
that it is impossible to boost output by improving
capacity take-up.
5.2.3. For many years EU policy has also been geared
towards employment, via the Structural Funds. Money
is channelled through the various Objectives to enable 6.2.3. We can also speak of utilization of capacity
Member States to improve the employment climate. The with reference to the national economy, if we take into
impact on job creation has been less effective than account the savings surplus in the private sector and
planned. Accordingly, it has been decided to make unemployment. There is a large savings surplus in the
job-creation a priority. The Structural Funds differ EU. It is put at 5 % of EU GDP, which is equal to
essentially from the employment chapter of the Amster- approx. ECU 350 billion (16 % of Germany’s GDP).
dam Treaty in that they allocate money directly to Besides the uncertainty about the future which is behind
national employment measures. This direct influence the wish to save, large public budget deficits have made
over job-creation measures constitutes a more ambitious a high degree of private saving necessary.
policy for the EU.

6.2.4. When the deficit is cut, it becomes necessary
to ‘activate’ the savings surplus in order to boost output
5.2.4. The next section reflects on whether, and in and employment in Europe. If one succeeds in increasing
what way, better coordinated economic policies could investment it has a positive impact on output capacity
provide for more ambitious employment targets. We and, consequently, potential growth. However, certain
believe that the bulk of the practical arrangements for conditions must be observed. The most important is
increased coordination should be carried out by the price stability. This puts the spotlight on the workings
Member States. However, the EU institutions can of the labour market and hence labour-market policies.
usefully harness the Structural Funds to channel EU
funding through to the Member States, and the EIB and
the EIF should step up funding for national projects. But
to involve the EU further in the practical implementation
arrangements is hardly the best way forward. We believe 6.3. The European labour market
that the method provided for in the Amsterdam Treaty’s
employment chapter — discussion of policy direction
and monitoring of policy as implemented in the Member 6.3.1. The main aim of monetary policy is to achieve
States — provides the most feasible way. However, we price stability. Rising employment in Europe puts
do not believe that the Amsterdam Treaty provides for pressure on wage settlements and inflation; a tighter
optimum exploitation of this method. monetary policy is then introduced to offset this,
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thus undermining any gains in employment. European policy measures. Labour market structural policy is
labour-market practice is thus decisive in ensuring that most effective in times of increased employment. It does
employment gains do not trigger such a policy. not, in itself, create jobs, but does help protect them. If
labour-market flexibility can be enhanced through
structural policy initiatives, then it must also be possible
to avoid an economic upturn being ruined by bottlenecks.
6.3.2. There are large discrepancies in the proportion
of long-term jobless in total unemployment figures.
Youth unemployment also stands out. In some countries
there are large differences between various sections of
the labour market. These discrepancies show that what 6.3.8. These are topical considerations, since more
is the best employment policy for one country is and more European countries are beginning to experi-
not necessarily the best for another though, generally ence falling unemployment. This can be seen in Diagram
speaking, education and training initiatives are vital in 4, showing OECD unemployment figures for 1994-1998.
all European countries. Their impact is both short- and
long-term.

6.3.9. As mentioned earlier, there are discrepancies
in Member State labour markets. However, there are
6.3.3. In the first place, the needs of industry can be also important similarities, e.g. inter-country wage
better catered for through education and training, thus pressure. In 1977, the Danish Arbejderbevegelsens
avoiding bottlenecks and the attendant pressure on Erhvervsråd attempted to calculate international wage
wages and inflation. Since unemployment is not equally pressure, and concluded that wage increases in trading
distributed across the labour market, a lack of certain partner countries have a considerable influence on wage
categories of manpower could block job-creation initia- settlements. This means that, besides the direct impact
tives. At the same time, there can be high unemployment of trade within the EU, economic and political measures
amongst uneducated groups. in one country can impact on the wage structure of the
others. A successful anti-bottleneck policy therefore
affects not just wage trends in the particular country,
6.3.4. Secondly, an educated worker is more prepared but also those of EU countries in general. This further
to try new kinds of work. This is important for the reduces the need to adopt a compensatory monetary
European labour market. Just as with an efficient social policy.
system which combines adequate security with an
incentive to work, better education can encourage
voluntary mobility in the workplace.

6.3.5. Thirdly, growth prospects are improved. 6.4. The link between growth and inflation
Higher education and training levels lead to increased
productivity. Education standards are a decisive factor
in the long-term prosperity of a nation. The boost
in productivity provided by education and training 6.4.1. The Arbejderbevegelsens Erhvervsråd has cal-
measures also make higher wage rises possible. culated an international economic model which effec-
tively illustrates the effects of increased demand on
employment. The main question is what impact does
labour market reaction have on employment and
6.3.6. An important factor, when discussing structur- growth (1).
al unemployment, is the speed and distribution of
job-creation. ‘Natural’ unemployment (NAIRU — non-
accelerating inflation rate of unemployment) is not
constant. If unemployment falls sharply, bottlenecks
could lead to inflationary pressure even with relatively
high levels of unemployment. The same happens when (1) The normal scenario assumes that wage rises will be just
jobs are created only in certain sectors and unemploy- as high as they have been historically. The ‘flexibility
ment remains high. If, however, employment gains are scenario’ is characterized by a more flexible labour market,
evenly distributed, the labour market and education and e.g. as a result of active labour-market policies and
training policies can respond, and satisfy industrial skills-development initiatives, for example. This leads to
demand for new manpower. Bottlenecks are thus avoid- lower wage increases than in other situations, when
unemployment falls. There is less need for a compensatory
ed in a situation of high unemployment. There can also monetary policy response, and less damage is done to
be a positive impact on NAIRU if it is adapted to the European competitiveness. Accordingly, the impact on
type of changes occurring in the labour market. growth and employment is enhanced. In the ‘bottleneck
scenario’, the labour market is unable to react in time, thus
producing bottlenecks, and compensatory monetary policy
initiatives as a consequence of impaired competitiveness.
6.3.7. In order to impact positively on NAIRU, It has been calculated that this scenario would produce
economic policy must be combined with structural wage increases of a quarter of one per cent per annum.
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TABLE 1 the public debt servicing requirement. In times of
increasing growth and employment, structural policy
Impact of a coordinated increase in public investment equal can also impact positively on the budget.
to 1 % of GDP on three labour-market scenarios

6.4.5. In practice, structural policy and cyclical policy
Increased are mutually dependent. An economic upturn will only
Normal Bottlenecks
flexibility be sustainable if it is backed up by structural policy.
Similarly, there must also be an upturn in production
GDP (%) 1,9 1,2 0,5 and employment, if structural policy is to have a
noticeably positive effect.
Employment (millions) 3,0 2,1 1,1

NB: The increase is for 1998 and continues through 1999 and 2000.
The table shows the impact on the EU for the year 2000.
Monetary policy is the same in all three cases. 7. Political options

6.4.2. The table shows that a considerable number 7.1. At the Employment Summit, the Heads of State
of jobs is at stake — almost 2 million, depending on and Government declared that employment policy must
labour-market reaction. A strategy which combines be built on three pillars: mobilization of all Community
financial policy initiatives with structural policy policy areas, coordination of Member State employment
measures to improve impact on the labour market will policy, and coordination of macro-economic policy (1).
boost employment. This will be particularly effective in
times of rising employment.

6.4.3. The connection does not just apply to coordi- 7.2. As an example of the political debate, we will
nated financial policy and structural policy. The impact summarize some comments made by Franco Modigliani,
on growth and employment of an increase in general Nobel prize winner for Economics, and by the Italian
demand in the private sector is likewise dependent on politician, Giorgio La Malfa:
labour-market reaction. This is shown in Table 2, where
the initial measure is a reduction in private sector savings — The EU must make a speedy assault on unemploy-
surplus. The impact of this increase in demand thus ment by means of massive investment. The future of
depends on whether the labour market can keep pace EMU depends on this.
with the changes.
— Labour market inflexibility is one reason for the
problem, but not the sole reason, and probably not
the main one either. Countries which have the lowest
unemployment figures often have lower than average
TABLE 2
inflation.

Reduction in private sector savings surplus as a result of an
increase in demand equal to 1 % of GDP in 1998 with — The EU must set an employment objective which
reference to three different labour-market scenarios can be achieved through a gradual but comprehensive
increase in investment. This can be funded, in the
long-term, from savings on unemployment benefits.
Increased
Normal Bottlenecks
flexibility — Agreements must be concluded between employers,
the workforce and government to avoid any impact
GDP (%) 3,0 2,3 1,6 on inflation when employment rises.
Employment (millions) 3,6 2,7 1,8
Budget balance (% of GDP) 1,5 1,1 0,7 — The Member States must implement this policy
together, since increased investment in one country
NB: Figures for the year 2000. has a considerable impact on the others.

6.4.4. The labour-market situation is of central
importance to the budget balance. The public budget (1) ‘Continuation and development of a coordinated macro-
variations in Table 2 reflect the impact of both employ- economic policy, underpinned by an efficient internal
market, which will lay the foundations for sustainable
ment and interest-rate levels. The greater the impact on growth, new dynamism and a climate of confidence
employment, the more is saved on transfer payments, conducive to boosting employment ... With regard to the
and the more tax revenue increases. The lower the macro-economic context, it is essential for the Union to
impact on inflation, as a result of wage settlements, the pursue a policy of growth geared to stability, sound public
weaker the impact on interest rates, which also reduces finances, pay restraint and structural reform.’
C 284/74 EN Official Journal of the European Communities 14.9.98

7.3. All for one and one for all TABLE 4

7.3.1. The following econometric calculations show Impact on France of go-it-alone expansion, and across the
the difference between a go-it-alone expansionist policy board EU expansion — 1982
and a common expansionist policy. In 1981, France
embarked on a job-creation policy by encouraging
private consumption and both public and private invest-
French EU
ment. The key instruments were an increase in the policy policy
Differ-
minimum wage and social transfers. The tax regime was ence
change change
changed to encourage investment. The aim was to
reduce unemployment in the wake of the second oil
crisis. Owing to the exchange rate policy, the Franc % GDP increase 1,3 1,5 + 0,2
plummeted.
Balance of payments (% of GDP) − 0,3 − 0,1 + 0,2

Budget balance (% of GDP) − 0,4 − 0,3 + 0,1

TABLE 3

French economy 1981-1983 7.3.5. With a common expansionist policy, growth
increases and the balance of payments and budget
balance deteriorate less. An expansionist financial policy
is effective mainly because an increase in demand leads
1981 1982 1983 to an increase in output, and, consequently, to rising
incomes. If consumer confidence is also affected, the
impact is even greater. This is what happened in France
Budget balance (% GDP) − 1,9 − 2,8 − 3,2 in 1982. The example shows that in the case of unilateral
French expansion, increased consumer confidence raised
Balance of payments (% GDP) − 0,8 − 2,2 − 0,9 GDP by a further 0,7 %, aggravated the balance of
payments deficit by a further 0,2 %, and improved the
(Percentage increase) budget balance by 0,4 %. In reality, these gains were
offset by an increase in transfers, as a consequence of
GDP 1,2 2,5 0,7 rising unemployment and high interest rates.
Private consumption 2,1 3,5 0,9

Exports 3,7 − 1,7 3,7
7.3.6. The example also shows the impact the
Imports − 2,1 2,6 − 2,7 accompanying devaluation of the Franc had on employ-
ment in the other countries. In France, the weaker franc
created 82 000 jobs in the short term, according to this
calculation. In Germany, there were 34 000 job losses,
18 000 in Italy, 12 000 in Great Britain and 12 000 in
7.3.2. EU growth for the same period was 0,2 %, other EU countries. This means that almost all the gains
0,8 % and 1,6 %. Despite a year-on-year increase in made in France were offset by losses in other EU
employment in the French public sector, private sector countries, and that these were unfairly distributed, as
employment decreased, so the overall result was they followed trade patterns.
negative. Unemployment climbed even higher because
the labour supply increased.

7.3.7. In short, when a nation boosts its economy
7.3.3. The new French policy had no equivalent in single-handedly, it is the balance of payments which
the other Member States, and led to a deterioration in suffers most. If there is a common expansionist policy,
the balance of payments. Upbeat consumer confidence the economy is boosted, and this largely compensates
was vital to the development of the economy. for the impact on the balance of payments. The French
example also shows how an expansionist financial policy
can put a stop to a downward spiral: by increasing
consumer confidence. It also shows how what might be
7.3.4. In order to demonstrate the different scenarios seen as a rash policy for a single country, can be effective
resulting from a unilateral policy change and an EU-level if implemented in common.
policy change (9 countries in this particular case),
the Danish Arbedjerrörelsens Erhvervsråd’s economic
model provides a simulation in which the policy change
is an across-the-board increase in investment equal to 7.3.8. The effects produced by exchange rate fluctu-
0,5 % of GDP. The French policy change involves certain ation will not be an issue when EMU takes off. What
other factors. remains is the effect in terms of an increase in output in
14.9.98 EN Official Journal of the European Communities C 284/75

an individual country as a result of expansion abroad.We 1990s. This change has taken place without any formal,
have therefore carried out further research , based trans-national agreements, but the alternative to wage
on the current economic situation and current EU rises in line with neighbouring countries is unemploy-
membership. The figures are based on the assumption ment.
that there will be expansion equal to 1 % of GDP.
The table below shows clearly that cooperation is
worthwhile. The more countries take part in expansion,
the greater the beneficial impact on GDP and employ- 8.2. It is not just the differences between countries
ment, and the negative impact on the national budget which have changed dramatically, but also the level of
and the balance of payments is contained somewhat. wage increases. Time after time, wage rises have
The best employment results will be achieved by been smaller. This means that, besides convergence on
stimulating the EU’s considerable demand capacity. inflation, we can also say that wage settlements have
converged. Inflation and nominal wage increases have
both fallen steadily. The extent to which lower pay
settlements have brought down inflation, or low inflation
has led to lower pay settlements, is for others to
determine. What is important is to note that both
TABLE 5
inflation and pay settlements seem to have stabilized at
a low level.
Impact (in the year 2000) of a 1 % of GDP increase in 1998

French EU-wide 8.3. This is positive for goods- and labour-market
expansion expansion stability. But even here, certain relationships between
different economic factors must be maintained if the
% GDP increase 1,2 1,6 economies are to function satisfactorily and unemploy-
ment is to fall. The relationship between inflation and
Employment 213 000 278 000 pay settlements is vital to demand and employment
Budget balance (% of GDP) − 0,6 − 0,4 trends (consumption accounts for 60 % of GDP). Growth
economies must have real pay rises if growth is to
Balance of payments (% of GDP) − 0,4 − 0,2 be sustained. Moreover, in order to encourage more
investment, the existence of consumer demand must be
accompanied by the knowledge that investment is
profitable. This means that productivity, both in the
current economic climate and over a longer period, must
7.4. Economic policy has been underpinned by the
rise faster than real wages.
fact that individual countries compete with each other.
Growth must thus be export-led, i.e. from demand from
other countries. They have acted like private companies.
This situation has partly changed with the single market 8.4. Despite the convergence on wage increases, there
and EMU. But there is still often a defensive approach are large differences in the way they are negotiated. In
to competitiveness, in the shape of measures directed at recent years there has been a link between positive
neighbouring countries. employment trends and nationwide tripartite or other
agreements on wages, etc. Examples include Ireland, the
7.4.1. It is hoped the corporate environment will be Netherlands, Denmark, Austria, Norway and Finland,
characterized by the fullest and fairest competition although the type and scope of the agreements differ.
possible, but it often attempts to avoid competition by
means of cartels, for example. It is hoped the Member
States will embrace cooperation, as opposed to compet- 8.5. We would point out that there is convergence in
ing in trying to take production and employment from labour law, environmental and tax policy, in the form
each other. EU competition law is extremely important, of minimum levels.
but there should be a more level playing field between
countries to make fair competition between companies
possible.
8.6. When the minimum rules method is used, these
are decided at EU level. However, the minimum rules
rarely establish the level which will be applied in the
8. Economic convergence — not just monetary? various countries, as a higher level is permitted. The EU
decides which direction the regulations shall take, but
not how far they must go.
8.1. We have seen how wage agreements in one
country impact on other countries. That this is not
merely theoretical can be seen in Diagram 5. Wage
settlement discrepancies have gradually diminished for 8.7. As regards the run-up to EMU and employment
the countries covered in the diagram — mainly EU guidelines, the EU establishes the guidelines but not the
countries — until very small variations remain in the measures to be implemented. The EMU convergence
C 284/76 EN Official Journal of the European Communities 14.9.98

criteria set targets, but do not say how these should follow suit, there is maximum gain and minimum
be reached. The employment guidelines establish the inconvenience.
direction ‘structural’ measures should take in 19 points.
The Member States choose the type of measure, and
only when it is considered at EU level that the measures
have not gone far enough can the choice of measure be 9.3. According to some estimates, massive coordi-
criticized. nated public investment throughout the EU15 could
create some 5 million jobs. Thus the problems which
individual countries which pursue a demand-led expan-
sionist economic policy have to deal with in terms of
budget balance, the balance of trade, and capital
8.8. The convergence which has been achieved with
outflows can be solved by coordinating policy at EU
the help of the convergence criteria will now be followed
level. One problem remains, however: inflation.
by greater convergence in those areas — viz. labour-
market policy and education and training — which are
covered by the employment guidelines. But even in the
future, Member States will continue to differ greatly in 9.4. Inflation and budget balance assessments are
terms of economic development, economic structure carried out first of all by the central banks, which
and social regulations; their position in the economic have independent status. The global financial market
cycle can also vary. Important political decisions will strengthens this policy. In the short-term, besides bring-
thus continue to be taken at Member State level. ing about considerably lower pay settlements and
Decisions concerning public income/expenditure keeping inflation down, the policy of austerity has, in
measures, targeted or general measures, or whether it is practice, generally resulted in even more unemployment.
preferable to implement initiatives in the public sector By the same token, a more expansive economic policy
or encourage private sector activity, will all still be taken reduces unemployment, but there is a risk that it will
at Member State level, even in a future, more coordinated push up inflation again unless accompanied by other
economy. action.

9.5. Seen in this light, it is not possible to combat
unemployment unless inflation is tackled simul-
9. Conclusions taneously. Therefore, a demand-led sustainable growth
policy must be combined with anti-inflation measures.
No realistic, reliable analysis can escape this. Politicians
must put forward an alternative which makes it possible
9.1. If unemployment is to be cut significantly, to combine demand-led growth with anti-inflation
then the economy must grow. This growth must be measures.
sustainable from environmental and other standpoints.
Increased growth goes hand in hand with lower unem-
ployment. But how can this be achieved? The political 9.5.1. It is sometimes pointed out that inflation no
debate has played increased demand off against labour longer poses any real problem. But the important thing
market flexibility. Instead what is needed is interaction is how inflation has been brought under control, i.e. via
between increased demand and structural changes in the a policy of low demand, with high unemployment as a
form of an active labour-market policy and education side-effect. This is why, given basically the same eco-
and training initiatives. Policy must not be used to nomic climate, the central banks will not allow inflation
reduce the economic pressure which causes structural and the accompanying rapid rise in employment. Simi-
changes in the economy. What is needed is cost pressure larly, a side-effect of a policy reversal to halve unemploy-
so as to switch production from non-profitable industry; ment would be high inflation.
and profitability, so that industry will be attracted to
sunrise sectors.
9.5.2. It is thus necessary to find other ways of
keeping down inflation. The only alternative which
would not inflict unacceptable human and social damage
9.2. Labour-market policy, and education and train- on the European social model is to change wage
ing initiatives put the individual in a stronger labour- bargaining and settlement arrangements, so that current
market position. However, growth which is not demand- pay increase rates could be maintained even if unemploy-
led does not create new jobs. The opposite is more ment were cut by half.
likely, as a more efficient workforce meets existing
demand with fewer workers. The pitfalls in pursuing
demand-led growth policy at national level are obvious. 9.5.2.1. The social partners thus have a key role to
However, it is possible to pursue such a policy at EU play in the fight against inflation. Labour costs account
level, thanks to economic integration. Problems of for the lion’s share of production costs, if earlier stages
balance which occur when a country — e.g. France in of the production chain are taken into account. This is
1982 — pursues an expansionist economic policy, level why wage increases which outstrip productivity gains
out the more countries follow suit. If all countries over a long period of time always lead to higher prices.
14.9.98 EN Official Journal of the European Communities C 284/77

9.5.2.2. This is why the Member States should report When devaluation is not an option, governments are
consistently — not just in the ‘Broad Economic Guide- forced to concentrate on the real circumstances.
lines’, but also in the annual employment plans — on
what government, the social partners and industry are 9.6. This, however, is not enough. The structural
doing to keep down inflation. problems inherent in the labour market must also be
addressed. The EU labour market is out of synch, as the
9.5.2.3. It is, first and foremost, up to the social demand for specialist knowledge and skills is not met
partners to share responsibility for keeping pay settle- by the education system. This is the biggest obstacle to
ments, in the long-term, within the framework provided greater labour market flexibility.
by low inflation, productivity increases and sufficient 9.6.1. When there is an upturn in investment and
demand. The method consists in keeping real wage economic activity, the skilled workforce supply/demand
increases down to low nominal levels in order to increase disparity not only hinders growth; it also leads to higher
purchasing power whilst keeping down inflation. inflation and bottlenecks.
9.6.2. The individual’s stronger position vis-à-vis the
9.5.2.4. Legislation is needed both to enable the labour market, thanks to better skills and qualifications,
social partners to cary out their wage bargaining means he/she is ready to risk trying new jobs. Public
responsibilities, and to ensure that wage bargaining can investment in education has probably decreased during
be conducted in the public interest (1). the convergence process, so it is important to start by
restoring it to previous levels. It should be increased in
9.5.2.5. The convergence criteria have already led to the long-term.
a high degree of Member State harmonization on wage
settlements, inflation and budget deficits. The social 9.7. The new Treaty provides greater scope for
partners are thus obliged to step up exchanges of common action in the fight against unemployment. But
information prior to the negotiations. The ESC therefore it is not enough to fight on one front only, viz. via a
calls on them to look into the possibility of setting up, structural policy with low nominal wage settlements
within the framework of the social dialogue and in and low inflation. A demand-led, expansionist economic
addition to existing committees on economics, the policy is also required. The two approaches can provide
labour market, and education and training, a joint an excellent combination. To paraphrase the econo-
committee to discuss wage structures. This should, mists, we could say that a policy of this kind would cut
of course, be done without direct encroachment on NAIRU, thus enabling the central banks to allow
negotiations at national level. demand to increase without slamming on the brakes.
This is providing we can stop regarding the foreign
9.5.3. Countries which do not manage to achieve trade total — i.e. 23 % — as a policy constraint, and
stable wage settlements will have to cope with dwindling base our actions on the considerably lower limit of 8 %.
job security, shrinking unemployment benefits, failure
to cut unemployment and, eventually, lower real wages. 9.8. Everyone has an important part to play here: the
Reduced competitiveness inevitably impacts on the social partners and other interest groups, industry,
employment conditions available to the workforce. governments and the EU institutions. In this context,
tripartite cooperation within the framework of the social
dialogue should be extended into a partnership for jobs
(1) Cf. ESC opinions on Employment policy and the role of in which employees, employers and industry face up to
socio-professional organizations in the third phase of their responsibilities, and governments and the EU
economic and monetary union (rapporteur: Mr Dock) commit themselves to seizing the opportunity to pursue
(currently being drafted) and on Employment and the euro a more expansive economic policy with a view to
(rapporteur: Mr Geuenich) (currently being drafted). boosting employment.

Brussels, 2 July 1998.

The President
of the Economic and Social Committee
Tom JENKINS
C 284/78 EN Official Journal of the European Communities 14.9.98

STATISTICAL APPENDIX
to the opinion of the Economic and Social Committee

1. European trade — Exports of goods at current prices — Foreign Trade Statistics

Member States
Trade with other Member States and outside the EU % of GDP

Europe as an Economic Entity
Trade outside the EU

Export market 8 % of GDP

Single market 92 % of GDP
Source: Commission services. No year is given for the figures.
14.9.98 EN Official Journal of the European Communities C 284/79

2. Poverty rates as a proportion of the national or union average disposable income, 1992

(There are no figures for Austria).
Source: ECHP 1994 and Nordic SLCs.

3. Utilization of capacity — German industry (in %), 1960-1997

Source: EcoWin.
C 284/80 EN Official Journal of the European Communities 14.9.98

4. Development of unemployment (in %), 1994-1998

Source: OECD’s Economic Outlook, No 62.
14.9.98 EN Official Journal of the European Communities C 284/81

5. Hourly wage in manufacturing industry

Average 1976-1980

Average 1981-1985

Average 1986-1990

Average 1991-1995

Source: OECD’s Economic Outlook, No 62.