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VIENNA -- The European Commission on 29 May issued specific recommendations to each of its Member States and to the euro area as a group on how to conduct and adjust their economic and fiscal policies over the coming months, but whether this could have an impact remains to be seen.
These recommendations are given in the context of the so-called "European Semester" which is the cornerstone of the EU governance framework. The intention is that during the first six month of a calendar year, EU Member States define their strategies for fiscal policy and set priorities for structural reform.
On the basis of the "Stability Programs" and "National Reform Programs", the Commission assesses the compliance of national policy settings with the common rules laid down in the EU Treaty and of the consistency of national policy priorities with the overall goals to achieve for the European economy, notably dynamic and sustainable growth, job creation and sound public finances to underpin the stability of the euro.
As a result of its assessment, the Commission formulates policy recommendations for each member state to be adopted by the Council of Ministers. These recommendations shall be followed up by the member states and their implementation shall in particular be reflected in national budgets that are drafted and adopted during the second half of each year.
Recommendations in the "European Semester" are therefore a key tool for the coordination of economic policy within the EU. They are part of the new governance framework that the EU has adopted in response to the crisis in the euro area.
Two major factors have been identified as the causes of the crisis: first, the inability of certain countries to bring their government deficits under control and stem the increase in public debt; second, the lack of competitiveness of (the same) countries due to strong wage rises and lack of productivity-enhancing structural reform, leading to slow domestic growth and a high and widening gap between imports and exports.
Under the heading of "Moving Europe Beyond the Crisis", the EU policy recommendations therefore focus on these two aspects: the enforcement of fiscal discipline and the insistence on structural reforms in goods and services markets, the labor market, but also in the public sector in order to put the European economy onto a more dynamic and sustainable growth trend.
In the words of European Commission President Jose Manuel Barroso: "Now is the time to step up the fundamental economic reforms that will deliver growth and jobs, which our citizens, especially our young people, anxiously expect."
"This is the only way to address the two lasting legacies of this crisis - the serious loss of competitiveness in many of our Member States, and persistent unemployment, with all its social consequences. The recommendations issued by the Commission today are part of our comprehensive strategy to move Europe beyond the crisis," he said.
Fiscal consolidation remains an overriding priority for most EU member states, and in particular for the euro area in order to regain confidence on financial markets.
Although deficits are generally heading down, they still exceed the allowed ceiling of 3 percent of GDP in 16 out of the 27 nations. For the euro area as a whole, the budget deficit for 2013 is expected at 2.9 percent of GDP and the stock of public debt at 95 percent, again far above the reference ceiling of 60 percent of GDP.
In order to improve budget balances, the Commission proposed spending restraint on retirement benefits by phasing out early retirement schemes and aligning the retirement age to the increase in peoples' life expectancy.
On the revenue side, taxes on labor ought to be reduced in order to encourage hiring and strengthen work incentives. Tax codes should be simplified by abolishing the many existing tax benefits and exemptions, which would create leeway for lowering tax rates.
A further priority must be the restoration of normal lending conditions to private companies. Banks' balance sheets are still impaired, and despite government support to banks and the expansionary monetary policy by the ECB, private business in many countries, especially small and medium-sized companies, face serious obstacles in obtaining credit.
Public policy should thus work to reinforce the banking sector and make it more resilient to crises in the future.
Probably the biggest challenge of all is the high and still rising unemployment, and in particular youth unemployment which in Greece and Spain hits one out of every two school-leavers.
Yet, the situation is much better in countries like Austria and in Germany. The Commission recommends the countries of high unemployment to make their labor markets more flexible, to facilitate migration and vocational mobility, remove barriers to the hiring of young people and, most importantly, to improve their education systems and extend and upgrade vocational training facilities.
Finally, a major reason for sluggish growth in Europe is a lack of competitiveness. Excessive wage increases in some countries need to be corrected and brought in line with productivity growth, underpinned by appropriate wage-formation settings.
Equally important, Europe clearly needs to step up its innovation efforts and continue to shift production and supply patterns towards more varied and sophisticated goods and services of higher value added. Here again, the role of research and education can hardly be overstated.
The performance and achievements with regard to these challenges is rather uneven across the EU member states.
This is reflected by the number of recommendations addressed to the different countries by the Commission. Whereas countries with satisfactory developments and sound economic fundamentals receive fewer recommendations, countries like Romania, Slovenia or Spain have received 8 or 9. Austria, despite its good overall economic situation, has nevertheless received 7 recommendations as the Commission considers that that the country is making little progress on fiscal consolidation as well as on overdue economic reforms.
Will the action by the Commission have an impact in the short term and lead to stronger growth and job creation in the longer term? In the area of fiscal discipline, the Commission is in a relatively stronger position, as it may propose financial sanctions in case of non-compliance. For the time being, the Commission is rather lenient: given the stagnation or recession in a number of countries, it is giving them more time for the correction of excessive budget deficits, like in France or Portugal, applying the rules in a flexible way.
For all structural reforms to achieve higher growth, the responsibility rests entirely with the member states and implementation relies on their insight and good will. In this respect, political considerations are the highest obstacles, as reforms, though necessary, are often unpopular and politicians, keen to stay in power, tend to sacrifice the long-term benefits of reforms to short-term electoral concerns. The latest example in this regard has been set by French President Francois Hollande. Disregarding the legal rules of European cooperation, he plainly rejected the policy recommendations, saying that "we do not accept instructions from Brussels, but only we in France decide on our economic policy." |
