Select Committee on European Union Eighteenth Report



43. The crucial feature of a common monetary policy is that it deprives national governments of the possibility of adjusting their economies either by devaluation or by differential interest rates. Economists have suggested that there will be benefits from a common currency if the costs associated with the loss of exchange rate flexibility are more than offset by the benefits of trade without the obstacles of exchange rate costs and risks—and that this is more likely to be the case when wages and prices are flexible, labour is mobile, and asymmetric shocks are not too great[37]. At the time of our previous inquiry, the Bundesbank's position was that "in a monetary union it remained a national responsibility to deal with structural problems and asymmetric shocks. This would be done partly by means of national fiscal policy but more especially by the flexibilities of labour and product markets"[38].

44. As the Governor of the Bank of England said, tensions and shocks occurred even between sectors and regions in a single national economy. But within a single economy there were possibilities of redistribution through a central budget and movement of labour which did not apply across the euro-zone (Q 261). Whether a one-size-fits-all policy would work for the euro-zone would depend partly on cyclical divergences, and partly on policy mix. Moreover, shocks would have a greater impact on some participating Member States than on others: Italy, for example, would be more affected by the current oil price rise, and structural differences would make some participating Member States more sensitive to interest rates than others (Q 262).

45. We examined with our witnesses whether the tools of fiscal policy and structural adjustment (in labour, product and capital markets) which remained with participating Member States were sufficient to enable them to manage their own economies, in particular to cope with inflation or to respond to shocks. We also considered whether the single currency, in combination with the Stability and Growth Pact, was leading to increasing convergence or increasing divergence within the euro-zone.

Fiscal policy

46. We looked first at the extent to which fiscal policy had remained effective within the constraints of the SGP.

47.   Public finances in participating Member States since January 1999 have been robust[39]. Better than expected growth of real GDP and falling unemployment rates have brought moves to smaller deficits and bigger surpluses. The fall in interest rates enjoyed by some countries, relative to their domestic interest rates pre-euro, has also improved public finances (important, for example, for Italy). Estimates of governments' net lending in 2000 show the average for the euro-zone as 0.9 per cent of GDP, with a range from Austria with a deficit of 1.8 per cent to Finland with a surplus of 4.1 per cent. Since public finances are affected by the cyclical position of economies, a better guide to the medium-term position is given by cyclically adjusted net lending figures. On this basis the Commission estimates the deficit for the euro-zone at 0.9 per cent of GDP in 2000, ranging from a surplus of 3.3 per cent in Finland to a deficit of 1.7 per cent in Austria.

48.   All these estimates of deficits for 2000 are well inside the 3 per cent reference value contained in the SGP[40]. However, in order to help judge whether the budget positions of individual participating Member States allow them enough room to respond to macroeconomic fluctuations with automatic stabilisers, the European Commission undertakes a further calculation, computing what it calls the cyclical safety margin[41]. Table 2 below shows (as a percentage of GDP)

  • the Commission's estimates of that margin;

  • the smallest level of cyclically adjusted net lending that a country needs to be reasonably sure of not breaching the 3 per cent borrowing limit in recession (the cyclical safety margin minus 3 per cent); and

  • the Commission's estimate of cyclically adjusted net lending for 2000.

The estimates in column 2 suggest that, in order to meet the SGP target of avoiding deficits of more than 3 per cent in recession, the United Kingdom (for example) would need to run an average deficit of no more than 1.1 per cent of GDP, whereas Austria could run an average deficit of 2 per cent, and Finland would need a surplus of 0.4 per cent. Member States' Stability Programmes should be proposing to bring their structural deficits to these levels. Column 3 shows that they are: for all participating Member States the estimated cyclically adjusted net lending is well within the cyclical safety margin minus 3 per cent, implying that—on the Commission's estimates—they all have enough room to allow automatic stabilisers to operate in recession without pushing their deficits above the 3 per cent reference value.

Table 2: Comparison of cyclically adjusted net lending with amount needed for cyclical safety (percentage of GDP)

Cyclical safety margin
Cyclical safety margin less 3%
Cyclically adjusted net lending

Source: European Commission, Public Finances in EMU—2000
Note:Figures are Commission estimates

49. A consequence of low deficit-to-GDP ratios is falling debt-to-GDP ratios[42]. Nevertheless, the debt/GDP ratio for the euro-zone in aggregate in 2000 is estimated at 70.5 per cent, still outside the Maastricht limit of 60 per cent. The debt ratios of the big borrowers—Belgium, Italy, and (briefly) Ireland—have been falling. Belgium's peaked at 134.6 per cent in 1993 and is put at 110.0 per cent in 2000; Italy's peaked at 213.8 per cent in 1994, and is 110.8 per cent in 2000; Ireland's reached 98.7 per cent in 1989, and is 45.2 per cent in 2000. Other States are around or below 60 per cent.

50. The underlying rationale for the SGP has been based on three arguments: the risk of default on government debt in the euro-zone, and the consequent effects on financial market stability, monetary policy and price stability; the claimed effects of government borrowing on the "policy mix"; and the alleged interest rate spillover effects. These are considered in turn below.

51. If a country ran up a huge debt and threatened default, it might be necessary in extremis for the ESCB to buy up the debt or otherwise to provide liquidity in order to prevent instability in the euro-zone banking system. By this means the monetary policy of the ECB, and price stability in the euro-zone, could be compromised by the excessive borrowing of a single EMU member state.

52. High borrowing could be used by Member States to finance high spending even in times of boom, not only in recession. This would increase inflationary pressure, which the ECB would have to counter by raising interest rates. The result would be likely to be high government spending on current consumption, together with high private consumption spending, and low investment, in other words the wrong policy mix—too much consumption, not enough investment—in the euro-zone. In this sense, the SGP provides a form of fiscal policy co-ordination in the euro zone.

53. It has been argued (for example by HM Treasury: Q 15) that one purpose of the SGP is to prevent high borrowing by one participating Member State from raising the cost of borrowing faced by all EMU governments. Whereas an increase in one country's borrowing would be a small fraction of the world total of euro-denominated government debt, so that the consequential increase in yields on government bonds would be small, the cost of borrowing would rise for the whole of the euro-zone government bond market, not only for that particular country. Thus the cost of one country's borrowing would be imposed in part on others[43].

54. The Commission sums up the benefits of the SGP as follows:

    "Budgetary discipline is an essential ingredient in ensuring the success of EMU … low deficits and debt help maintaining low interest rates and 'crowding in' private investment; foster low and stable inflationary expectations; by reducing the interest burden, help the restructuring of public spending and reduce taxation; allow an increase in public saving to make room for the budgetary consequences of ageing populations; and finally, create room for fiscal policy to cope with adverse economic disturbances"[44] .

55. In our previous Report, we concluded that the SGP had "some persuasive force beyond that of the politically extreme weapon of imposing substantial financial penalties". It would encourage a culture of stability, and produce pressure to conform[45]. Mr Jean-Claude Trichet, the Governor of the Banque de France, also emphasised the importance of the SGP, saying that "the constituency of central bankers" considered it as "absolutely crucial" for the single currency area to function correctly:

    "The rules that are enshrined in the Stability and Growth Pact are permitted precisely to ensure that we are in an appropriately balanced policy mix … It would be an enormous mistake to think that fiscal soundness is something like an après euro sacrifice we made on the altar of the single currency. It is a crucial feature, an essential feature … because it means that even if we [the euro-zone as a whole] do not have the automatic stabilising feature to counter asymmetric shocks, if a particular nation is in surplus as regards its own budget, then it has the room for manoeuvring which might be needed to counter asymmetric shocks" (Q 106).

56. It is too soon to judge the real effect of the SGP, since there has not yet been a situation in which it has imposed real constraints. The provisions for penalties for participating Member States which fail to observe it have not yet been tested. Mr Trichet claimed that they went further than anywhere else: there was no federal government with the right to dictate the fiscal policies of its component states. But he thought that if the circumstances arose where penalties were justified under the SGP, there would be pressure for them to be applied—not only from the governments of other participating Member States, but also from public opinion and from the markets, because he believed that the behaviour of one country would be imposing on all "the risk premium that interest rates are higher than normal" (Q 113). The Dutch Ambassador, HE Baron W O Bentinck van Schoonheten, said that the SGP was important because it made countries realise that they had to perform if they wanted to join EMU: "and they did". And now, for the first time, there was peer pressure so that those who might be inclined to backslide could be kept up to the mark (Q 338).

57. Nevertheless, not all participating Member States yet comply with the full conditions of the SGP: Belgium and Italy are still not in full compliance with the SGP limits. The Belgian government claimed that although its ratio of public debt to GDP still high, it was being reduced (p 114), and the Belgian Finance Minister is reported to be intending to press for increased fiscal co-ordination during his country's Presidency[46].

58. And one of our witnesses supplied a dissenting voice. Mr John Peet (Business Affairs Editor of the Economist) said that he was "not a fan of the Stability and Growth Pact", believing that EMU would work better without the inflexibility which it imposed on national governments—even though he accepted that in practice its effects had been beneficial. However, he could not envisage that the sanctions provided would ever be applied in practice (Q 83).

59. Professor Minford pointed out that the SGP was deliberately aimed at preventing a significant fiscal reaction by an individual Member State (Q 202). He thought that even swings in the size of public borrowing of the sort experienced in an ordinary recession could be outside the range allowed by the SGP. A symmetric shock[47] would not be a problem because the ECB could adjust interest rates appropriately. The difficulty was that most big shocks had asymmetric consequences, hitting countries differentially (Q 204). And for dealing with asymmetric shocks:

    "my conclusion is that just as we do not generally in an economy think that these fiscal stabilisers are really very effective compared with interest rates, in the context of the EU they are even less effective because of the constraints imposed by the Stability Pact" (Q 203).

Moreover, the fiscal mechanism was inevitably slow. A very large public spending increase could bring down unemployment in the same way as cuts in interest rates would, but "most States are unwilling, when in recession, to run up excessively large levels of debt and, if they do, that can have an effect in terms of undermining the stimulatory effects of fiscal deficits". He instanced Ireland in the 1980s, when very large deficits had not been stimulatory (Q 202). Professor Fitz Gerald considered that fiscal policy could be capable of moderating inflation in Ireland, though how to use it was a political decision—a difficult one for a government coming up to an election (Q 239). He agreed with Mr Power (Q187) that the present fiscal stance in Ireland was inappropriate, but pointed out that no sanctions could be applied since Ireland was well within the parameters of the SGP (Q 240).

60. The German Ambassador said that that fiscal reform in Germany was now well under way, though he pointed out that such reform always took time to make its effect felt: for example, it was estimated that inward investment decisions took five years to materialise (Q 308). The key tax reform was of income and corporate taxes, to be implemented in stages up to 2005-06. The return from the third generation sale of wireless frequencies was to be devoted entirely to reducing public debt (Q 310).

Structural adjustments

61. Given the limitations of fiscal policy, particularly within the constraints of the SGP, the ability to deal with domestic problems by structural adjustments is crucial. We therefore looked at issues of structure and flexibility in labour and products, as well as in financial markets (covered in paragraphs 94-107 below).

62. In our previous inquiry, we explored labour market issues with the witnesses; we have looked back with interest at what they said[48]. Dr Duisenberg (then President of the European Monetary Institute) claimed that there was general agreement that the problem of unemployment was a structural one, arising from the rigidities of the product and labour markets, which "simply could not be solved by monetary measures"[49]. And Dr Tietmeyer, then President of the Bundesbank, told us that "flexibility of labour markets" was not a euphemism for a reduced share of GNP going to labour: it meant "wages in line with changing productivity and, where structural change introduced new industry, finding the appropriate labour costs for that new industry". In the present inquiry, Mr Mervyn King, the Deputy Governor of the Bank of England, echoed the point that the ability to vary the exchange rate did not necessarily help in responding to shocks[50]: instead, it tended to cover up problems which should really be solved by domestic price and wage flexibility (Q 264).

63. Professor Minford said that, for the time being, labour mobility remained low between participating Member States, except among certain labour categories (Q 201). It is hoped that the euro will be associated with wide ranging reforms of the labour market, facilitating mobility of labour, including the transferability of pensions and the mutual recognition of qualifications (relating both to professional workers and to workers in such fields as construction and manufacturing). Labour mobility will also be helped to the extent that the rules governing immigration are relaxed within the EU. Ireland is unusual in having had had a great influx of workers from abroad—but they have not come particularly from euro-zone countries, nor only in the last two years.

64. There has been pressure for labour market reforms to increase the flexibility of wages and employment. There have been some significant changes, for example in Spain, where until the 1990s labour markets were characterised by extraordinarily strong protection for employees against dismissal; generous unemployment benefits, with a replacement ratio[51] of up to 80 per cent; and strong power of unions in bargaining. Although the rate of union membership was low, this was offset by statutory extension of wage agreements, state financing of unions, and a high degree of co-ordination among them. Particularly during the last decade, various reforms have been introduced, intended to make the labour market more flexible. Already at the end of 1984, new fixed term contracts had been introduced, with lower dismissal costs than permanent contracts, and by 1996 about 35 per cent of all employees were on these contracts. The level of unemployment benefits was cut in 1992. A reform in June 1997 extended the causes for which a firm could legitimately dismiss an employee so as to include down-sizing when a firm was uncompetitive, introducing a category akin to "redundancy" as grounds for terminating employment; and a variety of other changes have been introduced since then. These changes may sound modest, but the effective restrictions on firms' ability to reduce the size of their workforces were previously draconian, so the introduction of fixed-term contracts and the 1997 reform appear to have had major effects on the willingness of firms to take on new employees[52].

65. There are also moves to increased co-operation among euro-zone trade unions. Collective bargaining in euros and salary determination more generally will reflect the new economic context, the reality of a single interest rate, greater price transparency and—within narrow margins—a single inflation rate providing a common benchmark for pay developments side by side with other criteria such as profitability, productivity and changes in supply and demand. Though the developing floor of rights for all European workers will affect certain conditions of employment, actual levels of pay will continue to reflect levels of productivity which vary. We were told that trade unions from the euro-zone Member States did now meet to discuss real wage targets, based essentially on productivity.

66. Mr Trichet mentioned the importance of "flexible labour systems" in improving growth rates, instancing the need for longer working hours in France (Q 108). The Bank for International Settlements has claimed that there is mounting evidence of the good effects of structural reform in improving the flexibility of the euro-zone economies, with a very substantial decline in unemployment rates, indicating progress in making labour markets more flexible and in reducing structural unemployment[53]. Professor Minford disagreed, arguing that real wage flexibility was "heavily limited by social legislation and conventions in all the Member States of the current [euro-zone], particularly the big ones at the centre: Germany, France and Italy" (Q 201). He believed that in order to compensate for the effects of the one-size-fits-all monetary policy competition between different systems was needed[54] (Q 211). Dr Otmar Issing (the ECB's Chief Economist, and a member of its Executive Board), too, considered that calls for a "social union" went in the wrong direction:

    "Rather than harmonising social standards at the most generous levels in the EU-11 and imposing uniform wage agreements throughout Europe, wages need to take into account sectoral and regional differences in productivity and local labour market conditions"[55].

This was particularly true because labour mobility was likely to be lower in the EU than in the United States, and because there was no compensating fiscal transfer mechanism. The chances of success for Monetary Union would increase if each country tackled its own reform challenges—but this was not necessarily an argument for "Europeanisation" without appropriate institutions.

67. The Dutch Ambassador referred to the importance of the agreement at the March 2000 Lisbon European Council to put structural reform at the top of the European agenda, emphasising the need for flexible product and labour markets[56]. His government believed that this had increased awareness of the need to make real progress in this area. The Netherlands had already been commended by the OECD and the IMF for having pursued major reforms, though more would be needed (Q 324). Some of these structural changes would have been introduced even without EMU (Q 337), but EMU gave them an extra impulse. He commented that the Germans had yet not gone through the same process (Q 341).

68. The German Ambassador accepted that Germany had made a slow start, and agreed that it would have been better if structural reform had started earlier (QQ 306-307). However, he said that "the combined effect of globalisation, Monetary Union, higher competition" had been that reforms were now under way, for example in the area of health (Q 294) and of pensions (directed at a new mix between state and private pensions, which would lead to "a tremendous development in the capital market") (Q 310).

69. There has been increasing emphasis on the role of social partnership. The Dutch Ambassador said that the economic model in the Netherlands was "a result of very close co-operation between the unions, the employers' associations and the government", which had caused the economy to improve over a period of 18 years (Q 341).For example, the Belgian government said that for several years the objective during wage negotiations had been for trades unions and employers to aim for increases in labour costs not exceeding those in Belgium's three main trading partners: Germany, France and the Netherlands (p 114). The Irish government saw the limits agreed for future wage increases in its Programme for Prosperity and Fairness (PPF) as a crucial part of the overall strategy to achieve an appropriate balance between supply and demand (p 75).

70. But the partnership approach is perhaps most developed in Finland, where an important feature has been the introduction of buffer funds. In understanding the buffer fund system we were greatly assisted by a report[57] supplied to us by its author, Mr Peter Boldt (Senior Economist of the Central Organisation of Finnish Trade Unions: SAK)[58], who also gave oral evidence to us. Mr Boldt explained that the trade union movement recognised that, despite its economic diversification, Finland could still find itself out of phase with the rest of the euro-zone, in which case ECB policies designed to be appropriate for other participating Member States would make cyclical changes in Finland even more volatile. But it did not accept the inevitability of the claim "by many economists" that "the price for the monetary stability and predictability offered by a currency union would … be instability especially in the labour market", resulting in a fall in agreed nominal wages or an increase in unemployment. It took the view that what was needed was not flexibility in nominal wages but flexibility in total labour costs, since non-wage labour costs added some 30 per cent to wage costs.

71. In the huge recession of the early 1990s in Finland, as unemployment rose from 3.5 per cent to almost 20 per cent, the unemployment contribution rate for employers rose from 0.6 per cent in 1990 to 6 per cent in 1994. The unemployment benefit scheme was more or less pay-as-you-go, so although the intention had been for the rate of contributions to remain constant over time and over the course of the business cycle, the very high rate of claims made it necessary to increase the percentage rate of contributions.

72. The objective of the buffer fund (which is counted as part of government debt) is to produce counter-cyclical variations in the rate of contributions to the unemployment benefit scheme. Because the scheme builds up surpluses in good times in order to disburse them in difficult times, the percentage contribution rate could actually go down during recessions (rather than rising as in the past). This would cut the total cost of labour (wage plus non-wage costs) to employers, strengthening the working of the automatic stabilisers in the economy, and should reduce the amplitude of unemployment fluctuations over the course of the business cycle. If contribution rates were reduced in a recession in such a way as to cut the cost of labour by up to 3 or 4 per cent (without any fall in real wages), the likely effects on employment are argued to be equivalent to a currency devaluation of 10 per cent[59].

73. Asked how Finnish workers had come to accept the sophisticated idea of buffer funds as a quid pro quo for modest wage demands, Mr Boldt said that trade unions had realised that they must look at the whole economy rather than pressing for wage increases in particular sectors where productivity was rising: "we have to try to get people to remember what solidarity is about". In the past, unions had achieved increases in nominal wages, only to see real incomes fall; in the 1980s the focus had shifted to real incomes. The crash in 1991 resulting from the fall of the Soviet Union had led to an increase in unemployment to almost 20 per cent[60]. The result was that "even today when SAK ask their members what is the most important thing [to include in an agreement] for the coming two years … three out of four SAK members say that … the agreement must support employment creation in the economy", rather than emphasising increases in nominal wages (Q 157).

74. The Finnish government sounded a note of caution, saying that it was not yet evident to what extent the labour markets had adapted to the new rules of the game. "The wage contracts in the early part of this year were conducted in a situation where strong economic growth, connected with rising labour bottlenecks in some sectors of the economy, created some unrealistic expectations. However, despite these concerns, excessive wage increases were more or less avoided, and, on the average, pay increases remained rather moderate" (p 43).

75. Like the Finnish government, the Belgian government was concerned about non-wage labour costs; it had launched in 1999 a programme of reducing employers' social security contributions: "in the view of the Belgian government economic growth and social protection should not be set against each other, but rather be activated as two poles of a single field of forces, through a strategy of what has become known as the 'active welfare state'" (pp 114-115). The Italian government, too, stressed the importance of wage moderation in keeping internal inflationary pressures under control, pointing out that in the Italian manufacturing sector nominal wage increases had fallen from 9 per cent in 1990-91 to 2 per cent in 1998-99 (p 116).

76. Asked whether the euro had as yet had any effect on the approach to wage negotiations, Mr Robert Woods (an Economic Adviser in HM Treasury) said that the "Cologne process"[61] was designed to facilitate a dialogue between the social partners and the ECB (Q 22).

77. There was also evidence of increased flexibility in product markets. However, Mr Taylor (for HM Treasury) pointed out that many of the observable effects resulted initially from Single Market legislation, even if they were now reinforced by the single currency (Q 3)[62]. That may explain the fact that very few of our witnesses covered this point specifically in their evidence.

78. The German Ambassador said that there had been an increase in participation by SMEs in the euro-zone now that the exchange rate risk had been eliminated (Q 310).The Federation of German Industries (BDI) told us that:

    "For many companies, the introduction of the euro in conjunction with the Single Market is seen as a major element that will shape their European or global strategies in the years to come. Companies see themselves as facing considerable challenges as a result of the changed competitive environment and the new market parameters".

Companies were finding new markets and new sources of supply, and were adapting their structures. Nevertheless, few companies seemed to have made a systematic study of market opportunities and risks in the wake of monetary union, and some did not believe that it would significantly increase competitive pressure for them. Firms would obviously face additional change-over costs in the short run (estimated at 0.1-0.3 per cent of turnover), but in the long run there were potential savings of 0.5-1 per cent of GDP (p 121).

79. Mr Power noted that competition had increased across the broad spectrum of the economy, which he attributed to increased price transparency. In his view, EMU had accelerated the increase in competition already being felt as a result of the Single Market (Q 177).

37   Robert A Mundell, "A theory of optimum currency areas", American Economic Review, Volume 51, 4, September 1961, pp 657-665, and see paragraph 82. Back

38   Op cit, paragraph 57. Back

39   See Appendix 3, Tables 2.1 - 2.3.  Back

40   Defined in Protocol 20 to the EC Treaty (introduced by the Maastricht Treaty), and reiterated in the European Council Resolution of 17 June 1997, loc citBack

41   The "cyclical safety margin" is the Commission's estimate of the largest deficit that a country is likely to need to run during a recession, were the budget to be balanced on average over the cycle. The difference between this and 3 per cent is the size of the structural deficit (or cyclically adjusted deficit) that the country can run without exceeding a 3 per cent actual deficit in a recession, and is referred to by the Commission as the "minimal benchmark". The estimate of the cyclical safety margin is based on various measures of the amplitude of business cycles for each country, and the sensitivity of the budget deficit to the cycle. Back

42   See Appendix 3, Table 2.1. Back

43   This third line of argument is not universally accepted. It is countered by the view that in fact the world market in government debt is so large that any single euro-zone government's borrowing could not be large enough to affect bond yields at all. The only circumstance in which there might be an effect on bond yields would be if the borrowing by one participating Member State raised its debt to levels that seemed unsupportable, so that the market began to perceive an increased risk of default; then the market's response would be to attach a higher risk premium to the debt of that particular country, and not to debt of other countries. Thus a higher interest rate would be paid by the profligate borrower only, and not by anyone else. Finally, it is argued that even if one country's borrowing would indeed raise the cost of borrowing for all it would not be an argument for imposing limits on deficits, any more than there should be a limit on the amount of oil that each country can buy because one country's consumption raises the world price of oil.  Back

44   Public Finances in EMU-2000, p 33. Back

45   Op cit, paragraph 120. Back

46   European Voice, 2 November 2000. Back

47   Which he defined as a shock having a similar direct effect on every participating Member State, and whose indirect effects through the transmission mechanism within each national economy were very similar (Q 204). Back

48   Op cit, paragraphs 58 and 60. Back

49   This remains his view. In his lecture at the European Business School on 12 October 2000, he said: "in the past, many problems that were of a structural nature in many European countries were simply temporarily hidden by movements in the exchange rates within the area, and their solution was postponed. This is no longer possible. Monetary Union … unambiguously reveals the source of problems. This, I am sure, stimulates more responsible action on the part of governments, social partners and other economic actors". Back

50   A similar view is taken in a recent Liberal Democrat report: "If the labour market tends to have rigid real wages, so that wage bargainers react very quickly to any rise in inflation by enforcing higher wages, devaluation is likely to be of limited use in correcting any trade imbalance consequent upon a shock" (Britain's adoption of the euro, Report of the Expert Commission established by the Rt Hon Charles Kennedy MP, September 2000, p 36). Back

51   The ratio of unemployment benefits to the average wage which people had when employed. Back

52   See Olympia Bover, Pilar García-Perea, and Pedro Portugal, "Labour Market Outliers: Lessons from Portugal and Spain", Economic Policy, vol 31, October 2000, pages 381-428 and Banco de España, Annual Report 1999, page 69. Back

53   70th Annual Report, p 21; quoted in Liberal Democrat report, op cit, p 36. Back

54   As had occurred during the period of the Gold Standard, when labour markets were relatively flexible. Back

55   Revised version of lecture given on 20 September 1999, published in Institute of Economic Affairs Journal, March 2000. Back

56   This Council agreed a "new strategic goal for the Union in order to strengthen employment, economic reform and social cohesion as part of a knowledge-based economy". Back

57   EMU and the Labour Market: the Finnish case, June 1999 (printed with this Report at pp 49-55). Back

58   This organisation represents primarily blue-collar workers (Q 153). Back

59   Similar buffer funds (though on a more modest scale) are proposed for pension schemes, which are run by the trade unions and employers' organisations rather than by the State directly.  Back

60   With a differential effect on different sectors: 60 per cent of SAK's members in the construction industry were unemployed (Q 157). Back

61   The June 1999 Cologne European Council agreed a European Employment Pact with three pillars, the first of which was "the co-ordination of economic policy and improvement of mutually supportive interaction between wage developments and monetary, budgetary and fiscal policy through macro-economic dialogue aimed at preserving a non-inflationary growth dynamic", to be known as "the Cologne process. The other two pillars were the Luxembourg process (to improve the efficiency of labour markets) and the Cardiff process ("comprehensive structural reform and modernisation to improve the innovative capacity and efficiency of the labour market and the markets in goods, service and capital"). Back

62   HM Treasury's analysis of the effects is spelt out in more detail in a supplementary note at pp 18-20. Back

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