Public finances are improving and growth is returning to the European Union, the European Commission reported on Monday (2 June). But it urged EU member states to continue pursuing structural reforms, including of their services sectors and pension and healthcare systems.
The Commission presented its fourth set of annual recommendations on member states’ economic policies, a set-piece event in the EU’s economic semester that aims to ensure coherence and compatibility between national economic policies.
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National governments will discuss the recommendations at a meeting of EU finance ministers on 20 June before adopting the recommendations, including any amendments they wish to include, at a meeting on 8 July.
“The efforts and sacrifices made across Europe are starting to pay off”, said José Manuel Barroso, the president of the European Commission, pointing to the EU’s improved growth prospects and the stabilising of government finances.
But Barroso warned member states against relaxing their reform efforts, even though many ruling parties did badly in the European Parliament elections. “If politicians show leadership and summon the political will to see reform through – even if it is unpopular – we can deliver a stronger recovery and a better standard of living for everyone,” he said.
In the wake of the European Parliament elections, in which Eurosceptic parties made significant gains, the Commission struck a less aggressive tone than in previous rounds of economic assessments.
Nonetheless, the assessments reveal that the Commission has serious reservations about whether the French, Italian and Spanish budgets for 2014 will conform to EU-mandated limits on public spending.
In its assessment of the eurozone, the Commission recommended that members consider at the end of 2014 how to improve the surveillance of economic policy and deepen integration.
Indeed, many of the recommendations made by the Commission to member states echo those made last year, raising questions about the Commission’s ability to co-ordinate economic policy and reforms, in particular within the eurozone. BusinessEurope, a trade association, estimates that only 23% of the 2013 recommendations were implemented by national governments.
Olli Rehn, the European commissioner for economic and monetary affairs and the euro, warned against placing too great an emphasis on such figures. “By and large, the recommendations have been taken seriously,” he said.
Rehn argued that as many as 23 member states had acted on previous Commission recommendations relating to the reform of national pension systems, although he conceded that overall implementation was a “mixed picture”.
Six countries are back in the black
As further proof that EU member states’ public finances are stabilising, the Commission announced that of them – Austria, Belgium, the Czech Republic, Denmark, the Netherlands and Slovakia – had successfully reduced public spending to within EU-mandated limits.
As a result, in 2014 only 11 EU member states were expected to exceed the EU thresholds limiting public deficits to 3% of gross domestic product, down from the 24 countries that did so in 2011.
Renewed focus on employment
This year’s recommendations marked the first time that the Commission included a ‘scorecard’ on employment and social issues. “One of the biggest challenges we face today deals with the growing divergences in the employment and social situations of member states within the euro area,” said László Andor, the European commissioner for employment, social affairs and inclusion, who warned that “core-periphery gaps keep widening”.
Bulgaria, Romania and Slovakia fared worst, with the Commission urging action to fight long-term unemployment, to improve social safety nets and to improve the situation of the Roma. In Bulgaria, for example, half the population is at risk of poverty. Social assistance only guarantees a minimum income of 65 LEV per month (€33) – although only 9% of those who are out of work are entitled to receive unemployment benefits.
The social systems of Italy and Spain, the eurozone’s third- and fourth-largest economies, also came under fire. Both countries, according to the Commission, need to improve their public employment services and their social assistance. According to the Commission, 19 million Italians are at risk of poverty, while “a large share of the working age population is dependent on the pension income of a family member.”
The UK was singled out by Andor for its high levels of child poverty. “At 16.5% (2012), the proportion of UK children living in workless households is one of the highest in the EU,” according to Commission research.
Andor also called on Germany and Austria to do more to integrate women into the workforce.
Shift tax burden away from labour, says Commission
Fiscal policies figured prominently in the Commission’s recommendations. It urged member states to tax labour less to increase employment, and clamp down on aggressive tax planning by corporates.
Algirdas Šemeta, the European commissioner for taxation, said: “More than 25 million people are out of work in Europe. Yet…our tax burden on labour outweighs other OECD countries.”
The Commission did not, however, advocate that member states reduce their overall tax intake. Instead, taxes on labour should be shifted onto what Šemeta described as “the three Ps: pollution, property and purchases”. Such taxes would prove fairer and more efficient, he argued.
Austria, Belgium, the Czech Republic, Germany, France, Hungary, Italy, Latvia, Lithuania, Netherlands, Romania and Spain all need to make such changes, according to the Commission.
Šemeta said that EU member states’ disparate VAT systems are an “administrative nightmare” for EU businesses.
The Commission’s assessment also suggested that multinational companies may be using the Dutch and Luxembourgish tax systems to “channel tax-driven financial flows to other [low-tax] jurisdictions”.
Although not a ringing endorsement, Barroso’s observation that reforms in France are going in the “right direction” belies a more sober assessment in the documents. France did not provide the Commission with sufficient details about its policies to “credibly ensure” that France will meet its commitment to bring its public spending within an EU-mandate limit of -3% by 2015. The Commission predicts that by 2015 the French government deficit will be 3.4%. What is more, the government’s “underlying structural adjustment [falls] well short of the level recommended by the Council”. The French government should adopt more ambitious cuts in healthcare and pension costs, and step up efforts to cut costs of the French state, the Commission said.
The recommendations represent the Commission’s first assessment of the economic reforms – including tax cuts for low-earners – proposed by Matteo Renzi, who became Italy’s prime minister in February and shortly afterwards requested more time to meet EU budget rules. La Republica, an Italian newspaper, reports that the final meeting of commissioners considered rejecting this request, but chose to delay the decision until later in the year.
The assessment makes it clear that, on its current path, Italy risks missing a target agreed with the EU to eliminate its structural deficit by 2015. The Commission did find that Italy’s proposed reform has done enough to remedy concerns expressed by the Commission in March regarding macro-economic imbalances in the Italian economy. It makes clear the challenges facing the Italian government, with reforms having to contend with the country’s complex governance structures, infrastructure bottlenecks and corruption. More broadly, the Commission called on Italy to improve its tax system, public administration and schools, boost the strength of its banking sector and introduce a proper system of unemployment benefits.
The Commission described Spain’s budget plans for 2014, which project spending within Spain’s EU commitments, as broadly adequate, although it notes that Spain, unlike other governments, had no independent body to endorse its budget figures. But the Commission expressed concern at the lack of detail in Spain’s budget plans for the following years and called on it to “fully [specify] the underlying measures for 2015” to ensure that Spain reduces its public deficit to 3% by 2016, as required by EU law. Notably, Oiil Rehn tentatively welcomed a €6.3 billion stimulus package announced over the weekend by the Mariano Rajoy, the Spanish prime minister, which would include reducing Spain’s corporate tax rate, although he said that the Commission would have to first examine the proposal in detail before delivering its verdict.
The Commission called on the United Kingdom to address the rapid rise of housing prices in and around London. Increases in house prices did not match increases in salaries, the Commission observed, while taxes on property in the UK had not kept up with the explosion in the value of property in London. It recommended that the UK government increase the housing supply and curb its help-to-buy policy, which provide loan guarantees for first-time buyers of property in the UK.
Germany, whose economy the Commission predicts will grow by 1.8% in 2014, received a clean bill of health compared with most other EU member states. Germany enjoys a “sound fiscal position” and is on target to meet its medium-term budget objective. The Commission encouraged it to reduce taxes and social-security contributions for low-wage earners, and to reduce some fiscal disincentives for people to get into work. This would stimulate domestic demand in Germany, whose burgeoning trade surplus with EU member states (meaning it exports more than it imports) is a cause of concern for the EU. The Commission reiterated its call on Germany to do more to open up its services sector to competition, in particular professional services such as law and accounting, and to liberalise its railway sector.