ETUC criticises EU finance Council’s recommendation to cut public spending

The economic crisis and subsequent recession have led to a major increase in unemployment across Europe. The best strategy to reduce unemployment remains contentious. Although the Council of the European Union favours a phased approach towards cutting public spending by 2011, the European Trade Union Confederation (ETUC) favours an increase in spending to secure further economic recovery. Some small and medium-sized enterprises agree with ETUC.

Increasing unemployment across EU

EU Member States and the European Commission have tentatively suggested that the worst of the economic crisis is now over, with Eurostat recently announcing that industrial production increased by 0.3% in September 2009 compared with August. Nevertheless, unemployment remains a major problem for the EU. In the eurozone, unemployment rose to 9.7% in September 2009, a 0.1 percentage point increase compared with August.

An estimated 22.1 million people in the 27 EU Member States are currently out of work; this represents a total increase of five million jobs lost between September 2008 and September 2009. Considered individually, some Member States appear to have been better placed to deal with the economic crisis than others. At one extreme, Spain saw unemployment increase by a substantial 6.9 percentage points, up from 12.4% in September 2008 to 19.3% in the same month the following year. In contrast, unemployment in the same time period increased by a mere 0.5 percentage points in Germany. A combination of working time accounts and government assistance for short-time working schemes has ensured that German unemployment remains under 8%.

Council proposes winding down anti-crisis measures

With economic indicators suggesting that the crisis is almost over, the Economic and Financial Affairs Council (ECOFIN) of the Council of the European Union met on 20 October 2009 in Luxembourg. The Council, comprising the Member States’ economics and finance ministers, agreed to prepare a coordinated strategy for exiting from broad-based policies in place within the European Economic Recovery Plan (129Kb PDF) to stimulate the economy (Council conclusions (132Kb PDF)). In addition to reviewing the role of the European Economic Recovery Plan in sustaining confidence in the European economy, the Council is committed to what it calls ‘fiscal consolidation’.

In consolidating Member States’ public spending, the Council hopes to address the issue of growing debt and return to what it calls ‘sound fiscal positions’ that prevailed before the outbreak of the recent economic crisis and recession. The Council believes that such a strategy will be important for creating new jobs.

The Council has pinpointed the following four areas which will be central to what it terms its ‘fiscal exit strategy’.

• A coordinated approach to lowering public spending is needed across the EU.

• Member States should start fiscal consolidation no later than 2011.

• Cuts in public spending should be ambitious, higher than 0.5% of the yearly gross domestic product (GDP).

• National budgetary frameworks and structural reforms should be strengthened as part of the exit strategy.

ETUC calls for greater public spending

Responding to the Council’s new proposed fiscal strategy, the European Trade Union Confederation (ETUC) has called for more and not less public spending. Although Member States’ stimulus measures amount to €80 billion, ETUC argues that this represents a mere 0.6% of GDP in 2009. While the Council is in favour of pulling the fiscal break, ETUC believes that if the EU is serious about cutting unemployment it will need to increase public expenditure. The ETUC General Secretary, John Monks, said of the Council’s conclusions:

The crisis and mass unemployment will not go away by themselves. If ECOFIN ministers limit themselves to fiscal exit strategies while hoping recovery will be automatic, they are putting the cart before the horse.

As a means of both addressing high unemployment and supporting the slow road to recovery, ETUC believes that about 1% of the EU’s total GDP, amounting to an estimated €130 billion, should be made available. ETUC suggests that some of the investment could be used to overhaul industry, specifically to promote the ‘greening’ of the economy (see the 2009 EIRO comparative study on the Greening the European economy: Responses and initiatives by Member States and social partners). ETUC’s clear Keynesian policies, based on the macroeconomic theories of the British economist John Maynard Keynes, do not represent a new departure for the trade unions but an old belief that governments need to spend their way out of economic crisis.

ETUC is convinced that an increase in public spending does not have to amount to poor housekeeping. It believes that governments have various untapped revenue sources. These include raising taxes on corporate profits as well as a Tobin tax on financial transactions, so-called after the economist James Tobin, who first suggested a currency transaction tax.

The trade union confederation is also concerned that the proposed fiscal exit strategy might have major consequences for workers’ rights as well as their standard of living. ETUC is fearful that governments’ only alternative option to combating unemployment would involve further labour market deregulation and wage cuts.

Commentary

ETUC is not alone in arguing against too early an exit strategy. The European Association of Craft, Small and Medium-sized Enterprises (Union Européenne de l’artisanat et des petites et moyennes enterprises, UEAPME) believes that falling investment and a decline in disposable incomes could threaten economic recovery and lead to even higher levels of unemployment. One of the key mandates of the Council of the European Union is economic stability. However, even though recent economic indicators suggest that recovery has begun, European ministers should bear in mind that the economic upturn remains a fragile affair.

Michael Whittall, Technical University Munich