Cohesion and convergence in Europe

1. Cohesion and convergence in Europe László Andor Mercator Senior Fellow at Hertie School of Governance (Berlin) Visiting Professor at ULB (Brussels) Poznan, 18 May 2015

2. Cohesion & convergence in EU Treaties Treaty on European Union (TEU): Preamble: RESOLVED to achieve the strengthening and the convergence of their economies and to establish an economic and monetary union including … a single and stable currency… Article 3 TEU (objectives of the union): The Union shall establish an internal market. It shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment. … It shall promote economic, social and territorial cohesion, and solidarity among Member States. Treaty on the functioning of the European Union (TFEU): Article 121(3) - economic policy coordination: In order to ensure closer coordination of economic policies and sustained convergence of the economic performances of the Member States, the Council shall … monitor economic developments in each of the Member States and in the Union as well as the consistency of economic policies with the broad [economic policy] guidelines … and regularly carry out an overall assessment. + the ‘convergence criteria’ agreed in the Maastricht Treaty as pre-conditions for Member States to join the single currency (inflation, exchange rate stability, interest rate, 3% deficit rule, 60% debt/GDP rule) + Title XVIII on economic, social and territorial cohesion

3. Single Market (EU-28) Currency union (€A-18) Much stronger constraints on monetary and fiscal policies, yet: No lender of last resort No shared fiscal capacity to help deal with cyclicality & asymmetry “Internal devaluation” as the only remaining adjustment mechanism This set-up deepens core-periphery divergence • Cohesion policy (budget ~0.4% EU GDP) • supporting long-term cohesion & convergence • mitigating core-periphery dynamics resulting from competition within Single Market • Social legislation preventing a race-to-the-bottom in working conditions

4. Convergence and divergence in GDP per capita across the EU (1995–2013) Reading note : EU-15 Centre (BE, LU, NL, DE, FI, FR, AT), EU-15 North (DK, SE, UK), EU-15 South and periphery (EL, IE, PT, ES, IT), EU-13 Centre and North (CZ, HU, PL, SI and SK), EU-13 South and periphery (BG, CY, EE, LV, LT, MT, HR, RO). Source: Eurostat, calculations DG EMPL. Note: GDP in real terms (in euros) — some missing values were kept constant : BG, EE, HR, CY, MT (1995-99), LV (1995-98), EL, LT, SK (1995-97), PL, RO (1995-96), HU, SI (1995).

5. Convergence and divergence in unemployment rates across the EU (1990–2013) Reading note : EU-15 Centre (BE, LU, NL, DE, FI, FR, AT), EU-15 North (DK, SE, UK), EU-15 South and periphery (EL, IE, PT, ES, IT), EU-13 Centre and North (CZ, HU, PL, SI and SK), EU-13 South and periphery (BG, CY, EE, LV, LT, MT, HR, RO). Source: Eurostat, calculations DG EMPL. Note: GDP in real terms (in euros) — some missing values were kept constant : BG, CY, EE, HR, MT (1995-99), LV (1995-98), LT (1995-97), PL, RO (1995-96), HU, SI (1995), AT (1990-93), DE (1990), EL (1990-97).

6. Convergence and divergence in poverty rates (AROPE) across the EU (1995–2013) Reading note : EU-15 Centre (BE, LU, NL, DE, FI, FR, AT), EU-15 North (DK, SE, UK), EU-15 South and periphery (EL, IE, PT, ES, IT), EU-13 Centre and North (CZ, HU, PL, SI and SK), EU-13 South and periphery (BG, CY, EE, LV, LT, MT, HR, RO). Source: Eurostat, calculations DG EMPL. Note: GDP in real terms (in euros) — some missing values were kept constant : HR (2004-09), RO (2004-06), BG (2004-05), CZ, DE, CY, LV, LT, HU, MT, NL, PL, SI, SK, UK (2004).

7. Convergence and divergence in income inequality (S80/S20) Source: Eurostat, DG EMPL calculations – Years refer to income reference years

8. Convergence and divergence in gross household disposable income per capita (GHDI) Source: Eurostat, DG EMPL calculations – adjusted for inflation and at fixed exchange rates for countries outside the euro area

9. Weakening of stabilisation of household incomes in the crisis Contributions to nominal growth of gross disposable income of households (EA 17) Labourincomes Benefits GHDI Source: Eurostat and ECB.

10. Weakening of automatic stabilisation: 2011 and 2012 Public social expenditure and GDP: deviation from trend during current and past recessions Source : Eurostat, National Accounts, DG EMPL calculations Note: 2012 data are estimated based on quarterly data from the first 3 quarters. In the current recession, N is year 2009. Estimates of the deviation from the trend in social protection expenditures are based on a standard Hodrick-Prescott filter. Reading notes : in the year of the recession, in the current crisis, social expenditure were around 5% above their trend in Europe, while the GDP was about 4% below its potential (output gap of -4%). Averages are unweighted country averages (since countries do not always experience a recession the same year).

11. Development of household income in Germany and Spain After 2010 Germany: Market income increases with recovery; benefits no longer needed After 2010 Spain: Weakened social benefits do not compensate for fall in market income

12. Social divergence in the Economic and Monetary Union • EMU with serious design flaws: • --uniform fiscal (and centralised monetary) policy without risk sharing or transnational fiscal transfers • --social problems generate spill-over effects on other members of euro area (e.g. falling demand) • --deterioration of human capital, loss of competitiveness and risk of destablisation and disintegration  Need to restore socio-economic convergence in EMU, e.g. Youth Guarantee and Youth Employment Initiative

13. Stronger social dimension of the EMU Ability of economic governance mechanisms & policy instruments to anticipate, take into account & address problematic developments & challenges related to employment & social policies in the EMU;helping all MS to realize their growth & employment potential & improve social cohesion • Better monitoring of employment & social dynamics in EMU: scoreboard of five indicators introduced in European Semester • Better coordination of employment & social policies to collectively ensure timely action • Better involvement of EU-level & national social partners in EMU governance

14. Need for automatic stabilisers in EMU • Countering „asymmetric shocks” and resulting imbalances with rule-based, conditional and temporary fiscal transfers • Supporting aggregate demand  economic activity  employment  social cohesion in zones of economic downturn (lacking autonomous fiscal/monetary policy) • Options: • --automatic income support (based on „output gap”) • --reinsurance of national unemployment insurance funds • transfers triggered by major crises • --partial pooling of unemployment benefit systems • (need for partial harmonisation)

15. Example of a basic EMU-UBS

16. Dynamic CEE growth since late 1990s:compensation for major income loss in early 1990s Source: IMF, "25 Years of Transition: Post-Communist Europe and the IMF", October 2014

17. EU13 employment still well below EU28 average(employment rates across the EU, 1995–2013) Reading note : EU-15 Centre (BE, LU, NL, DE, FI, FR, AT), EU-15 North (DK, SE, UK), EU-15 South and periphery (EL, IE, PT, ES, IT), EU-13 Centre and North (CZ, HU, PL, SI and SK), EU-13 South and periphery (BG, CY, EE, LV, LT, MT, HR, RO). Source: Eurostat, calculations DG EMPL. Note: GDP in real terms (in euros) — some missing values were kept constant : HR (1995-01), BG, MT (1995-99), CY (1995-98), LT, LV, SK (1995-97), CZ, EE, PL, RO (1995-96), HU, SI (1995), AT, FI, SE (1990-94).

18. Structural shift from agriculture Share of primarysector in total … employment … Gross Value Added Source: Eurostat, National Accounts Source: Eurostat, National Accounts

19. …but manufacturing remains significant Share of manufacturing in total… … employment … Gross Value Added Source: Eurostat, National Accounts

20. Stronger labour productivity growth in East before and during the crisis… Real labour productivity per person employed (2005=100) Source: Eurostat, National Accounts

21. ...limits increase in cost of labour Real unit labour cost, 2005=100 Source: Eurostat, National Accounts

22. Low share of GDP for wages Adjusted wage share in manufacturing industry: Compensation per employee as % of nominal gross value added per person employed Source: AMECO data-base, National Accounts.

23. Still a major income gap between EU13 & EU15Difference in GDPpc between EU28 average and two groups of EU13 Member States (1995–2013), expressed as % of the EU28 GDPpc, in real euros (not PPS) EU-13 Centre and North EU-13 South and periphery Reading note : EU-13 Centre and North (CZ, HU, PL, SI and SK), EU-13 South and periphery (BG, CY, EE, LV, LT, MT, HR, RO). Source: Eurostat, calculations DG EMPL. Note: calculations based on GDP in real terms, in euros. Note — some missing values in the beginning of the period were kept constant for the calculation of averages: BG, EE, HR, CY, MT (1995-99), LV (1995-98), LT, SK (1995-97), PL, RO (1995-96), HU, SI (1995).

24. Large labour outflows from some CEE countries (as % of labour force) Recent (<10 years) mobile (economically active) EU citizens by nationality, as % of labour force of country of origin (2013) Source: Eurostat EU LFS

25. Faster population decline in some EU13 countries(combined result of low fertility, low life expectancy & emigration) Total population, 1995=100 Source: Calculationbased on Eurostat

26. Gender gap in employment and pay levels Gender pay gap (2012) as % of men's average hourly earnings (paid employees) Source: Eurostat, SES Gender employment gap (2013) (difference between empl. rates for men and women in percentage points) Source: Eurostat, LFS

27. 2nd decade of EU membership should be about human capital investment! • The European Social Fund is EU’s key financial instrument for investing in human capital: • to improve employment opportunities • to promote education and life-long learning • to enhance social inclusion and combat poverty • to improve efficiency of public administration An integral part of EU cohesion policy • In 2014-20, the ESF has been given a minimum share of 23.1% of the total cohesion policy budget; in practice close to 25% (€ 85bn) • Poland is greatest beneficiary...

28. Thank you for your attention!