Official Journal of the European Union

C 110/111

Opinion of the European Economic and Social Committee on ‘budgetary policy and type of investment’

(2004/C 110/19)

On 21 January 2003 the Economic and Social Committee, acting under Rule 23(3) of its Rules of Procedure, decided to draw up an opinion on the Budgetary policy and type of investment.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 9 February. The rapporteur was Ms Florio.

At its 406th plenary session (meeting of 26 February 2004), the Economic and Social Committee adopted the following opinion by 98 votes to 38 with three abstentions.

1.   From Maastricht to the Stability Pact


The Maastricht Treaty was signed in 1992. The Treaty criteria, which brought the first countries (followed later by Greece) into the single currency, were essentially based on a drastic reduction of the budget deficit, public debt and on low inflation. The quantitative criteria underpinning it are set out in Treaty Article 104 (ex Article 104 c) and in the appended Protocol on the excessive deficit procedure, which establishes the stages and timeframes for reviewing it.


The same criteria were later applied to the Stability Pact. However, unlike the Pact, the Maastricht Treaty gave the Council a certain leeway with regard to the implementation and nature of penalties. Moreover, it did not establish any deadlines for the various steps towards the declared objectives (1).


The Stability and Growth Pact, adopted in 1997, will go down in the history of Treaties and Agreements as one of the most important steps towards the policy of coordination sought by the European Union. The Pact sets itself three main objectives: strengthening control of budgetary policies, coordination of economic policies, and support for economic policy monitoring procedures.


The Pact states that, in the short–medium term, the budget must be ‘close to balance’. It is this same mechanism which should enable the automatic stabilisers to be triggered more effectively during a recession.


The deficit is excessive if it exceeds 3 % of GDP. However, there is an ‘exceptionality clause’ that can be called upon to address external factors that are beyond the control of the Member States (natural disasters, etc). As far as ‘close to balance’ is concerned, no country has yet revealed exactly what an acceptable percentage might be for the eurozone.


The Pact requires each national government of the eurozone countries to present a ‘stability programme’, while the other countries are to adhere to (national) ‘convergence programmes’. The Council decides when and how to issue recommendations and ‘early warnings’. Unlike with the Maastricht criteria, the specific deadlines set by the Stability and Growth Pact enable decisions to be taken rapidly in cases of excessive public deficit.


Economic growth has fallen far short of expectations, and this has prevented France and Germany – and to some extent Portugal – from respecting the agreed criteria. Under Treaty Article 104(8) and Regulation 1466/97 of the Stability and Growth Pact, this should have triggered drastic adjustment measures and possible sanctions for failure to respect the agreed criteria. However, the Ecofin Council of 25 November 2003 decided to suspend the infringement procedures against France and Germany.


Generally speaking, the Maastricht Treaty has achieved significant and positive results, not least the introduction of the euro in 12 countries of the Union: to such an extent that, soon after the Treaty was signed, i.e. from 1993, the budget deficits of most EU countries started to fall (in 1993 the budget deficit in the eurozone had reached its historical maximum: 5.5 %).


Since 1997 the EESC has adopted several opinions on budget policies, notably the Opinion on the Pact for Stability and Growth (2)

2.   The Stability Pact in the current European and international economic climate


A discussion of budgetary policies and potential investments to re-launch the European economic system must include an appraisal of the current situation, the direction it might take and the instruments needed to pull back from the brink of stagnation/recession.


In Japan, the US and the EU, the interest rates set by the major central banks are already at historically low levels: 2.5 % for the ECB, 1.25 % for the American Federal Reserve and 0.5 % for the Bank of Japan (figures for July 2003). The European Central Bank (ECB) argues that there is little room for manoeuvre on interest rates. Moreover, the single interest rate could turn out to be too high for some and too low for others. This is probably why the ECB moves so cautiously compared to the speed with which the Federal Reserve intervenes (3).


However, in practice a monetary policy that is more reactive to the difficulties involved in achieving recovery and growth and swifter to respond could be a useful factor (but not necessarily the only one) in kick-starting the EU economy.


The European Central Bank could have exercised its room for manoeuvre on interest rates, particularly with a view to benefiting EU external trade as a whole and giving some breathing space to national economies under stress. But although the ECB President said, in the immediate aftermath of the Council decisions, that recent events would weaken confidence in the euro, causing inflation to resume, and that the ECB would therefore have to intervene by raising interest rates, this does not seem to be an imminent threat.


The particularly critical state of public finances in the major industrialised countries would appear to make economic and financial recovery difficult in terms of new expenditure (investment), particularly in the eurozone. The budget deficit in France was 3.1 % of GDP in 2002; Germany, with a negative balance of 3.6 %, is in an even worse state. In the United States, the ambitious plan to kick-start the economy with an injection of 674 billion dollars over 10 years, announced at the beginning of the year, has ended up increasing the budget deficit, which has naturally worsened owing to the military expense of the war in Iraq. This has now been partially offset by the withdrawal of some of the tax cuts promised to American taxpayers. In Japan, the forecast is circa 8 % of GDP for 2003, i.e. the same level as in 2002.


In its most recent report, published in April 2003, the World Bank forecast global growth of 2.3 % for the second half of 2003 (2.5 % in the US, 1.4 % in the eurozone and 0.6 % in Japan). However, more recent data suggest there are signs of a slow recovery of the United States economy, but this has yet to be confirmed. Cyclical estimates confirm the current phase of almost imperceptible growth in the economy: Eurostat figures for the last four-month period of 2003 show eurozone GDP growth of 0.4 %, the same as in the EU 15 area.


Over the last few months the conflict in Iraq has aggravated the global mood of uncertainty (political and military). Oil prices in the wake of the conflict have not reacted as expected, and tension has risen with the Arab countries and in the Middle East, with a significant intensification of the conflict between Israel and Palestine.


Economists believe that the difficulties in the global economy are not a result of a shortage of credit, but of a lack of confidence, which is further aggravated by the international crisis.


In Europe, the greatest obstacle to a real economic recovery is undoubtedly the widespread lack of certainty in economic and industrial circles, and in public opinion in general, as to the future of the European Union's strategy on economic and budgetary policy, combined with slow implementation of the Lisbon Strategy and doubts about the Stability Pact. If the reference point continues to be the rate of growth of the US economy, the European economy will not take off of its own accord.


What then, are the ‘ghosts’ we need to lay in order to speed up economic recovery? First and foremost, weak internal demand throughout the EU system (low growth, stable unemployment, low take-up capacity for human resources).

3.   Should we re-interpret the Pact?


The European Commission believes that the fact that some major countries such as France and Germany have failed to comply with the Maastricht Treaty and Stability Pact criteria (3 % and 60 %) could be an obstacle to efforts to secure economic recovery, better coordination of eurozone budgetary policies and a re-launch of employment promotion policies. However, many observers see the restrictive use of the Pact and the lack of a strategy to boost demand and supply in the EU as perhaps the most serious obstacle to the success of the Pact.


The restrictive way in which the Pact has been used has led to a worsening economic situation in some countries, such as Portugal, where cutbacks in current public spending, mainly in investment, which are necessary in order to reduce the deficit, have aggravated the economic situation and thrown thousands of people out of work. Application of the Pact should allow for counter-cyclical use of public finances.


The European Commission has often argued that if implementation of the regulatory measures needed to achieve the declared objectives is postponed, the instrument itself is viewed with suspicion, especially at a time when unexpected stagnation/recession puts the Pact in further difficulty.


It is not enough: major international organisations such as the IMF and OECD have suggested raising the inflation threshold from 2 % to 2.5 %. More importantly, however, almost all economic and financial circles recognise that monetary instruments are not the only realistic way of securing a chance of economic recovery.

4.   The Stability and Growth Pact: an instrument for resolving the crisis


The Pact must be maintained by policies designed not just to control inflation, make adjustments and to limit the public debt, but also to provide greater stimulus to internal demand and encourage the public and private investment needed to revive the economy in the context of the objectives laid down by the Lisbon Strategy, as the EESC has argued in a number of documents.


Now that the ‘dividend’ effect from the introduction of the euro has worn off, the priority instruments we need to activate in order to stimulate growth, development and employment are those aimed at boosting macroeconomic policies, which should focus chiefly on relaunching the Lisbon Strategy and aim for full employment, the creation of high-quality jobs, and stimulating supply and demand. Moreover, the automatic stabilisers designed for an economic downturn could help prop up demand.


In short, the EESC takes the view that employment policies should be one of the basic assessment criteria for economic growth, with special reference to economic and social cohesion policy. This should become a criterion for assessing economic growth, enabling cohesion countries to increase their spending on investment in this area.


A European Central Bank (ECB) that is the guardian of monetary policy and price stability but also pays heed to economic growth and employment could play an even more important role than that laid down in the Treaty. This presupposes constant dialogue with the European institutions (Council, Commission) and the social partners. The European Investment Bank (EIB), for its part, could fulfil its remit by harmonising its activity with that of the other European institutions and with national government plans to boost development and secure greater economic and social cohesion for the EU.


Furthermore, the main task of the ECB as a financial instrument is to help to achieve EU objectives and policies. Multiannual programming of budget resources, coordinated with the Commission, would make it possible to optimise the impact of these measures in order to bolster EU economic and social cohesion within the framework of the new financial perspectives.


Moreover, the accession of ten new countries will make further demands on the economy in terms of investment in infrastructure, which is already planned, and more especially in terms of training, support for research and civil service reforms.


It is essential to shore up the Stability and Growth Pact with a comprehensive information campaign, including by involving the intermediate levels of society (principally the social partners, but also consumer organisations, etc.), as was the case with the introduction of the single currency. Sharing, co-responsibility, and a large-scale public information campaign were the key to the success of the Maastricht Treaty and of joining the single currency. This was not done in the case of the Stability and Growth Pact.


It would also be advisable to review the definition of the ‘exceptional circumstances’ in which countries can exceed the Pact's 3 % threshold, thus providing a breathing space for economies that are experiencing difficulties or negative annual growth.


‘Exceptional circumstances’ should in particular include setting a long-term ceiling for increases in public spending which reflects the situation in each individual country, accompanied by European-level monitoring. Targets would thus be adjusted to each country's short-term economic situation and position in the economic cycle.


A genuine European strategic plan must retrace the path embarked upon more than ten years ago by the Delors White Paper, working towards boosting the Lisbon objectives and supporting the Stability and Growth Pact in the political arena. A rethink of the way the Pact is run will mean reconsidering the case for a common EU growth strategy, and using tax policy as one of the ways of achieving it. To this end, the Committee would reiterate the need for a suitably flexible approach towards any departure from the ‘close to balance’ rule, in order to permit investment in activities that are conducive to growth. Infrastructure is certainly necessary to a market extending to 25 countries, but the keystone is investment in human resources and the future of the EU: hence, research but also school and university education, designed for the new generations and for the challenges of competition, then lifelong learning etc.

5.   Investments of European interest designed to achieve the objectives set in Lisbon should be excluded from the calculation of the public deficit


The missed forecasts and a relative lack of investment could also widen the development gap of the new Member States, which – if they do not receive adequate assistance to achieve growth and create new competitive, skilled jobs, could feed dangerous pockets of poverty and exclusion that the EU's economic and social system would find difficult to sustain.


A rethink of the way the Pact is run would require flexible, expansionist budgetary policies that include a common growth and cohesion strategy and that remove strategic investment and investment for growth from the budget deficit books, and leave it to the Council, with the agreement of the Commission, to decide what is meant by ‘strategic investment’ in the European interest, as set out in the Delors White Paper and the Lisbon objectives.


As stated in the Report which the Commission presented in preparation for the Spring European Council in March 2003 (Going for Growth), there is a need to encourage all aspects of the knowledge chain – from basic education to advanced research – and to provide funding for corporate management skills.


Consequently, it is important to secure harmonisation of tax regime criteria, with a universal guarantee of the principles of equity, proportionality and efficiency policed at European level and endorsed by European citizens.


A good national tax regime, monitored at European level, not only ensures a healthy current expenditure environment, but could also be key to providing public investment to revitalise the whole national and European economic and employment system.


A healthy tax policy restricts as far as possible recourse to one-off measures, tax amnesties, etc., which could encourage irresponsible forms of management of national budgetary policies.


Here, we need to indicate what type of investment is useful for growth. Common criteria will naturally have to be agreed for all EU countries, with due regard, of course, for differing circumstances and growth requirements. This could also require a rethink of the role of the ECB as no longer just the ‘guardian’ of monetary policy, but as a strategic instrument for growth and economic development, and as a helpmate for the Commission, which would have a beefed-up role in terms of ex ante and ex post monitoring and assessment of strategic investments.


The European Economic and Social Committee believes then that all the potential for economic and employment growth must be ensured, whilst still maintaining macroeconomic stability, especially in the eurozone.


The investment needed for this will call for closer macro-economic cooperation, consensus, common standards and harmonised best practice from national governments. At European level, the open coordination method could provide one of the more flexible means of determining the type of intervention needed for a recovery in the economy and in employment.


The objective is to go for growth and economic and social cohesion on the basis of a common understanding, worked out between all the social players (national and supranational institutions, governments, social partners and interest groups), while complying with Community rules.


The European Economic and Social Committee can play an important part, thanks to its accepted, established role as a consultative body and monitoring agency, for the course set out by the Stability and Growth Pact.

Brussels, 26 February 2004.

The President

of the European Economic and Social Committee


(1)  Marco Buti, ‘Maastricht's Fiscal Rules at Ten: An Assessment’ Vol. 40, no. 5 – December 2002

(2)  OJ C 287 of 22.9.1997, p. 74

(3)  Fitoussi ‘La règle et le choix’, Seuil 2002


to the opinion of the European Economic and Social Committee

The following amendment was put to a vote and rejected in the course of the discussion (Rule 54(3) of the Rules of Procedure):

Point 5.2

Replace this paragraph by the following:

‘A reconsideration of the rules of the Pact, and the application of the rules, should take account of the requirement for adequately flexible budgetary policies supportive of a common medium-term growth and cohesion strategy. The amended rules should give a clear definition of what constitutes a budget deficit in a way that allows borrowing to finance strategic investment to take place within the application of discretionary counter cyclical macro-economic policy and is external to the short-term disciplines on the permitted scale of current deficits.’

Result of the vote:

For: 43, Against: 61, Abstentions: 8.