Why fine words are not enough

Date: 08/02/1996

Tim Jones reports that EU politicians have taken to drawing up pacts instead of facing problems.

IT was once said of Bill Clinton that he would respond to an offer of a cup of coffee with a ten-point plan.

The European Union, usually the last to emulate trans-Atlantic practices, is falling into the same trap as 'pact' inflation takes hold in Brussels, Paris and Bonn.

Instead of imposing their plans on a reluctant public, European politicians like the idea that their wish-lists are sacred agreements made between themselves and the population.

No problem is too small or too great to have one.

It began in the autumn when German Finance Minister Theo Waigel chose to try to ensure fiscal discipline in a monetary union with a Stability Pact. But just as he drew up his pact, budgetary cut-backs throughout the Union, a downturn in investment and the reluctance of consumers to spend caused European growth to decelerate.

Suddenly, all the discipline, self-sacrifice and punishment in the Stability Pact looked highly inappropriate. Waigel's colleague Karl Lamers called for an Employment Pact to rebalance the inflation-dousing tenor of the Maastricht Treaty and Sweden's call for an employment chapter in the revised treaty fell on more receptive ears.

Stung by the fierce public-sector response to his plans to cut social security spending and raise taxes, French Prime Minister Alain Juppé learned his lesson and dubbed his programme to attract finance into the inner cities a Pact for Urban Renewal.

Not wanting to be left out, Belgium's Jean-Luc Dehaene is threatening a Pact Against Pessimism.

Last but not least, and with the longest name, comes the European Commission's offering. Last week, President Jacques Santer called on “all the political, economic and social forces in the Union to rally together. I am proposing that they unite in concluding a European Pact of Confidence for Employment.”

Every time a European politician comes up with a new pact, or pledges to wage war on unemployment, or calls it “unacceptably high”, the normal response from the public is either to laugh or pull out their hair in frustration.

“The problem for the EU is that most people in Europe believe employment is about 900th on the list of what it cares about,” says Dan Corry, head of the London-based Institute for Public Policy Research.

It was two years ago that the Brussels summit adopted Jacques Delors' White Paper on Growth, Competitiveness and Employment. Then, with Europe stuck in recession, its prime ministers wanted to know why the Union was incapable of generating jobs in the same way as the US or Japan.

When the US economy emerged from recession, very low interest rates as well as the 'flexibility' of its labour market meant it was able to create jobs at a much faster pace than the EU ever could.

Delors told EU leaders that they had to nurture those economic areas where Europe could excel: high-technology production with a large value-added element dominated by small and medium-sized enterprises, the audio-visual sector, biotechnology and information services.

Yet the only suggestion that won the attention of the media at the time was the row with the UK and Germany over whether to finance Trans-European Networks with extra borrowing from the bond markets.

Twenty-six months later and Santer is reviving the plan to put more money into the TENs and into research and development. But what are we talking about? An extra billion ecu for TENs over five years in an economy worth 6 trillion ecu a year and the release of the R&D budget's 700-million-ecu reserve fund, again over five years.

There will be no changes to the EU's macro-economic orthodoxy. Inflation must be fought without mercy, public budgets brought into balance in the medium-term and interest rates kept high in support of exchange rate stability.

Santer's answer to the crisis of confidence that is besetting the European business and consumer is to call a meeting. He will host a gathering of industrialists and labour unions at an employment round table in May to brainstorm on the issues of flexibility, training and cost-cutting.

Meetings can be valuable, but does anyone remember the Group of Seven's Detroit jobs summit? While Santer's aims are laudable, do they qualify for the grand title of a Confidence Pact?

The European unemployment rate has hovered between ten and 12&percent; for some time. Some may regard the emphasis placed by Santer on the fact that “fear of unemployment is sapping confidence in the single currency”, rather than underlining the plight of the unemployed, as somewhat lopsided.

It does, however, highlight a genuine problem for our leaders: namely that the policies they must pursue in order to qualify for the single European currency are not helping to create jobs in the short term.

It would be better if they acknowledged this and concentrated their attempts to “sell” the Euro on convincing the public of the long-term benefits of economic and monetary union.

They should admit that responsibility for creating and losing jobs lies with companies, geographical location and the economic framework established by national and local governments - and, above all, stop saying that reducing budget deficits does not cost jobs.

Over time, cutting the costs of financing the government's debt and reducing the taxes companies pay when hiring staff will create jobs. But in the short term - which can last several years - overdue cuts in runaway budgets will dampen growth and increase unemployment.

Alain Juppé's plan to bring France's social security budget into balance within two years and pay off 40 billion ecu of past debts will cost jobs. Calculations from the Bureau d'information et de prévisions économiques (BIPE) make that crystal clear. They show the plan will drain 9 billion ecu from aggregate spending and lop 0.8&percent; off economic growth this year. Six billion ecu in extra taxes will ensure that the French consumer's disposable income will grow three times more slowly this year than last.

All this means they will spend less and save more, and only major reductions in interest rates or allowing the franc to weaken will offset this budgetary tightening - a course the Bank of France will be reluctant to take.

With no budgetary room for manoeuvre if he wants to meet the Maastricht budgetary criteria by the end of 1997, French President Jacques Chirac came up with the now typical EU approach: halve a problem by sharing it.

Appearances count as much as substance. As Chancellor Helmut Kohl's government announced a 50-point plan to maintain the pace of German economic growth while also cutting the budget deficit, Chirac decided to sit on the Chancellor's coat-tails.

He too would announce a “recovery programme” on the same day.

This amounted to an exhortation to commercial banks to reduce their base rates in return for a reduction in the rate on a national savings bond.

Because he promised to wage war on unemployment to get elected last May, Chirac feels he must talk always in grandiose 'new deal'-style terms, when all he can offer is cuts in national savings rates and repackaging of previously-announced plans.

Nobody in power in the EU believes a major expansion of demand will create more jobs, although there is certainly a case for saying that interest rates have been kept too high for too long. Inflation is still being fought as if it were the number one enemy.

Instead, they talk endlessly about the need to create labour market flexibility and structural reform. The problem here is that it always sounds like a call for wage cuts, longer hours, compulsory overtime working and easier hiring and firing.

In some European countries, restrictions in the markets for products and services cost as many jobs as high wages and social protection. Shops closing on Saturday afternoons and closed energy and telecommunications markets can be found in many countries.

Politicians should concentrate on tackling these barriers to job creation instead of always appearing to blame a “rigid” workforce for all their country's economic ills.

They could also do everyone a favour by taking their eyes off the 18-million-unemployed figure. The number that really counts is the 40&percent; or so long-term unemployed, people who have little influence on wage-setting and inflation, but are becoming steadily excluded from the labour market altogether.