The GAF – so nearly a good idea

Date: 30/03/06

The EU's liberalisation drive may have been good for economic growth. But it has done little to endear the Union to its people at a time of high unemployment and sluggish growth.

Many Europeans accuse the EU of ignoring the social consequences of its policies. Only half of all Europeans think that their country has benefited from being inside the EU. Fears of unemployment were the main reason why 15 million French people voted against the EU constitutional treaty in 2005.

A growing number of politicians and commentators argue that a more social Europe is needed to rebuild popular support for the EU. And after the French and Dutch 'No' votes to the constitution, EU leaders decided to set up a globalisation adjustment fund (GAF) to help laid-off workers find a new job, retrain or set up a business.

This makes sense in theory. The EU's trade with the rest of the world has grown by more than 8% a year over the last decade, significantly faster than intra-EU trade. Mostly, globalisation has been good for the EU economy, delivering lower prices and new business opportunities for European exporters. But there are losers, too, especially in labour-intensive manufacturing sectors that cannot compete with the low wages on offer in China and other emerging economies. The European Commission estimates that up to 20% of all permanent lay-offs in the EU could be the result of increased international trade.

These workers often lack the skills needed in high-tech growth sectors. Only half of those laid off in import-competing manufacturing sectors in the EU find a new job within two years, says the Organisation for Economic Co- operation and Development. Governments can help these workers through individualised job-search assistance, retraining schemes or other active labour market policies (ALMPs). Countries such as Denmark, the Netherlands and the UK have successfully cut unemployment by moving from passive unemployment benefits to active measures. But the fact that ALMPS can work - provided they are well-designed and targeted - does not mean that the EU should get involved in their provision.

The globalisation adjustment fund is too small and its procedures are too cumbersome for it to make a difference. Since it will be ineffective, the GAF, later renamed the European Globalisation Fund, risks making the EU less popular.

EU governments agreed to set up the GAF, but they did not make money available for it in the EU's next budget for 2007-13. The fund will be financed by unspent EU funds, up to an annual limit of 500 million euro. In recent years, the EU budget has amounted to 100 billion euro per year, of which 2-4bn euro remain unspent. But since leftover money normally flows back to the member states, governments may have an incentive to keep the GAF as small as possible.

Even assuming that the full 500m euro was available, that sum would only amount to maybe 0.5% of what EU countries collectively spend on ALMPs. And the 35,000 to 50,000 workers that the Commission expects to benefit from the GAF account for 0.25% of the EU's total unemployment count of 20m.

It will also be difficult to decide who qualifies and who does not. Under the Commission's draft regulation for the GAF, governments' applications must "demonstrate the link between job losses and significant structural changes in global trade patterns". Does this imply that help would be available for Latvian textile workers that have come under pressure from Chinese imports, but not to German hi-tech workers laid-off because their factory has moved to Hungary? The Commission's criteria give no clue, simply limiting GAF funding for lay-offs of 1,000 people or more in regions with above-average unemployment. Since all EU governments, as well as the European Parliament, will need to back a funding application, the funds may arrive too late to help workers laid off because of surging imports or the relocation of their factory.

If the GAF is ineffective in practice, it could at least serve as a symbol that the EU cares about the losers of liberalisation. But perhaps not. One of the lessons from the demise of the EU constitution is that the EU should be cautious not to oversell its policies. The constitutional treaty was less ambitious than previous EU treaties, but Europeans expected it to have a big impact because of its pompous name. By claiming that it can help with globalisation adjustment the EU could raise expectations that it ultimately cannot fulfil. Already, many Europeans believe that the EU could prevent job losses if only it wanted to. When Hewlett Packard announced 1,240 redundancies in France in December 2005, President Jacques Chirac accused the President of the Commission, Jos�anuel Barroso, of not doing enough to save French jobs.

A globalisation adjustment fund would have made a lot of sense as part of a thorough overhaul of the EU budget. But since EU countries failed to stump up the cash, the GAF amounts to little more than tokenism. This can only lead to disappointment.

• Katinka Barysch is chief economist at the Centre for European Reform, a London-based think-tank.

Major commentary feature in which the author, who is Chief Economist at the Centre for European Reform, takes a critical look at the European Commission's proposal of 1 March 2006 for a European Globalisation Adjustment Fund (EGF or GAF).

European Commission: COM(2006) 91, Proposal for a Regulation of the European Parliament and of the Council establishing the European Globalisation adjustment Fund, 1.3.06 http://ec.europa.eu/comm/employment_social/news/2006/mar/com06091_final_en.pdf

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