Brussels, 20/10/2009
1. High public deficits and debts in Europe have returned. With the average deficit for 2010 expected to reach 7% of GDP[[Public debt is expected to reach 84% of GDP in 2010. Source: Commission Spring Forecasts]], Europe is essentially back to the level of deficit that existed when member states started preparing for entry in monetary union. The major part of the deficit comes from so-called automatic stabilizers: A major fall in economic activity presses tax revenues downwards and unemployment benefit payments upwards. Only a minor part (not more than 1% of GDP) is to be attributed to explicit fiscal measures that were taken with the aim to produce a recovery in activity.
2. At their 1 October informal meeting, European finance ministers agreed the main principles of a coordinated exit strategy from expansionary fiscal stimulus: ‘Timely’ withdrawal of fiscal stimulus, structural consolidation at or above 0.5% of GDP a year, structural reforms on the labour market and long term investments. From its side, the European Commission is calling for structural consolidation from the moment growth is back in line with potential growth (which is estimated to be around 1%) without the help of stimulus measures.
3. The consequence of this policy choice is unemployment remaining persistently high. A further consequence of the refusal to use fiscal policy to bring high unemployment back down is that the pressure to reform labour market institutions increases, with a weakening of workers’ rights as the likely outcome.
4. In all of this, the fact that the current recession is not a normal recession needs to be taken into account. It is the private, not public sector over indebtedness that is causing a structural weakness in aggregate demand, growth and jobs. The real issue to be addressed at this moment is not to withdraw but how to maintain and significantly improve fiscal stimulus so as to help the private sector in reducing its debts without causing a protracted slump in economic activity.
5. To do so, the ETUC urges the Commission, the Council and national governments to substantially strengthen European macro economic policy cooperation and turn it around into a new driver for demand and growth for the period to come. This means:
Preventing ‘free rider’ exit strategies. With several governments already intending to implement heavy fiscal consolidation packages, Europe urgently needs a ‘reversed’ stability pact to prevent countries from running prematurely and all at the same time to a – disastrous- fiscal policy exit.
Transforming temporary stimulus into ‘investment’ stimulus. The European Recovery plan is too limited[[It only represents 0,6% of GDP in 2009)]] and highly fragmented ([[An accumulation of many different policy measures, including a big focus on tax cuts. However, these tax cuts will be mainly translated into higher savings and not in higher expenditure]]). The ETUC therefore proposes to transform the existing temporary and fragmented fiscal policy action into more powerful European level action: An annual 1% of GDP investment effort into the ‘greening’ of the economy[[Change to a low carbon economy, renewable energies, clean technologies, modern cars and transportation systems,…]] and this for each of the next three years needs to be organised by using European level instruments (European Investment Bank, European budget,…).
Mobilise the financial power of Europe and address tax competition. Rising public debt remains manageable if the interest rate to be paid on public debt is low or falling. Here, the European Central Bank can help substantially by buying government bonds so as to bring long term interest rate costs for government lending back down[[Despite the crisis, long term interest rates in the euro area have not come substantially down from pre-crisis levels, pointing to the fact that banks have hoarded the low cost liquidity provided to them by the central bank in order to increase profit margins.]]. In addition, joint issuance of a European/ Euro Area Bond would increase market liquidity and reduce liquidity premiums in interest rates to be paid by government. Another important contribution to improve public finance sustainability is to stop tax competition in Europe and increase tax pressure on those revenues[[corporate profits, interest rate payments, financial fortunes, financial transactions taxes]] that are highly mobile but have low consumption rates.
6. Finally, the ETUC warns against the abuse of ‘exit strategies’ to renew with and even intensify the agenda of ‘structural deregulation’ of labour markets. Policies consisting of cuts in welfare, wages, public services, job protection have caused high and rising inequalities. These policies have contributed to the crisis in the first place; they can not get us out of the crisis. In particular, policy to weaken social security systems by increasing retirement age or cutting unemployment benefits will spread social insecurity to which workers and citizens will respond by spending less and increasing precautionary savings. The crisis is not the moment to promote higher private sector savings rates.
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