We are worried about the economic and social situation in Europe. As economists working in most of` the member countries of the European Union (EU) we observe with increasing concern that unemployment in the EU remains at unprecedentedly and intolerably high levels. 18 million people or 11% of the active population of the EU are officially unemployed, half of them have been so for more than one year. More than one fifth of all young people in the EU have no work. As a consequence we see a rise in poverty, more social polarisation and exclusion, and an erosion of life perspectives for an increasing number of people in our societies.

In this situation we regard it as alarming and unacceptable that economic policy in Europe is failing to respond adequately to the new pressures and challenges of recent years but remains primarily centred on restrictive monetary and fiscal policies and social cuts in order to fulfil the convergence criteria laid down in the Treaty of Maastricht (TM). We reject the assertions made to the public that this policy is scientifically well founded and politically the only possible way to promote European integration and unity among the peoples of Europe. Both claims are incorrect:

The theoretical basis for the main policy direction in the EU is very controversial, often dubious and even false. We maintain that there are alternative policy options which would serve the interests of the European people and strengthen their co-operation and unity much better than the present one.

We consider the fundamental failure of EU economic strategy to be its very narrow conception of economic stability which is almost exclusively defined as price stability. This disregards the stability of growth, employment, wages, social security and the environment which are·equally important aspects of economic and social stability. The obsession with the fight against inflation has determined the convergence criteria and it also dominates the provisions for the monetary policy of the European Central Bank (ECB) in the monetary union as determined in the TM. It even prevents member countries from taking energetic co-ordinated measures to fight unemployment through an appropriate fiscal policy. Because a very high intra-European interdependence the restrictive policies which were adopted in most countries from the beginning of the: 1980s have considerably accentuated the economic slow-down and have had only very limited success in terms of deficit reduction. The lack of a co-ordinated policy for economic stimulus at the European level has had severe consequences. These have already been very visible and worrying in recent years. and the problems will be aggravated in the context of monetary union, where, if no substantial changes are made. the lack of economic policy co-ordination will constitute a major difficulty.

The assertion that low inflation will, through the market mechanism, lead automatically to more growth and thus to more employment is very unconvincing given the experience of the last ten years, when inflation has fallen to very low levels - from 10:6% on average in the 1970s through 6,5% in the 1980 to 2,6% in 1996 -while economic growth has slowed down considerably and unemployment has risen to post-war record levels in the AEU: from an average of 4,0% in the 1970s and 8,9% in the 1990s to 11,2% in 1996. There are also sufficient studies to show that low and stable rates of` inflation do not generally have a negative impact on growth and employment. On the other hand, a disinflationary policy continued even when inflation is firmly under control, has a clear negative impact on the economy. This is the present situation in the EU: inflation is not a danger in the foreseeable future. Therefore, the dominant policy of tight money and contractionary budgets, required by the TAM and reinforced by the recent "stability pact", is leading to a deflationary downward spiral. This is undermining the macroeconomic basis which is necessary for the creation of more employment, income and social security and for a realistic approach to regional cohesion and ecological restructuring.

Unemployment amounts to a personal catastrophe for the individuals affected. It is also an enormous economic waste and a burden on public budgets, with a tendency to raise deficits in spite of all efforts to reduce them. Persistently high unemployment is eroding social cohesion in the member countries and in the EU as a whole and is leading to political instability and to the rise of nationalism and xenophobia.

In our view this economic policy in the EU is partly an incorrect response to external turbulences and to internal constraints on economic development in our countries since the1970s. We also see it as in part a result of strong pressures exerted by powerful business groups, particularly by financial institutions. But we do not accept the view that these new problems have no other and better solution than the prevailing one, nor do we think that the forces behind the pursuit of austerity are universal or uncontainable. Economic policy in the EU remains a contested area. With the following proposals for an alternative economic strategy in the EU we want to contribute to a public debate leading out of the the present impasse and to the establishment of an alternative type of economic development.

In the short term the EU needs an immediate further relaxation of monetary policy in order to encourage investment and to take pressure off fiscal policy, thereby facilitating energetic employment creating measures. This relaxation should be brought about by the co-ordination of. monetary objectives and a reduction of. interest rates across member countries.

The Bundesbank must end its policy of monetary sterilisation of capital inflows. In order to protect such co-ordinated monetary relaxation against capital flight and speculative currency attacks we recommend the introduction of- a foreign exchange transaction tax which would also give a strong stimulus towards international monetary reform.

In the medium and longer perspective the EU needs much greater control over financial processes, which at present subject most of- the member countries to the tyranny of globalised asset markets without contributing to productive investment. Such control can be facilitated by a closely co-ordinated and integrated monetary and financial system. It entails enhanced and improved supervisory control and prudential standards. In this context, the question of complete central bank independence must be reconsidered: Without denying that it has a special responsibility for the control of inflation. we consider that European monetary policy should be embedded in a comprehensive economic strategy with different and equally important objectives and with transparent and democratically debated and decided policy instruments. That would also require the creation ,as a counterpart to the European Central Bank, of. an institution responsible for overall European economic policy, that is for the co-ordination of national policies and for the management of the federal budgetary policy which we propose below.

In the area of external monetary relations we propose the establishment of a reformed and modified European Monetary System (EMS 2). If the monetary union begins in 1999 as laid down in the TM, the EMS2 would serve as the framework for co-operation between the members and non-members of` the monetary union. However, in our view it would be desirable to defer the beginning of the monetary union in order to permit a substantial revision of its priorities and methods of. operation. In this case, MS2 would provide a general framework for co-operation among all member countries. The viability of this system of fixed but adjustable exchange rates should be ensured through additional instruments which the monetary authorities could respond to speculative capital movements: currency transaction taxes and the use of the European Fund for Monetary Co-operation, which should dispose of additional resources coming from surplus countries. In the case of a postponement of the monetary union an additional possibility would be to introduce a common external currency, which would circulate alongside national currencies inside the EU and would be the exclusive reserve asset for member states in their dealings with third countries.

In any case the EU should in our view actively promote and contribute to international monetary reform with the aims of establishing a stable global framework for monetary and currency transactions and restricting primarily speculative or arbitrage-driven money flows. Such reform should begin with a stronger and more continuous commitment to international monetary co-ordination and advance toward a comprehensive reform of international monetary institutions.

We propose as the most urgent fiscal policy measure in the EU. the launch of a large employment programme backed by a considerable extension of public expenditure. It should consists of two closely connected parts: firstly, a genuine EU investment initiative in some basic fields, with ecologically sustainable European infrastructure projects such as railway connections or decentralised energy provision. Because the present budget of the EU is very small, such EU projects should be financed through EURO-bonds issued by the European Investment Bank. The second part of the employment initiative should consist of jointly designed and well co-ordinated projects on the national and regional levels in the member countries. The particular areas would certainly differ according to specific national and regional needs and priorities. In most countries the financing of such programmes requires a temporary but considerable increase in the public deficit. This should be accepted given the high priority of the employment objective and the absence of inflationary pressures .A fiscal employment initiative does not mean more public expenditure regardless of the specific purposes for which the money is spent. It should also be consistent with the important objective of ecological sustainability. There are lots of reasonable projects fulfilling these requirements: environmental clean-ups in highly contaminated areas, establishment of ecologically acceptable transport structures in underdeveloped regions etc. Also the expansion of the public sector, for instance in education and new social services, is a useful investment in employment and social welfare.

In the medium and longer perspective the EU needs some fiscal centralisation and an enhanced revenue base. In this respect we adopt the findings of the MacDougall Report of 1977, recommending an EU budget of about 5% to 7% of the combined EU national product - still far below the scale of national budgets. As a way to reach this we recommend:

- the introduction of a C02 emission tax, as has already been under consideration in the EU for some years;

- the establishment of a currency transaction tax in order to curb speculative money flows;

- the exploration of the possibility of an EU share in taxes on interest and (other)capital income, as a step towards the European harmonisation of tax systems and to moderate tax competition among member states.

In all three cases the new taxes would fulfil two purposes. Firstly, they would strengthen the EU revenue base; secondly. they would establish regulatory barriers against harmful economic activity, and guidelines towards more socially desirable activities among economic agents and in market interactions.

Finally we recommend the introduction of some automatic stabilisers into the fiscal system of` the EU in order to strengthen the political mechanism of social cohesion and solidarity across member countries while contributing to macroeconomic stability.

Under the present circumstances the reduction of working time represents a considerable job creation potential, which must be used in order to restore full employment in the foreseeable future. Depending on the size in working time cuts and on the responses at the managerial level, the creation of between five and ten million jobs throughout the EU is a realistic proposition. Working time reductions should take different forms, starting with the immediate reduction of overtime and extending over a whole range of measures, such as less hours per day or per week, parental leave and sabbaticals , retraining and different forms of part-time work etc.

Governments and the EU can do a lot to promote working time reductions under socially acceptable conditions. As themselves very large employers, governments could play a pioneer role, thereby also creating room for the expansion of publicly financed employment in fields where this is particularly necessary and urgent. It is also a political responsibility to ensure that working time reduction does not simply become a way to more flexibility in the interests of business without taking into account the working time interests, remuneration and social security of employees. Otherwise, working time reduction would only lead to more intense work at lower wages and a smaller number of jobs. On the important question of wage compensation the Community should aim at a legal framework which could guarantee (and where necessary support) full compensation for lower income groups.

The EU should enhance its efforts to ensure that working conditions and social security are not negatively affected by reductions in working time. This should include the fight against insecurity in all its forms, the enforcement and gradual raising of minimum standards and of the provisions in the social protocol of the TM. It is particularly important, in order to make part-time work more attractive, that full coverage of social insurance and of retirement payments is maintained. Here, too, the EU should play a leading role.

We reject all attempts to abandon labour market and welfare policy under the pressure of budgetary constraints and the convergence criteria. Active labour market policy cannot restore the conditions of relatively low unemployment under which it was originally designed in order to resolve bottleneck problems in the labour market, but it still has a very important task and we recommend that the EU should be energetically engaged in maintaining and extending it. Its main orientation should be an ambitious assault on increased labour market differentiations and the ensuing process of social exclusion. This requires an energetic legal defence of the basic social rights which are now under attack. Effect should also be given to the so far mostly nominal commitment to life-long education and retraining, and to the facilitation of labour market access for disadvantaged groups such as jobless young people and people with physical or mental handicaps. In tackling these problems successfully the EU could make a considerable contribution to the preservation, re-establishment and progressive reform of. the European model of the welfare state which, in most countries of the EU was erected after World War 2 and has been under continuous attack during the last 15 years. In this sense the vast majority of the provisions of the Social Charter of 1989 still remain unfulfilled commitments. Their implementation requires not only a return to higher and eventually full employment. It requires also, that the dramatic redistribution in favour of profits, interest and very high income groups which has taken place during the last two decades, is halted and then reversed.

We have criticised the economic policy predominant in the EU: theoretically it is unfounded and false; practically it is harmful to the majority of the people and is polarising society. We have made proposals for an alternative economic strategy which we regard as much better founded. If adopted it would put the EU on the way towards full employment, more social cohesion and equity, thereby advancing the transition to an alternative type of. economic development. This would strengthen the basis for closer integration and unity among European countries and their peoples.

Of course it is difficult to achieve such a change in the direction of- economic policy. Because we reject a simplistic market-only approach we realise these difficulties. They consist firstly in the fact that an alternative economic strategy requires a multi-level approach among different agents and institutions, secondly. we recognise that. because many problems are very complex,. there are often no completely satisfactory solutions yet and our proposals, therefore, sometimes have a tentative character. Finally there is the fact that an alternative economic strategy is - like the dominant one - not only a matter of theoretical insight and research but also of material interests, social mobilisation and political forces. Thus, while we shall continue to work for the technical improvement of our proposals, we will also try to offer our supporting arguments to the social movements which have begun to resist the policy of persistent job destruction and social cuts and to demand a well founded economic vision and policy for Europe.