Opinion of the European Economic and Social Committee on the ‘Communication from the Commission to the European Council — A European Economic Recovery Plan’

COM(2008) 800 final

(2009/C 182/15)

Rapporteur-General: Mr DELAPINA

On 26 November 2008 the European Commission decided to consult the European Economic and Social Committee, under Article 262 of the Treaty establishing the European Community, on the

European Economic Recovery Plan

COM(2008) 800 final.

On 2 December 2008 the Committee Bureau instructed the Section for Economic and Monetary Union and Economic and Social Cohesion to prepare the Committee's work on the subject.

Given the urgent nature of the work, the European Economic and Social Committee decided to appoint Mr DELAPINA as rapporteur-general at its 450th plenary session, held on 14/15 January 2009 (meeting of 15 January), and adopted the following opinion by 179 votes to one with three abstentions.

1.   Summary and conclusions

1.1   With the global programme to stabilise the financial sector in all its international variants the international community has given a clear signal: economic policy has visibly taken on responsibility for global economic stability. And with the European Economic Recovery Plan the European Union has now also made clear its determination to tackle the crisis with all available means.

1.2   The psychological impact of the economic recovery plan is just as great as the impact of the sums involved. These economic policy signals should have a major stabilising effect on consumer and investor confidence. However, action must follow swiftly from all stakeholders, particularly the European Commission and the Member States, to ensure that pessimistic expectations are not confirmed.

1.3   The steps being taken to revive the real economy will have the desired effect only if the financial sector is made fully functional once again. In addition to the various rescue packages this will also require a reorganisation and a new system of regulation for the financial markets at all levels in order to build confidence.

1.4   European economic policy-makers have recognised the need for counter-cyclical macroeconomic policy to complement economic policy's past reliance on supply-side measures. The EESC also welcomes the commitment to better protection for the weakest members of society and more effective economic policy coordination. The scale of the EU's economic recovery plan is, however, relatively small compared with packages adopted in other regions of the world.

1.5   The Committee considers it to be vital that programmes of public investment and financial stimulus brought forward to assist economic recovery should also play their part in assisting the transition to a low carbon economy that is needed for the future. They urge the Commission and Member States to shape their recovery plans and programmes accordingly.

2.   From sub-prime crisis to global recession

2.1   The causes of the current economic and financial crisis are many and varied. In a declaration made at their summit on 15 November the G-20 heads of state and government listed the following: monetary and exchange-rate policies which led to excessive liquidity, insufficient or non-existent regulation of certain areas or actors, the search for unrealistically high returns coupled with insufficient understanding or analysis of risk by market actors and supervisory and regulatory bodies, excessive leverage, insufficiently coordinated macroeconomic policies and inadequate structural reforms. These developments led to excesses which highlighted the need for a revision of the rules for actors, products and markets.

2.2   In the USA in mid-2007 a pyramid scheme of property loans collapsed as property prices stopped rising. In an overheated property market with unrealistically optimistic expectations borrowers with low credit ratings were granted loans which were then securitised by the banks and sold on. New, highly speculative and opaque financial products were developed, which were not subject to any form of supervision or regulation. The extent of the risk was not understood by many of those involved.

2.3   The bursting of the property bubble in the USA and some EU states led to the collapse of hedge funds, investment and commercial banks and insurance companies. The securitisation of risk sent shock waves through the world of finance. Uncertainty and lack of trust among financial institutions led to a cessation of interbank lending even among essentially sound institutions and caused the interbank market to dry up.

2.4   Through various channels the impact of the financial market crisis finally began to be felt in the real economy. These effects include the credit crunch, higher financing costs, the impact of falling share prices on assets, contracting export markets, loss of confidence and asset write-downs and potential write-offs on balance sheets. It is now clear that, as at the beginning of 2009, the entire OECD is in a recession, the likely length and depth of which even experts cannot accurately assess at present.

3.   The most urgent challenges

3.1   The first step was to stop the chain reaction on the financial markets. The central banks, especially the ECB, provided the markets with liquidity in order to enable them to continue functioning. At national and international level numerous bailout packages were put together, comprising measures such as capital injections and investment in, or even the nationalisation of, ailing financial institutions, public guarantees, improved deposit protection for savings etc. To a certain extent these measures helped the banks to continue their normal activities.

3.2   The second important step is to strengthen the real economy. The confidence of consumers and investors has to be restored. This requires measures to stimulate domestic demand and to stabilise the labour markets. The lower income groups in particular need support, as they are particularly hard hit by the effects of the crisis, but also because they have the biggest impact on domestic consumption.

3.3   In addition, measures are needed to cushion the impact on the business sector. This sector, through its production, investment, exporting and research and development activities, has a key role to play in revitalising the economy, and it contributes decisively to job creation and the creation of domestic demand. In addition to cyclical aspects, however, sustainability and structural aspects must not be neglected.

3.4   In addition, restructuring of the international financial architecture and more effective regulation of financial markets are needed. The rules applicable to supervisory authorities and ratings agencies and for the filing of company accounts, and the way these rules are coordinated, also need to be changed in order to ensure that crises like the present one can be prevented in future.

4.   The role of European economic policy

4.1   Although the crisis originated in the USA, the European economy was dragged down by its global economic links. The euro has proved its worth as an anchor of stability. Without a common currency the effects on national economies would have been far more serious. An international crisis requires international responses. The European economy requires action on a massive scale. The challenges outlined in section 3 of this opinion require rapid, decisive, massive, targeted, coordinated and proactive measures, although many of these measures will be only temporary.

4.2   At the same time we need to learn from the past. When, at the beginning of the century, after the bursting of the IT bubble and 9/11, all the main regions of the world experienced a sharp fall in economic activity, Europe alone did not opt for an active fiscal and monetary policy stimulus, combined with supply-side measures. This was part of the reason why it took four years to emerge from the downturn, with much of Europe still suffering from weak domestic demand today, which has drastically increased these regions' vulnerability to collapsing international demand.

4.3   The seriousness of the current crisis was recognised too late by the relevant economic policy-making bodies. Up until September the finance and economics ministers, meeting in the ECOFIN Council, were sceptical about the need for an economic recovery plan. Although the euro area economy was already shrinking in the second quarter of 2008, in the summer the ECB paradoxically increased base rates. And the lack of agreement among the heads of government at their Paris summit on the financial crisis dashed hopes of rapid, coordinated action. Unilateral national measures to improve deposit protection for savers did not give the impression of concerted EU action. This makes it clear that merely acting is not enough. Rather, what is needed is better coordination of plans and packages of measures, above all at national level.

5.   The Commission's European Economic Recovery Plan

5.1   It is therefore all the more welcome that the European Commission has now unequivocally demonstrated its commitment to decisive and coordinated action. The Commission's strategy for dealing with the financial crisis aims to address the difficulties of the wider economy and make Europe a key player in the global response to the financial crisis. The Commission was also asked by the Heads of State and Government to draw up proposals for coordinated action for discussion at their meeting in December. This was submitted at the end of November in the form of a European Economic Recovery Plan, which was intended to be timely, temporary, targeted, and coordinated. The European Council, meeting in Brussels on 11 and 12 December 2008, subsequently adopted a plan along these lines.

5.2   Specifically, a fiscal stimulus of 1,5 % of EU GDP is proposed, amounting to EUR 200 bn for the period 2009/2010. EUR 170 bn is to come from the Member States, with EUR 30 bn from the EU budget and the EIB.

5.3   Apart from strengthening the activities of the EIB, particularly with regard to SMEs, the aim is to simplify and accelerate procedures to enable the early deployment of resources from the Structural and Cohesion Funds and the Rural Development Fund. The European Social Fund will finance measures to promote employment, particularly among the economically weakest sections of the population, and the European Globalisation Fund is to be made more effective. Conditions for the granting of state aids will also be relaxed and measures will be adopted to accelerate public procurement procedures.

5.4   The measures adopted by the Member States are to be conducted within the reformed Stability and Growth Pact, making use of the greater flexibility it offers, and are to be in addition to the effect of the automatic stabilisers which stimulate demand by means of government spending and/or tax cuts, of which the Commission proposal gives a number of specific examples. These include, for example, temporarily increased transfers to the unemployed or low-income households, public investment in infrastructure and training, support for SMEs (such as loans or equity stakes), measures to combat climate change, lower taxes and social levies for employers and employees and a temporary cut in the standard rate of VAT. The measures will be temporary in order to ensure that the recovery plan does not compromise the medium and long-term sustainability of public finances.

5.5   The measures by the Member States are to be coordinated, as the individual countries' starting positions and scope for action vary. They are to be temporary, as medium-term budget targets will subsequently have to be reinstated. The measures are to be supported by structural reforms, aimed at improved operation of markets and increased competitiveness.

5.6   The recovery plan is intended to be closely coordinated with the priorities of the Lisbon strategy for growth and employment (people, the economy, infrastructure and energy, research and innovation). The European Commission has adopted a package to help implement the European Economic Recovery Plan and reinforce the Lisbon Growth and Jobs Strategy. The adoption of country chapters assessing Member States' progress in implementing the Lisbon Strategy will take place in the New Year (1). The recovery plan sets out a broad range of measures, and each government is asked to select the appropriate ones.

5.7   Another main thread of the recovery plan is the green economy, i.e. intelligent products for a low-carbon economy. This includes investment in energy efficiency, the environment and climate protection. The measures to support sectors particularly hard hit by the crisis, such as motor vehicle manufacturing and construction, will also be tied to environmental and energy-saving targets.

5.8   Not least, the plan stresses the need for a coordinated global approach, involving the emerging countries, in an effort to return to economic growth.

6.   The EESC's initial assessment

6.1   Qualitative assessment

6.1.1   The Commission document appropriately identifies the existing challenges, needs and requirements for action. Europe must act quickly, confidently, ambitiously and in a focused way. Europe must be conscious of its own importance and must throw its full weight behind international efforts.

6.1.2   Confidence and demand have to be stimulated in order to stop the downward spiral. The negative impact of the crisis on the labour market and on the weakest members of society have to be combated with particular energy. The existing macroeconomic policy mix has not offered appropriate responses to the problems facing us, as it has neglected the importance of domestic demand for the economic cycle. The Commission has taken on board, albeit somewhat late, the need for fiscal and monetary policy to play an active role in strengthening demand, which the EESC has been advocating for years, alongside the supply-side measures to promote competitiveness. The Commission and the Member States have finally acknowledged that expansionary fiscal policy measures are needed, as the effectiveness of monetary policy measures is extremely limited in current circumstances.

6.1.3   The Commission's reference to the greater flexibility of the Stability and Growth Pact since the 2005 reform is particularly interesting in this respect. This flexibility has to be used in the present situation. Given the current extraordinary combination of financial crisis and recession it makes sense to allow the 3 % budget deficit threshold to be temporarily exceeded.

6.1.4   The EESC welcomes the stress laid by the Commission on the positive role to be played by the ECB in supporting the real economy. The Commission refers to the essential contribution which the ECB has made to stabilising markets by lending to banks and by its contribution to liquidity, and to the scope for interest rate cuts.

6.1.5   Clearly, once we have put the crisis behind us and the recovery is underway, the medium-term objectives of fiscal policy will once again have to be observed, so as not to jeopardise the sustainability of public finances. At that time care will be needed to avoid the reimposition of excessive burdens on labour or unacceptable spending constraints. A start should be made now, for example, on developing approaches which would permit new sources of revenue to be tapped. Among other things, restoring government spending to its pre-crisis level should not be seen as an end in itself. With an ageing population and high social standards, as in the European social model, a higher level of state spending is not necessarily a bad thing. Moreover, countries which are praised for their successful flexicurity strategies also have higher than average levels of government spending.

6.1.6   It is essential that national measures not only be complemented by European measures but that they also be coordinated. In this way positive cross-border spill-over effects will be achieved and the problem of ‘freeloading’ avoided. Countries which do not participate in the recovery plan could dilute the impact of the measures. And those which do take action to stabilise the economy risk being pilloried for their deficits. A particular responsibility falls to those Member States which, by virtue of their size, have a significant impact and which have relatively large scope for fiscal easing.

6.1.7   A positive feature of the document is the fact that, when it comes to stimulating growth, environmental, climate-change and energy objectives have not been overlooked, nor is the scope of the document restricted to the highly developed industrialised countries. From a global perspective, the opposition to unjustified protectionist measures is also significant.

6.2   Quantitative assessment

6.2.1   In this opinion the EESC intends to limit itself to a general macroeconomic assessment. The Committee will, however, continue its work and will examine and evaluate the proposals and decisions in detail in a separate opinion. In this context necessary changes to the law on subsidies will need to be discussed, as will changes to the rules of the Globalisation Fund. Some of the measures from the Commission's comprehensive ‘toolkit’ will need to be critically examined. These would include the not uncontroversial reduction of social levies and VAT on labour-intensive services. The compatibility of subsidy and support measures with competition should also be assessed.

6.2.2   As the economic recovery plan is to be accompanied by structural reforms, care should be taken to ensure that these do not run counter to the objective of stimulating demand. Rather, structural reforms should be designed to be socially acceptable and conducive to growth and employment.

6.2.3   Another point of criticism is the fact that the amount of EUR 200 bn over two years appears far more than it actually is. In fact it includes relatively little ‘new money’. The funding that will come from the EU budget and the European Investment Bank in part represents the bringing forward of payments which were already planned. In the case of the national funding, in many cases this does not represent new, additional initiatives but rather a catalogue of measures which were already planned or even adopted by the national governments, even in the absence of an EU recovery plan.

7.   Reorganisation of the financial markets

7.1   Two serious crises in quick succession are sufficient grounds for a new system of regulation for the financial markets, its transactions, its products, its participants, supervision, the rating agencies etc, both within the EU and particularly at global level. This is necessary in order to restore confidence as quickly as possible — confidence in the financial institutions, confidence between institutions and that of investors and consumers. A reform of the financial markets and the rapid restoration of their effective operation is key to ensuring that they can once again begin to fulfil their role of supporting the real economy and to ensuring the success of the measures to bring about economic recovery.

7.2   Europe uncritically adopted many developments originating in the USA, from the introduction of so-called financial innovations, through the financing of pension schemes to rules on company accounts, and the damaging consequences of this are there for all to see. In future greater importance should again be attached to European ways of doing things, and to European strengths, experience and traditions, which would include specific forms of business organisation such as cooperatives. In this process greater use should be made of the critical mass of the euro area, which has grown with enlargement. The G-20 summit in Washington gave some promising signs and the achievements of this summit must be further developed with a view to the next summit, to be held in London on 2 April 2009.

7.3   The necessary reorganisation and new system of regulation for the financial markets are not addressed in the Commission's recovery plan. The EESC hopes that this is only because the Commission is intending to adopt its initiative on supervision of the EU financial markets in July 2009. In redrawing the rules account should be taken of academic studies which show that speculative markets systematically overshoot in both directions as herd behaviour takes control, not least because of the computer model-based trading and decision-making systems used by major market participants. The EESC reserves the right to issue its comments and proposals on this at a later date and draws attention in this connection to the conference it is hosting in Brussels on 22 and 23 January 2009 entitled ‘Rien ne va plus’? Ways to rebuild the European Social Market Economy after the Crash of ‘Casino Capitalism’.

(1)  See Commission press release — Decisions on the Lisbon Growth and Jobs Strategy (IP/08/1987) for details of the package of measures.