Did you know that last year 22.9 million people in the EU were unemployed, of which, a staggering 10.9 million people were long-term unemployed. At the current pace of reduction, the unemployment rate would take 7 years to return to its pre-crisis level in Europe. This is one of the many interesting points in a new economic study from European progressive economists.
The authors of the Independent Annual Growth Study
“The Elusive Recovery”, expect that economic growth is going to slow down in the EU in 2017 to 1.6% after 1.9 % in 2016 and to 1.5% in 2018 because “tail-winds are turning into headwinds.” Brexit, higher oil prices and especially the slowdown in trade will impact negatively, along with uncertain politics.
The EU Commission has its own Annual Growth Survey
too which sets out its view on what are the most “pressing economic and social priorities” confronting us. But as the Commision’s record demonstrates, it usually gets it wrong.
Thus this report is perhaps more important becuase it focuses on the real priorities for citizens and not on bank sustainability, prudence or what matters to the rich and corporates.
This report suggests that:
1) Europe needs more and better employment and a lower dispersion of incomes. An option, they suggest“although it depends a lot on national context, is to distribute more equally the overall working time within the labour force in order to lower income inequalities. Whatever, fighting unemployment and creating better jobs must be a number one priority for policy makers.”
2) Financing redistributive welfare states via the taxation of high wealth, high incomes and inheritances promotes economic growth and increases social stability. (Can you imagine the EU Commission arguing for this?).
3) They say that the growth-oriented economic policy of the Commision is necessary but not sufficient to obtain social progress and individual well-being. Policy makers need to move beyond the predominant, narrow focus on GDP growth, and aim instead at a broader set of economic, social and environmental targets. (They still have the word “Growth” in their report as it is the counter report to the Commission’s).
On the third point, they point out that GDP is a partial measure of well-being. “It ignores non-market flows such as domestic work, damages to nature and social inequalities. A good society should reach a fairly distributed material well-being, full employment and good jobs, quality of life and ecological sustainability. Furthermore, we propose four other subsidiary targets that aim at providing a stable economic framework: financial stability, stable state activity, price stability and external balance.”
The study calls for reform of the Stability and Growth Pact, the conservative, austerity driving “iron rule” hanging over Europe’s economies. It calls for introduction of the “golden rule of public finance” and a modified expenditure rule.
The “golden rule” was advocated in TASC’s study of Irish investment “A Time for Ambition
”, published a year ago, among other suggestions, such as:
- Ireland needs increased public investment because it is historically low and we need the assets – social and affordable housing, public transport, schools, clinics, as well as education and training.
- Interest rates are historically low.
- There is still an unacceptable level of unemployment, especially among construction workers.
- The lack of investment is reducing future economic growth and development.
- Investment leads to innovation which makes the economy more efficient.
The Independent report argues that “it is a traditional public finance concept that deducts net public investment from both the headline and the structural deficit, so that net public investment would be financed via deficits. The spending rule implements a limit for non-cyclical nominal expenditure growth, that is determined by the medium-term growth rate of real potential output plus the ECB target inflation rate of 2%, stabilizing the expenditure-to-GDP ratio over the business cycle.”
They argue that the spending rule and the golden rule of public investment should be the major point of reference of the preventive as well as the corrective arm of the SGP. “Both rules together avoid the procyclicality of the current framework while at the same time ensuring fiscal sustainability.”
On inequality, the report says that it requires intervention to attenuate market outcomes. A comprehensive package will thus “comprise a kaleidoscope of measures that, first, affect the framework within which market economies function; second, strengthen the redistributive function of the European welfare state by more progressive taxation and sufficient public expenditure.”
It calls for a considerable pay rise in the European Union as whole as the positive effect on internal demand is expected to be larger than the negative effect on exports, leading to an overall positive effect on aggregate demand. Also an increase in wages, it argues helps to rebalance the large current account surplus of the Eurozone on a global level.
Perhaps controversally, it suggests that the overall economic workload has to be distributed more equally within the labour force in order to smooth income imbalances.
It points out that deep labour market segregation still persists, contributing to gender gaps in pay, pensions, decision-making, and wealth and much nore need to be done to address this issue such, as well as regulating wage transparency and conducting pay audits on the company. Furthermore, it argues “public investment in childcare opportunities and all-day schools can lay the basis for the opportunity to participate in the labour market.”
Taxation and spending policies are essential tools to reduce inequality in market incomes and to stabilise growth in times of economic crises.
Abolishing bank secrecy and implementing systems for the automatic exchange of information on asset ownership between European countries are necessary preconditions for an effective taxation of undeclared income and of wealth. It supports the ETUC call for Eurotax, an EU tax investigation agency to tackle tax avoidance, tax evasion and tax havens in this era of globalisation.
Wealth inequality has to be reduced, the authors argue. Wealth is much more unequally distributed than income and there is no evidence of an upcoming trend reversal. On the contrary, intergenerational wealth transfers, higher returns on larger wealth, and imbalances in the taxation between labour and capital might even increase and reinforce wealth inequality in the future, it argues, citing Piketty. “Wealth concentration has detrimental effects for economic growth, and on social stability”. It argues that “social mobility should be enhanced through taxes on inheritances. In particular in order to promote intergenerational mobility, inheritance taxes are an effective measure.”
On the expenditure side, social spending needs to increase to counteract rising poverty rates and rates of material deprivation since the financial and economic crisis. It says labour market outcomes need to be improved by reducing unemployment and increasing job security.
Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions. He is a member of the Economic Committee of the ETUC and chair of TASC’s Economists’ Network. He was a President of the Statistical and Social Enquiry Society of Ireland, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.