Cause and Effect in European Politics and Law

The Decalogue of Brussels

Ralitsa Kovacheva, January 18, 2011

For the first time in its history the European Union is starting a procedure of common economic and budgetary planning. The so-called European semester (the first half of the year) is aiming member states to synchronise their national policies with the European priorities, so as to avoid any unpleasant surprises later when the budgets will be approved by national parliaments. The procedure is starting with the first-ever Annual Growth Survey, accompanied by three reports: Macro-Economic Report, Joint Employment Report and Progress Report on Europe 2020.

"A new phase of European integration begins with the Annual Growth Survey. We are setting out to break new ground and to decisively improve the way in which we manage and coordinate our interdependent economies in the European Union. This is the EU model. This is our economic governance in action", European Commission President Jose Manuel Barroso said while presenting the document.

The challenges

The global financial crisis didn’t only hit hard EU's economy and literally blew up public finances, but it had the community face the need to urgently solve structural weaknesses that had been neglected over the years. According to the EC, by the end of 2012 eleven member states will not reach their pre-crisis output levels. In 2010, EU's gross government debt has risen, on aggregate, to around 85% of GDP in the euro area and to 80% EU-wide. On aggregate, 9.6% of the working population is unemployed. In some countries, youth unemployment is close to 40%. 80 million people in Europe are living below the poverty line.

Except internal challenges, the EU has to deal with another one - to enhance its competitiveness globally. “Medium term potential growth for Europe is projected to remain low and estimated at around 1.5% up to 2020 if no structural action is taken namely to resolve the labour productivity gap with our main competitors.” In addition, “Europe needs to accelerate the consolidation of its public finances, the reform of its financial sector and to frontload structural reforms now”.

In the Annual Growth Survey, the European Commission sets out 10 priority measures (10 "Commandments") in 3 key areas, directly linked to the targets set in the Europe 2020 strategy: fiscal consolidation and macroeconomic stability, labour market reforms to increase employment and measures to promote growth.

I: Save more!

First Commandment: Implement a rigorous fiscal consolidation! EC requires member states, especially those in excessive deficit procedure, to “keep public expenditure growth firmly below the rate of medium term trend GDP growth, while prioritising sustainable growth friendly expenditure in areas such as research and innovation, education and energy.” Their Stability or Convergence Programmes should be based on prudent growth and revenue forecasts.

Some countries will have to raise taxes. The Commission's view is that “indirect taxes are more growth-friendly than direct taxes and broadening tax bases is preferable to increasing tax rates. “

Second Commandment: Correct macroeconomic imbalances! The Commission notes the urgent need to increase competitiveness, especially of the euro area countries. Member states with large current account deficits and high debt levels should provide specific corrective measures (including wage moderation). Those with large current account surpluses have to encourage domestic demand, including through further liberalisation of the services sector and improving conditions for investment.

Third Commandment: Ensure financial sector stability! Since the beginning of the year, the new financial supervisory institutions are operational: the European Board for Systemic Risk (EBSR) and the European Supervisory Authorities (ESAs) - the European Banking Authority (in London), the European Insurance and Occupational Pensions Authority (in Frankfurt) and European Securities and Markets Authority (in Paris). By the summer the Commission will present a legislative proposal for an EU Framework for Crisis Management in the Financial Sector to facilitate the restructuring of distressed financial institutions. Brussels recommends this process to be accelerated, particularly for banks which have received substantial state aid.

In addition, according to the requirements of the Basel III agreement, banks will have to increase their capital base. A new set of bank stress tests will be carried out this spring and the Commission promises these to be tougher and more ambitious than previous ones. According to European Economic and Monetary Affairs Commissioner Olli Rehn, the tests will pay particular attention to the stability of banks in terms of sovereign debt. At the same time, the European Banking Authority will initiate a separate thematic review of liquidity funding risks across the EU banking sector in the first quarter of 2011.

II: Work more!

Mobilisation of workforce and creation of job opportunities are key measures to promote growth, the Commission notes. Europe is at a disadvantageous position compared to other parts of the world because of its ageing population and low utilisation of the workforce. The Commission has made a recognition, which has been clear to many for a long time, but was concealed because of the political benefits of social comfort: “The combination of high unemployment rates, low participation in the labour market and fewer hours worked compared to other parts of the world undermines the EU's economic performance.”

Against this background, the Fourth Brussels' Commandment sounds less paradoxical: Make work more attractive! We have come to an end where we have to convince ourselves that work is not just to go to work, that labour is not a burden, but an inherent human need and a form of self-expression. This philosophy is obviously not very popular in indulging Europe, not to mention in its periphery, especially in Bulgaria.

The Commission recommends member states to implement reforms in order to promote training and work incentives, including reducing labour taxation, tax benefit systems, flexible work arrangements and childcare facilities. However, unemployment benefits should be reviewed in order to encourage people to work. Therefore, the Fifth commandment is: Get the unemployed back to work! Especially for the low income level, it is important to carefully evaluate the relationship between labour taxation and unemployment benefits, in order not to prove that it is more profitable to live on social aid.

However, the excessive employment protection in certain national laws should be revised (Sixth Commandment) in order to provide a more flexible labour market, with more opportunities to include new workers, especially young people. Member states should simplify their regimes for the recognition of professional qualifications to facilitate the free circulation of labour force across the EU.

Seventh Commandment: Reform pension systems! The things here are clear: member states should increase the retirement age and link it with life expectancy, reduce early retirement schemes, support the development of complementary private savings.

III: Encourage growth!

“To remain competitive in a globalised economy Member States must urgently begin the deep structural reforms needed to enhance the excellence of our research and our capacity to innovate, turning ideas into products and services that meet the demand of high-growth markets, taking advantage of the technological capabilities of our industry and helping SMEs to grow and internationalise”, the European Commission points out.

In this sense, the single market can be an important source of growth, although at present it is not fully functional. Cross-border services only represent 5% of GDP, less than a third of trade in goods and only 7% of consumers buy on-line because of the numerous restrictions, according to the EC's data. Therefore, the Eighth Commandment is: Exploit the potential of the single market!

One of the measures in this regard is related to the sensitive issue of taxation. This year the Commission will propose measures to modernise the VAT system, to introduce a common consolidated corporate tax base, and to develop a coordinated European approach to taxation of the financial sector. It is provided also tax on labour to be reduced to the necessary minimum and the European framework for energy taxation to be adopted.

In an attempt to attract private capital to finance growth (ninth commandment), the Commission will propose setting up EU project bonds for priority projects in energy, transport and ICT. These innovative financing instruments will be included in the next multiannual financial framework.

The last, 10th Commandment is: Create cost-effective access to energy! The Commission calls for rapid and full implementation of the Third Energy Package by the member states and enhancing energy efficiency policies.

What's next?

Based upon these 10 "Commandments", until mid-April member states should present their med-term budgetary strategies under the Stability or Convergence Programmes, as well as their National Reform Programmes. Based on the recommendations of the Commission, the Council will adopt policy guidelines for each country until July, which have to be considered when preparing budgets for 2012. It is expected the rest of the EC proposals for strengthening economic governance to be adopted by the summer, which will enable the evaluation of how member states meet their objectives and to impose sanctions in cases where it is unsatisfactory, particularly with regard to the euro area.

One of the most urgent questions, set in the Annual Growth Survey is about the European Financial Stability Facility. According to the Commission, “the effective financing capacity of the EFSF must be reinforced and the scope of its activity widened”. Addressing this issue is important both in terms of the current financial problems of some euro area countries and in terms of preparation of the permanent rescue fund - the European Stability Mechanism, which should be operational from mid-2013. Although until recently there were serious disagreements between member states on this issue, obviously positions have evolved and we can expect an agreement on further changes to be reached at the European Council in early February.