Maastricht targets miss point

Date: 02/05/1996

By Tim Jones

GOVERNMENTS are in danger of forgetting much needed reforms to the European economy in their single-minded pursuit of the Maastricht Treaty's budget-cutting targets, warns a leading industrialist.

“An over-emphasis on speed and certain arithmetic criteria could lead to new divisions within the common market and create walls that we will later regret,” says ABB Europe president Eberhard von Körber.

ABB, one of the world's biggest electrical engineering companies with 209,600 employees and annual sales revenue of 27 billion ecu, takes a keen interest in both monetary union and the enlargement of the EU into Central and Eastern Europe.

Von Körber acknowledges the benefits for his company and EU citizens of a single currency to consolidate the gains of the internal market, but fears it could also lock in the uncompetitive aspects of European economies.

“A discussion about monetary union which exclusively focuses on the convergence criteria, rather than on competitiveness, employment and growth opportunities while there is too much state over-regulation and excessive public spending, could lead to sub-optimisation of European competitiveness into the next century,” he warns.

Avoiding this mistake is particularly vital given the slow-down in the European economy, which has even produced two consecutive quarters of negative growth in Germany - the EU's economic locomotive.

“So I appeal for a broadening of the discussion in the light of the downturn in the economy, since the focus on selective criteria does not reflect the complexity of the total picture,” says von Körber.

“We should look at education and training and the learning society as well as the consumptive expenditures of governments not included in the Maastricht criteria catalogue.”

Indeed, for von Körber - a 57-year-old German who has been the ABB board member responsible for Europe since 1993 - the growth slowdown and Maastricht-inspired budget cuts could even undermine public confidence.

“Under normal post-war economic cycles, we are now in a downturn - a fact that has always been greeted with surprise even though it has been a pattern over decades. But this time we have a second factor: deflationary risk caused by the attempts of EU governments to meet the Maastricht criteria,” he maintains.

“Moreover, they are possibly cutting back on public spending in the wrong areas - including investments - so reducing demand and possibly increasing the downward trend, not realising the difference between cutting spending on the consumption side and the investment side.

“As a result, the real benefits for the man in the street, in terms of job security, do not appear to fulfil the hopes that were raised earlier by the internal market and the EU as a whole.”

Von Körber argues that European countries need to undertake major reforms to move away from the 'social market economy' model - with its high non-wage costs for employers - or face a grim future as companies relocate jobs in cheaper countries.

“Whereas governments can wait until they are thrown out of power, companies cannot wait because they go bankrupt. Countries never physically disappear, but firms can disappear overnight. So we have a different sense of urgency,” he says.

Nevertheless, von Körber is a realist, acknowledging that a sudden revolution in European social systems will not happen.

“We cannot expect that 40-50 years of development, which had great success in a less globalised world, can be reversed in a globalised world overnight. It will take time and a period of adaptation for the sake of social order,” he concedes.

ABB has already globalised, creating 45,000 jobs in Asia, Central and East European countries and the former Soviet Union while shedding 53,000 jobs in western Europe and North America.

“Global as we are, export-oriented as we are, we are benefiting from our presence in emerging markets compared with those companies who largely have to rely on domestic demand inside Europe.”

The firm's presence in Central and Eastern Europe also allows it to offset the high costs it incurs through its manufacturing and servicing bases in countries such as Germany and Switzerland.

ABB estimates that employing an engineer in Germany adds between 54&percent; and 59&percent; to the wage bill compared with its plants in Poland, Hungary and the Czech Republic.

Nevertheless, Germany cannot be written off for very practical reasons.

“It would be just unthinkable to do business in power-generation and transmission in Germany or Switzerland and believe we can import all that from Poland or America or South East Asia. Why do we have 30,000 people in Germany? Because it's the biggest single market inside the EU,” explains von Körber.