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European Commission

László ANDOR

European Commissioner responsible for Employment, Social Affairs and Inclusion

Detecting key employment and social imbalances and challenges in the EMU

Conference on social dimension of the EMU / Brussels

10 October 2013

Ladies and gentlemen,

Let me refer to a very useful image that I borrow from President Barroso's State of the Union speech: "when you are on the same boat, one cannot say 'your end of the boat is sinking'. We were on the same boat when things went well; we are in it when things are difficult".

We face today unprecedented employment and social divergence within the European Union, and these gaps are even more amongst Euro area Member States. Employment and social disparities are so profound that they not only affect the socio-economic situation of specific Member States, but they also threaten the stability of the monetary union as a whole – i. e. "our boat".

The Commission proposed last week to create a new scoreboard of key employment and social indicators relevant for the well-functioning of the EMU that would be integrated into the EU's yearly economic policy-making cycle, the European Semester.

The scoreboard would enable key employment and social problems in the EMU to be detected and addressed in a more focused and direct way when the Commission prepares its Country-Specific Recommendations and when Member States undertake multilateral surveillance of employment and social situations and policies within the Council.

A key concern behind the Commission's proposal is that we need to detect and act in a timely way on major employment and social imbalances and challenges. This is crucial for the sustainability, legitimacy but also the economic performance of the EMU.

Rationale for an employment and social scoreboard for the EMU

I will first briefly explain the rationale of the new scoreboard, before presenting the five indicators proposed.

In the monetary union – and especially its third stage, i.e. currency union – countries affected by an economic shock cannot unilaterally devalue or inflate debt away, and national fiscal policy is heavily constrained by the jointly agreed rules. Currency union membership has huge advantages, but it also removes important adjustment mechanisms from the governments' hands.

This means that unemployment and social crises risk developing to a greater extent within a currency union than outside, unless they are anticipated and addressed by the currency union on a collective basis.

Indeed, employment and social crises in individual countries have negative economic impact on the EMU as a whole. The theory of "spill-over effects" of fiscal measures and structural reforms is rather well-known. It points to the fact that situations or actions might generate some effects beyond national borders.

The main channels through which national reforms spill over on other Member States are internal trade, price competitiveness and financial markets.

It is quite clear that not only action, but also lack of action can have spill-over effects. For example, high youth unemployment in Spain and Greece is certainly bad for The Netherlands and Austria. Young unemployed people do not earn and spend, which affects the internal demand also in other countries; and their loss of skills is aggravating the differences in competitiveness across Europe. Trying to rescue their human capital in a few years' time will be more costly for the public purse than fixing the problem at an early stage. Moreover their indignation could even undermine political stability in the EMU.

The scoreboard of key employment and social indicators we have proposed would not represent any new procedure nor a new process, but it would be a new tool enabling us a more focused and systematic analysis within the European Semester. We intend to analyse it for the first time in the Draft Joint Employment Report that will come out in mid-November as part of the 2014 Annual Growth Survey package.

The findings will have no automatic triggering effect, but they will feed into the analysis undertaken by the Commission during the Semester, resulting potentially in Country-Specific Recommendations (but no sanctions). The scoreboard can also feed into the multilateral surveillance undertaken by the Council of Employment and Social Affairs Ministers.

The question is what do we consider as the key potential employment and social imbalances that might threaten the sustainability of the monetary union and that we should therefore try to anticipate in due time and prevent?

The key indicators are, in our view, the unemployment rate, the NEET rate, the change in gross household disposable income, the at-risk-of-poverty rate, and income inequalities measured by the ratio of the 'richest' 20% of the population to the 'poorest' 20%.

Let me now briefly illustrate the divergence we could observe on these indicators over the past five years.

If we compare the weighted average unemployment rates between the north/core and the south/periphery of the euro area, we will see that in 2007 there was practically full convergence, while nowadays the gap in average unemployment is larger than 10 percentage points.

Here you see the divergence in unemployment rates between two particular countries (Germany and Spain), and I will quickly show you the same for the other four indicators.

Here is a comparison of the NEET rates. You can see that Spain is beginning to have a visible problem already in 2008, if not earlier, and that it has not succeeded in tackling the problem in subsequent years.

This slide tells a more complex story, but in a nutshell: in Spain, household incomes were rising rapidly till 2008, but so was household indebtedness as we could see from auxiliary indicators. In 2009, households started repaying their debts and continue to do so till the present, but the ratio of debt to income remains roughly the same, as overall household incomes have fallen. People are less and less able to save, while the outstanding debt burden remains substantial. This is not good news for aggregate demand.

By contrast, in Germany, household income developments were much more moderate throughout the past decade. During the crisis, the national automatic stabilisers have worked well, protecting household incomes and demand, although this cushion effect has recently been reduced.

Here we can compare poverty developments. Spain has seen a major deterioration in the relative poverty rate, as well as in child poverty, in-work poverty and financial distress of households.

Germany was a top performer on the previous indicators, but on poverty it is not doing too well compared to the euro zone average. Even this country is losing human capital due to child poverty.

Also in terms of inequalities, Germany is not doing as well as one could hope for given its overall economic performance.

But Spain has seen a significant increase in income inequalities, as well as in labour market inequalities. Under-employment has risen sharply, and transitions from temporary to permanent contracts have fallen to a very low level (10%).

Ladies and gentlemen,

As expressed by one of my Colleagues during the Commission's debate we had on this proposal last week, "what we do not analyse we do not fix".

These indicators are key to identifying and acting on the problematic developments in a timely way, before they get even worse. These findings should therefore feed into the European Semester and help rebalance our framework of economic governance.

Yes, our division of competences – between European and national levels - must be respected, but a currency union cannot afford to leave major employment and social problems unaddressed. This is why what we call the "coordination of policies" in employment and social areas is so important. It notably helps in monitoring the capacity to pursue upward social and economic convergence.

The scoreboard is therefore an important tool. It will support stronger surveillance and coordination of employment and social policies in combination with the other tools we have – our financial instruments or those fostering transnational labour mobility.

Thank you for your attention.

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