On Wednesday 7 March, the European Commission confirmed the strength of economic recovery and the reduction in macro-economic imbalances in the European Union. For the first time ever, it spoke out against aggressive tax policies observed in certain member states, an initiative welcomed by left-wing parties in the European Parliament and unions.
This economic good news comes in a package presented in the framework of the 2018 exercise of the European Semester budgetary process, which includes the country-by-country reports and an in-depth economic analysis of 12 member states. The package follows the publication of the interim winter economic forecasts on 7 February (see EUROPE 11956).
Growth and falling unemployment rates in the EU are, according to the Commission, the result of the socio-economic reforms undertaken by the member states since the launch of the European Semester process in 2011.
“More than two thirds” of the country-by-country recommendations have been taken on board in the execution of the economic policies of the member states, the Commissioner for the euro and Social Dialogue, Valdis Dombrovskis, told the press. However, he added, there is still work to do: the fruits of growth are still being distributed unevenly and socio-economic convergence at the level of the member states is still not complete.
The country-by-country analyses bear out these observations. For instance, the Commission notes that French growth has accelerated whilst its unemployment has fallen, despite levels of government debt that are still high. Similar trends are also visible in Italy, although government debt, which has been estimated at 130% of national GDP over the period 2017-2019, is of greater concern.
Spain is also on the right track. Although its unemployment rate is still one of the highest in the EU, it has fallen significantly and growth is expected to remain solid over the coming years.
It is worth noting that there was no annual report on Greece, which is still under a financial bailout plan (see other article).
Excessive macro-economic imbalances observed in three countries
The Commissioner for Economic and Financial Affairs, Pierre Moscovici, welcomed a “substantial correction” of the macro-economic imbalances.
As announced (see EUROPE 11975), the Commission has taken France off the list of countries experiencing excessive imbalances and added it to the list of those in which macro-economic imbalances have been noted, due to its economic and budgetary trajectory and the policies pursued by the current government and its predecessor.
Benefiting from similar Commission decisions were Bulgaria - which has made substantial progress with its structural reforms, according to Moscovici - and Portugal, whose growth accelerated last year alongside a reduction in government deficit.
Slovenia will no longer be subjected to specific monitoring.
The result of these decisions is that there are now just 11 countries under the supervision of the macro-economic imbalance programme. Macro-economic imbalances remain excessive in Cyprus, Croatia and Italy and are simply observed to exist in eight other member states: Germany, Bulgaria, Spain, France, Ireland, the Netherlands, Portugal and Sweden.
Tax optimisation in certain countries under fire
The specific reports, which call attention to certain national tax regimes that facilitate aggressive tax planning on the part of certain businesses, did not make pleasant reading for the countries in question. These are Belgium, Cyprus, Luxembourg, Malta, Ireland, the Netherlands and Hungary.
This reaction echoes that observed when the Commission published its first list of tax havens in June 2015 (see EUROPE 11347).
“This is a new procedure. We are making the question of tax planning central to our reports and stress that this is part of the imbalances and reforms to be carried out”, Moscovici explained. He immediately added that no country was “inert” and that all of them had started to take measures.
In particular, the Commission flags up the absence of anti-abuse rules in Ireland, Luxembourg, Malta and Cyprus. The lack of withholding tax on payments of dividends in Ireland, Cyprus, Hungary and the Netherlands is a concern. The same applies to exempted payments of interest and royalties in Cyprus, Hungary, Malta, Luxembourg and the Netherlands. Belgian, Maltese and Cypriot notional interest also make the list.
A separate Commission report states that some "small" member states, such as Cyprus, Malta and Luxembourg, are capable of levying more corporate tax in relation to GDP than others. The Commission’s study also states that Ireland seems to be capable of attracting a substantial tax base.
The Luxembourg Prime Minister, Xavier Bettel, who was not pleased to have found out about the Commission’s initiative through the press, said that it would have been better to discuss it with the countries first. Speaking through minister Johan Van Overtveldt, Belgium accused the European institution of double standards, as the regimes of certain countries had not come under fire. This is the case with France, which has been reluctant for several months to make any changes to its pro-intellectual property tax regime (patent box) (see EUROPE 11664).
When asked about the idea of French President, Emmanuel Macron, to make access to European funding conditional on tax convergence, Commissioner Moscovici declined to comment. He did, however, say that the EU was exemplary in such matters and that all channels should be mobilised to this end.
Reinforcing the social dimension of the country-by-country reports
For the first time, the European Semester process includes the priorities of the European pillar of social rights (see EUROPE 11906 and 11907) and is based on the data collected in the social scoreboard, such as access to the market, fair working conditions and social protection.
Overall, the figures are positive, the Commissioner for Employment and Social Affairs, Marianne Thyssen, said at a seminar the day before. 236 million people in the EU are now in work, 9 million jobs have been created since 2014 and unemployment has virtually returned to pre-crisis levels (around 7.3% at European level).
But there are still huge differences between member states. For instance, according to the scoreboard, the percentage of young people not in employment, education or training (NEET) is lowest in the Netherlands (around 5%), but very high in Italy (around 20%). The national disparities concerning basic digital skills are even more striking: 25% of Bulgarians have these skills, compared to over 80% in Luxembourg.
More broadly, the Commission notes a series of concerning matters: an imbalance between the needs of the employment market and the qualifications of the labour force, gender inequality in access to employment, large sections of the population exposed to high poverty, the lack of effectiveness of social transfers in reducing poverty, low growth in salaries and dysfunctions in social dialogue.
On the question of poverty, the objective set at EU level to bring around 20 million Europeans out of poverty and social exclusion by 2020 is highly unlikely to be met. The figure is in fact rising, with over a million more people living in poverty since the crisis of 2008.
Thyssen stressed the need to further reduce unemployment, which is still very high in certain member states (Spain, Italy, Portugal, Cyprus and Croatia), particularly among young people. This can be achieved by training and learning new skills, or adapting the social security systems to new forms of employment. On the last of these points, the Commissioner will present a series of recommendations to member states next week (see other article).
It is particularly worthy of note that the Commissioner stressed the need to increase the salaries of workers in member states such as the Netherlands and Germany.
The ball is now in member states’ court. They must submit their national stability and reform programmes by mid April, setting out their priorities in the social field. On the basis of these, the Commission will make its own country-by-recommendations in May. (Original version in French by Lucas Tripoteau, Élodie Lamer and Pascal Hansens)