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2.3.1. What does it consist of? Can simple coordination of economic policies suffice?

The economic policy and the social policy of the EU and the euro zone are still the responsibility of each member state.  In particular, the institutional framework set in place by the Maastricht treaty is asymmetric as far as the conduct and the instruments of the macroeconomic policies of the Economic and Monetary Union are concerned. On the one hand, the monetary policy is centralised in the European Central Bank, and the central banks of the countries are no more than the agents for carrying out this single monetary policy. On the other hand, the other economic policies are decentralised since they have remained the responsibility of the national governments, and even their federated bodies.

This is particularly true of the budgetary policy, the decentralised nature of which is emphasised even more by the comparative puniness of the European budget.  Whereas, in the United States, the expenditure of the Federal Government accounts for about 60% of total public expenditure, the budget of the European Union, at a little more than 1% of its GDP, represents less than 3% of total public expenditure. Because of this the US Federal Government has the means to intervene to help a region in difficulty.  There is no such mechanism of interregional economic stabilisation in the EU.

Although decentralised, the economic policy of the member states is nonetheless surrounded by common rules emanating from the fact that they belong to the internal market: these cover, in particular, competition, the prohibition on principle of public aid to companies and the setting of base levels of VAT. Tommaso Padao-Schioppa* has synthesised the breakdown of responsibilities for economic policy between the member states and the European Union as follows:

Policies	Micro-economic	Macro-economic
European Union	Market for goods	Monetary policy and capital
Member States	Labour markets	Budgetary policy

       

2.3.2. What is the Stability and Growth Pact?

In order to get into EMU and gain access to the single currency, the candidate countries have had to meet the “convergence criteria” of the Maastricht Treaty (chapter 1.2.4.)   Since these obligations result from macro-economic policies (inflation rate, long-term interest rate, budget deficit and public debt), they constitute another sort of framework surrounding economic policies which has remained, in theory, the responsibility of the Member States.
 
The “Stability and Growth Pact” (SGP), made by the European Council in Amsterdam in June 1997, on the basis of a proposal put forward in 1995 by Theo Waigel* extends, in a way, the obligations undertaken by the Member State to get into the EMU, by keeping a watch to ensure that their efforts at good management of public finances are not relaxed once they are in.  Through this Ppact, EMU Member States have undertaken, under the eye of the Commission and the Council:

• to consider that, in a normal economic situation, well-balanced public finances (a nil deficit or even a budgetary surplus) must be the rule
• to move progressively towards this objective through “stability programmes” made subject to procedures of multilateral surveillance provided for by the Maastricht Treaty
• not to pass a ceiling of 3% of GDP for the budget deficit (of all the public authorities taken together)
• to agree that the passing of the ceiling – unless it is temporary or caused by exceptional circumstances ( a serious recession, for instance) – will be sanctioned, after an excessive deficit procedure, by a deposit without interest with the ECB, which deposit will become a definite fine if the excessive deficit is maintained.

2.3.3. What is the import of the Stability and Growth Pact?

Right from the outset, the SGP has been criticised by some observers as being too rigid, and the likelihood that the Council could impose a fine on one of its members has been deemed slim.  When the budget deficit of Portugal reached 4.4% of its GDP in 2001, the Commission started an excessive deficit procedure in 2002, which fairly quickly took budgetary austerity measures, and it also rapidly made it known that it had France and Germany (deficits of 3.2% and 3.5% of GDP, respectively, in 2002) in its sights. With protests and threats of rebellion from the governments of these two countries, controversy flared up around the SGP, with the small countries fearing that, when all was said and done, they would be the only ones the pact would affect.

In view of the danger to the credibility of the EMU that a pact too rigid, and even simplistic in its conception would present (Sr. Prodi*, the then President of the Commission even described it in an interview as “stupid”) a consensus rapidly emerged over the need to refine the SGP.  In November 2002 the Commission made the following proposals, which were adopted by the Council in March 2003:    

• to enable countries in good financial health (structural budget – audited to take in the effects of variations in the economy – in balance and public debt less than 60% of GDP) to be allowed to have reasonable short-term deficits in order to be able to finance the actions needed to implement the Lisbon strategy*; for instance, programmes of investment in scientific research and infrastructure
• to make those Member States whose structural deficits have remained too high, reduce them by at least 0.5% of GDP annually ( at the time this meant, more particularly, Germany, France, Italy and Portugal)
• to make the States whose public debt exceeded the threshold of 60% by much (Belgium, Greece, Italy) adopt more ambitious programmes for reducing this ratio, so that they could face up to the foreseeable increase in indebtedness due to the cost of future pensions, failing which, these states would find themselves on the wrong end of an excessive deficit procedure;
• to consider that lax budgetary policy during a period of favourable economic conditions, even if it doesn’t lead to the 3% threshold being exceeded, is a breach of the SGP punishable with a warning.

The trends in deficits and public debt show that these rules are only partially enforced due to a lack of authority on the part of the European Commission.

Illustration 2d :  Public deficits in the EU older members in 1997. 2001, 2003 and 2006.

 

Illustration 2e :  Public debts in the EU older members in 2001and 2006.  

For the public deficits and debt of the new member
countries and candidate countries, see chapter 1.3.3.

2.3.4. How can the public indebtedness of the states of the EU be appraised ?

Whilst the Americans may have piled up excessive private debts, the Europeans have accumulated public debts.

Comparing the tables of public debts in 1997 (see illustration 1.2.4.d), 2003 and 2006, it is noticeable how this indebtedness, as a percentage of GDP, fell sharply until 2003 and then took-off upward again.  In this way, the number of countries exceeding the Maastricht criterion of 60% of GDP had fallen in 1997 and stayed at 4 out of 15 until 2003.  Since then, indebtedness has increased sharply, with the number of countries not meeting the Maastricht criterion for indebtedness rising from 4 to 7 (public debt being less severe in the new member countries than in the 15 older EU Members).

In fact, the euro offers monetary protection on the international markets which the national currencies don’t give. Instead of the decision-takers seeking to make their public finances healthy in order to improve the stability of the euro, it was as if they did the opposite, by using this international stability to pursue a course of excessive public borrowing and using their companies and private citizens to defray the fiscal costs.  This is what France did, for instance, as the 2005 report of Michel Peberau* has shown.

See also: en.wikipedia.org/wiki/Peberau_Report_on_public_debt    or

fr.wikipedia.org/wiki/Rapport_P%C3%A9berau_sur_la_dette_publique

During the period of accelerated economic growth between 2006 and 2007, the pubic deficits remained negative, on the whole, whilst the SGP envisaged balanced public accounts in good times in order to build up reserves.  Whilst, as a  % of GDP, the average public debt of the countries of the 15 member EU is today slightly lower than it was in 1997; expressed in euros per person, it has risen from 13,800 euros in 1997  to 17,600 euros in 2006 (expressed in 1997 ecus); that’s an increase of 27% in less than ten years.

2.3.5. Do we need a European “industrial policy” and encourage the emergence of “European champions”?

Industrial policies got a bad press in Europe in the 1980s and 90s, not only under the influence of the prevailing liberal current of opinion but also because, in the name of an industrial policy, countries kept firms condemned to disappear alive artificially through aid and so left themselves stuck with antiquated economic structures.

Even policies oriented towards industries of the future were condemned on the grounds that the government, faced with huge technological changes and unforeseeable trends in demand, had neither the information nor the competence to work out what sectors to encourage.  It was better to leave industrial policy to the blindly groping ministrations of market forces, for these had the capacity to correct their forecasting errors more quickly – and at less cost.

Nevertheless, there has been a recent resurgence of interest in industrial policy, motivated by several factors: fear that company relocations will progressively empty Europe of its industrial substance, takeovers of some of the best bits of European industry by foreign interests and the fear of seeing important levers of economic control slip out of the hands of Europe or its Member States, consciousness of the fact that some large competitors of the European Union (not only China but also the United States) did not hesitate to encourage this actively.

Nevertheless, outside extreme nationalist parties, there is a fairly broad consensus in Europe that national industrial policies and the encouragement of “national champions” no longer make any real sense.  These champions are so much part of the European, even world, economic and industrial fabric that any public support given by a country to one of its champions would increasingly be of advantage to foreign beneficiaries, workers and shareholders and could, therefore, not be justified to national taxpayers.

2.3.6. Should the European Union do more to encourage the emergence of European champions – of the Airbus type – in order to stand up against its big competitors better?

There is controversy over this question. Some people think that such a “European industrial policy” should be accompanied by a more active European strategy in the multinational trade negotiations at the WTO, particularly to have the principle of reciprocity fully respected.  They think that the procedures of reinforced cooperation provided for by the treaties could act as a framework of coordinated support for efficient European sectors reaching a “critical mass” in the field of international competition, such as in energy, the environment, defence, air and space, health and biotechnologies.   

Others are sceptical: They say the European Commission doesn’t have the information and the competence required to pick winners, any more than a national government does, and the inevitable mistakes in the choice of European champions could cost the European taxpayer dear.  They also point out that the existing big European companies have no trouble sticking up for themselves amidst the international competition and have often become big world companies through their acquisitions outside Europe, whilst the comparative weakness of Europe stems especially from the fact that the small companies set up there grow less easily than in the United States because they don’t have access to a sufficiently developed risk capital market (see chapter 1.3.2.).

2.3.7. Taxation: Should we let subsidiarity* prevail and fiscal competition between States act or should we aim for a degree of harmonisation ?

Should we try and harmonise the taxation systems of the European Union?  National governments consider as one of their essential prerogatives being able to decide for themselves just what resources they need from taxation and how they will go about getting them.  So it is hardly surprising that up to now the Member States of the EU have reserved unto themselves a right of veto (the unanimity rule) over any European decision on the matter.  But is there really any point in harmonising taxation in Europe, or any need for it?  Some people think that the present situation is fine in that it allows States to compete on the fiscal level, and that this competition is an efficient way of curbing their appetites and preventing them from overtaxing their citizens. Other people think that a single market cannot function properly with excessively large disparities in taxation and that fiscal competition risks reducing countries’ tax revenues too much, even to the point where it harms their proper running and social cohesion.

2.3.8. To what extent is indirect taxation harmonised?

It is necessary to make a distinction between different types of taxation. A part of indirect taxation has been harmonised through the suppression of customs barriers and the adoption of a common customs tariff (article 3, a, b, of the EC Treaty, called the Treaty of Rome).  As for VAT, it has been the subject of a directive of November 2006 codifying the previous provisions and establishing a “common VAT system”.  This provides that the normal rate of VAT cannot be less than 15% and that, moreover, on certain categories of goods or services, Member States may have one or at the most two reduced rates which cannot be less than 5%.  As regards the excise duty, particularly on fuels, minimum rates are also established.

In any case, the existence of minimum rates limits the undue competition which Member States could be tempted to engage in to attract customers from frontier regions of neighbouring countries with very low rates.  In the United States, indirect taxation is the responsibility of the federated States and, because of this, there are considerable differences between them in the rates of tax on consumption, but this apparently does not give rise to large distortions in the operation of the large American market.   

2.3.9. …and direct taxation: the case of income from capital and company taxation

Direct taxation is harmonised in the United States.  It is not so in the European Union. Should it be?  That does not seem necessary for taxation of income from work. To be sure, there are big differences between Member States in the tax rates and the progressiveness of the scales, but that does not seem to be a major snag or to give rise to large migrations of workers between Member States just because of it (although, in the recent campaign for the presidential election in France, attention was drawn to the number of young French people working in the financial sector in London, at least in part to benefit from lighter taxation).

Tax on income from capital poses another problem due to its very great mobility.  Particularly In a common monetary area where capital must be able to circulate freely, if each Member State could freely decide to tax the income from capital of residents without touching that of non-residents, it could have led to a worst case scenario in which all European citizens went to cash their income from capital in a neighbouring country   

After years of discussion, an at least partial solution has been brought to this problem by a 2003 directive making the banks of each country indicate to the tax authorities of the countries of non-residents the income from interest paid through them to these non-residents. As a transitional measure, Austria, Belgium and Luxembourg have been able to replace this obligation by the deduction at source of a 15% levy on this income.  

Finally, the taxation of companies is probably the area where the lack of harmonisation gives rise to the most harmful distortions by enabling Member States to attract firms with a very low or nil tax rate on their profits.  Ireland has made shrewd use of this opportunity in its development.  Several of the new Member States want to do the same thing.  Fiscal competition in this domain has already led to a lowering of company tax in a number of EU countries, and this can create political situations calling for delicate management, particularly in countries where personal income tax is still onerous.  An attempt at harmonisation is under way, the object being, at least in the first place, to harmonise the taxable base of companies, with the rate of tax remaining something to be decided at Member States’ discretion.  Such a reform would, in any case, have the merit of making life easier for European companies based in several countries of the European Union (and their accountants).

2.3.10. What is the distribution2 of unemployment throughout the EU?

This is a domain where subsidiarity* comes fully into play and allows diverse socio-economic cultures and “social models” to coexist (cf. 2.1.5. above),  with quite different results, to boot.  The high structural unemployment that exists in some countries or regions is not an overall characteristic of the European Union as a whole, or even the euro zone.  Countries like Austria, Denmark and Ireland have had full employment for years, and even over-employment, with unemployment rates even lower than those of the United States. If there is an area where bench-marking and the practice of peer-pressure can usefully apply, this is it!  (see illustration 1.3.1. j&k and 1.3.3.d.)

2.3.11. What is Europe doing to combat unemployment?

In its preamble, the 1957 Treaty of Rome made “the constant improvement of the living and employment conditions” of the Europeans the “essential aim” of the creation of the European Economic Community and, in its article 3i it envisaged “the creation of a European Social Fund, with a view to improving the employment chances of the workers and contributing to the raising of their standard of living”.  Within the context of the free movement of workers, which is considered as one of he the essential objectives of the large market, a system was introduced in 1970 guaranteeing the payment of social security benefits for workers employed in another member state.
 
Until the adoption of the first “social action programme” in 1974, which marked the (modest) beginnings of a European social policy, this was limited to the activities of the European Social Fund, which in the sixties was used especially to finance measures for transferring and retraining workers. From the mid 70s onwards, priority, in the area of social policy, was given to programmes of specific action on health and safety at work, the promotion of equal opportunities for women, and job-training and placement for less favoured categories workers.  While these domains were certainly important, they nevertheless were outside the main axes of a social policy, which ought, firstly, to be the promotion of employment, the definition of the rights of workers and the organisation of social security.  These programmes were based on specific areas of responsibility (article 100 of the EC Treaty) and always required unanimous decisions n the Council.

2.3.12. What is the contribution of the Single Act to the fight against employment?

The refusal of some countries – including the United Kingdom – to extend Community legislative powers in the realm of social policy and develop a European social policy in this area has been expressed on several occasions.  In 1986 The Single European Act added an article 100A to the EC Treaty, allowing the Council to decide by a qualified majority “measures relating to the approximation of legislative, regulatory and administrative provisions the object of which is to establish the internal market and make it function”.  Over a few years this essential provision enabled some 300 directives to be passed putting in place the large market of 1992.  However, it was stated in the same article that it did not apply  “to fiscal provisions,  to provisions relating to the free movement of persons and to those concerned with the rights and interests of wage-earning workers”, for whom the unanimous vote system continued to apply.

2.3.13.…. and of the Treaty on the Union and later Treaties ?

In 1991, the British position on the social policy almost compromised negotiations on the treaty on the European Union.  The European Council in Maastricht in December 1991 found a compromise which did not alter the provisions of the EC Treaty in the realm of social policy but added to the new EU treaty a “Protocol on Social Policy”  of a restrictive nature which authorised eleven out of the twelve to have recourse “to the institutions, procedures and mechanisms of the treaty” in order to pursue a common social policy without the United Kingdom. It also added the wording of an “Agreement on social policy made among the member states of the European Community with the exception of the United Kingdom of Great Britain and Northern Ireland”.

The first article of this agreement states that “The Community and the Member States have as their objectives the promotion of employment, the improvement of living and working conditions, adequate social protection, social dialogue, the development of human resources enabling a high and lasting level of employment and the fight against exclusion. To this end the Community and the Member States are implementing measures which take into account the diversity of national practices, particularly in the field of relations based on written agreement or contract, as well as the need to keep the Community’s economy competitive.  Nevertheless, excluded from European social policy are many aspects of labour law (right of association, right to strike and of lockout) as well as the matter of pay.  Moreover, unanimity is always required for decisions affecting the rights, the social protection or the social security of workers.

 The Amsterdam Treaty, which was signed in 1997 and came into force in 1999, made progress inasmuch as the social agreement annexed to the Maastricht Treaty was integrated into the EC Treaty (replacing articles 117 to 120 in it), the United Kingdom having agreed of sign up to the Community Social Policy.  Nevertheless, the restrictions in this social agreement concerning its field of application were maintained.

The Constitutional Treaty of 2004 had integrated the Charter of Fundamental Rights (see sub-chapter 5.4) into its Part II so as to make its application compulsory in all the states of the EU.  At the insistence of the United Kingdom, it was transferred into an appendix, as was the case with the Nice Treaty, and the United Kingdom is specifically dispensed from its application.

2.3.14. So can it be said that there’s a social Europe?

We are a long way from a Europe united on the social front, even if, mainly under the pressure of the internal market, minimal European recommendations are coming more and more to complement national regulations in certain areas. Important areas of labour law and social legislation are still completely national,  which appears inevitable at this time bearing  in mind the diversity of the socio-economic cultures in the EU (see 2.1.5.), which has got even bigger with the last two enlargements.  No doubt, given this diversity, the national governments are in a better position than the authorities in Brussels to appreciate the needs and preferences of their own citizens here.

As far as employment policy is concerned, the Treaty on the Union stipulates that the member states should look upon the promotion of employment as a matter of common interest and coordinate their actions in this respect in the Council, and the Constitutional Treaty lists among its fundamental values “full employment”.  In the longer term, one might think that the integration of the markets, the growing mobility of labour and the increasing similarity of life-styles will produce a gradual convergence of the systems of collective
solutions.  But that’s probably for tomorrow.