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European Corporate Law – State of play

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					              Central Europe and the Eurozone




                  EURO - Social conference
                    25 May 2007, Bratislava




                              Bela Galgoczi


European Trade Union Institute for Research, Education and Health and Safety
                         http://www.etui-rehs.org
The context of Eurozone accession for the new
member states – major questions
  How   the agenda of the Eurozone accession fits
   into the mid and long-term development
   strategies and national priorities of the individual
   NMS-s
  Isthe ‘race for the Euro’ matching with other
   objectives, as Lisbon Strategy, European
   Employment Pact, real convergence
  Itis taken for granted that an early entry into the
   Euro zone is beneficial for the development of all
   these countries...
    appears on a mere technical level, how
  It
   governments manage the process
  Only  question is how to push the bitter pill of
   ‘fiscal and monetary’ adjustment down the throat
   of the population - is this really so simple?
                                                          2
Two major ‘mismatches’, why the SGP criteria do
not fit NMS-s
    1. Different macroeconomic framework in NMS-s
     compared with steady, slow growing EMU countries
    1.1. Higher dynamism of CEE with cca. 10% nominal
     growth rates..
    As a result, 4-5% government deficit would be
     sustainable (in order government debt in % of GDP
     does not grow)
    1.2. Fast and uneven productivity growth > Balassa
     Samuelson effect > large gap in productivity growth
     between tradeable and non-tradeable sectors of the
     economy >
    Push effect on wages from tradeable to non-tradeable
     sector + Distorted price and cost structures, wages
     below potential levels > adjustments still underway
    Result: higher inflationary potential

                                                            3
Illustration for the different macroeconomic
profile
Labour productivity and ULC in CEE-8 compared with Austria (2003)
        Country               Labour productivity                               ULC1)
                              (GDP per one worker) wages PPP
                              in PPP)
                                        Austria = 100
        Czechia                       64               43                       32
        Hungary                         65                       42             35
        Poland                          51                       44             39
        Slovakia                        56                       31             27
        Slovenia                        73                       61             62
        Estonia                         45                       37             39
        Latvia                          42                       29             29
        Lithuania                       46                       29             28
        Austria                         100                     100
Wage and non-wage costs converted by exchange rates to GDP per one worker in purchasin power parity based on EUR (PPP)
Source: Calculations by
                          Helena Czornejova and Martin Fassmann based on Podkaminer, L. et. al., WIIW Research Reports 303,
2004,



                                                                                                                              4
         Comparative price levels (EU25=100), 2005

                          1995                            2005
160

140

120

100

 80

 60

 40

 20

  0
      DK IE FI SE FR LU NL UK BE DE EU AT IT EU CY ES GR PT SI MT EE HU PL CZ SK LV LT
                                    15       25

 Source: Eurostat 2006
        Change in nominal yearly compensation per employee in Euro, 1999-2006
                                        (%)


        120


        100


         80


         60


         40


         20


          0
                DE AT BE MT FR EU15 IT   ES FI   SE DK LU CY NL PT UK SI   PL GR IE EU10 LV HU CZ SK EE LT




Source: AMECO
               Illustration: Uneven growth of wages and
             productivity (Hungary between 1995 and 2005)



             15


             10


              5
                                                                           productivity
              0
                  1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005   Average gross real
                                                                           wage increase
             -5


            -10


            -15




Source: Central Statistical Office, Budapest
       Second mismatch > fiscal pressures


 2.  Fiscal pressures due to `welfare deficit` and public investment
    needs
 2.1.  Welfare deficit due to forced modernsation and structural
    change (see social risk index)
 Low   employment rates, high unemployment rates > more active
    LMP > more spending needed
    2.2. Need of public investments (infrastructure development,
    environment protection, research & development, education &
    training in line with Lisbon agenda) > more spending
 The     fiscal issue is not just a question of pushing deficits down,
    it is a policy choice and a choice of priorities (ESM, Lisbon ??)




                                                                      8
              Social spending in NMS and OMS (2005)
                                                                         (ESM spending, % GDP)


                                                                                 SE
     46
     44                                                                                DK
                                                                           FR
     42
     40                                                                     FI
                                  HU                                                   BE
     38                                              SI               DE
                    PL                      MT                      IT            AT
     36                                                                                      NL
                                      CZ                                         UK
     34                                                        EL
     32
                                 SK
     30     LV                                                CY
     28                       EE
     26          LT                                                                                IE
     24
     22
          8       10        12        14      16       18      20   22     24     26    28        30    32
                                                                           output per capita, ‘000 PPS
Note: Luxemburg excluded, data not available for ES, PT, US
 Source: AMECO (2005)                                                                                        9
At-risk-of- poverty rate and needed social transfers




                                             Source: Eurostat Yearbook 2006-07:118
            Employment rates, 2004

80


70
                                                                                             69,2
60                                                                                    64,7          64,1
                                                     61,8          62,9   62   62,6
                                                            61,1
                                       57,7   57,7
50                           54,2
             50,6    51,2

40
     40,7
30


20


10


 0
      BG      TR      PL     MT        SK     HU*    LV     LT*    EE     RO    SI    CZ     CY     EU-15

 Source: Eurostat; national reports.
          Social risk indicators for EMU accession (2003)


                                  Social Risk Indicators: Absolute Values
                                                          Risks Derived from       Risks Derived from
                   Risks Derived from the Labour Market         Ageing         Insufficient Income Support
                     Long-Term                                                   At Risk of Poverty Rate
                   Unemployment         Unemployment      Old Age Dependency      After Social Transfers
                    Rate (2003)           Rate (2002)        Ratio % (2001)           (2001-2003) (1)
    BG                 8,9                  17,8                 24                        13
    Cyp                1,1                  3,9                 17,3                       16
    CZ                 3,8                  7,3                 19,8                       8
    EE                 4,6                  9,5                 22,7                       18
    HU                 2,4                  5,6                 21,4                       10
    LV                 4,3                  12,6                22,6                       16
    LT                 6,1                  13,5                20,2                       17
    MT                 3,5                  7,7                 18,1                       15
    PL                 10,7                 19,8                17,8                       17
    RO                 4,1                  7,5                 19,6                       18
    SK                 11,1                 18,7                16,5                       21
    SL                 3,4                  6,1                 20,2                       10
Source: Eurostat




                                                                                                             12
          Major social concerns of a fast track EMU accession



       On  basis of an aggregation of of the above social risk
        indicators into a `social risk index` taking also fiscal
        positions into account, country groups were identified*:
       Group     1: Hungary (and Malta and Cypus)
       Hungary   has a high debt, a high deficit and an intermediate
        level of social spending, and a relatively low position on the
        ‘welfare stress’ index. This would suggest that while EMU will
        be constraining, the social consequences could be
        managable.
       Group     2: Poland, Bulgaria and Slovakia
       For this group, EMU public expenditure constraints pose a
        problem, demanding retrenchment and cuts that may prevent
        a level of social expenditures in line with relatively high levels
        of welfare stress.
*M. Rhodes-M.Keune: EMU accession and welfare states in CEE                  13
   Major social concerns of a fast track EMU accession



 Group    3: The Czech Republic and Slovenia
 The Czech Republic has a low-to-moderate debt, medium
 level of deficit intermediate level of social expenditure, a
 relatively high employment rate and a low level of ‘welfare
 stress’. Slovenia is in even better condition, with low a low
 deficit and debt, high employment and low welfare stress,
 alongside a relatively high level of social spending – making
 it the best performer of the wider CEE group.
 4)   Group 4: Lithuania, Latvia and Estonia
 Thisgroup of countries has medium levels of employment,
 low deficits and debts but medium to high levels of ‘welfare
 stress’, alongside low levels of social spending. Even within
 EMU, these countries (with their largely residual welfare
 states) could embark on a path of welfare catch up in line
 with the EU 15.


                                                                 14
     Major concerns of a fast track EMU accession


 The   general concerns are thus:
 SGP  criteria in their present (rigid) form do not fit with the
    NMS-s
 Due   to different macroeconomic framework conditions
 NMS-s     would have a higher equilibrium inflation rate – as a
    result of the BS effect, the distorted price and cost levels, and
    the productivity reserve..
   Moreover due to low debt rates and higher growth (in
    nominal terms up to 10%) – higher than 3% deficit rates are
    sustainable (4-4.5% are estimated) – the 3% deficit ratio was
    designed for other framework conditions (Belgium, Italy)
 If non-fitting criteria are applied in a forced way they have a
    downside effect – price stability at fixed exchange rate is a
    burden and would not be sustainable


                                                                        15
   Major concerns of a fast track EMU accession

 Ifthe present SGP criteria are rigidly applied, sacrifices in
  growth, employment, real convergence, wage convergence,
  with knowlege based economy targets are unavoidable
 This would cause substantial welfare sacrifices, given the
  ‘welfare deficit’ already there, aggravated by low employment
  rates in most countries, high unemployment rates in several
  countries (special risks: Pl, SK where both of these are
  present) –
 Would ‘Maasricht’ become a means to maintain social
  dumping?
 Would   hamper strategies for breaking out of the low wage
  profile (Hungary started this and has got under constraints,
  for Slovakia and some of the Baltic states it might be a major
  ambition in the future..)
 Lisbon goals, convergence would need higher public
  investments
                                                                   16
Example of Lithuania


   Lesson:   on basis of constructed arguments on the inflation
   criteria, LT was rejected
   Message:    low income fast growing countries not welcome
   Eurozone:    a club of slow-growing rich countries?
   GDP/capita    a hidden criterion?
          comment: sustainability of the inflation criteria is not
   Official
   guaranteed (prognosis also a criterion?)


   Lesson:    inflation is the major problem
   Question,   what is the optimal path?
   How could LT wages of cca 400 EUR converge to 2500 within
   the Eurozone
   How   could Baltic welfare system be consolidated within the
   EMU


                                                                     17
The case of Hungary


   The case of Hungary with the social-political turbulences in the
    autumn of 2006 in the wake of the announcement of the latest
    Maastricht convergence plan with the necessary austerity measures,
    delivers lessons from another angle.
   In the period 2001-2005, Hungary has launched a welfare correction
    programme accompanied with a comprehensive infrastructure
    development.
   This programme has responded to real expectations of the society,
    but due to political irrationalities did not respect basic realities of
    sound public finances and led to a crisis of government finances
    culminating in a government deficit close to 10% of the GDP in 2006.
   The case of Hungary has thus demonstrated how basic European
    priorities, as the Lisbon Agenda, the Stability and Growth Pact criteria
    and the principles of the European Social Model get into conflict with
    each other in the case of transformation economies. A chain reaction
    of political irrationalities has only magnified the contradiction.




                                                                               18
 Conclusion


In case of transformation economies there is a clash between
  EU objectives:
SGP – Lisbon agenda – European Social Model
A forced fulfilment of Maastricht goes to the detriment of the
 two other objectives and might hamper real convergence
A revision of the Stability of Growth Pact is unlikely, although
 several European think tanks propose to implement a
 `Balassa-Samuelson rebate` for CEE at the inflation criterion.
Each country needs a proper societal debate on its central
 national priorities and needs to embark on an optimal EMU
 accession agenda accordingly.




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