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European Commission

László ANDOR

European Commissioner responsible for Employment, Social Affairs and Inclusion

What does more Europe mean?

Friends of Europe 9th Annual VIP round table "State of Europe: Escaping the doldrums" - Brussels

11 October 2012

Transfer of powers to EU level to make single currency sustainable?

The economic and employment outlook for 2013 has worsened dramatically in recent months. The EU has been on the verge of a double-dip recession for nearly a year, and growth for 2012 as a whole looks set to be negative for the EA17 as well as EU27 (-0.4% and -0.2% respectively, according to this week's update of the IMF World Economic Outlook).

Five years from the start of the crisis, Europe is the only major world region where unemployment is not going down. We are slowly but steadily drifting away from meeting the Europe 2020 targets. Two years since the launch of Europe 2020, there has been virtually zero progress on the employment target, and negative progress in terms of poverty reduction.

An important feature in this is the growing divergence among Member States. A group of southern and peripheral European countries seem to be trapped in a vicious cycle of recession and growing unemployment and poverty, while most countries in northern and central Europe show better employment and social resilience so far.

The short-term challenges of the crisis in terms of lower job creation, rising unemployment, and growing risk of poverty and social exclusion come on top of the more long-term structural challenges facing Europe's labour markets and societies, such as population ageing, technological change and keener competition - from globalisation. Europe needs economic and structural policies that address both the short-term and the longer-term challenges, and stronger governance – building on the European Semester - is an indispensable means to an effective response.

But to strengthen economic governance and achieve better socio-economic outcomes with it, we need not jump straight to Treaty change. We could still make much better use of the Treaties and instruments at hand. Let me give a few examples:

In the Employment Package of April 2012 the Commission has proposed ways to strengthen the surveillance of employment policies in the context of the European Semester, so that Member States make maximum use of employment policies in supporting growth.

We have also proposed an EU tripartite format for wage monitoring, where EU-level and national social partners would participate in a common reflection on what wage developments mean for economic, employment and social outcomes.

And already in 2011 we have proposed aligning Cohesion Policy – the EU's key tool for structural investment – much more to the Europe 2020 Strategy and the European Semester, so that country-specific recommendations are reflected in the programming and utilisation of EU funding. This would help ensure, for example, that if a country has clear problems with its labour market, like low female participation or high youth unemployment, it uses EU money in a focused way to address precisely these problems.

If we implement such improvements, we can make the EU27 function better without outright Treaty changes. But of course we need to think also about the medium-to-long term.

Economic and fiscal policy coordination has been strengthened recently by the "six pack", and the proposed "two-pack" goes even further, based on the current treaties. At the same time, 25 Member States entered into the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union.

As we try to consolidate and complete the Economic and Monetary Union, we need to look into all options, and into all relevant dimensions. From my point of view it is particularly important not to neglect the employment and social dimension.

Closer coordination in the employment and social areas has become essential for at least three reasons:

1. Labour market participation, unemployment and labour costs play a role in macroeconomic stability, and are taken into consideration in the procedure on the prevention and correction of macroeconomic imbalances;

2. The crisis has shown up the interdependence of the EU’s economies and labour markets. Unemployment and poverty in one country is bad for all the others as it undermines demand and destroys economic potential.

3. European integration cannot be strengthened, and probably cannot even be maintained, if we have huge socio-economic divergence between countries, with some of them caught in spirals of negative developments. It boils down to simple questions of legitimacy and social acceptance of the European construction.

However, while economic coordination is increasingly being strengthened and codified, arrangements for social policy coordination at EU level are non-binding, based on the open method of coordination. In the employment field things are slightly better, as we have the Employment Guidelines which are reflected in country-specific recommendations. But overall we are grappling with a major institutional imbalance in the overall coordination of economic, employment and social policy. One consequence of this is that employment and social variables are sometimes viewed more as adjustment variables than as possible drivers of economic development and resilience. But if we fail to develop progress-oriented governance in the employment and social fields, where higher and more productive employment and stronger social cohesion are treated as tools to actually improve economic performance, the reality will hit us back. It is in fact already hitting us, because European economies are being dragged down by falling consumer and business confidence related to rising unemployment and poverty.

My conclusion is, therefore, that greater coordination of the European and national levels on employment and social matters has become necessary if we want to further integrate of financial, budgetary and economic policy. We need a stronger social union if we want to have a genuine Economic and Monetary union. Failing to strengthen EU governance in the employment and social policy areas would result in a diminishing capacity of Member States to direct their welfare policies – and we all know there is no pan-European welfare state that could replace the function of national welfare states.

This is not to say that closer coordination must lead to undifferentiated welfare policies. Nor is stronger employment and social governance incompatible with the idea that the Member States must retain sovereignty in specific areas. But the Member States must be able effectively to assume their welfare responsibilities, which is why the EU should explore whether to make some aspects of employment and social policy binding upon the Member States.

If we need a Treaty change for this, then let's explore it, but a very good first step would already be to strengthen as much as possible the employment and social dimension – and solidarity more broadly – within existing Treaties and governance mechanisms.

Solidarity mechanisms

The vulnerability of our currency union is due to its lack of buffering mechanism, in particular its lack of automatic compensation through transfers in case of economic asymmetric shocks.

When, the EU launched the idea of a single currency more than 20 years ago, there was a wide debate on whether the Member States formed an optimum currency area. Several economists doubted that the euro area would be an optimum currency area. These were often American economists comparing the European plans to the US set-up. Specifically, they pointed to the very low labour mobility and the lack of a risk-sharing system, such as an automatic fiscal transfer mechanism to redistribute money to areas/sectors which are hit by asymmetric shocks.

In the new governance of Economic and Monetary Union, it should be made clear that, not only, vulnerable countries have no choice but to reform, but also that stronger countries need to show solidarity. This should bring back fairness and equity between Member States in Economic and Monetary Union and help restore market confidence.

At the June EU Summit, the four presidents of the EU institutions proposed the essential building blocks for a new Economic and Monetary Union. This included an integrated budget framework which could contain also different forms of fiscal solidarity.

My point of view is that an EU-level unemployment insurance structure can be a logical element in this new framework as an automatic stabiliser mechanism effective in the short-term. We need and must study possible set-up of such a European unemployment benefit scheme as we develop the next phase of Economic and Monetary Union. Such an automatic stabilisation mechanism could also make mobility a more credible option for European workers and job seekers.

A European unemployment benefit scheme would of course need to be well-designed and well-explained to the European citizens. This is not a threat to the national social protection systems. It is a tool to prevent social protection from spiralling to the bottom.

A European unemployment benefit a scheme would act as an automatic stabiliser by temporarily reducing the social public spending of the countries most affected, without introducing long-term transfer flows. It could help to dampen fluctuations in real GDP, in case of asymmetric shocks affecting some parts of the EU more than others (insurance function), and maybe also if a symmetric shocks affect everybody (stabilisation function).

Such a scheme would leave most of the stabilisation function of government spending and even of spending on unemployment benefit at national level. The EU-level scheme would represent a supplement, or perhaps a basic provision, which would then be topped up by the Member States as they so wish. Some form of harmonised coverage/eligibility would probably also be necessary.

Replacing part of national funding for unemployment benefit payments would have an important social function and be an expression of solidarity. But it would also have an important macroeconomic effect, as the transfer mechanism would enable the monetary union to rebalance itself in response to an asymmetric shock.

Demands for popular referendums on closer European integration

There is increasing concern within the Member States and the EU at the political and legitimacy issues exposed by the global financial crisis and the response that has been made by the euro area to the difficulties created. The political and public unease concerns a more general sense of loss of sovereignty to global markets, just as much as it does the short-term management of the EU sovereign debt crisis or the long-term consolidation of Economic and Monetary Union (EMU).

The EU policymakers’ response to such concerns has been to announce a major step forward in European integration. Whether for EU policymakers to take control again of a regulatory agenda or to halt a increasing series of bail-outs that have strained the solidarity of national populations in both donor and recipient countries, more EU - or at least Economic and Monetary Union - integration is now firmly on the drawing table.

To avoid both a return to monetary nationalism and a permanent euro-area crisis, we need to underpin Economic and Monetary Union with the right institutional arrangements and, ultimately, political union to sustain it.

To move to more integrated fiscal and economic decision-making within the EMU will therefore require strong mechanisms for legitimate, accountable decision-making.

Ultimately only a politically united Europe stands a chance of resisting governance imposed by global markets in favour of a governance founded on parliamentary democracy.

But political legitimacy is not only a matter of democratic accountability. It is also a matter of social justice and fairness. The EMU needs a true employment and social dimension. And the true employment and social dimension of the EMU is about deeper coordination of employment and social policies of the Member States to ensure that employment and social outcomes are put at the heart of economic policy definition. There is a political rationale behind this, but also a macroeconomic one.

Greater accountability for policymakers and officials

The dramatic increase in unemployment in some Member States has led to fears of destabilisation of the fabric of society and of the political systems of the countries in question. In less-affected Member States too, over time unemployed workers lose their basic skills and their human capital deteriorates. The financial crisis has revealed the need to deepen Economic and Monetary Union, as the social problems are widely seen in connection with the existence of imbalances between euro-area economies.

Policymakers are now coming forward with proposals to make good the gaps in the governance of Economic and Monetary Union, starting with a banking union. But it is also time to give the governance of Economic and Monetary Union a true employment and social dimension that will ensure that employment and social outcomes are put at the heart of economic policy definition. These can no longer be considered adjustment variables.

We need to reshape not only the general macroeconomic model but also the macroeconomic dimension of employment policy. Our economies will only pick up if there are enough people working, earning and spending. In other words, we need to remember that putting people into productive work creates growth. In a slow-growth scenario, we cannot simply wait for growth to create jobs and perhaps we should focus less on productivity and more on inclusive labour markets.

The crisis has underlined the need for continued social investment and social protection, while making them more efficient, effective and adequate. Appropriate safety nets are needed for those who may be negatively affected. This will ensure that all members of our societies participate and contribute, and secure adequate livelihoods and social inclusion.

In the new governance of Economic and Monetary Union, it should be made clear that vulnerable countries have no choice but to reform. But an effective social protection system that helps those in need is not an obstacle to prosperity. It is an indispensable part of it. Indeed, it is precisely the Member States with the most effective social protection systems and the most developed social dialogue that are among the world’s most successful and competitive economies.

European institutions should therefore come out with a strong policy message that corresponds to the actual situation in Europe, characterised by weak economic performances and seriously deteriorated employment and social situations. Social Justice is part of our values, it shapes our policies and laws: it is therefore essential for the political legitimacy of the European integration and for rebuilding citizen's trust.

Can Member State governments restore faith in the Union?

Social Europe has been neglected for two decades and even destroyed by austerity measures. As a result, European integration now risks being compromised by resentment over what we –more and more - call the "fairness gap".

Social policies, social rights – even fundamental social rights – are part of European Treaties for more than 50 years now. In 1959 we had the first Directive in the field of health and safety (on dangers arising from ionizing radiations), and in 1975 the first Directive on equal pay between men and women was adopted.

The idea that the EU should adopt the objectives of the national welfare states, and remind the Member States of these objectives, has been central to the open method of coordination over the past decade. But as a steering or coordination mechanism between the European and national levels, the open method of coordination has been generally perceived as too weak an instrument.

My point of view is that coordination of the European and national levels has become all the more necessary with a view to further integration of financial, budgetary and economic policy.

Not to do so in the employment and social policy area would result in a diminishing capacity of Member States to direct their welfare policies without greater steering capacity on the part of the EU. The experience of the new economic governance in the European Semester only reinforces this point.

This is not to say that closer coordination must lead to undifferentiated welfare policies. Nor is it incompatible with the idea that the Member States must retain sovereignty in specific areas. But the Member States must be able effectively to assume their welfare responsibilities, which is why the EU should explore whether to make some aspects binding upon the Member States.

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