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Annual Growth Survey : Summary of the economic analysis and messages
Commission Européenne - MEMO/11/11 12/01/2011
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Brussels, 12 January 2011
Annual Growth Survey :
The first Annual Growth Survey (AGS) sets out clear economic priorities for the Union in three main areas: macro-economic area, structural reforms and growth enhancing measures. The Commission has based these recommendations on a thorough analysis, attached to the main communication adopted on 12 January (IP/11/22). Summary of this analysis and recommendations can be summarised as follow.
1. MACRO-ECONOMIC AREA
This macro-economic report contains four main messages
Europe is going through particularly challenging times
Before the crisis, several Member States deviated from the basic principles of prudent fiscal policy, and macroeconomic imbalances continued to build up. The European economy is now slowly emerging from the deepest recession in decades. The sharp contraction in GDP wiped out on average four years of growth. The crisis has taken a heavy toll on Europe's societies with a sharp rise in unemployment from 7% in 2007 to almost 10% in 2010, with almost half of that representing long-term unemployment. The crisis had a dramatic impact on public finances, and led to a sharp drop in investment.
Reining in public debt through a rigorous and durable fiscal consolidation
Fiscal policy makers in the EU face a double challenge: putting fiscal policy back on a sustainable path, while supporting growth and employment. At the end of 2010, government debt in the EU is expected to have risen to around 79% of GDP, some 20 percentage points above the 2007 levels. Withdrawing the fiscal stimulus that was implemented during the crisis will not be sufficient to restore the long-term sustainability of public finance. In spite of that, public deficits increased more sharply in the US. An annual improvement in the structural budget balance of 0.5% of GDP - the conventional benchmark of the Stability and Growth Pact – would clearly be insufficient in many EU Member States to bring the debt to GDP ratio close to the Treaty-based threshold of 60% in the foreseeable future. The situation differs significantly across the Union both in terms of the public finances and external competitiveness (see Annex 1). These require tailor-made policies.
Repairing the financial sector swiftly to find the path to recovery
There is a strong correlation between healthy credit expansion and sustained economic development. Balance sheet repair in the banking sector is essential to improve cost efficiency, restore competitiveness and return to normal lending. A swift exit from sizable public support to banks will remove possible distortions to competition in the financial industry. Furthermore, confidence in the banking sector is a prerequisite for maintaining financial stability. This is now being corrected through a more robust EU regulatory framework, a future permanent "European Stability Mechanism" to be established by 2013 to safeguard the financial stability of the euro area as whole, as well as tougher capital requirements on banks (Basel III agreement).
Structural reforms to support growth and correct macroeconomic imbalances
Structural reforms can serve two goals: enhancing growth, and preventing or correcting imbalances. In the absence of resolute policies, potential growth is likely to remain weak, at around 1½%, in the coming decade, compared with 1.8% in 2001-2010. This is significantly lower than the growth in the past two decades and much lower than e.g. US growth rates. The main reasons behind the weak growth outlook are the pronounced underutilisation of labour in the wake of the crisis, combined with population ageing and slow productivity growth in the EU. The growth outlook (1¼%) is even worse in the euro area; this compares to average potential growth of 1.6% in 2001-2010.
Correcting macro-economic imbalances is a key condition for growth and is particularly relevant for the euro area. For Member States with large current account deficits, weak competitiveness and weak adjustment capacity, large price and cost adjustments will be needed, alongside measures supporting the reallocation of labour across firms and sectors. In Member States with large current account surpluses, the sources of persistently weak domestic demand need to be identified. Moreover, policies need to be put in place to prevent future imbalances.
2. EMPLOYMENT AND LABOUR MARKET
The draft Joint Employment Report is a legal obligation from Article 148 TFEU. It is based on the review of the employment situation in Europe, the analysis of the implementation of the Employment Guidelines adopted by the Council in October 2010 as well as on the results of the examination of the draft National Reform Programmes.
EU labour market situation shows signs of recovery, but remains fragile
The EU labour market continued to stabilise in 2010 showing signs of recovery in some Member States. In the second quarter of 2010 employment grew by 0.2 %, for the first time in nearly two years. Nevertheless, employment was still 5.6 million people lower than its peak level in the second quarter of 2008. The employment of workers aged 20 to 64 stood at 208.4 million people, corresponding to an employment rate of 68.8%.
The unemployment rate, currently at 9.6 %, has remained unchanged since February 2010. Unemployment now stands at 23.1 million persons. The Youth unemployment rate now stands at 20.4 % in the EU. Demand for labour has continued to show a relative improvement. However, the simultaneous increase of unemployment rates and job vacancy rates may signal a mismatch between the skills of jobseekers and the skills required for available jobs.
Labour productivity growth was negative between mid 2008 and the first quarter of 2009 but has been positive thereafter, at around 2% per annum. Negotiated wages saw an increase of only of 2.1% in second quarter 2010 in the euro area. Growth in real unit costs in the EU has been falling since mid 2009, to reach -2% per annum in second quarter 2010.
Labour market reforms require immediate attention
In 2011, a majority of Member States are likely to move from cyclical demand management to structural reforms to boost growth and job creation. Given the macro-economic and fiscal context, priority should be given to labour market reforms while providing better flexibility and security. The pace of recovery and the available fiscal room to finance policy measures diverge across the Member States. Thus, the selection and sequencing of the following reforms will have to be tailor made to country specific situations.
Complementary growth-enhancing reforms
Labour market participation of older workers and of women remains very low, standing at 46.4% and 62.4%, respectively. Involuntary part-time work among women is still an issue in some Member States. In some Member States the reintegration of women is further impeded due to unfriendly career break labour markets and unbalanced take-up of parental responsibilities.
Persistent segmentation and rigidity of Member States labour markets should be adequately addressed. Barriers to labour geographical mobility may also prevent the proper labour market functioning.
Beside measures aimed at lowering non wage labour costs on a temporary basis, actions to support workforce adaptability and promote self employment and entrepreneurship should be strengthened to promote faster job creation. In a number of Member States there is a lack of well targeted active labour market measures aimed at the long-term unemployed, vulnerable and disadvantaged groups.
Unemployment benefit systems and other benefit schemes should provide the right incentives to work, to avoid benefit dependency, but at the same time ensure the much needed income support and adaptability to the business cycle. It is key that over the medium term real wages grow in line with labour productivity across occupations and economic activities. The responsiveness of training systems should be enhanced and complemented by policies aimed at solving existing skills gaps, promote life-long learning, tackle early school leaving and modernise higher education systems.
Combating poverty requires stronger actions in terms of ensuring inclusive labour markets, adequate and sustainable social protection systems and access to high quality services.
3. PROGRESS REPORT ON EUROPE 2020
Europe 2020 is the reform agenda the EU and its Member States have adopted in June 2010 to help Europe recover from the crisis and come out stronger through a coordinated, comprehensive programme of reforms, driven by a long-term vision. This strategy was proposed by the Commission in March 2010 (IP/10/225) and it will be monitored each year by the Spring European Council. The purpose of this annex to the Annual Growth Survey is therefore to report on the progress made in implementing this strategy and to serve as a Commission input to the Spring European Council (24-25 March 2011). It focuses on three aspects:
Frontloading growth and giving priority to growth-enhancing initiatives
Member States need to act in 2011 and 2012 to prevent a slide into sluggish and job-poor growth avoiding a "lost decade scenario". In 2011 and 2012, EU efforts will need to concentrate on the adoption of those measures that can most directly support Member States reform actions, do not require large public investments and have the greatest impact on growth potential and job creation. Therefore, the Commission will focus on a number of EU-level priority measures will be selected from the Europe 2020 "flagship initiatives" that must be mobilised to support national efforts. The Commission has indeed mapped out an ambitious agenda, to be delivered by means of seven flagship initiatives as well as parallel action on horizontal policies supporting the strategy. 1
First steps towards the Europe 2020 targets
The June 2010 European Council adopted five EU-headline objectives but each Member State sets its own level of ambitions as regards its targets. In the autumn of 2010, Member States worked on setting national targets and on developing strategies for their implementation. The purpose of the targets is not just numerical – it is to generate momentum with each Member State committing to stretch itself to make measurable progress in key areas for our future. There is a risk of a relatively low level of ambition in setting national targets and of an excessive focus on the short term, with insufficient attention to designing reform trajectories covering the whole period up to 2020.
Although no final conclusions can be drawn from the preliminary figures, some trends can be identified. In most cases, the aggregation of the provisional national targets shows that the EU still has some way to travel to meet the EU headline targets (see Annex 2). Recognising both that this is the first year of a new approach and the particular challenges for many Member States of raising their level of ambition at a time of fiscal consolidation; the Commission proposes to make a mid-term review in 2014 and afterwards to take additional measures if needed.
Draft National Reform Programmes (NRP) were presented to the Commission in the Autumn 2010 providing a clear response to the important macro-economic challenges and growth bottlenecks. The measures announced are often already being implemented or already quite advanced. The insufficient attention to structural reforms that could boost growth in the medium and long run is worrying. In the absence of such growth-enhancing policies, consolidation strategies could turn out to be self-defeating.
Until the submission of the final NRP in April 2011, Member States and the Commission will cooperate to ensure that the final programmes are both ambitious and realistic. In the Member States, consultations of the different actors and stakeholders should take place, to ensure that the reform programme is "owned" politically and by citizens.
Final NRP will be presented at the same time as the Stability or Convergence Programmes, allowing for a greater coherence between macro-economic issues and structural reforms. This is an important element of the "European Semester" that starts with the AGS.
Based on the conclusions of the March European Council, the Commission will assess the NRPs and the Stability and/or Convergence Programmes by June 2011 and will make integrated country specific recommendations to Member States and provide guidance on budgetary policy under the Stability and Growth Pact2.
The recommendations and the Council Opinions on the Stability and Convergence Programmes will be adopted by the Council in July 2011. Then EU will act and Member States will turn these recommendations and opinions in concrete decisions when setting their national budgets for 2012 in the second half of the year.
Different starting conditions in 2010
Public debt /external account deficit
Provisional Europe 2020 Targets3
"A digital agenda for Europe" (IP/10/581)", "Youth on the Move" (IP/10/1124), "Innovation Union" (IP/10/1288), "An industrial policy for the globalisation era" (IP/10/1434), "An agenda for new skills and jobs" (IP/10/1541), "European platform against poverty" (IP/10/1729) and "Resource-efficient Europe" (early 2011).
Council recommendation of 13 July 2010 on broad guidelines for the economic policies of the Member States and of the Union (2010/410/EU) and Council Decision of 21 October 2010 on guidelines for the employment policies of the Member States (2010/707/EU), which together form the Europe 2020 Integrated Guidelines.
The final national targets will be set out in the National Reform Programmes in April 2011.
The national emissions reduction targets defined in Decision 2009/406/EC (or "Effort Sharing Decision") concerns the emissions not covered by the Emissions Trading System. The emissions covered by the Emissions Trading System will be reduced by 21% compared to 2005 levels. The corresponding overall emission reduction will be -20% compared to 1990 levels.
It should be noted that the national projections also vary as to the base year(s) against which savings are estimated.
Estimated contribution to EU target