Brussels, 13-14/10/2010

European economic governance and EU 2020: The Commission’s proposals

1. A reinforced Stability Pact : To tighten up the Stability Pact, more focus is to be put on the level of public debt: It is proposed that even Member States with a deficit lower than 3% of GDP can still be put into an ‘excessive deficit’ procedure in case public debt loads are over 60% of GDP and fail to reduce this debt load each year by 5% of the difference with the 60% threshold. Meanwhile, member states which are not subjected to an ‘excessive deficit’ procedure but who are still facing a high level of public debt are to follow an even faster pace of consolidation towards a close to zero deficit. The latter also has to be seen in connection with the proposal of taking implicit liabilities (future public pension obligations) on top of formal debt into account. Moreover, the Commission also seeks to intervene on the way member states are to achieve fiscal consolidation, with expenditure cuts being preferred over higher tax revenue.

2. Adding a new procedure: ‘Excessive macroeconomic imbalances’. Current account imbalances (which reflect imbalances in aggregate savings and investments), together with persistent competitiveness problems are thought of as harming the monetary union. To remedy this, a new procedure with both a preventive as well as a corrective arm is being proposed. The procedure would work on the basis of a scoreboard, using indicators such as current account positions, unit labor costs, public debt and private sector credits. Thresholds would be defined so as to formalize from which level imbalances are potentially harmful. Given the fact that macro economic imbalances are interconnected with a wide range of policies, this new process is giving finance ministers and DG ECFIN yet another possibility to intervene in areas where they have no competence (including collective bargaining, labour market institutions, public services,…).

3. Sanctions, fines and penalties (but for Euro Area members only). A battery of penalties is proposed, ranging from interest and non – interest bearing deposits of 0.2% in case of non compliance with stability pact recommendations and a yearly fine of 0.1% of GDP in case of failure to act upon ‘excessive imbalance’ recommendations. Moreover, a ‘reverse voting’ mechanism is to be introduced: The fines that are proposed by the Commission can only be stopped by a qualified majority vote. Finally, the Commission is also trying to move to a system of enforcement that is linked to the EU budget: Member states in breach of stability and a (reasonable) external balance position would see their access to European structural, social and cohesion funds being cut or reduced. This measure also includes the agricultural funds but in this case the end beneficiaries would not be affected since member states would have to continue to pay the farm subsidies without being reimbursed by the EU budget.

4. Finance ministers and EU 2020. Behind the proposal of a European policy semester in which stability plans and national reform plans are being streamlined in the first half of the year and finalized by April 2011, is hiding the decision of finance ministers to start writing these plans already now. The aim is to politically commit to ‘growth enhancing’ structural reforms as soon as possible. Commissioner Rehn is proposing the following time table:

a. Bilateral meeting between the Commission (DGECFIN) and Member states in September – October 2010

b. Political commitment to accelerated key reforms and first drafts of National Reform plans by Mid – November.

c. Commission assessment by December 2010,

d. Followed by ECOFIN tightening the reform plans ahead of their finalisation in April 2011.

5. Reforms to be frontloaded . To address ‘bottlenecks’ to growth, and in order to compensate for the contractionary effects of fiscal austerity on economic activity, DG ECOFIN (backed up by the EPC/EFC) is proposing the following policy agenda:

a. Pension reforms through higher tax revenue and lower public spending in future.

b. Reform of bargaining systems to swiftly restore cost competitiveness.

c. Reform of job protection systems as part of flexicurity and in order to remove impediments to job creation.

d. Address incentives to work

e. Enhance active labour market policies, public employment services and training.

f. Better regulation including market liberalization.

ETUC evaluation of the Commission’s proposals

6. Turning around our concept of economic governance. European economic governance is a long standing demand from the ETUC. From the start of monetary union, the ETUC has argued that a single European currency and a European central bank needed to be complemented by a close coordination of national (macro) economic policies. However, economic governance as proposed by the ETUC had the double aim of keeping member states from resorting to wage and social dumping as an alternative to national currency devaluation as well as to exploit the fact that a joint and coordinated expansion of demand has twice the effect on growth and jobs compared to a situation in which member states are acting entirely on their own. In contrast to this, the Commission’s economic governance proposals are about forcing member states to undertake a coordinated contraction of demand as well as to pursue non cooperative policies through which member states try to get out of the crisis at the expense of others.

7. Workers to pay for the entire cost of the crisis . What the Commission’s proposals basically do is to present workers with all of the huge costs of the crisis. This is operated by questioning all institutions which provide economic security to workers. Wage cuts undermine the stability of incomes derived from wages; flexibility jeopardizes job stability and the protection offered by regular labour contracts, while cuts in unemployment benefits systems make workers feel totally insecure. All of this will substantially weaken the bargaining position of workers. Business will use this opportunity to force workers into accepting a further degradation of wages and working conditions. The overall result will be for inequalities to increase further. A rising number of workers will be experiencing difficulties to make ends meet while CEO’s and shareholders at the same time enjoy rising dividends and bonuses.

8. Repeating the mistakes of the past . The Commission is exactly repeating the same type of policy mistakes which have contributed to the crisis in the first place:

a. By shifting even more income to wealthy households with high savings rates, the economy will face a demand deficit, making growth depend once again either on asset bubbles and rising private debt loads, or alternatively on huge export surpluses.

b. By focusing on public finances, the Commission is forgetting the fact that public finances are the victim and not the cause of the crisis. It was private sector debt, not public debt, which exploded and was being misinvested in asset (housing) price bubbles. Public debt only increased as a result of the crisis, with automatic stabilizers keeping the economy from even worse. Weakening these social stabilizers spells disaster when the next crisis comes. Questioning the operation of public services comes down to forget the fact that these services do not represent a cost but an investment in the future of our societies.

c. By introducing the debt criterion, the pro- cyclical bias of the Stability Pact becomes worse: It is much easier to reduce debt when the economy is growing but impossible to do so when the economy is in recession.

d. By pursuing a supply side policy at a moment that the problem is a lack of demand, unemployment will increase even more and the downwards pressures on wages will intensify further.

e. By viewing current account imbalances as a problem to the extent these imbalances imply deteriorated competitiveness, the Commission is putting the entire burden of adjustment on the ‘deficit’ countries. The latter have to rebalance without a corresponding revival of domestic demand in the ‘surplus’ countries. This is not possible. In an integrated internal market, deflating one part of Europe can only work if the other part reflates so that the ‘deficit’ countries can enjoy some dynamism in the markets they are exporting to.

f. By pushing for labour market flexibility, business will obtain even more opportunities to transform what otherwise would have been ‘good’ or regular jobs into precarious contracts and the process of self sustained growth will be blocked.

9. Wage cuts to organize competitive deflation. Underlying the Commission’s vision on economic governance is the idea that wages should take over the role of currency devaluations. Instead of devaluing the national currency by 20 or 30%, wage cuts are to set in motion a process of deflation. This deflationary process is then supposed to mimick the effects of a currency devaluation by rapidly improving the cost competitiveness of economies. This however will not work. There is a reason why central banks have preached for decades about the virtues of price stability: Deflation will make existing high private and public debt loads even more difficult to carry. As a result, domestic demand dynamics will be completely aborted and the gain in export competitiveness will not be able to compensate for this. If, in turn, the ‘surplus’ countries stick to their competitive position, regional deflation becomes euro area wide deflation.

10. The road into a double dip and depression . All of this will have severe consequences. Fiscal austerity, wage austerity and social austerity will combine to push the economy into a renewed recession. And from the moment low inflation turns into deflation, and with nominal interest rates constrained by the zero bound, monetary contraction will be added to this tripe austerity.

Europe needs an Economic and Social government

11. Europe needs an Economic and Social Government. Instead of Europe and its finance lobby preaching the virtues of anti labor, anti state, anti tax policies, Europe needs to take up its role in actually providing member states with those instruments which are indispensable to tackle the crisis and the economic and social imbalances that caused the crisis. This implies:

a. A European organized stimulus policy in the form of investment transfers to member states, helping countries to grow out of debt instead of forcing them into a blind austerity scenario that is self defeating and will destroy many more jobs while failing to bring spiraling public debt under control.

b. A European Bond to help all member states face the irrationality of excessively pessimistic financial markets, and this without the brutal economic conditionalities now attached to the joint Commission- IMF loans.

c. A European Financial transaction tax, along with European wide cooperation in those areas of taxation where the internal market is used by banks, businesses and capital incomes in general to escape from fair taxation. The extra revenue generated this way is to finance the European Growth Bond. In this way, those that have caused the crisis will pay for the exit from the crisis.

d. Strengthened social level playing field, addressing unfair competition in the internal market in the form of precarious work practices and competitive wage dumping.

12. The role of European Social Dialogue . Economic and social governance is too important to be left to finance ministers and central banks only. The ETUC insists on the fact that the process of economic and social governance should be led by the European Council of heads of state, with social and employment ministers providing their input and being involved in the process on the same basis as finance ministers. The ETUC and its affiliates stand ready to assist in this process. In this respect, the ETUC suggests the Council of Employment and Social ministers to invite and hear European Social partners on these matters. To back this up, the ETUC also proposes to create a standing ‘EU 2020’ group inside the European Social Dialogue so that all 27 countries and their social partners can be involved on a regular basis in ongoing policy discussions.

13. The model of trade union governance must take into account the fact that the proposals of the ECOFIN Council could trigger a serious and quick degradation of the workers’ situation and of the trade unions’ role and position in collective bargaining. This is why we must clearly reaffirm that the ETUC and the entire European trade unionism are not and will never be prepared to bring into question their full autonomy and their right to collective and wage bargaining nor to accept limits or, even worse, restraints, to their activities. Moreover, the proposals tabled by the ECOFIN Council should motivate us to improve and indeed strengthen our internal coordination even more to make the exchange of information easier and to intensify our cooperation so as to avoid the risk of aggravating social dumping and divisions between European workers.