Sun, May 06, 2007 - Page 9 News List

EU's new fund hopes to conquer negative effects of globalization

By Etienne Wasmer and Jakob von Weizsacker

On both sides of the Atlantic, many view economic globalization as a threat to below-average earners. A recent poll by the German Marshall Fund said that majorities in France, Germany and the US favor maintaining existing trade barriers, even if doing so hampers economic growth. Clearly, the large net gains from global economic integration are not enough to convince those who have lost their jobs and the many others who feel at risk.

The recently established European Globalization Adjustment Fund (EGF) is an EU-wide response to this challenge. The EGF can spend up to 500 million euros (US$680 million) annually in EU member states on workers affected by trade-induced layoffs. But sharing the benefits of globalization with the losers is traditionally regarded as a national responsibility.

For example, the inspiration for the EGF, America's Trade Adjustment Assistance, introduced by the Kennedy administration in 1962, is a purely national scheme. Is EU involvement really justified?

The economic case for a European globalization fund is that trade policy has been delegated to the European level, while EU members retain the ability to block decisions.

Consider the hypothetical example of full trade liberalization in textiles, which would have greatly asymmetric effects between, say, Sweden, with hardly any textile industry, and Portugal, with a substantial one. Sweden would be a clear beneficiary while Portugal would be hit hard, owing to the large number of displaced textile workers.

The negative impact of such redundancies is serious. Organization for Economic Cooperation and Development statistics show that 40 percent to 50 percent of displaced manufacturing workers in the EU's first 15 member states remain without a job 24 months after becoming unemployed. Around 30 percent work in a job that pays less than the previous one. Only around one-quarter are re-employed with a wage at or above the previous level.

Through the EGF, part of the cost of helping displaced textile workers would be borne by all EU countries, thereby making wider trade liberalization a more likely prospect. Although Sweden, for example, would be a net contributor to the EGF, it might well be a net beneficiary of the arrangement as a whole. In principle, a web of bilateral transfer arrangements could achieve such an unblocking of trade. In practice, however, such transfers hardly ever take place, so the potential gains from opening trade may fail to materialize.

Nevertheless, the EGF's rules need to be tightened, lest the scheme comes to be regarded as a political gimmick. The current setup leaves too much room for discretion, as neither necessary nor sufficient conditions for aid are clearly spelled out. This will expose the EGF to wasteful political posturing and lobbying by countries and sectors.

The EGF's rules should be amended to ensure that governments and trade-displaced workers receive transparent, visible, and reliable assistance, as well as to spread best practice in active labor market policy.

Displaced workers often face unemployment, a lower-paying job, or a new job far from home. Of these, the unemployed typically receive most public support. To address this distortion head on, and to provide clarity concerning the allocation of funds, the EGF should focus its limited funds on two simple active labor market programs: wage insurance and mobility allowance.

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