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EU: Good News And Bad News For The Economy

  • Joel Blocker

Prague, 9 April 1998 (RFE/RL) -- As it moves steadily toward full Economic and Monetary Union (EMU), the European Union has had both some good and bad news this week. The good news came in statistics indicating long-predicted economic growth has begun to show moderately beneficial effects across the 15-nation bloc. The bad news was also contained in official figures, but these showed that the EU's basic economic problems are even more serious than was known previously.

At the same time, key member-state leaders seemed to have resolved a long-standing dispute over who will head the new European Central Bank that will come into existence with EMU's start next January 1.

Here are brief run-downs on all three developments:

According to figures released yesterday by Eurostat, the EU's official statistics office, overall unemployment last month fell to 10.3 percent, its lowest level in five years. Eurostat also estimated that 17.4 million people were out of work in February, some 600,000 less than the year before. Encouraging as these numbers may seem to be, however, they are based on national government estimates that do not take into account many categories of joblessness such as the hundreds of thousands supported by government training programs. When these categories are factored in, say some high EU officials, the true extent of unemployment in the Union could be as high as 27 million.

Nevertheless, the beginnings of healthier economic growth in several EU member states is reflected in another Eurostats announcement made yesterday. This one said that industrial production throughout the EU rose by 4.3 percent in January of this year, as compared to the same month a year earlier. Production also showed a moderate (0.8 percent) rise in the three-month period from November of last year through January, as compared to the previous 90-day period.

But the problem here is that economic growth is far from assuring significant reductions in the EU's chronic joblessness. That, say many analysts, can only come about through structural reforms of EU national economies, notably by reducing welfare-state grants, taxation and regulation, and by loosening rigid labor markets.

It is just such high levels of taxation and regulation that have spawned a long-existing but little-publicized "black' or alternative economy in the EU. On Tuesday, a report released by the EU's Executive Commission estimated that undeclared work in the EU today could be as high as 16 percent of the Union's overall Gross Domestic Product (GDP), compared to five percent in the 1970s, and one-fifth as high as declared work. The first figure is equivalent to the size of Britain's GDP, the second indicates that as many as 28 million people may be involved in the EU's alternative economy.

The Commission's report, written by EU employment commissioner Padraig Flynn of Ireland, wants member-states to attack the tax evasion and other "anti-social" behavior encouraged by the black economy. Flynn urged a tightening and more aggressive enforcement of tax rules. But Flynn acknowledged that member states may be reluctant to open what he called "a Pandora's box of sensitive issues, some of which could only be tackled through politically unpopular measures."

Flynn may only have been putting the problem mildly. Many analysts believe that several EU governments are loathe to interfere with their countries extensive underground economies, seeing it as indispensable factor in preventing social unrest in areas high in officially acknowledged joblessness. In an editorial in its current issue (dated April 4), the British weekly "Economist" says that the EUs black economy is first and foremost a sign of government failure (reflecting) everything that is failing in Europes economies."

The magazine says the black economy's roots lie in the same factors that stifle EU competition and hamper the creation of new jobs. "Seen this way," its editorial concludes, "the underground economy (is) a blessing rather than a curse: it allows firms to escape the rigidities of the formal economy (and create) jobs and wealth."

Finally, the months-long quarrel among Germany, France and the Netherlands over who will be first president of the EU's new European Central Bank (ECB) seems to have ended. Yesterday, the respected German newspaper "Sueddeutsche Zeitung" reported that Wim Duisenberg of the Netherlands will be nominated for an eight-year term at the EU's summit meeting on EMU in three weeks (May 1-3). The paper said Chancellor Helmut Kohl had reached an agreement with the Netherlands and France last weekend in London during the EU-Asia summit meeting. It also said that as a part of the deal engineered by Kohl, a long-time supporter of Duisenberg, it had been agreed that a French national would be chosen to head the London-based European Bank for Reconstruction and Development (EBRD) when Duisenberg completed his term as ECB president.

The French Government, which had nominated its own candidate for the ECB job, Bank of France head Jean-Claude Trichet, immediately denied any such deal. But, significantly, there was no public comment on the matter from German officials.

Most analysts concluded that the report was probably basically accurate. They noted that the EBRD was originally conceived by former French President Francois Mitterrand, and that its first president was Mitterrand aide Jacques Attali. They said that Paris had probably advanced Trichet's nomination in the first place in order to work out a later trade-off for the EBRD post, which it sees as its natural domain. Today's Sueddeutsche Zeitung titled its analysis of the decision on Duisenberg, "France's Cold Calculation."