EU agrees pact for the euro

In March 2011, EU heads of state of the countries in the euro zone agreed on a pact designed to guarantee its stability. The pact’s four main principles are: promoting competitiveness; fostering employment; contributing further to the sustainability of public finances; and reinforcing financial stability. Member States are encouraged to try to achieve this by reforming pay and labour market policies. The pact also welcomes participation from non-euro area countries.

Background

On 11 March 2011, representatives of the governments of countries in the euro area reached informal agreement on a pact for the euro, which is designed to guarantee the stability of the euro zone. It also provides for non-euro area countries to participate on a voluntary basis. The pact was formally adopted as the ‘Euro plus pact’ at a summit meeting on 24 and 25 March. Bulgaria, Denmark, Latvia, Lithuania, Poland, Romania also indicated that they would join the pact, set out in the European Council’s conclusions (306Kb PDF).

Aims of pact

The pact rests on four main principles: fostering competitiveness; fostering employment; contributing further to the sustainability of public finances; and reinforcing financial stability. It stresses that each participating Member State should present the specific measures it will take to reach these goals. A Member State can choose to exclude any area in which it can show that no action is needed. Member States have the freedom to choose which specific policy actions they wish to undertake to achieve these objectives.

The pact has a number of implications for social and employment policy. For example, under the title of fostering competitiveness, it states that progress will be assessed on the basis of wage and productivity developments and competitiveness adjustment needs. In particular, in order to assess whether wages are evolving in line with productivity, unit labour costs will be monitored over a period of time, by comparing them with developments in other euro area countries and in the main comparable trading partners.

The pact states that, respecting national traditions of social dialogue and industrial relations, there are two main measures to ensure that costs are kept in line with productivity:

The first is a review of wage-setting arrangements and ‘where necessary, the degree of centralisation in the bargaining process’, and indexation mechanisms. However, the pact makes it clear that the autonomy of the social partners in the collective bargaining process should be maintained.

The second is ensuring that wage settlements in the public sector support competitiveness efforts in the private sector.

The pact also contains a number of measures aimed at fostering employment. It states that progress towards a well-functioning labour market will be assessed on the basis of long term and youth unemployment rates and labour participation rates. Although it notes that Member States should be responsible for the policy actions they choose, the following areas should be given particular attention:

  • labour market reforms to promote flexicurity, reduce undeclared work and increase labour participation;
  • lifelong learning;
  • tax reforms, such as lowering taxes on labour to make work pay, and taking measures to facilitate the participation of second earners in the workforce.

The pact also contains a number of provisions aimed at ensuring that pension systems are sustainable. These include aligning the pension system to the national demographic situation, for example by aligning the effective retirement age with life expectancy or by increasing participation rates, limiting early retirement schemes and using targeted incentives to employ older workers, particularly those over the age of 55.

As part of the pact, each year participating Member States will agree on a set of concrete actions to be achieved within 12 months. These actions will also be reflected in the annual Member States’ National Reform Programmes and Stability Programmes.

Social partner reactions

In a Resolution on European Economic Governance (424Kb PDF) agreed in March 2011, the European Trade Union Confederation (ETUC) stated its belief that strict unit labour cost comparisons ‘will force Member States to enter into a competitive downward spiral of undercutting each others’ wages and working conditions’, and called instead for a pact for fairness and more equality. ETUC General Secretary John Monks said: ‘The rules of the single currency have been seriously threatened, not least by a decade-long strategy of stagnant wage development and more precarious work. To rebalance the euro area, this strategy should now be reworked by introducing minimum wage floors, by respecting the principle of ‘equal pay for equal work’, and tackling the problems caused by collapsing financial markets by new initiatives in those markets, not labour markets.’

BUSINESSEUROPE has supported the pact, with the organisation’s Director General Philippe de Buck stressing in a speech (91Kb PDF) on 24 March that the only sustainable way to improve growth and employment is to boost competitiveness. Mr de Buck added that the European business community fully supports the pact and does not understand the hostility to it. He added that Europe needs ‘more coordination and better monitoring of fiscal and economic policies. Unit labour costs are an essential and objective indicator of economic health … A country cannot over a longer period of time have a combination of high increases in labour costs and low increases in productivity.’ He noted that BUSINESSEUROPE believes that social dialogue is a critical factor for success, but that the social partners ‘must show a sense of collective responsibility, including at European level’.

Andrea Broughton, Institute for Employment Studies (IES)

Useful? Interesting? Tell us what you think. Hide comments

Eurofound welcomes feedback and updates on this regulation

Add new comment