ETUC demands policy action to prevent the slowdown from turning into a long-term slump
The European Commission’s 2008 Spring Economic Forecasts, to be released on Monday 28 April, will revise growth prospects further downwards. At the same time, a report from the European Trade Union Confederation (ETUC), entitled ’Time to act!’, warns policy-makers against misplaced complacency. Macroeconomic policies to stabilise economic activity and demand need to be deployed right now, to prevent the economy from getting caught in a further downwards spiral. The ETUC calls on the Commission and finance ministers to convene a special ECOFIN Council aimed at strengthening economic governance to address the downturn, and to invite the European social partners to take part.
The ETUC report’s basic line is that macroeconomic policy cannot stand by and watch shocks multiply throughout the economy, ultimately giving rise to negative confidence and expectations becoming entrenched.
While monetary policy should normally be the ‘first line of defence’, the ETUC report finds that the European Central Bank (ECB) is in fact ‘missing in action’. The ECB is looking backwards at past and present inflation rates and fails to identify the important disinflation potential in the euro area (wage formation remains disciplined, the commodities bubble will burst, the euro exchange rate is set to appreciate further). Interest rate cuts are long overdue.
The ETUC report argues that, in the absence of monetary policy action, fiscal policy should fill the gap. Economic governance in Europe and the euro area should be substantially beefed up. Member States’ fiscal policy should be closely coordinated in order to:
Avoid making matters worse by sticking to rigid deficit objectives. The automatic stabilisers should be allowed to work to the fullest extent possible.
Improve the situation by shifting the composition of public budgets and targeting those expenditure and/or tax measures with the highest impact on aggregate demand. This implies measures for those who are economically weak instead of further tax cuts for the rich.
Turn those Member States with low deficits and high current account surpluses into an engine of growth for the rest of the European economy.
The ETUC urges the Commission and finance ministers to organise a special ECOFIN Council to set up such economic governance, and to invite the European social partners to take part.
Finally, the ETUC report proposes that the Commission and finance ministers should discuss the idea of a new European Smart Growth Initiative, focussing on investment in sustainable development and backed up by European bonds to be issued on international markets.
Says ETUC Deputy General Secretary Reiner Hoffmann: “Resilience to shocks is becoming the new alibi for macroeconomic policy to maintain a ‘wait and see’ attitude while the economy declines. European policy-makers should realise, however, that ‘resilient’ economies tend to have very active demand-side policies. There is nothing ‘automatic’ about resilience to shocks.”
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