The European Social Model and the Greek Economy

SPEECH/05/577 Joaquín Almunia European Commissioner for Economic and Monetary Affairs The European Social Model and the Greek Economy Dinner-Debate Athens, 5 October 2005

Minister, ladies and gentlemen, Let me start by thanking minister George Alogoskoufis for organising this dinner and giving me the opportunity to address this distinguished audience this evening here in Athens. I intend to share with you some reflections on the future of the European social model. This morning, the Lisbon group of Commissioners has considered this very relevant issue in view of the informal European Council that will discuss on this topic at the end of this month. The debate on the future of Europe is going on after the no votes on the Constitution in France and The Netherlands, and the reflection about the way to preserve our values in the new environment of this century is crucial. But I will also deal with the situation of the Greek economy, highlighting its strengths, weaknesses and challenges in the light of such debate. Greece, as all the other member states must prepare itself to the necessary changes in the economic and social sphere. My comments should be seen against the backdrop of two key steps for Greece: the draft budget for 2006 that has been announced by the government and the national program on structural reforms that your country is preparing according to the revised Lisbon agenda for growth and jobs. The European Social Model Let me begin by the so-called European Social Model. The European Social Model is an abstract definition of a common set of values which are at the basis of EU. These values are freedom, democracy, equality, solidarity and openness and have inspired the social systems of all the EU Member States. While they differ from one another in their practical design, they have common features and reflect those values. It is not by chance that they all involve government intervention to reduce poverty and social exclusion, achieve a fairer distribution of income, provide social insurance and promote equality of opportunity. We can be proud of the achievements of our social model. But we should also acknowledge that our social systems have shortcomings, and need to stand ready to cope with both the weaknesses inherent to the systems and the challenges resulting from ongoing trends. The weaknesses of our systems are rather clear: low growth and low employment in many countries, with the social systems not able to cope with the modern society. But let me focus on the challenges which are ahead of us, the most important of which are, in my opinion, globalisation and the ageing of the population. Let me first look at the challenge of globalisation. It is evident that Europe is facing fierce competition, not only from the US and other industrialised countries, but also from low-cost economies like China and India. But there is no reason to think that the overall impact of globalisation on the European economy will be negative. On the contrary, globalisation should be regarded as an opportunity, not a threat. However, in order to do so we need to be able to foster economic and social reforms aimed at greater economic flexibility and more adjustment capacity, while achieving better social protection. 2

The second major challenge for our Social Model is that of ageing. Ongoing negative demographic developments will have a huge impact on public finances over the next few decades, but also on economic prospects. An ageing population will call for increased expenditure on pensions and health care and will make it more difficult to maintain high economic growth as the labour supply shrinks. This in turn will weaken the financing base of the national social models. There is a strong case, therefore, for reforming the Social Model. This requires redesigning and implementing labour market and welfare state reforms, fields where the economic case for centralising policy actions at EU level is not very strong, and therefore it is mainly up to national governments to take the lead. That being said, some possible guidelines for reforms, based upon experience in some EU Member States, could include a number of elements. This includes looking at the achievement of equality in terms of equal opportunities, rather than in terms of income distribution; putting more emphasis on security in employment rather than keeping always the same job; more active policies to raise the employment rate; extending our working lives to deal with the impact of ageing; modernising health and long-term care systems; investing more in education and R&D; and modernising tax systems to remove obstacles to factor mobility and to make work pay. These are all actions which can, and should, be carried out at national level. However, let me note that the success of national reforms strongly depends on a number of pre-conditions, also to be satisfied mainly at national level: stabilityoriented macroeconomic policies and sound public finances are necessary for strong and sustained growth and employment, and thus for the sustainable financing of any social model. The EU can also contribute to the modernisation and the viability of the national social models: Firstly, the EU has an important role in economic policy co-ordination, in particular for those countries that share the single currency. Second, the liberalisation and better regulation of product and service markets through the single market programme will help achieve a more efficient allocation of resources and should create opportunities for employment, contributing to the success of labour market and social policy reforms undertaken at national level. Other common policies, such as trade and competition policies, will also be relevant in this respect. A third important role for EU policies in supporting national social models can be provided by building consensus on the benefits of economic reform and through the sharing of best practice. The processes existing at EU level, including favouring social dialogue, may be useful to this end. The Lisbon agenda, drawn up by the Member States in 2000, contains all the elements for action at both national and EU level which I just mentioned. But, unfortunately, relatively little has been achieved with the Lisbon strategy, due to the too slow and partial implementation of reforms. Its mid-term review, completed last spring, therefore focused on increasing Member States ownership of the reform process. First of all, it has strengthened the focus on the promotion of economic growth and productivity and the creation of more and better jobs. 3

Secondly, it has established a new partnership between the EU and Member States based on a clearer distribution of tasks and responsibilities and on the simplification of reporting. In this context, a major innovation is the introduction of the National Reform Programmes in which the Member States are called to identify the main challenges they are facing and to outline a comprehensive strategy of reform for addressing them. In conclusion, we are entering in a crucial phase right now. The need for reform is clear, and we have the right instruments in place. I hope that the Heads of State and government at the informal European Council in late October will discuss this issue frankly, and address the challenges with determination. The Greek economy and the need for change In this particular framework, I will now focus on the situation of Greece and on what action appears needed to ensure a sustainable economic and social model. The recent story of the Greek economy is one of remarkable success in terms of real convergence. Over the last five years, real GDP has been growing at around 3½% per year, significantly more than the Euro-area. But, at around 75%, the ratio of GDP per capita in Greece still remains well below the area s average. It is therefore important to ensure that efforts to maintain the current pace of economic convergence continue vigorously. The framework of macroeconomic stability introduced by the Economic and Monetary Union represented a positive confidence shock for the Greek economy, and brought about the lowest interest rates seen in modern times. This has provided positive leverage for private investment and consumption which are the main support for the solid trend in economic activity. However, a number of imbalances and risks have emerged or worsened. The current account deficit has increased substantially, up to around 7-8% of GDP. The situation of public finances is still worrying and the insufficient reforms are exposing the country to the growing risks arising from ageing and globalisation. This cannot be sustained for ever. Unless decisive steps are taken, these developments will eventually weigh on growth prospects, and hamper the necessary framework for modernising the social model. Dealing with them requires a combination of fiscal consolidation and comprehensive structural reforms. Let me start by looking at the public finances. The latest available figure for the 2004 general government deficit is 6.6% of GDP. The debt ratio is 110% of GDP. These figures are the highest in the euro area, and well beyond the thresholds set in the Treaty. The efforts undertaken to improve the budget balance have been important, but produced only limited results over the years. Higher spending associated with the organisation of the Olympic Games has been only one among many factors behind the high public deficit. The latter reflects insufficient revenues and unhealthy trends in current expenditure, especially public consumption. The Council recommendations, issued to Greece last February in the framework of the Excessive Deficit Procedure, should be seen in view of the need to provide stability to economy and ensure sustainable finances, in order to release resources to support private investment and to boost potential growth over the coming years. 4

The update of the stability programme for the period 2004-2007 outlined a consistent budgetary strategy, in particular as it aims at reducing the deficit below the 3% of GDP reference value by 2006 by means of measures which have a permanent effect on the budget balance. The government also implemented on 1 April an additional package of fiscal measures for 2005 and 2006. In view of this, on 6 April 2005, the Commission and Council concluded that Greece had taken action consistent with the Council recommendations. But surveillance of the Greek situation needs to remain high, given the size of the imbalances. The Commission will assess progress in the correction of the excessive deficit on the basis of the report to be submitted by the Greek government at the end of this month. One of the main elements which will be considered is the effectiveness of the measures implemented for 2005. Let me recall that the Council requested Greece to implement the 2005 budget rigorously. Although the government has again confirmed the deficit target of 3.6% of GDP for this year, cash data until August suggest that further efforts are still needed before the end of the year to compensate the effects of tax shortfalls and expenditure overruns. And clearly, another main element for the assessment will be the 2006 budget, the draft of which has just been adopted by the government for discussion by Parliament. We are still in the process of analysing it within the framework of the autumn forecasts, which will be released by mid-november. But I would already like to stress that, for the EU, it is of the utmost importance the Greece brings the deficit below 3% next year. I trust that the Parliament will adopt a final budget consistent with the Council recommendations. So far I have been concentrating my remarks on the correction in the budget balance. The urgency of completing the consolidation arises from the very high debt ratio but also from the fact that Greece faces a very adverse impact of ageing populations. Unless adequate reforms take place, pension outlays, which now amount to 12% of GDP, could attain more than 22% in 2050. In other words, unless corrective action is taken now to reverse current trends in pensions and health care, the debt will move onto an explosive path. Accordingly, the first and foremost challenge for Greece is, of course, to ensure the sustainability of public finances. This requires addressing fiscal imbalances and pursuing further reforms of the social security system: early retirement should be curbed and incentives should be created to get older workers to participate in the labour market. An overall reassessment of the pension system could also be useful. A second challenge for Greece regards the labour market, where action is necessary to address low employment and high structural unemployment, as well as to strengthen education and vocational training. This would require eliminating remaining rigidities, promoting part-time work and pursuing active labour market policies. Education and training systems must be more responsive to the real needs of the labour market, in order to effectively bring a greater accumulation of human capital. A third key challenge concerns competition and the business environment. Increasing productivity growth requires bigger efforts towards a greater accumulation of physical, human and knowledge capital. But only a healthy competitive environment in product markets provides the adequate incentives for innovation and capital accumulation. 5

Recent measures to reduce the administrative burden on start-ups and to simplify regulation and taxation systems go in the right direction. Further progress in liberalising network industries and transposing Internal Market directives would be welcome. Finally, increased investment in R&D and education are also crucial to improve productivity performance. From a first assessment, I welcome the fact that many of these elements are incorporated in the draft of the National Reform Programme for the period 2005-2008, released on 14 September 2005. This shows the determination and commitment of the Greek government to restore fiscal discipline and speed up the reforms in order to be better equipped in the face of the new needs of our modern and open societies. To sum up, it has now become almost self evident that Greece, like most of the other EU Member States, needs to implement important reforms in the coming years. These are necessary to nourish a modern and flexible society, although we know that some reforms can be painful. But let s be frank: there is no alternative, if we want a dynamic and sustainable social model. I believe that the benefits brought by the necessary reforms and fiscal discipline will clearly outlay the costs. For this reason, we stand ready to support and stimulate the reforms while making sure, through close vigilance and peer pressure, that all the advantages coming from macroeconomic stability and sound public finances can be soon reaped by all. Thank you. 6