Relaunching the EU Economy

ETUC Economic and Employment Committee 18th October 2010 – Brussels.
The world crisis was triggered by a number of factors pervasive in both housing and credit markets. When Lehman Brothers and other important financial institutions collapsed in late 2008, the crisis hit a key point transcending into a domino effect on the rest of the financial markets affecting economies worldwide adversely.  Governments responded through individual bailouts and by devising economic stimulus packages.
Nature and extent of aid varied by country but mainly focused on rescuing financial institutions and on monetary and fiscal measures to kick start activity by pumping billions of funds into the real economy to stimulate consumption.

In its report ‘EU Macro-structural Bottlenecks to Growth’, the European Union identified the main constraints to growth for each member country including infrastructural constraints and impediments to the efficient working of the internal market. The significant fiscal deficits, mounting public debt, large current account imbalances and inefficient labour markets emerged as the main problem areas slowing down economic recovery and the international situation remains fragile. Under this scenario, most countries are facing challenges in upgrading of their economy. A point which has emerged as increasingly important is that unless there is a strong human capital base, there will be a negative impact on growth and international competitiveness. It is consequently extremely important for any Euro economy area like Malta to remain flexible in adjusting to external shocks. Price stability is important as is the maintaining of the country’s competitive edge through increased productivity.

In the case of Malta, five points have been identified as bottlenecks to growth calling for improvement. The issue of demographic ageing and its adverse impact on public finances. The need to increase alignment between productivity and wages. Support for the diversification of the economy and a further move to higher value-added activities by raising investment in new growth areas Improving skills base of the labour force, better utilisation of labour potential especially women and older workers Addressing weaknesses in the business environment and enhancing competition.

A lot of these problems prevail in other EU countries and various measures to address these are being sought. On top of this, member countries must adhere to the overambitious target that the EU has set on itself; that of reducing public deficits to below 3% of GDP by 2013. This is very different from the situation in the US, where the focus was on a stimulus plan based on quantitative easing. In fact, recently, the US FED announced that it would pump an additional $600bn (£372bn) into the ailing US economy in an attempt to accelerate growth and cut unemployment.

Another notable difference from the US is that while all countries in the Eurozone are expected to adhere to one single monetary policy, each country operates its own fiscal and wage policy. This means that each economy must adhere to the same monetary policy independent of the business cycle in which the country is positioned. This situation works well in promoting currency stability but is proving to be a problem on other levels due to different realities faced by each country. Each country is in fact rated separately and spreads between sovereign bonds of different euro-countries have widened dramatically during the crisis increasing borrowing costs for already debt-ridden economies.

Various EU member states are adopting significant austerity measures where budgets on public services, wages and social transfers have been slashed down. Public sector wages in certain countries have been decreased by circa 40%.

The European Trade Unions Committee (ETUC) disagrees wholeheartedly against these measures as it feels this policy will be self defeating. Such large scale austerity will bring the economy close to economic stagnation costing many jobs and undermining Europe’s industrial base. This will obviously impact the potential long term growth prospects of Europe and consumer spending which has always served as the motor of the economy will be hit hard. Such measures will prolong the sovereign debt crisis as tax revenues will decrease following low consumer spending stimulating a downward spiral.

ETUC recommends the transformation of austerity to stimulus in dealing with this crisis. Securing economic recovery and transforming recovery into self sustaining growth should receive absolute priority and precede any austerity measures. The departing point should be putting the economies back on track. Stimulus will also provide the opportunity to invest in infrastructure, networks and research and development strengthening Europe’s industrial base.

As things currently stand in Europe, the worst hit countries will find it difficult to access finance, hampering their ability to stimulate their economies. It is thus being recommended that the EU and not individual countries issue bonds. As an entity, the EU has virtually no debt. The funds for such a use are ready available; Europe has created a more than 500 billion fund to make sure banks will be paid back in full the sovereign debt they subscribed to. This fund has been funded by blind austerity measures directed to ordinary citizens. This system will therefore mean that welfare systems will be diverted from ordinary citizens to the banks.

The stimulus should work by injecting the whole amount in transnational investments for the Euro Area economy over the next three years. This will represent a persistent stimulus unlike the short term/one off government spending which has been the case so far. Structured models developed by IMF, the ECB, Federal Reserve and the Commission estimate that a 1% GDP stimulus boosts economic level by 1.5%. This means that the five hundred billion stimulus would boost the economic activity by Euro 240 billion in 2011, 2012 and 2013. This new economic activity will give the opportunity to the individual countries to grow out of deficits and debts as more taxes will be collected. Deficits in this way will be reduced by 1.50% of euro area GDP, bringing the average deficit to 1/5% of the GDP in 2011, 2012 and 2013.

From 2014 onwards the European stimulus will be withdrawn as it is felt that during this period, the private sector will have had sufficient time to restore their balance sheets. Should this not be the case, the stimulus package will be withdrawn in a phased manner so as to avoid a too sudden shock on economic activity.

The forced change in labour market rules is another area of great concern to the ETUC. Companies are taking advantage of the current economic situation and shopping around Europe to benefit from the lowest taxation and best conditions. In a tight situation, workers are being lectured that in order to compete with other countries it has become unavoidable to accept ‘precarious’ work practices.

Taxation as a sole measure cannot solve the imbalance between the interests of capital and labour in the internal market place. A European financial tax, European minimum tax or corporate profits, a European tax on high fortunes are amongst the previous proposals to help address this imbalance. Another two new proposals which are being suggested also try to achieve the same aim. The first is a European tax on profits which are not reinvested and the second is a tax on business which are resorting to ‘precarious’ work practices.

On a concluding note, the ETUC strongly recommends that this stimulus is not to provide a short term relief but have a long term effect to boost the Euro Area growth potential generating economic activity which secures jobs. Increased activity will provide member countries with an opportunity to reduce deficits. Additionally, the taxes proposed will provide the governments with measures which will increase revenue generation, hence reduce deficits in an equitable way while allowing the consumer to once again power the economy back to steam.
Mr Kenneth Genovese works at APS Bank Ltd and is a member of the APS Group Committee within MUBE.
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