31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/1
II
(Actswhosepublication isnotobligatory )
COUNCIL
COUNCIL DECISION
of22December 1986
adoptingtheannualreportontheeconomicsituationintheCommunity andlayingdown
economicpolicyguidelines for1987
(86/667/EEC)
HASADOPTED THISDECISION :
Article 1
TheCouncilherebyadoptstheannualreportonthe
economicsituationin,andeconomicpolicyguidelinestobe
followedby,theCommunity ,contained inPartIofthe
Reportannexedhereto,andlaysdowntheeconomicpolicy
guidelinestobefollowedbytheMemberStates,contained in
PartIIofthesaidReport.
Article2
ThisDecision isaddressed totheMemberStates.THECOUNCIL OFTHEEUROPEAN COMMUNITIES ,
HavingregardtotheTreatyestablishing theEuropean
Economic Community ,
HavingregardtoCouncilDecision74/120/EECof18
February1974ontheattainment ofahighdegreeof
convergence oftheeconomicpoliciesoftheMemberStatesof
theEuropeanEconomic Community (J),asamendedby
Decision 75/787/EEC(2)andbyDecision
79/136/EEC(3),andinparticular Article4thereof,
HavingregardtotheproposalfromtheCommission ,
HavingregardtotheopinionoftheEuropean
Parliament (4),DoneatBrussels ,22December 1986.
FortheCouncil
ThePresident
G.SHAWHavingregardtotheopinionoftheEconomic andSocial
Committee (5),
(')OJNoL63,5.3.1974,p.16.
(2)OJNoL330,24.12.1975,p.52.
(3)OJNoL35,9.2.1979,p.8.
(4)OJNoC322,15.12.1986.
(5)OJNoC333,29.12.1986.


31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/3
ANNUAL ECONOMIC REPORT
1986/87

NoL385/4 OfficialJournaloftheEuropean Communities 31.12.86
ANNUAL ECONOMIC REPORT 1986/1987
CONTENTS
PartI—Reduction ofunemployment inamoredynamicEuropean economy
Foraneffectiveimplementation ofthecooperative Community strategy
Page
1.Summaryandconclusions
2.Evolution oftheeconomyandconvergence
2.1.Theworldeconomy
Box:Economic consequences oftheoilpricecounter-shock
2.2.TheeconomicoutlookintheCommunity
2.3.Nominalandrealconvergence intheCommunity
3.Thecooperative growthstrategyformoreemployment
3.1.Objectives andmethods
3.2.Forecastsfor1986and1987seenfromtheviewpoint ofthecooperative strategy
3.3.Macroeconomic policyimperatives in1987andbeyond
Box:Medium-term scenariosforthecooperative strategy
4.Contribution ofpoliciestothecooperative strategy
4.1.Monetary guidelines andcoordination questions
4.2.Budgetary policy
4.2.1.Budgetdeficits,publicdebt,growthandemployment
4.2.2.Publicexpenditure ,taxation,growthandemployment
4.3.Wagesandthelabourmarket
4.3.1.Incomesandwagecosts
4.3.2.Adaptingthelabourmarketformoreemployment-creating growth
4.4.Theadaptability ofmarkets
4.5.FinancingCommunity policies :thebudgetandfinancialengineering
4.6.Socialdialogue6
11
11
16
18
25
36
36
39
41
48
49
49
54
54
55
60
60
62
65
68
71
4.7.International economicpolicycoordination 72

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/5
PartII—Economic policyintheMemberStates
Page
Application ofthecooperative growthstrategyformoreemployment intheMemberStatesin1987
Belgium
Denmark
FederalRepublicofGermany
Greece
Spain
France:
Ireland
Italy
Luxembourg
Netherlands
Portugal
UnitedKingdom75
76
79
82
85
88
91
94
97
100
102
105
107

NoL385/6 OfficialJournaloftheEuropeanCommunities 31.12.86
ANNEX
PARTI
REDUCTION OFUNEMPLOYMENT INAMOREDYNAMIC EUROPEAN ECONOMY
FORANEFFECTIVE IMPLEMENTATION OFTHE
COOPERATIVE COMMUNITY STRATEGY
1.SUMMARY ANDCONCLUSIONS
compared withthetrendinrecentyears,when
unemployment hasbeenrisingorremaining station­
aryatahighlevel.
However ,suchprogressdoesnotyetmeanfull
employment .Thereremainsanurgentneedfor
complementary measures ,particularly asregards
youthunemployment andlong-term unemployment ,
ifrelativelylargegroupsofthepopulation arenotto
beleftjoblessforalongtimetocome.Thepolitical
andsociallong-term implications ofsucha
development couldbedisastrous .Thesectoraland
regionalchangesassociated withthenecessary
adjustment ofproduction structures and
technological progressalsorequireback-upmeasures
totakeaccountofthesocialdimension :thefasterthe
Community economy regainsitsmomentum ,the
easieritwillbetodealwithproblemshere.
IftheCommunity strategyistobesuccessful ,there
mustbeevolution ,insomecasessubstantial ,in
economic policiesandbehaviour compared withthe
past.Suchchangesareunderway.Theymustbe
speededupandconsolidated .Itisaquestionof
ensuringthateconomic agentsmakeabalanced
contribution tothesuccessofthestrategyandthatthe
acceptance ofeconomic policyisreinforced .The
socialdialogueatCommunity level,andinparticular
atnationallevel,isthereforeanimportant instrument
inimplementing thestrategy .
1.2.ThisAnnualEconomic Report1986/87examines
economictrendsandoutlookandupdateseconomic
policyguidelines inthelightoftheCommunity
strategy .1.1.Inadopting thelastAnnualEconomic Report
(1985/86),aftertakingnoteofthefavourable
opinionsofParliament ,theEconomic andSocial
Committee andtheEuropean socialpartners,the
Councilendorsed theCommission 'sproposed
'cooperative growthstrategyformoreemployment 'in
theCommunity .
Theaimofthestrategyistoachieveasignificant and
lastingreductionofunemployment overaperiodof
severalyears.Unemployment inEuropeistheresultof
seriouseconomicandsocialdisequilibria .Itcannotbe
overcomewithadhocmeasuresthatmerelytreatthe
symptoms .TheCommunity strategytakesboththe
macro-andmicroeconomic ,aswellasthesocial
aspectsoftheproblem ,intoaccountandattemptsto
tackleunemployment atitsroot.Atamacroeconomic
level,thismeansthattheremustforsometimetocome
becontinuedmoderation inthegrowthofrealwages,
butthatatthesametimetheremustbeanappropriate
evolution ofdemandconforming tostability
requirements .Thiscombination willstrengthen
profitability ,investment andemployment .Atthe
microeconomic level,payingdueregardtothesocial
aspects,theadaptability ofmarketsforgoods,
services,capitalandlabourmustbeimproved ,and,in
particular ,theestablishment ofnewfirms,the
development ofvocational training andthe
introduction ofnewtechnologies mustbepromoted .
Thiswillfacilitatethenecessarystructural change,
generateaneweconomicimpetusandmakeitpossible
toimprovefurtherthecompetitiveness ofthe
European economy ,takingadvantage ofthelarge
European internalmarket.
Themoredynamicandmoreemployment-creating
growthresultingfromsuchapolicywasillustrated
withanannualrateofsome3to3,5%atCommunity
levelfortheperiod1986to1990.Thismightbe
associated withaverageemployment growthofsome
1to1,5%ayear,whichwouldallowtheaverage
unemployment rateintheCommunity tobebrought
downbyjustunderfourpercentage pointsby
1990(1).Thiswouldrepresent majorprogress1.3.TheCommunity 'seconomic environment has
changedconsiderably asaresultofthefallinoil
prices,thenormalization ofthedollarexchangerate
andthefallininterestrates.Theoil-consuming
industrial countries haveneverexperienced sucha
sharpimprovement intheirtermsoftradeinsoshorta
periodoftimeinthepost-waryears.Thedevaluation
ofthedollartookplaceagainstabackground ofbetter
coordination ,towhichthePlazaagreement in 11990:EUR10some7%,EUR12some8%

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/7
ormanufactured output,thesecountriescouldbe
constrained toreducefurthertheirgrowthand
theirimports .September 1985andtheresultsoftheTokyoSummit
inMay1986contributed .Thefallininterestrates
constitutes welcome ,butinsufficient ,assistance for
thehighlyindebteddeveloping countries .Therecent
negotiations onMexico'sforeigndebtanddomestic
adjustment policycanalsobeseenasanexampleof
positivedevelopments .Theagreement reachedin
PuntadelEsteinSeptember 1986tostartanewround
ofmultilateral tradetalksintheframework ofGATT
lendsstrengthtothehopethatthetrendtowards
protection canbehaltedandreversed .Butevenifthereisafavourable development ofthe
worldeconomy ,theCommunity willnotbereceiving
anygreatstimulustowardsgrowthfromworldtrade
inthenextfewyears.Thisisduetothenatureofthe
necessaryprocessofadjustment :areduction inthe
hugeUnitedStatestradedeficit,andconsolidation of
thepositionoftheOPECanddeveloping countries .
FortheCommunity ,thisisafurtherreasonto
reinforceinternational cooperation tofacilitatethe
necessaryadjustments attheworldlevelandintensify
itsefforttoaugmentitsowngrowthpotential .Despitethesepositivedevelopments atinternational
level,considerable effortsarestillnecessary ifthe
majorproblemsfacingtheworldeconomyaretobe
solved.Thereremainsanurgentneedtoimprovethe
international monetary system.Ifthereistobea
returntoanacceptable distribution ofcurrentaccount
balancesatworldlevel,theremustbeagradual
reduction intheUnitedStatesbudgetdeficitsand
expansionary fiscalmeasuresinJapan,togetherwitha
furtherriseinthevalueoftheyen.Themost
important contribution thattheCommunity andthe
EFTAcountriescanmaketothisinternational process
ofadjustment istoreinforcetheirowngrowthonsolid
foundations .Anadequateexpansion ofworldtrade
dependsthereforebasicallyonastrongergrowthin
JapanandEurope.Moreover ,theproblemofthe
heavilyindebteddeveloping countriescanberesolved
onlyinthelongertermagainstabackground of
strongerworld-wide growth .1.4.WithintheCommunity ,themoderate upswing is
continuing in1986,andwillprobablypersistin1987.
According toforecasts ,growthinrealGDPshould
accelerate slightly (1985:2,4%;1986:2,5%;1987:
2,8%)butithasnotyetreachedthelevelwhichwould
bepossibleandnecessary inordertosecurea
substantial andlastingfallinunemployment inthe
Community .Certainly ,thethresholdbeyondwhich
economicgrowthproduceshigheremployment isnow
appreciably lowerthanitwasinthesixtiesor
seventies .Anincreaseofsome0,8%inemployment is
expected in1986and1987.Thelabourforceis
continuing togrow,however ,whichisduelessand
lesstodemographic factorsandincreasingly to
changing labourmarketbehaviour ;theaverage
unemployment rateintheCommunity willfallonly
slightly (EUR9:1985:11,1%;1986:11%;1987:
10,8%).Thisisstillthoroughly unsatisfactory . However ,compared topresentforecasts ,thegrowth
prospectsforworldtradecouldbesignificantly
reducedbytheseriousriskfactorsweighinguponthe
international economic environment .Theseriskscan
beidentified asfollows :Similarlyunsatisfactory isthepatternofgrowth
acrosstheregionsandMember Statesofthe
Community .Beforethefirstoilshock,the
less-developed regionsandcountries wereclearly
catchingupintermsofrealGDPperhead,butthis
processhassincecometoahaltorhasevenpartially
beenreversed .In1986and1987thereseemsstilltobe
norealconvergence underway.Promotion ofthis
processisanessentialelementinreinforcing the
economic andsocialcohesionoftheCommunity .—asignificant furtherdevaluation ofthedollaror
uncontrolled movements ofexchangerates.
—aninsufficient orinappropriate adjustment
processinJapanandtheUnitedStateswhichcould
leadtoarapidincreaseinprotectionism -inspite
oftheintentions declaredatPuntadelEste-,a
recessionintheUnitedStatesoraresurgence of
inflation ,
—amajorfurtherchangeinthepriceofoil,
—anaggravation ofthesituationofthedeveloping
countries :confronted withthecontinued dropin
thetermsoftradefortheprimarymaterialswhich
theyexportandalackofsufficient external
financingorgrowingoutletsfortheiragriculturalInoverallterms,growthintheCommunity now
derivesfrominternaldemand .Thisshiftoccurred in
thefirsthalfof1986,hesitantly atfirst,andmeant
thatlastspring'sgrowthforecastsfor1986hadtobe
reviseddownwards slightly.Thedynamicelementsin
realdomestic demand arenowinvestment in
equipment (1986:6,1%;1987:6,9%)andprivate
consumption (1986:3,7%;1987:3,5%);investment
inconstruction isrecovering ,whilepublic
consumption continuestogrowveryslowly.Despite

NoL385/8 OfficialJournaloftheEuropeanCommunities 31.12.86
willtakeaccountofthelowerrateofinflationinmost
countries .Concerning thislastpoint,theimportance
ofthesocialdialogueisevident.theworsening intherealcurrentaccountbalancefor
goodsandservices,whichhasnegativerepercussions
ongrowth,theCommunity 'snominalcurrentaccount
surplusiscontinuing torisetemporarily (1985:0,5%
ofGDP;1986:1,2%;1987:0,9%).
Thesedevelopments primarilyreflecttheconsiderable
improvement inthetermsoftradeasaresultofthe
fallingpriceofoilandthedevaluation ofthedollar.
TheCommunity 'soilbillhasbeenhalved;the
purchasing powerofprivatehouseholds willincrease
considerably in1986and1987inmostcountries ;yreal
wagecostsperheadshowpractically noincreasein
1986,butcouldspeedupagainin1987;the
profitability offirmshasimproved ,evenifthe
Community averageisstillfarbelowthelevelwhich
obtained beforethefirstoilshock;insome
Community countries ,theimprovement intheterms
oftradehaspartiallybeenusedtotakemeasuresin
ordertorelievethepressureonpublicbudgets .1.5.Theclearimprovements insupply-side conditions
achievedoverthelastfewyearsandthepositiveeffects
ofthefallinthepriceofoilarenotsufficienttomove
theCommunity spontaneously towardsapathof
adequateandemployment-creating growthallowing
unemployment tobereducedinthewaywhichis
desired.Medium-term studiesshowthat,despitethe
betterconditions ,theaveragegrowthrateforthe
years1986to1990couldcontinuetoliebelow3%,
andthatinthesecircumstances unemployment inthe
Community ofTwelvecouldstillbeabove10%in
1990.Onereasonisthat,inthenextfewyears,there
willbenostrongstimulustowardsgrowthcoming
fromtheinternational environment .TheCommunity
cooperative growthstrategyformoreemployment ,
whichwasadoptedlastyearandissummarized in
point1.1above,hasnotlostitsrelevance .Quitethe
reverse,itmustnowbeimplemented deliberately and
withdetermination .Itisinthiswaythatthe
improvement underwayinsupplyconditions and
behaviour canbeputtotheserviceofafastergrowth
ofemployment andthatthefavourable conditions
resultingfromthefallintheoilpriceandlower
inflationcanbebestexploited .Ifthisopportunity is
notseizedin1987and1988,itwillnolongerbe
possibletoreduceunemployment intheCommunity
significantly bytheendofthedecade.Thesustainedgrowthofinvestment byenterprises
whichisapparentin1986andforecastfor1987not
onlysupportsdemandbutalsoleadstoanincreasein
productive capacity .However ,theoveralllevelof
investment :intheCommunity (asapercentage of
GDP)remainsaboutfourpointslowerthanitslevel
beforethefirstoilshock,andtheincreasein
productive capacityandcreationofnewjobsstillneed
toaccelerate progressively .Anincreasedinvestment
effortthereforeremainsnecessaryforseveralyears.
Theeffectiveimplementation oftheCommunity
strategyforgrowthandemployment isalsoan
important elementforachievement ofthemajor
projectsandtasksthattheCommunity iscommitted
tointhemedium-term .Inthiscontext,thereisa
particular linkofmutualreinforcement .The
encouragement oftechnological advanceandthe
completion oftheinternalmarketwillsupplyan
essentialboosttotheeconomic potential and
competitivity oftheCommunity ;simultaneously ,the
achievement ofthistaskwillbesignificantly aided-
fromthesocialpointofviewalso-ifimplementation
ofthestrategyleadseffectivelytoamorevigorousand
employment-creating growth.Thisgrowthshould
greatlyhelpthecatching-up processofbackward
regionsandthereconversion ofdecliningindustrial
regions;simultaneously ,thereinforcement ofthe
economicandsocialcohesionoftheCommunity and
therenewaloftheprocessofrealconvergence should
contribute toincreasing theeconomicpotentialand
dynamism oftheCommunity .Finally,growthwith
stablemonetary conditions shouldfacilitatethe
development oftheEMSandmonetarycooperation ;
atthesametimethecreationofazoneofmonetary
stabilityencourages trade,reinforces integration and
dilutestheimpactofexternalshocks.Therehasbeenafurtherfallininflationrates,anda
strengthened convergence towardsgreaterstability .
Thisfavourable development isalsolargelyduetothe
improvement ofthetermsoftrade.Thefallinimport
prices,notablyforoilproducts ,putsabrakeonthe
riseintheconsumer priceindexandleads,inmost
countries ,toaslowergrowthinnominalwagesand
costs.Butthismustalsoberegardedasasuccessfor
themoreconvergent stabilization policiespursuedfor
severalyearsintheEMSandtheCommunity .The
averageinflationrateintheCommunity (private
consumption prices1986:3,7%;1987:3,0%)has
nowfallentoalevelwhichhasnotbeenseen
for20years.Thisgreaterstabilityandprice
convergence mustbemaintained andconsolidated .
Someoptimismseemsjustifiedinthisregard.Evenif
capacityutilization rateshaverisen,therecoveryin
investment isbeginningtocontribute toanincreasein
capacity ,andthepointatwhichtensionsappearmay
bereceding .Moreover ,theevolutionofimportprices
doesnotseemtoimperilinternalstabilityin1987and
therearechancesthatthegrowthofnominalwages

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/9
themselves moreeasilysustainprivateconsumption
and,atthesametime,produceadditional revenuefor
thepublicauthorities aswellaslowerexpenditure .1.6.In1987andduringthefollowingyears,theeffortto
improvesupplyconditions andtheadaptability of
marketsmustbepursued .However ,whenthepositive
impactoftheimprovement ofthetermsoftradefades,
itwillbenecessary tosustaininternaldemand,
consistently withthegoalsofmedium-term
consolidation ofpublicfinance.
Business investment shouldandcanbethemost
dynamicfactor.Itwouldsufficethatpresenttrends
becomemoredynamictoarriveattheexpansion
necessaryforachievement oftheobjectives ofthe
Community strategy .Anyinvestment is,ofcourse,
basedonarealisticeconomicassessment ;thisiswhyit
isimportanttopursueeffortstoimproveprofitability ,
reducerealinterestratesonasoundbasisandpromote
theuseofriskcapital.However ,thedecisiontoinvest
alsodependsuponconfidence andentrepreneurial
readinesstotakerisks;thusapositiveinfluence
mustbebroughttobearontheseattitudes .The
contribution ofentrepreneurs thereforeistorespond
toincreasing profitability withhigher,andmore
job-creating investment .1.7.Publicfinancepolicyhasanimportant but
particularly difficultroletoplayinimplementing the
Community strategy .Thegoalofmedium-term
consolidation ofpublicfinancesshouldbefurther
pursued .Atthesametime,itisimportantthatall
existingandfutureroomformanoeuvre shouldbe
exploitedinadetermined fashion,andasquicklyas
possible,inordertoimprovetheconditions governing
supplyanddemandthroughtheloweringoftaxesand
socialsecuritycontributions andbysteppinguppublic
investment .Thismargincomesfromsupplementary
receiptsandlowerexpenditures resultingfrommore
vigorousgrowthandtheincreaseinemployment .
However ,theroomformanoeuvre availabletothe
variousMemberStatesdiffersveryconsiderably .The
situationappearstobemostfavourable inGermany
andLuxembourg .InFrance,existingroomfor
manoeuvre isbeingused,largetaxreductions already
beingforeseenfor1987andsupplementary
reductions announced for1988,whilethebudget
deficitwouldbesimultaneously reducedineachofthe
twoyears.Ifgrowthweretostrengthen stillfurther
abroad,and,particularly intheCommunity ,
budgetary policyinFrancewouldbefacilitated allthe
more.IntheUnitedKingdom ,theGovernment ,inits
autumnstatement ,providedforanincreaseinpublic
expenditure ofsome£4750millionin1987/88.This
willmeanthatpublicexpenditure in1987/88is
plannedtobeabout2%higherinrealtermsthanthe
estimatedout-turnin1986/87.Ontheotherhand,
thepersistent ,excessively highdeficitsandthelevelof
thepublicdebtinBelgium,Greece,Ireland,Italyand
Portugalmeanthatprioritymustcontinuetobegiven
totheconsolidation ofpublicbudgets .Inrecentyears,
Denmarkhasshownthatthiscanbecampatible witha
favourable trendinbusiness investment andin
employment .Although ,inthefinalgroupofcountries
(Denmark ,Spain,theNetherlands ),budgetary
constraints arelesssevere,otherfactorsinthe
foreseeable futurelimitthescopeformacroeconomic
action.Publicinvestment andinfrastructure investment inthe
broadersense,whichmustnotallbefinancedfrom
publicfunds,shouldlikewiseformadynamic
component ofdemand .Publicinvestment hassuffered
fromtheconsolidation ofpublicfinance;sincethe
beginningofthe1970s,itsshareofCommunity GDP
hasdeclinedbyalmost1,5percentage points.Thereis
nowaneedtomakeupforthegroundlostasfaras
economically viableprojectsofthiskindare
concerned .Here,thenecessary initiatives mustbe
taken,bothatnationalandCommunity level,andthe
privateandpublicresourcesrequiredmustbemade
available .Theroomformanoeuvre enjoyedbythe
publicauthorities asaresultofrestructuring and
additionalrevenuesordecreasedexpenditure through
growthandemployment should,tosomeextent,be
exploitedinimplementing suchprojects .
Inthenextfewyears,privateconsumption ,asthe
biggestaggregate indomesticdemand ,canalso
sustaindemand .Themoderateincreaseinrealwages,
increasedemployment andtheloweringoftaxesand
socialsecuritycontributions ,duetotheuseof
increased budgetary roomformanoeuvre ,enable
privateconsumption toriseinthemediumtermatreal
ratesofgrowthwhichapproximate toGDPgrowth
rates.Inthisconnection ,itisimportant that
reductions intaxation andsocialsecurity
contributions areeffectedrelativelyearlyon,while
adheringtothegoalofmedium-term consolidation of
publicfinances .Atalaterstage,whentheprofitability
offirmshasstrengthened andthereisagreater
increaseinemployment ,growthinemployment and
gradually accelerating increasesinrealwagescanIn1987and1988itwillthereforeprobablyonlybe
possibleforasmallgroupofcountries touse
budgetary policytoexertanoverallinfluenceon
supplyanddemandconditions .Itisalsoof
importance thatthenumberofsuchcountries is
increasing astheeconomic recovery isfurther
progressing .Thisbeneficial chainreactionmustbe
reinforced throughconcertedaction.Inaddition,all
MemberStatescontinuetohavesupplementary room
formanoeuvre tocreatemorefavourable conditions
forincreasing employment throughtherestructuring
ofpublicrevenueandexpenditure (including the
selectivedismantling ofsubsidies).Thesepossibilities
shouldnotbeunderestimated andanexchangeof

NoL385/10 OfficialJournaloftheEuropeanCommunities 31.12.86
experiences shouldtakeplace.Theprincipleof
restructuring shouldalsoapplytotheCommunity
budget.shouldrapidlyshowupinastrongerrisein
employment .Somereduction ofsocialsecurity
contributions couldalsohelptostrengthen
employment .However ,thisshouldrelyontheuseof
available financialheadroom andshouldnotaffect
eitherthequalityofsocialprotection regimesortheir
financialbalance.Moreover ,adjustments ofcertain
excessive oroutdated labourmarketrulesand
regulations couldhelptocreatenewjobs.Alarge
numberofinitiatives topromotejobcreation,
especially fortheself-employed andinsmall
businesses ,havebeentakenorarebeingexamined ;
theyshouldbeencouraged andexperiences inthis
fieldexchanged .
Inmanycases,themeasures toimprovethe
adaptability ofmarkets,andinparticular ,thelabour
market,haveimportant socialrepercussions that
shouldbediscussedindetailwiththesocialpartners .
Someofthemarelargelyamatteroffreecollective
bargaining betweenthetwosidesofindustry .Thisis
true,forexample ,ofthereorganization andreduction
ofworkingtime,whichcanlikewisemakethegrowth
processmoreemployment-creating providedithasa
neutralimpactonthelevelofcosts.
Inthisconnection ,theprinciplesetoutinlastyear's
AnnualEconomic Reportshouldcontinuetoapply,
namely :'Thespiritinwhichthedebateaboutmarket
adaptability isheldisimportant foritssuccess.The
objectivebehindeffortstoincreaseflexibility isnotto
destroyachievements madeonthesocialfrontbutto
createmorejobs.Asfarasatallpossible,therefore ,
economic efficiency shouldbereconciled withthe
maintenance andfurtherdevelopment ofsocial
achievements .'1.8.Despitetheconsiderable changesthathaveoccurred
intheinternational monetaryenvironment ,thebasic
principles governing monetary policyinthe
Community donotneedtobeadapted .Theaimof
monetarypolicyshouldcontinuetobeappropriate
financingoftheavailablescopeforrealgrowthand,at
thesametime,consolidating and,wherenecessary ,
extending thesuccessesthathavealreadybeen
achievedinregardtothereduction ininflationrates.
Untilnow,thetaskofmonetary policyhasbeen
greatly facilitated byexternal economic
developments .Thedevaluation ofthedollarandthe
declineinoilpricesandUnitedStatesinterestrates
havecreatedfurtherheadroom forinterest-rate cuts
withoutposinganyrisksontheinflationfront.A
furthersharpfallinthedollarmightrequireaflexible
responseonthepartofinterestratesinEuropein
ordertocounterthedangerofarenewedovershooting
ofthedollar,togetherwiththeadverserepercussions
thiswouldhaveinthemediumterm.However ,care
mustbetakenheretoensurethatthereisnonew
build-upofinflationary potential .Theerosionof
inflationary expectations andthestrongertrendof
aggregatesavingarealsoexpectedtobringaboutafall
inlong-term realinterestratesonasoundbasisin
mostcountries .Thisisconsistent withthestrategy .
TheEMShasshownitselftobeastabilizing factor.
Closerconvergence coupledwithmovestoliberalize
capitalmovements hasaccentuated theneedfor
tightereconomic policycoordination ,notonly
domestically betweenmonetary policy,budgetary
policyandincometrendsbutalsobetweenMember
States.Theprogressthathasbeenmadein
establishing azoneofmonetaryandcurrencystability
isreducingthedependency onexternalinfluences .
Thisprovidesasoundbasisforfurtherprogressin
integrating theeconomies ofEurope.1.10.IftheCommunity growthstrategy 'formore
employment istobesuccessful ,itisimportantthatthe
guidelines itcontainsshouldalsobetranslated into
practiceinallMemberStates.Thisistruebothof
macroeconomic andmicroeconomic measures inthe
economic policyfieldandofthesocialdialogueat
Community andnationallevel.
Initscommunication ,dueforpresentation tothe
Council (Economic andFinancialAffairs)inJuly
1987,theCommission intendstoconductaninterim
assessment ofthewayinwhichtheCommunity
strategyisbeingimplemented .Discussion ofthe
Commission 'sinterimassessment couldprovidethe
Council (Economic andFinancial Affairs)withan
opportunity tofulfilthemandateassignedtoitbythe
EuropeanCouncilofTheHague'tofollowprogressin
implementation ofthecooperative growthstrategy
adoptedattheendof1985.'Inthiscontext,andin
ordertofacilitatethiswork,theCommission invites
governments oftheMemberStatestosubmitbythe
beginningofMayashortreportontheinitiativesand
tangibleeconomicpolicymeasurestakenbythemin1.9.Themeasurestoimprovemarketadaptability andthe
businessenvironment ,tofostertheestablishment of
newand,inparticular ,smallandmedium-sized
businesses ,topromotevocational trainingaswellas
toencourage thedevelopment andapplication ofnew
technologies ,mustbeadvanced asamatterof
priority .Completion oftheinternalmarketisan
essentialelementforreinforcing competition and
improving markets .Labourmarketpolicyis
especially important fortheachievement of
employment-creating growth.Thesocialpartners
shouldcontinuetopursuemoderate realwage
increasesconducive toemployment untilsuchtimeas
employment-creating investment becomessufficiently
profitable andtheunemployment rateshowsa
continuing markeddeclinefromoneyeartothenext.
Substantial progresshasbeenmadeinmoderating real
wageincreasesinmostcountriesinrecentyearsand,
providedthereisadequategrowthindemand ,this

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/11
theirowncountry .Thesereports,possibly
accompanied byreportscompiled bythesocial
partners,couldbediscussedintheEconomic Policy
Committee andasapartoftheEuropean social
dialogue .
Atnationallevel,thesociallevel,thesocialdialogue
onthevariousaspectsoftheCommunity strategyhas
notmadesufficientheadwayinmanycountries .The
Commission is,therefore ,callingonMemberStates'
Governments ,pursuant toArticle3ofCouncilDirective74/121/EECof18February 1974on
stability,growthandfullemployment inthe
Community 0),totakethenecessary initiatives ,
takingintoaccounttheparticular conditions in
individual countries .
Inaddition ,theCommission invitesthesocial
partnerstoengage,ifappropriate ontheirown
initiative ,indialogueatthenationallevelonthe
themesoftheCommunity strategy .
(')OJNoL63,5.3.1974,p.19.
2.EVOLUTION OFTHEECONOMY ANDCONVERGENCE
2.1.Theworldeconomy Ahalvingofthedollarpriceimpliesafallinthecostofthe
westernworld'sconsumption ofsomeUS$220000million.
Overahalfofthisoilistradedinternationally implyinglower
payments tonetoil-exporting countries fromnetoil
importers ofaboutUS$120000million .Thefallinthe
Community 'stotaloilbill(includingdomesticproduction ),
basedon1985consumption levels,isworthsome85000
millionECU(2,5%ofGDP),whilethenetoilimportbill
willfallbysome60000millionECU(1,8%ofGDP).Inthelast18months,therehavebeenthreestriking
developments intheworldeconomy—thehalvingofdollar
oilprices,acorrection ofthedollar'sovervaluation andthe
reduction ininterestrates.Allofthesethreeinterconnected
developments willhelptheworldeconomymoveback
towardsamorestablegrowthpathinthemediumterm.
Nonetheless ,theshort-term forecastofworldeconomic
growthisnotmuchmoreoptimisticthanitwasatthistime
lastyear.GrowthintheOECDareaasawholeisexpectedto
beabout2,5%inboth1986and1987,slightlylessthanin
1985.Theslowingofinflationcausedbytheoilpricecuthas
helpedintheloweringofinterestrates.IntheUnitedStates,
short-term ratesdeclinedby1V2percentage pointsintheyear
toJuly1986,whilelong-termratesdeclinedevenmore,by
2V2percentage points.Thereweresimilarfallsinthe
Community (whereshort-term ratesalsodeclinedby1V2
percentage pointsandlong-term ratesby2percentage
points).Themarkedeasinginmonetarypolicy,especiallyin
theUnitedStates,hassignificantly contributed tothese
interest-rate movements (seeGraphs8and9).OilpriceshavefallenfromarangeofUS$25to30perbarrel
in1985toUS$10to15perbarrelduringthecourseofthis
year.Theproportionate fallisevengreatermeasured in
Europeancurrencies .Thusthespotoilpricefellindollarsby
around50%inthe12monthstoSeptember 1986;inECUit
fellsome65%.Theimpactwillnotbelimitedtotheoil
marketitselfbuttherewillalsobewidespread indirect
effects,namelythereduction intheoilbill,the
disinflationary impulse,thebeneficial consequences for
potentialoutputinindustrial countries andthusthe
possibility ofeconomicpoliciesconsistentwithafasterrate
ofgrowth.Ahalvingofthepriceofoilisunprecedented and
theeffectsontheworldeconomycannotbepredictedatall
surely.Loweroilpricesandinterestratesleadtohigherprofitability
inenergyconsuming industries ,withthelikelihood that
industrialists mayeitherincreasenewinvestment ordelay
scrapping ofolderplant.Thiswouldimplyacertain
'supply-side 'increaseinpotentialoutput.
PricesaslowasUS$10to15perbarrelareexpectedto
induceasignificant increaseinoilconsumption andagreater
energyintensityofgrowthwhichwouldbeevenmore
markedifdomesticpricesofotherenergysourceswereto
adjusttothisfall.Domestically ,thisrisksaccentuating
problemsassociated withtheprotection oftheenvironment .
Externally ,alliedtothefallinoilsupplyfromproducing
countries ,amarkedincreaseinconsumption ofoiland
oil-basedproductswouldincreasetheprobability ofarapid
recoveryintheirprice.Thewidespread fallsininterestratesareawelcomebut
insufficient helpfortheheavilyindebted developing
countries .Ageneralized declineininterestratesof1
percentage pointiswortharoundUS$7000millionper
yeartotheindebteddeveloping countries (reflectingthe
extentoftheirshort-term orfloatingratedebt).However ,
atthesametime,theindebteddeveloping countrieshave
suffered afurtherdeterioration oftheirtermsoftrade
(-1,7%in1985)andafallintheirexportearnings
(-1,6%in1985and-0,9%forecastfor1986).Asa

NoL385/12 OfficialJournaloftheEuropeanCommunities 31.12.86
countrieshaveimprovedgreatlyin1986(by7V2%butby
morethan30%excludingintra-OECD )trade),thelargest
improvement recordedsincethewar.However ,thevolume
ofworldimports (excludingtheCommunity ),weightedby
theCommunity 'smarketshares,islikelytogrowonlyvery
slowly (about1,3%in1986,2,4%in1987).This
underlines thegrowingneedforadomestically generated
economicexpansion inEuropeasawhole.result,theyincurredalargerdeficitoncurrentaccountand
wereonthewholeunabletoincreasetheirgrowthrate
(4,1%in1985and3,3%forecastfor1986).Inparticular ,
theoilexporters (mainlyOPECbutalsoMexico,Chinaand
Malaysia )faceaperiodofausterity ,implyingacutin
imports.Theprospectsare,however,betterforsomenewly
industrialized countries (forexampleTaiwanandSouth
Korea)wherethealignment oftheircurrencies tothe
weakening USdollarhasgiventhemagreatcompetitive
advantage .
Presenteconomicindicators signalfor1987neitherstrong
growthnorarecessionintheworldeconomy .However ,
therearerisksattachedeventothisrathermoderateoutlook,
andthehypothesis oftheCommission asregardsworldtrade
couldprovetobeoptimistic .Thus:Thefallinthedollartodate,althoughlarge(33%againstthe
ECUinthe18monthstoSeptember 1986,40%againstthe
yen),isnotonitsownsufficienttoequilibrate rapidlythe
UnitedStatestradeaccount .Inthefirsthalfof1986,thefall
inoilpricescountered theeffectsonthetermsoftradeofthe
dollar'sdevaluation .However ,dollaroilpricesarenot,in
theCommission 'sshort-term forecasts ,expectedtofallmuch
further,sorisingnon-oilimportpriceswillthereafterworsen
thetermsoftrade.Intime,thiswillleadtoanadjustment in
UnitedStatesexport-import volumes ;butfor1986and
1987,itisnotyetpossibletoanticipate animprovement in
thetradedeficitsinceexpenditure onimportscouldincrease
fasterthanreceiptsfromexports (J-curveeffect).Moreover
thecurrentaccountisbeingprogressively weigheddown
withtheinterestserviceburdenoftheaccumulating foreign
debtoftheUnitedStates.ThesefactorsmeanthattheUnited
Statescurrentaccountdeficitisexpectedtoremainwellin
excessofUS$100000millionin1986and1987.The
surplusesoftheCommunity andJapanwillincrease
substantially in1986becauseoftheoilpriceeffect.Asashare
ofGDP,Japan'ssurpluscouldbeover4%in1986,a
percentage fourtimesgreaterthanthatofthe
Community .(i)Thedepreciation ofthedollarhasnotyetledtoan
acceleration ofinflationintheUnitedStates.However ,
itisprobablyonlyamatteroftimebeforethedollar's
depreciation resultsinmoremarkedimportpricesfor
theUnitedStates,andsomeupwardadjustment of
worldcommodity pricesdenominated indollars.
Therefore ,theriskofresurgentinflationshouldnotbe
underestimated .Ifacontractionary budgetary policy
requiredtoreducethebudgetdeficitweretocoincide
withatighteningofmonetarypolicyeithertoprevent
anexcessive fallofthedollar'sexchangerateorto
chokeoffarapidincreaseininflation ,thenarecession
therecouldwellresult;
(ii)Oilpricescouldrecovermorerapidlythanpresently
expected ,especiallyif,asbegantobethecasealreadyin
mid-1986 ,OPEC-countries wereabletoactinconcert
torestrictoutput.Itispossiblethatthefixingofquotas
bytheOPECcountriesinmid-1986hasalreadybegun
amovement inthisdirection .However ,itmustbe
recognized thattheoilpriceisnowpotentially volatile
inbothdirections .
(iii)Theinternational debtandbankingsystemasawholeis
stillexposedtothepossibility ofmajorcountrydefaults
stemmingfromhighinternational indebtedness andthe
ratherunsatisfactory outlook fordeveloping
countries .Asregardsdomesticadjustment policiesintheUnitedStates,
theGramm-Rudmann-Hollings DeficitReduction Act,
enactedattheendof1985,soughttoimposerigidbudgetary
disciplinereducingthefederalbudgetdeficittozerooverfive
years.However ,theoutlookfortheachievement ofthis
objectiveremainsuncertain .Nevertheless ,thepressurefor
deficitreduction fromtheUS$230000billionleveloffiscal
year1986isstrong,implyingarestrictive USfiscalpolicyfor
severalyears.Budgetary policyinJapanremainsgeared
towardstheobjectiveofstrengthening thepublicfinancesin
themediumterm.Intheautumn,aprogramme ofmeasures
supporting domesticdemandwas,indeed,adoptedbythe
Government including ,inparticular ,accelerated spendingof
3000000000000yen(1%ofnominalgrossdomestic
product )onpublicworks.Despitethesemeasures ,itappears
nevertheless thattherepercussions ofthegainsinthetermsof
tradetothewholeeconomy ,andinparticulartoconsumers ,
areonlycomingthroughunevenlyandhavenotasyet
generated thestimulatory effectwhichwasinitially
expected .Inthelastyear,theworldeconomic environment has
changeddramatically withtheloweroilpriceanddollar
exchangerateandlowerinterestrates.Themagnitude and
thesuddenness oftheassociatedimprovement inthetermsof
tradeoftheoilconsuming industrialized countries is
unprecedented inpost-warhistory .Itshouldbeexpectedthat
domestic demandintheindustrialized countries willbe
strongenoughtoavoidaslowdown inthetrendofworld
demandandoutput.However,theeconomicadjustment
processwilltaketimeandthereisadangerofdisruptions inTheoverallgrowthinworldtradeofmanufactures should
remainmoderate .Thetermsoftradeoftheindustrialized

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/13
thisprocesstowardsanew,morebalancedstateoftheworld
economy .Industrialized countries inparticular must
implement specific,coordinated policiesinordertobenefit
fullyfromtheimproved supplysideconditions andtoaccelerate theprocessofcorrecting themajorbalanceof
paymentsdisequilibria .Thedebtsituationofthedeveloping
countries isalsostillprecarious ,andrepresents arisktothe
international economy .
TABLE 1
Worldoutput,tradeandprices
1984 1985 1986 1987
Realgrossdomesticproduct—
%changeonpreceding year:
EUR12 2,2 2,4 2,5 2,8
OtherOECD 5,5 3,4 2,6 2,4
—USA 6,5 2,8 2,8 2,3
—Canada 5,0 4,5 3,3 2,8
—Japan 5,7 4,5 2,0 2,4
—restOECD 3,3 3,6 2,5 2,4
TotalOECD 4,4 3,0 2,6 2,5
Volumeofworldinports—
%changeonprecedingyear:
IncludingEUR—worldimportweights
Excluding EUR—worldimportweights
Excluding EUR—EURmarketsweights9,3
10,4
7,53,4
2,2
1,93,8
2,3
1,34,4
3,1
2,4
WorldexportpricesinUS$—
%changeonpreceding year:
Rawmaterialsexcluding fuels
Crudeoil(fob)
Manufactured products-1,5
-4,5
-2,8-10,5
-3,0
-1,23,2
-47,3
17,3-1,6
-12,9
4,0
Balanceoncurrentaccount—billionsofUSS.­
EUR12
OtherOECD
—USA
—Canada
—Japan
—restOECD2,8
-67,5
-101,6
1,9
35,1
-3,014,4
-74,4
-117,7
-1,7
49,2
-4,350,5
-65,8
-139,5
-5,4
85,0
-6,043,5
-75,5
-140,5
-6,5
79,0
-7,6
TotalOECD -64,7-60,0-15,3-32,0
OPECcountries
Otherdeveloping countries i1)
Othercountries (2)-6,0
-20,0
25,21,4
-22,2
5,0-32,2
-22,3
-1,4-24,8
-21,2
-0,7
Errorsandomissions -65,5-75,8-71,1-78,6
(!)Otherdeveloping countriesincludeChina,Yugoslavia andSouthAfrica.
(2)Othercountriesexcludeintra-Comecon trade.
Source:Commission services (basedonOctobereconomic forecasts).

NoL385/14 OfficialJournaloftheEuropeanCommunities 31.12.86
TABLE2
Thesavings/investment balancefortheUnitedStates,JapanandtheCommunity (%ofGNP/GDP)
Sourceoffunds Useoffunds
Private
savingsPrivate
InvestmentSurplus
savingsCurrent
account
surplus+General
Govt,
deficit
USA 1985
1986
198717,2
16,4
15,916,6
16.5
16.60,6
-0,1
-0,7-2,9
-3,5
-3,3+
+
+3.5
3,4
2.6
Japan1985
1986
198732,9
34,2
33,528,0
28,9
29,54,9
5,3
4,03,7
4,3
3,5+
+
+1,2
1,0
0,5
21,7
22,4
22,6EUR121985
1986
198716,1
16,5
17,05,6
5,9
5,00,5
1,2
0,9+
+
+5,1
4,7
4,1
NB:NationalaccountsdataforUSA,JapanandtheCommunity arenotonastrictlycomparable basis.
Source:Commission services (basedonOctober1986economicforecast).

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/15
GRAPH 1
Thepriceofoil
AverageimportpricesofcrudeoilintheCommunity (EUR12)inUS$,ECUandinrealterms
(Index1973=100)
(')Deflatedbythepricedeflatorofprivateconsumption .
Source:Eurostat andCommission services .

NoL385/16 OfficialJournaloftheEuropeanCommunities 31.12.86
Economic consequences oftheoilpricecounter-shock
Thefallinoilpricesisoneofthemajorfactorsintheeconomicsituationin1986.Assuminganoilprice
ofUS$15abarrelonaveragein1986(aplausible ,ifnotcertain,assumption ),thedeclineonthe
1985dollarpriceis45%.Themajordepreciation ofthedollaragainsttheECUhasfurtheramplified
thisdevelopment ,withtheECUpriceofabarrelofoilin1986about55%downonthe1985price.
Theextentofthedecline,inviewoftheimportantroleplayedbyoilasasourceofenergyinour
economies ,suggeststhatthisoilpricecounter-shock willhavemajorimplications fortheoutlookof
theeconomies ofEurope.
Theseimplications willaffectboththeshort-term andthemedium-to-long-term outlook,andthey
willextendnotonlytosupplyanddemand,butalsotoeconomicpolicy.Twopreliminary reservations
must,however ,bestated:
—Theassumption ismadehereofadefinitivefallintheoilprice.Theconsequences arethereof
assumedtohavethenecessarytimetoworkthroughtotheirfullextent(incontrasttothescenarios
presentedinthemainbodyofthetextwheretheoilpricerecoversinthemediumterm).Asaresult,
nodelayinthereactionsofeconomicagentsisintroduced while,ineconomicreality,uncertainty
onthedurabilityofthefallpotentially slowsdownchangesinbehaviour .
—Besides,otherdevelopments (e.g.thedepreciation ofthedollar)havealsooccurredin1986which
interferewiththeconsequences oftheoilcounter-shock alone.Thefavourable effectswhichcan
beexpectedforEuropecannot,therefore,betranslatedintoanimmediate andprecisely
predictable improvement intheEuropeanshort-term economicsituation .
TABLE 3
Estimated effectsofthedeclineinoilpricesfromUS$27to15perbarrel
Levelof
GNP
(as%)Levelof
consumer prices
(as%)Levelof
employment
(as%)Currentbalance
(as%ofGNP)
1986 1987 1986 1987 1986 1987 1986 1987
Estimatesof
theCommission (*)
Germany 1,4 1,7-1,7-2,40,9 1,2 1,4 0,3
France 0,9 1,9-1,4-2,20,9 1,2 1,5 0,9
Italy 0,3 2,1-1,2-2,90,2 0,7 1,5 0,5
UnitedKingdom 0,3 0,9-0,3 0,2 0 0-1,4-0,7
EUR10 0,9 1,4-1,4-2,20,5 0,9 1,0 0,5
Estimatesofthe
Hermesmodel(2)
France 1,1 1,9-3,5-4,40,3 0,5
Sources:
(')TheseestimateshavebeenmadebytheCommission servicesandarenotdirectlybasedoneconometric models.Theestimate
fortheCommunity asawhole(EUR10)isbasedonfiguresforindividualcountries .
(2)TheHermesmodel(Harmonized Europeanresearchformacrosectorial andenergysystems)isbasedontheassumption that
30%ofincreasedprofitsareinvestedinthemodernization ofindustry .

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/17
Intheshortterm,twodirecteffectsoftheoilpricecounter-shock willappear :first,incometransfers
fromoil-producing countriestonetoil-importing countries ;andsecondly ,widespread reductionin
theproduction costsofoilusers.IfoilpricesaverageUS$15abarrel,substantial transfersofincome
willtakeplace;equivalent to1,8pointsofGDPfortheEuropean Community ,withmarked
differences betweencountriesdepending ontheirdegreeofdependence (rangingfrom4,1pointsfor
Portugalto-0,8pointsfortheUnitedKingdom).Takenseparately (*),thiswouldleadtoamore
rapidgrowthinGDPatconstantprices,thelevelofwhichattheendoftwoyearswouldbe1,5%
higherthanthatwhichwouldhavebeenthecasewithoutthefallinoilprices.However ,these
favourable effectswillbeattenuated bythedecline—indeed,probably ,thecollapse—ofimportsby
oil-producing countries ,althoughitseemstobeagreedthattheoverallimpactwillstillbepostivefor
Europeancountries .Inaddition ,thefallinoilpricesshouldeasepublicdeficits(savingsinexpenditure
onenergyoffrom0,1to0,5percentage pointsofGDPandgrowthinrealtermsinthebaseoftaxation
andothercompulsory contributions ).
Theimprovement inthetermsoftradeduetotheoilpricecounter-shock willalsoleadtoavery
markeddeclineintherateofinflationintheEuropeancountries (exceptprobablyintheUnited
Kingdombecauseofthedepreciation ofsterling).Thedeclinemightbealmost2%bytheendoftwo
years.Thishasalreadyledtoamajorfallinnominallong-terminterestrates(-2,0pointsfromJuly
1985toJuly1986fortheCommunity ),while,paradoxically ,thedeclineinshort-term ratesseems
morehesitant,asitisstronglyassociated withexchange-rate movements .Thedeclineininterestrates
playsanimportant rolebecauseoftheimprovement inthesolvencyofborrowers ,evenintheshort
term,asafunctionofthepercentage oftheirborrowing thatissubjecttoadjustable rates.Thetrend
towardsdisinflation shouldalsofacilitatethetaskofthemonetaryauthorities .
Inthelong-term ,thestayingpoweroftheseeffectswilldependcruciallyonwhetheroilpricesremain
low,butalsooneconomicexpectations ofoilprices.EvenifoilpricesweretoremainclosetoUS$15
abarrelforsometime,theycouldthenbegintoriseagainunderthecombinedpressureofincreasing
worlddemandforoilanddecliningsupply.Thelong-termeffectsarethereofshroudedinuncertainty .
Supplyeffectswhich,bydefinition ,comethroughfullyonlyinthemedium-to-long term,wouldarise
mainlyfromanincreaseinprofitable capacity .Certaininvestment plansthatwouldnothavebeen
implemented withouttheoilpricecounter-shock ,becauseitwouldhavebeenimpossible togenerate
adequateprofitmargins,cannowgoahead,owingtotheimprovement inexpectedprofitability .In
theearlyyears,thiseffectmaybereinforced bydecisionstopostponethescrapping ofolder
equipment ,whichwillremainprofitableforlongerasaresultofthefallinoilprices.Althoughthese
puresupplyeffectsaredifficulttoevaluate,theymightleadtoanincreaseinproductive capacityof
2to5%inthelongtermfortheCommunity asawhole.
Thefallinoilpriceshasmajorconsequences foreconomic policy.Itislikely,soonerorlater,
depending onthecountryconcerned ,toloosenthevariousconstraints onmonetaryandfiscalpolicy
asinflationdeclines,publicdeficitscontractandthebalanceoncurrentaccountimprovesinmost
Community countries .Theindirectconsequences leadingtoagreatermarginformanoeuvre of
economicpolicywouldincrease .Thiscanonlyhelptowardstheimplementation ofthecooperative
growthstrategyformoreemployment .
(')Thisfigureisbasedontheceterisparibusassumption ,inparticularunchanged economicpolicy,andisthus
additional totheeffectsofothershocks(Gramm-Rudman-Hollings Law,weaknessofthedollar,etc.).

NoL385/18 OfficialJournaloftheEuropeanCommunities 31.12.86
2.2.TheeconomicoutlookintheCommunity level,thusbecomingthemainfactorsupportingtheupswing .
Thehighestgrowthrateofprivateconsumption ,justunder
5%,willbeachievedinGermany .
Thefundamental changesintheeconomic environment
mentioned —halvingoftheoilbill,correction oftheUS$
exchangerate,decreases ininterestandinflationrates—
haveimprovedthegrowthprospects inEuropeinthe
mediumterm.However ,atthebeginningof1986,the
economy'supturn,whichinanycasewasrathermodest,
showedsignsoffaltering .Oilproducers hadcuttheir
demandforindustrialgoodsfasterthantheoilconsumers
haveincreasedtheirdomesticdemand .OPECandComecon
countriesinparticular ,whichin1985togetheraccounted for
morethanathirdoftotalCommunity exportstothird
countries ,evenreducesignificantly theirimportsin1986(by
around25%and11%involume,respectively ).Inaddition ,
mostnon-oildeveloping countriescouldbarelystepuptheir
importsin1986duetoexternaldebtproblems ,low
commodity pricesandassociated lackofforeignexchange .
Non-Community OECDcountries didincreasetheir
imports,butintotaltheCommunity 'sexportmarketswill
barelyexpandin1986.Asaresult,inadditiontothelossin
pricecompetitiveness ,Community exportsatconstantprices
couldevenfallsomewhat .Itisthusmainlybecause
intra-Community importsarebuoyantthatmember
countriesexportsin1986willincreasebyabout2,2%in
volumeterms,lessthanhalfasmuchasin1985(5,7%).Alongside privateconsumption ,investment continues to
supporttheeconomicrecovery,eventhoughgrowthrates
herearenotashighasthosewhichweretypicalofearlier
upswings .Thisismainlyduetolessexpansionary investment
inconstruction whichin1986,however,willgrowby
around2,3%,afterdecliningin1985(—-2,6%inreal
terms).Investment inequipment isbycontraststillonaclear
upwardtrend(realincreasearound6%).Thisisconfirmed
bythemostrecentsurveysofinvestment inEuropean
industry .According tothissurvey,lastautuam'salready
expansionary investment plansofindustrialcompanies for
1986havebeenrevisedupwardsinnearlyallthemember
countries (from+7to+10%inrealterms).Investment
growthinindustryin1986thusremainsmorebuoyantthan
intheeconomyasawhole.Therelativelystronginvestment
increasein1985and1986hassofarledonlytoa
stabilization ofthenumberofindustrial jobsinthe
Community .Thisunderlines theneedforacontinuedstrong
investment trendinthecomingyearsinordertoreplacethe
jobslostasaresultofinsufficient investment activityinthe
secondhalfofthe1970sandearly1980s(seeGraph10).
Asinrecentyears,theincreaseinpublicconsumption iswell
belowtheaveragegrowthrateofdomesticdemand(1,7%).
Onthewholetherewillbeamarkedexpansion ofdomestic
demandintheCommunity in1986(+3,8%inrealterms
compared with2,2%in1985).ImportsofmembercountriesfromoutsidetheCommunity ,
ontheotherhand,willincreasesignificantly moresharply.
Externaltradewillmakeasignificant negativecontribution
totheCommunity 'srealgrowth.Withoutthisnegative
impact,growthintheCommunity wouldbemorethan
1percentage pointhigher.Thisnegativeimpulsefromthe
Community 'snetrealexportsis,however ,asubstantial
contribution totheprocessofreabsorbing theimbalances in
worldtrade.Inspiteoftheselargechangesinthevolumeof
exportsandimports,theCommunity 'scurrentaccountwill
registerasignificantly highersurplusin1986thanin1985
(equivalent tosome1,2%ofnominalgrossdomestic
productcompared with0,5%in1985),duetothemarked
improvement inthetermstotrade.Incontrasttothesituationasfarasthegrowthofrealgross
domesticproductisconcerned ,thetermsoftradeeffecthas
workedthroughalmostimmediately inthecaseofconsumer
prices,inspiteofthefactthatthereduction incostshasnot
beenfullyreflectedinfinalsellingprices.Yet,theaverage
European consumer hasbenefitted morefromthetermsof
tradegainthantheconsumerinJapan,wherearelatively
largerpartofthisexternalgainhasremainedintheenterprise
sector.AstheCommunity consumersurveyshaveshown,the
steadying ofpriceshasledtoasignificant increasein
purchasing powerinEurope.Theaverageriseinconsumer
pricesin1986(around3,7%)willbethelowestinthe
Community forthepast20years.Inthefirsthalfof1986,theweaknessinexportswasonly
partlyoffsetbybuoyantdomestic demand .Because
purchasers expectedpricestofallfurther,theyheldbackfor
atimeintheearlymonthsoftheyear.Companies
demonstrated thisbytheirpartialde-stocking ofinputs.
Consumers atfirstusedtheunexpectedly largeincreasein
realincomestobuilduptheirsavings.Butthereisevidenceof
arevivalinfinaldemand,startinginthesecondquarter.This
isalsoborneoutbytheimprovement intheconsumer
climate,aleadingindicatorbasedonregularsurveysinthe
Community .Privateconsumption isexpectedtoincreasein
1986byabout3,7%involumetermsattheCommunityDespitetheconsiderable improvement inrealpercapita
wages(2,3%,usingtheconsumerpricedeflator),reallabour
costspercapitawillremainstableintheCommunity in1986
(onthebasisoftheGDPdeflator).Thisfavourable situation ,
whichwillnotberepeatedinthecomingyears,isduetothe
largeimprovement inthetermsoftrade,whichhasreduced
companies 'costsandatthesametimeincreased the
purchasing powerofconsumers .

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/19
Theupswing ,thoughnotverydynamicsofar,hasalsohad
animpactonthelabourmarket .In1986,intheCommunity ,
thenumberofpersonsinemployment isexpectedtoriseby
0,8%,wellabovetheaverageforthe1960sand1970s(see
Table4).Inmacroeconomic termsthethreshold ,above
whichincreases inoutputbegintohaveaneffecton
employment ,appearstohaveagainbeenbroughtdown.
However ,theincreaseinemployment isalsoattributable to
specificmeasuresoflabourmarketpolicyaswellasthe
growthofpart-time employment .Theincrease in
employment willbeaboveaverageinDenmark (1,9%),
Spain(1,8%)andGermanyandtheNetherlands (1,1%in
bothcountries).Despitethemarkedriseinthenumbers
employed ,theCommunity 'sunemployment willdeclineonly
slightlyin1986(from12%in1985to11,9%,EUR12)
becausethesizeoftheCommunity 'slabourforcecontinues
toincrease (bysome0,8%in1986).Recently ,thishasbeen
duemoretotherisingparticipation rate(especiallyamong
women),thandemographic factors.
Despitethisgraduallyimproving labourmarketsituation ,
certainsegmentsofthelabourforcestillposespecific
problems .Ofparticular significance isthecontinuing risein
theshareoflong-termunemployment intheCommunity :at
presentabout40%oftheunemployed havebeenoutofwork
formorethanoneyear,compared with36%in1983.
Althoughitisdifficulttomakedirectcomparisons between
MemberStates,thereappeartobeimportant differences in
thisrespect.Forexample,whileinDenmarktheproportion
oflong-term unemployed inthetotalisonly6%,itisover
50%inBelgium,theNetherlands andSpain,andisbetween
30and40%inGermany ,France,Ireland,Italyandthe
UnitedKingdom .Thetotalnumberofunemployed young
peoplehasdeclinedslightly(from4,6millionin1985to4,5
millionin1986,i.e.about35%oftotalunemployed —
EUR9).Thisreflectsdemographic changesandspecial
effortsofMemberStatestoextendbasictrainingand
education .Nevertheless ,theunemployment ratioofyoung
personsbetween15and25yearsremainsintolerably highat
theCommunity level(around20%).
Economic outlookfor1987.Thegradualrecoveryin
economic activityintheCommunity will,in1987,be
enteringitsfifthyear.According tothenormalcyclical
patternofearlierupturns,thiswouldmarkthelatephasein
therecoveryprocess,andtheuppercyclicalturningpoint
wouldnotbefaroff.Butinthecurrentsituation ,this
conclusion seemsunfounded ,sincethecyclicalupswingthis
timediffersmarkedlyfromitspredecessors .Unlike1972/73
and1979/80,risingcapacityutilization hassofarnotbeen
associated withupwardpressureonprices,butonthe
contrarywithfallinginflationrates.Norhaveunitlabour
costsstartedtoaccelerate ,astheyhaveusuallydoneinlate
phasesofanupturn,becausethelabourshortagestypicalof
earlierrecoveries havenotoccurred .For1987,thereisnosignsofaroftheriskofoverheating .
Onaverage,forallthemembercountries in1987,the
Commission actuallyforecasts afurtherslowdown in
consumer prices(3,0%compared with3,7%in1986),
mainlybecauseofprogressinfightinginflationinthe
membercountrieswhichhavesofarstillhadhighratesof
priceincrease (Greece,Spain,PortugalandItaly).Inthe
othermembercountries theinflationrateisprobably
stabilizing attherelativelylow1986levelorwillonly
increaseslightly.
In1987,domesticdemand (+3,5%)willagainmakethe
mostimportantcontribution togrowth;theincreaseislikely
tobesomewhat lowerthanthe1986figure.Themain
growthfactorswillcontinuetobeprivateconsumption
(3,5%inrealterms)andfixedinvestment (5,1%inreal
terms);investment inequipment (6,9%inrealterms)willbe
muchmoredynamicthanconstruction (3,2%inrealterms).
Theexpansion ofpublicconsumption willstillberelatively
slow(1,3%).Inaddition,exportscanhardlybeexpectedto
provideastimulustotheEuropeaneconomyin1987.After
standingalmoststillin1986,theCommunity 'sexport
marketswillprobablygrowslightlynextyear(bysome
2,4%inrealterms)asworldtradeagainpicksupsomewhat .
Member countryexports (insideandoutsidethe
Community )couldgrowby3,5to4%in1987.But,since
Community importswillgoongrowingvigorously (around
6,5%),externaltradewillcontinuetomakeanegative
contribution totheCommunity 'srealgrowth (probably
-0,8%compared with-1,2%in1986).TheCommunity
willthereforecontinuetocontribute totheprocessof
adjusting thedisequilibria ofworldtrade.Despitethe
unfavourable trendintheCommunity 'sexternaltradein
volume,thecurrentaccountwillremainsubstantially
positive (0,9%ofGDPorUS$42000millionin1987,
I,2%ofGDPorUS$52000millionin1986).
Allinall,thegrowthoftheCommunity economyasawhole
in1987islikely,onpresentpolicies,toremainjustunderthe
3%mark.Growthrateswillrangefrom3,6%inItalyto
-0,2%inGreece.Althoughemployment isagainincreasing
(0,8%ayearin1986and1987)unemployment remains
excessively high;in1987,theunemployment rateinthe
Community ofTwelvewillprobablyonlyfallfrom11,9%to
II,7% .
Economic recoveryintheCommunity iscontinuing .Thisis
dueinlargeparttothetransferinincomesfollowing the
considerable fallinimportprices.Domestic demand,
especially privateconsumption andinvestment ,arethe
strongestgrowthelements,whiletheCommunity 'sexternal
exportmarketsareonthewholeweak.Lowerpriceincreases
andinterestratesareimproving medium-term growth
prospects .Somefirstsuccessesarebeginning toberegistered
inreducing thehighlevelofunemployment inthe
Community ,butthesefallshortofwhatisrequiredor
possible .

NoL385/20 OfficialJournaloftheEuropeanCommunities 31.12.86
TABLE4
EUR12:Maineconomicaggregates 1961to1987
(Annualpercentage changes)
1961to
19731974to
19801981 1982 1983 1984 1985 1986(»)1987(2)
rvalue
Grossdomestic Ivolume
product I^deflator10,2
4,8
5,114,6
2,2
12,110,8
-0,1
10,911,2
0,5
10,69,6
1,2
8,38,8
2,0
6,68,5
2,4
6,08,8
2,5
6,26.4
2,8
3.5
Privateconsumption deflator 4,612,1 12,1 10,4 8,4 7,0 5,8 3,7 3,0
rprivate(13)
Grossfixed Ipublic(13)
capitalformation ]total5,6
3,2
5,61,2
-0,6
0,5-1,7
-6,8
-4,1-2,2
5,3
-1,5-1,7
0,7
-0,43,5
-1,0
1,31,7
0,5
2,45,2
1,2
4,25.0
2,0
5.1
ofwhich: construction Il -2,6 2,3 3,2
equipment 8,0 6,1 6,9
Domesticdemand (const,prices) 5,0 2,1-1,8 0,8 0,8 1,4 2,2 3,8 3,5
National indicator
Gapwithrespecttoother
OECDcountries -0,6-0,2-4,1 1,0-1,9-4,2-1,1 0,4 0,9
rnominal
Compensation
ofemployees JrealA(3)
perhead 1g(3)10,0
4,7
5,214,9
2,5
2,512,8
1,7
0,610,9
0,3
0,49,9
1,5
1,47,6
0,9
0,66,8
0,8
1,06,0
-0,1
2,34,8
1,3
1,8
Productivity (4) 4,5 2,2 1,1 1,5 2,1 2,1 2,0 1,8 2,0
Realunitlabourcosts(5) 100 104,5 104,3 103,0 102,4 101,1 99,9 98,1 97,4
Profitability (5)(6) 100 67,4 60,0 60,4 62,3 64,7 68,2 75,5 79,0
Competitiveness (5)(7) 100 108,8 105,5 98,9 93,2 86,7 85,6 95,1 95,9
Employment 0,3 0,0-1,2-0,9-0,8-0,2 0,4 0,8 0,8
Registered unemployed as%
ofthecivilianlabourforce(8)(9) 2,2 4,7 7,8 9,310,3 10,8 11,1 11,0 10,8
Currentbalanceas%ofGDP -0,7-0,8 0,0 0,1 0,5 1,2 0,9
Long-term interestrate(10) 7,110,5 15,1 14,3 12,7 12,0 10,8 9,0
Moneysupply (1J) 13,5 10,6 11,6 10,6 8,7 9,4 8,4 6,5
Netlendingorborrowing ofgeneral
government as%ofGDP(12) -0,6-3,8-5,4-5,6-5,5-5,4-5,1-4,7-4,1
Publicdebtas%ofGDP 45,0 49,8 53,5 56,0 58,9 60,3 61,8
Publicdebtinterestas%ofGDP 2,9 4,1 4,6 4,9 4,9 5,1 5,1 5,0
f1)EstimatesoftheCommission services,October1986.
(2)ForecastsoftheCommission services,October1986,onthebasisofpresentpolicies..
(3)A:GDPdeflator;B:privateconsumption deflator .
(4)Grossvalueaddedperoccupiedpersoninthewholeeconomy ,onrealterms.
(5)Index:Average1961to1973=100.
{6)EUR4:D+F+I+UK;non-agricultural business .
(7)Realeffectiveexchangerate(vis-a-vistheothernineindustrialcountries )onthebasisofunitlabourcostsforthewholeeconomy .
(8)Eurostatdefinition .
(9)Excluding Greece,Spain,Portugal .
(,0)Excluding Spain,Portugal .
(u)Endofyear.BroadmoneysupplyM2orM3accordingtocountry .
(12)Excluding Greece,Spain,Ireland,Portugal .
(u)Estimate forEUR10.

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/21
TABLE 5
Importsofgoodsofthemaineconomiczones
(%changeinvolume)
1982 1983 1984 1985 1986(•)1987(2)
EUR12(includingintra-EUR ) 2,7 2,0 7,1 5,5 6,36,4
USA
Japan
OPEC-2,3
0,5
5,112,7
-2,8
-10,123,6
11,0
-7,44,7
-1,9
-11,310,9
8,5
-25,06.3
6.4
-12,5
Otherdeveloping countries -8,2-1,2 5,5 3,3 1,83,0
World -0,8 1,7 8,9 3,4 3,8 4,4
(])ForecastofCommission services;October1986.
Source:Eurostat andCommission services .
TABLE 6
Rateofchangeofdemandcomponents ,EUR12
(%changeinvolume)
1983 1984 1985 1986(')1987(>)
Privateconsumption 1,0 0,9 2,2 3,73,5
Publicconsumption 1,7 1,0 1,7 1,71,3
Fixedinvestment -0,3 1,3 2,4 4,25,1
Contribution tochangeinGDPof:
Finaldomesticdemand (2)(3)
changeinstocks(2)
foreignbalance (2)0,9
0,5
-0,31,0
-0,2
0,12,1
0,0
0,23,4
0,4
-1,23,4
0,2
-0,8
GDP 1,2 2,0 2,4 2,5 2,8
Exports (goodsandservices) 3,1 7,6 5,7 2,23,7
Imports (goodsandservices) 1,5 5,6 5,3 6,36,2
(')ForecastofCommission services;October1986.
(2)Changeaspercentage ofGDPofprecedingperiod.
(3)Excluding changeinstocks.
Source:Eurostat andCommission services .

NoL385/22 OfficialJournaloftheEuropeanCommunities 31.12.86
TABLE7
Forecastincreaseingrossdomesticproductin1986and1987
%)
19860) 1987(')
GDPin
valueGDPin
volumeGDP
deflatorGDPin
valueGDP
volumeGDP
deflator
Belgium 6,7 2,0 4,6 3,1 1,3 1,8
Denmark 7,8 2,9 4,8 5,5 1,8 3,7
Germany 7,1 3,1 3,9 4,6 3,2 1,4
Greece 23,2 0,5 22,6 12,1-0,2 12,3
Spain 15,1 2,9 11,8 9,3 3,0 6,1
France 6,9 2,2 4,6 5,3 2,5 2,7
Ireland 7,6 1,8 5,6 6,8 3,1 3,6
Italy 12,7 2,8 9,7 9,1 3,6 5,3
Luxembourg 8,0 2,4 5,4 5,3 2,6 2,6
Netherlands 2,0 1,6 0,4 0,1 1,8-1,7
Portugal 23,8 3,8 19,2 14,4 3,5 10,5
UnitedKingdom 6,3 2,3 3,9 7,0 2,7 4,2
EUR12 8,8 2,5 6,2 6,4 2,8 3,5-,
(l)ForecastofCommission services ,October1986.
TABLE 8
Indicators oflabourmarketdevelopments
Unemployment asapercentage ofthecivilian
labourforce Annualrateofchangeoftotalemployment
1960 1970 1983 1985 1986 19871961to19701971to19801981to19851986 1987
Belgium 3,12,114,313,712,913,4 0,6 0,3-0,8 0,3-0,6
Denmark 1,61,110,1 8,87,67,7 1,1 0,7 0,9 1,90,3
Germany 1,00,68,48,48,17,7 0,2-0,1-0,6 1,11,0
Greece 7,87,87,68,3-0,7 0,6 1,0 0,50,0
Spain 17,822,121,721,5 0,7-2,1-2,2 1,81,2
France 0,71,38,810,310,510,7 0,6 0,4-0,5 0,10,3
Ireland 4,75,314,918,018,418,0-0,0 0,9-0,9-1,10,7
Italy 7,24,410,912,913,412,8-0,5 0,5 0,5 0,51,3
Luxembourg 0,10,01,61,61,31,2 0,6 1,3 0,1 0,80,7
Netherlands 0,71,314,313,112,011,1 1,2 0,2-0,9 1,10,9
Portugal 10,28,78,68,5-0,5-0,3-0,7 0,30,3
UnitedKingdom 1,62,511,612,012,012,0 0,2 0,2-0,8 0,80,8
EUR12 11,012,011,911,7 0,2 0,2-0,6 0,80,8
EUR9(>) 2,52,010,311,111,010,8
USA
Japan5,5
1,74,9
1,19.6
2.77,2
2,66,9
2,86,9
2,91,9
1,42,0
0,81,6
1,02,21,7
(J)WithoutGreece,SpainandPortugal .
NB:Theunemployment ratespresentedherearebasedonthenumberofregisteredunemployed onacommonEurostatdefinition .Exceptions :forGreece,Spainand
Portugalnationalsurveyresultsarepresented .
Source:EurostatandCommission services (October1986).

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/23
GRAPHS 2to5
Comparative evolutionoftheCommunity ,USandJapaneseeconomies ,1982to1986
2.Grossdomesticproduct,s.a. 3.Industrialproduction
three-month movingaverage,s.a.
4.Unemployment rate,s.a. 5.Tradebalance
fob/cif,billionsECU,
three-month movingaverage,s.a.

NoL385/24 OfficialJournaloftheEuropeanCommunities 31.12.86
GRAPHS 6to9
Comparative evolutionoftheCommunity ,USandJapaneseeconomies ,1983to1986
6.Consumer prices
six-month change,s.a.,annualrates7.Exchange rates
IndexofSDRspercurrencyunit
8.Long-term interestrates 9.Short-term interestrates

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/25
GRAPH 10
Trendofindustrialinvestment intheCommunity (businesssurveyindicator )inthecontextofother
macro-economic indicators
1985and1986:Estimation oftheCommission 'sserviceswiththeexceptionofgrossfixedcapitalformation inindustrywhichare
basedonECinvestment surveys .
Source:EurostatandECinvestment surveys .
2.3.Nominalandrealconvergence intheCommunity
TheCommunity 'smajorpoliticaleventsofthelastyear—
agreement ontheinternalmarketprogramme ,theSingle
European Act,andtheaccessionofSpainandPortugal—all
giveheightened importance toeconomicconvergence .
Thenotionofconvergence coversessentially twodistinct
objectives .Thefirstconcernsconvergence onabetter
stabilityofprices,butitincludesalsoabettercontrolof
monetarytrends,nominalincomesandthemaineconomic
equilibriasuchasforthepublicfinancesandthebalanceof
payments ;thismaybecallednominalconvergence .The
secondobjectiveconcernstheupwardsconvergence ofliving
standards ,measuredforexamplebyrealGDPpercapitaof
theregionsandMemberStatesoftheCommunity ;butit
includesalsothedownwards convergence ofunemployment ;
thismaybecalledrealconvergence .Theseeconomicpolicy
objectiveswerealreadylaiddowninthepreambleandArticle
104oftheTreatyestablishing theEuropean Economic
Community .TheSingleEuropean Act,initsArticle130,reaffirmsandspecifiestheobjectiveof'reducingdisparities
betweenthevariousregionsandthebackwardness ofthe
least-favoured regions'.Itdesignates thisobjectiveclearlyas
anobjectiveofthecoordination ofeconomic policiesof
MemberStatesandoftheactionthattheCommunity pursues
throughitsstructural fundsandfinancialinstruments
(Article130B).
Nominalandrealconvergence aretwogoalsthatarenot
independent .Theachievement ofnominalconvergence isa
centralcondition inthepursuitofsustainable anddynamic
economicgrowth.Suchagrowthmakesiteasierforthe
relativelypoorerregionsandMemberStatestodiminishthe
gapseparating themfromthemoreprosperous ones.
Convergent andlowinflationratesarealsorequiredtosecure
stabilitywithintheEMSandenhancethepredictability ofthe
factorsdetermining investment andsavings'decisions .
Inconjunction withthecompletion oftheinternalmarket,
monetarystabilityshouldprovideamajorimpetustothe
furtherexpansion ofintra-Community trade.Inaddition,

NoL385/26OfficialJournaloftheEuropeanCommunities 31.12.86
theabsenceofseriouspublicsectororexternaldisequilibria
allowsthesteadypursuitofpoliciesfavouringvigorous
economic growth .subdued,thecourceofunitlabourcostsandmonetary
conditions mustbecompatible withpricestability .The
forecastdevelopments for1986and1987inthisregard
warrantsomeoptimismforthecourseofEuropeaninflation
ratesinthenearfuture.Growthratesofthemoneystockand
unitlabourcostsareexpectedtocontinuetheirdecline,
whilstthedifferences betweentheMemberStateswillbe
reducedfurther ..Thefollowingparagraphs reviewrecenttrendsinthemain
economic indicators thatarerelevanttotheassessment of
convergence .
Nominalconvergence .TheCommunity inflationratehas,in
linewiththedevelopments occurring elsewhere inthe
industrialized world,declinedconsiderably since1982,as
borneoutbyGraph11.ThegrowthrateoftheCommunity
privateconsumption deflatorin1986isexpectedtobe
3,7%,anachievement thathasnotbeenmatchedfor20
years.Itisforecasttocontinueitsdownward coursenext
year.Whereasmonetarypolicyhasbecomeincreasingly more
similar,therecentpublicfinancerecord,bothfromthe
viewpointoftheCommunity asawholeandasbetweenthe
MemberStates,hasbeenlesssatisfactory .Differingdegrees
ofsuccessinpruningpublicsectordeficitsmaythreatenthe
consolidation oftheconvergence towardsmonetarystability
achievedsofar.Inseveralcountries ,publicsectordeficits
haveclearlybeencurbed,butinanumberofothersthepublic
sectorborrowing requirement isstillexcessive .Mostofthe
lattercountrieshaveinrecentyearsfinancedtheirdeficit
moreandmore,byissuinginterest-bearing liabilitiestothe
non-banksector.Thissounderformofdebtfinancinghas
contributed tothepricestabilityorientedmonetarypolicy
referredtoearlier.Ontheotherhand,thepersistence oflarge
deficitshasinevitablygivenrisetoacorresponding sizeable
expansionofpublicdebtandhasexertedanupwardpressure
onrealinterestratesincapitalmarkets .Theresulting
aggravation oftheinterestpayments burdenshouldbe
interpreted asasignaltostepupeffortstocorrectpublic
financeimbalances .Ifgeneralgovernment deficitsinthese
countriesarenottrimmedfurther,thethreatofincreased
debtmonetization willberekindled .Theslowdownoftheaverageinflationratehasgonehandin
handwithasmoothreduction ininflationary disparities
betweentheMemberStates,inparticular since1984,as
illustrated byTable9andGraph12.Theseshowthatforthe
privateconsumption deflatorthisconvergence processis
expectedtocontinuein1986and1987.Thepresentannual
percentage increaseoftheprivateconsumption deflatoris
expectedtorangefromover22%forGreece—4percentage
pointsupfromlastyear'sgrowthrate—tovirtuallynilfor
theNetherlands andGermany .Table9alsoshowsthatthe
nominalconvergence phenomenon occurringinrecentyears
isevenmorepronounced amongthecountriesadheringto
theEMS.TheEMShasprovedacatalystfornominal
convergence inthatcountries inwhichinflationhasbeen
relativelyhighweresubjecttopressurefavouringbetterprice
stabilityduringlengthyperiodsofunchanged exchangerate
parities (cf.chapter4.1).Thereduction in,andimproved
convergence of,inflationratesshouldbeseenasasuccessof
economicpolicyandinparticular oftheEMS.TheCommunity onaggregate hasreduceditsgeneral
government deficitsfrom5,6%in1982to5,1%in1985,
andisexpectedtocontinuethisdesirabletrendthisyearand
nexttoreach4,1%in1987.However ,thisdeclinehasnotso
farreachedthepointofstoppingthegrowthofpublicdebtas
apercentage ofGDPfortheCommunity asawhole.This
ratiohasrisensteadilyfortheCommunity averagefrom
50%in1982andwillbehigherthan63%in1987(more
detailisprovidedinChapter4.2).Severalcountries ,for
exampleBelgium,Ireland,Italy,arenowconfronted witha
levelofdebtexceedingtheirannualGDP.Theforecastsfor
1986and1987suggestthatthesepeoccupying trendsarenot
yetbeingcorrected .Thefoundations fortherecentreduction inannualinflation
rateswerelaidbyeffortstoenhancecontrolovertheir
fundamental determining factors(seeGraph13).Monetary
policywasconductedincreasingly withaviewtowardsprice
stability,illustrated byadeclineinmoneygrowthperunitof
output.Thisdeceleration resultedinpartfromthefactthat
budgetdeficitsweremonetizedtoalesserdegree.Inaddition,
nominalwageswereadjusted ,asreflectedinamarked
slowdown inunitlabourcosts.Thefactthat,inthe
meantime ,monetary conditions andunitlabourcosts
converged betweentheMemberStatesshowsthatmost
Community countriesadoptedasimilarstabilization policy
stance .Whereastheevolutionofbudgetdeficitsstillleavesalottobe
desiredinanumberofcountries ,mostMemberStates
confronted withaseriouscurrentaccountproblemare
predictedtoseetheirsituationimprovesignificantly in1986
and1987.Table10indicatesthatDenmark ,Greeceand
Irelandwillcuttheircurrentaccountdeficitsfollowingthe
largetermsoftradeimprovement andmeasureslimiting
domesticconsumption .
Checkinginflationratesduringthisyearandnextisbeing
facilitated byfavourable yetreversibleexogenous factors,
suchasthemassiveoilpricefallandthelargedepreciation of
thedollar.Thesefactorsexertonlyaonce-and-for-all
deflationary influence .FortheinflationratetoremainRealconvergence .Upwardconvergence ,intermsofreal
grossdomesticproductpercapitaandoftheemployment

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/27
Community inGDPpercapitagrowth .Thepresentforecasts
for1986and1987suggestthatthistendencyforMember
States'realincomelevelstodivergeisnotbeingarrested .level,iscrucialtoensuringgreatereconomic andsocial
cohesionintheCommunity .Bringingaboutrealconvergence
hasclearlybecomeamoreambitious taskfollowingthe
consecutive accessions totheCommunity intheeightiesof
relativelylessprosperous butpopulouscountries .Therecent
enlargements haverenderedtheCommunity muchmore
dissimilar ,bothintermsofGDPpercapitaandof
unemployment levels.Table11,whichrankstheMember
Statesindescending orderofrealincomepercapita
(expressedinpurchasing powerstandards ),in1985,shows
thattheaverageinhabitant ofthefourpoorestCommunity
MemberStates(Spain,Greece,PortugalandIreland),
togetherrepresenting some20%ofthecurrentCommunity
population ,hadarealincomelastyearwhichwashalfthatof
theaveragecitizenofthefourrichestcountries (Germany ,
France,Denmark andLuxembourg ).Theratioofthe
extremes (PortugalandLuxembourg )wasalmostoneto
three.Theevolution since1975ofthevariousnational
unemployment rates—whichadmittedly posesome
problemsofcomparability —wasdissimilar aswell.Inthis
respect,thelevelofdispersion betweentheMemberStates
trebledinadecade,ascanbegaugedfromGraph16.This
increasing dispersion wasbothduetothedevelopment of
employment aswellaslabourforcegrowthrates,whichboth
divergedfromthemiddleofthe1970sonward .
Thesenegativetrends,asregardsrealconvergence ,sincethe
mid-seventies arealsoseenbetweentheregionsofthe
European Community ,forwhich,ofcourse,absolute
disparities areconsiderably higher(seeGraph16).The
virtualconstancy oftheindicatorofrealGDPpercapita
inequalities overthe10yearsorsopriorto1984isalso
observedamongtheregionsofeachofthemajorMember
States.Noneofthecountrieshaswitnessed asignificant
reductionofregionalGDPdifferences .Theworsening ofthe
unemployment convergence recordbetweenMemberStates
isalsoparalleled attheregionallevel.Whereastheweakest
25regionsoftheCommunity hadanaverageunemployment
rateof8%in1976,relativeto2,4%forthe25strongest ,the
figuresregisteredfor1985stoodrespectively at21,1%and
6,6%.Duringthe1960s,whenEuropean economicgrowthwas
dynamic ,worldtradeliberalized andthecustomsunion
established ,theCommunity madeswiftprogressinreal
convergence .RealGDPpercapitaaswellasunemployment
levelsconverged betweentheMemberStatesuntilaboutthe
middleofthe1970s(seeGraph14andGraph15).Graph15.
shows,forinstance,thatfrom1960uptothefirstoilshock,
thefourrelativelypoorestcountriesoftheCommunity
managedtoreducethegapseparating themfromthefour
richestMemberStatesbyaboutone-third .Atthattime,the
reduction oftheMemberStates'dispersion aroundthe
EuropeanaveragecoincidedwitharapidrealGDPpercapita
expansionfortheCommunity asawhole(4,0%perannum,
cf.Table11).ItappearsthatamoredynamicgrowthoftheEuropean
economy isanimportant condition fortherelatively
backward regionstocatchup,andforthedeclining
industrial regionstoconvert.Theimplementation ofthe
cooperative strategy,aswellasthecompletion ofthe
Community internalmarket,wouldhelpassurethis
favourable economic climatewhichisindispensable .
However ,toreducerealincomeinequalities withrespectto
therelativelymoreprosperous areasoftheCommunity ,the
relativelypoorerregionsshouldnotonlyshareintheoverall
Europeaneconomicexpansion ,buttheirgrowthshouldalso
befasterthantheEuropeanaverage .Therefore ,besidesthe
establishment ofamoredynamicgrowthclimateinthe
Community ingeneral,itisequallynecessarytocreateinthe
regionsinquestionsoundconditions foradurableandstable
economic expansion .Thisexperience showsthattheachievement ofadynamic
economicgrowthintheCommunity isanimportantfactorin
sustainingtheprocessofrealconvergence .IftheCommunity
weretogenerateadevelopment duringthenext10to15
yearssimilartothe1960s,theobjectiveofrealconvergence
andgreatereconomic cohesionwouldbebroughtmuch
nearer.However ,theconditions ofthe1960sarenolonger
presentandtheCommunity musttakeaccountofthis
fact.
Since1975,whentheworldwide economiccrisistriggeredby
thefirstoilshocksetin,andthetrendrateofeconomic
growthwassizeablyreduced,therealconvergence processin
theCommunity has,however ,beenstalled,evenreversed .
Thisphenomenon canbeseenforbothrealgrowthandthe
unemployment performance .Thefourrelativelypoorest
countries togetherhavefallenshortoftheaggregate
Europeangrowthratesincethefirstoilshock,onaccountof
theslowexpansion experienced inGreeceandparticularly
Spain.Meanwhile ,Germany andDenmark ,thetwo
relativelyrichestcountriesafterLuxembourg ,outpacedtheTheregionalcatch-upandreconversion processhastobe
based,amongotherfactors,onfreshprivateandpublic
investment ,whichwillrequirethemobilization of
considerable funds.Thelattercaninpartbegenerated at
homebydeveloping domesticsavings,butinvestment inthe
poorercountries andregionswillalsorequiresufficient
capitalmovements .Spontaneous capitalinflowsinthese
areasoftheCommunity willgathermomentum provided
theirexpectedprofitability isadequate .Tothisend,the
authorities intheseareasshouldpursuepoliciesaimedat
creatinganenterprise-friendly economic andpolitical
environment .Theremovalofcapitalcontrols ,proposedby

NoL385/28 OfficialJournaloftheEuropeanCommunities 31.12.86
theCommission ,willalsopromotecapitalinflowsasit
dispelsforeigninvestors'fearsinrelationtothemobilityof
theirfunds.However ,pastexperience suggeststhatprivate
capitalinflowsaloneareofteninsufficient .Tothismustbe
addedadetermined actiononthepartofthepublic
authorities ,inwhichtheCommunity hasanimportant role
toplaythroughitsstructuralfunds,theEuropeanInvestment
Bankanditsotherfinancial instruments .
Inaccordance withArticle130DoftheSingleEuropeanAct,
theCommission willsubmittotheCouncilageneral
proposalintendedtomodifythestructureandtheoperating
rulesofthestructural funds.
Itsobjective isto:
—specifyandrationalize theroleofthesefundssothatthey
contribute bettertoachievingtheobjectivesofeconomic
andsocialcohesion ,
—reinforcetheirefficiency ,
—permitbettercoordination betweentheoperations ofthe
fundsthemselves ,andinrelationtothefinancial
instruments oftheCommunity .
Inthisway,itshouldbepossibletoassureanimportant
contribution totheeconomic andsocialcohesion ofthe
Community .Moreover ,thereinforcement oftheprocessof
realconvergence willalsocontribute totheoveralldynamics
oftheCommunity .TheCommunity hasregistered intherecentpastsignificant
progressasregardsnominalconvergence .Inflationratesin
mostcountrieshavecomedowninthelastfewyearsasa
resultoftheconductofeconomicpolicyingeneralandofthe
functioning oftheEMS.Thecorrection ofcurrentaccount
imbalances isalsobeingundertaken withsuccess.Inseveral
countries ,publicsectordeficitshaveclearlybeencurbed,but
inanumberofothersthepublicsectorborrowing
requirement isstillexcessive .Intheperioduptothe
mid-1970s ,theCommunity witnessed bothsustainedand
dynamicgrowthandanimprovement ofrealconvergence .
Sincethen,however,thelatterprocesshasbeenarrested,
evenslightlyreversed .Forrealconvergence inthe
Community toresume,severalcomplementary conditions
needtobefulfilled .First,itisnecessary tocreateamore
dynamicgrowthenvironment intheCommunity asawhole,
whichisacentralobjectiveoftheCooperative Strategy .
Secondly ,itisnecessaryforthebusinessenvironment inthe
relativelybackwardandinthedecliningindustrialregionsto
beimproved throughappropriate adjustment policiesthat
aretheresponsibility ofnationalandregionalauthorities .
Thirdly,itisnecessarythattheCommunity ,throughits
financialinstruments andtheintervention oftheEuropean
Investment Bankontheonehand,anditsstructuralfundson
theother,complements theeffortsoftheauthorities ofthe
disadvantaged regionstoestablish thefoundations of
durableeconomicgrowth .Inthisway,itcanmakean
important contribution toachieving greatercohesion
between theregionsandMember Statesofthe
Community .

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/29
TABLE 9
Privateconsumption prices(deflator,%changeperannum)
1961to
19691970to
19771978 1979 1980 1981 1982 1983 1984 1985 1986 1987
Belgium
Denmark
Germany
Greece
Spain
France
Ireland
Italy
Luxembourg
Netherlands
Portugal
UnitedKingdom3,2
5,7
2,7
2.4
5,9
4,2
4,5
3,7
2,3
4,0
2,6
3,77.4
10,0
5.5
10,5
13.4
8,3
13.8
12.9
6,8
8,0
13,1
12.54.1
9.2
2,8
12,8
19,2
8,7
8,0
12,9
3.4
4.5
21,0
9,13,9
10.4
4,0
16.5
16,2
10.4
14,9
15,1
5.2
4.3
24,0
13.56,5
10,7
5.8
21,2
15,6
13.2
18,6
20,2
7,7
6.9
22.3
16.48,1
12,0
6,0
23,3
15.1
12,8
21.2
19,2
8,6
6,3
16,9
11,57.4
10,2
4,7
21,2
14,2
11,2
16,0
17,0
10,6
5,3
22,5
8.57,5
7,2
3.1
18,6
12,2
9,5
8.2
15,1
8,0
2,8
25,5
5,25,9
6,5
2.4
18,0
11,1
7.3
8.5
11,1
6.4
2.6
29,3
5,14,8
5.0
2.1
18,4
8.4
5.5
4.2
9,4
4,0
2.6
19,3
5.31,3
3,3
0,0
22,5
8,6
2,5
3,7
6,2
0,5
0,0
11,8
4,01,5
2,8
1,1
12,5
5,3
2,3
3,2
4,0
1,3
-1,0
9,0
3,9
Averages
EUR12
EUR10
EMS3,7
3,6
3,69,8
9,3
8,59,0
7,7
7,210,6
9,8
8,713,2
12,9
11,612,1
11,7
11,510,4
9.8
9.98,4
7,7
8,17,0
6,2
6,25,8
5,3
5,03,7
3,1
2,43.0
2,6
2.1
(a)Meandeviationfrom
theaverage
EUR12
EUR10
EMS1,2
1,0
1,03,1
3,0
2,53,7
3,1
3,64,2
4,0
4,24,5
4,8
5,03,9
3,9
4,64,0
3,9
4,34,2
3,9
4,13,3
2,8
3,02,5
2,1
2,32,7
2,3
2,01,6
1,4
1,1
(b)Meandeviationfrom
theminimum
EUR12
EUR10
EMS3,3
1,8
1,55.3
4,9
3.46,1
4,9
4,46,7
5,9
4,77,3
6,9
5,86,1
5,7
5,45,8
5,2
5,25,6
4,9
5,34,6
3,8
3,83,7
3,3
2,93,7
3,1
2,34.0
3,6
3.1
Source:EurostatandCommission services ,October1986.
TABLE 10
Currentaccountofbalanceofpayments asapercentage ofGDPI1961to
19701971to
19801981 1982 1983 1984 1985 1986Difference
betweenl986
and-19821987
Belgium/Luxembourg 0,9 0,6-3,2-2,0 0,5 1,1 1,8 3,5 5,5 3,8
Denmark -2,2-2,9-3,0-4,2-2,2-3,2-4,4-4,1 0,1-3,6
Germany 0,7 0,6-0,7-0,5 0,7 1,0 2,2 3,2 2,7 2,1
Greece -3,1-2,2-0,2-3,8-4,7-4,1-8,4-5,8-2,0-3,7
Spain -0,9-2,4-2,3-1,4 1,3 1,7 3,5 5,9 3,7
France 0,2-0,4-1,4-3,0-1,7-0,9-0,8 0,1 3,1 0,4
Ireland -2,3-6,4-14,8-10,7-6,9-5,7-3,2-1,3 9,4-1,3
Italy 1,8-0,2-2,3-1,6 0,2-0,8-1,1 1,2 2,8 0,9
Netherlands 0,0 1,2 2,1 2,8 2,9 4,1 4,3 3,9 1,1 2,8
Portugal -1,0-3,3-11,7 13,5-7,2-3,0 1,8 5,4 18,9 4,2
UnitedKingdom 0,0-0,6 2,4 1,5 0,8 0,3 1,0-0,1-1,6-0,6
EUR12 0,4O -0,1-0,6-0,6 0,0 0,1 0,5 1,2 1,8 0,9
1EUR10.

NoL385/30 OfficialJournaloftheEuropeanCommunities 31.12.86
TABLE 11
RealGDPpercapitaexpressedinpurchasing powerstandards
1960 1965 1970 1975 1980 1985
Luxembourg 145,4 135,5 128,8 126,9 124,4 129,3
Denmark 126,6 129,5 123,5 117,7 115,9 123,9
Germany 123,4 121,5 118,7 114,5 119,3 121,6
France 104,9 106,9 109,9 114,4 115,6 114,0
Belgium 103,4 104,7 107,1 111,0 112,2 109,8
Netherlands 118,3 114,9 115,6 114,7 110,9 106,1
UnitedKingdom 125,8 116,5 105,9 103,5 98,7 102,0
Italy 83,5 85,4 92,2 89,3 93,3 91,7
Spain 59,9 69,8 73,7 81,6 75,2 75,0
Ireland 67,3 65,9 66,7 68,5 70,4 70,7
Greece 39,1 46,1 52,3 57,7 59,0 57,1
Portugal 32,8 36,5 41,2 43,5 47,3 46,2
EUR12 100,0 100,0 100,0 100,0 100,0 100,0
USA 186,6 179,5 163,0 154,7 152,6 157,6
Japan 63,1 79,7 104,3 106,5 114,0 128,1
EUR12(1960=100) 100,0 121,8 147,7 166,4 189,0 198,2
USA(1960=100) 100,0 116,9 129,5 137,7 154,4 166,9
Japan(1960=100) 100,0 153,5 244,0 280,1 340,6 401,4
Source:Commission services .

31.12.86 OfficialJournaloftheEuropean Communities NoL385/31
GRAPH 11
Theevolutionoftheprivateconsumption deflator
(%annualrateofgrowth)
Source:Commission services .

NoL385/32 OfficialJournaloftheEuropeanCommunities 31.12.86
GRAPH 12
Privateconsumption deflator
WeightedaverageEUR12andMemberStates'highestandlowestinflationrate
Source:Commission services .

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/33
GRAPH 13
Privateconsumption deflator,unitlabourcosts,andgrowthofmoneystockperunitofoutput
Weightedaveragepercentage changesEUR12
(')Broadmoneysupply(M2orM3)dividedbyGDPatcurrentprices.
Source:Commission services .

NoL385/34 OfficialJournaloftheEuropeanCommunities 31.12.86
GRAPH 14
TheevolutionofrealGDPpercapita:inequalities betweenMemberStates(')
StandarddeviationofrealGDPpercapitaasaratiooftheCommunity averageinpercentage terms
(')Theinequalities aremeasured bytheweightedvariationcoefficient .
weightedstandarddeviationTheweightedvariationcoefficientmeanx100reportsthedegreeofrelativedispersion aroundthe
average .
Adecreaseofthecoefficient signifiesareductionofdispersion .
Source:Commission services .

31.12.86OfficialJournaloftheEuropeanCommunities NoL385/35
GRAPH 15
Relationship betweenincome(*)perpersoninthefourpoorestandfourrichestcountriesintheCommunity :
EUR12(asapercentage )
(')GDPperpersonatconstantpricesandpurchasing powerstandardsof1980.
Source:EurostatandCommission services .

NoL385/36 OfficialJournaloftheEuropeanCommunities 31.12.86
GRAPH 16
Theevolutionofunemployment disparities (*)betweentheMemberStatesandbetweentheregionsofthe
Community
StandarddeviationfromCommunity unemployment rate
(])Disparities aremeasuredbypopulation weightedstandarddeviations .Regionsareselectedatlevel'II'ofdisaggregation .These
concern,forinstance,Regierungsbezirke inGermany ,reggioniinItaly,regionsinFrance,groupsofcountiesfortheUK,
provincesforBelgiumandtheNetherlands .Neitheroftheaggregates includesGreece.Figuresfortheinitialyearsarefor
EUR9.
Source:Commission services,Directorate-General forRegionalPolicy.
3.THECOOPERATIVE GROWTH STRATEGY FORMOREEMPLOYMENT
3.1.Objectives andmethods
IntheshapeoftheAnnualEconomic Report1985/86,the
Counciladoptedastrategyforsecuringasignificant and
sustainedreduction intherateofunemployment inthe
Community bytheendofthedecadebytacklingtheveryroot
oftheproblem .Toillustratethisobjective ,areductionof
some30to40%inthenumberofpeopleoutofwork
(representing between4and5millionpeople),thatistosay,
adeclineinunemployment equivalent tobetween3and4
percentage pointswascited.
Following theaccessionofSpainandPortugal ,thebasic
problemremainsthesame,asbothcountriesarealsofaced
withmassiveunemployment (in1986:21,7%inSpainand
8,6%inPortugal).Asaresult,theaverageunemployment
ratefortheCommunity ofTwelvestandsat11,9%in
1986(M.Intheirmedium-term analyses ,theCommission services
maketheassumption thatthelabourforceintheCommunity
willexpandinthecomingfiveyearsatanannualrateof
0,3%.Underthecircumstances ,areduction of3to4
percentage pointsinunemployment by1990willrequirean
annualincreaseinemployment ofbetween 1and1,5%until
theendofthedecade .
AsinthelastAnnualReport,medium-term scenariosareset
outbelowinordertoillustratetheordersofmagnitude and
themeasuresadvocated (seebox).
Afirstscenario ,thebaselinescenario,illustrates the
devolopment thatwouldtakeplaceifpresentpatternsof
behaviour andpoliciesremained unchanged .Itdoes,of
course,takeaccountofthechangesintheinternational
environment inrecentmonthsandofthelatestforecasts
compiledfor1986/87.
Onaveragefortheyears1986to1990,thegrowthrateis
expectedtobe2,7%(EUR10)whileemployment will(')Incalculating anaveragefortheCommunity ofTwelve,the
figuresusedforGreece,SpainandPortugalarenotentirely
comparable withthosefortheothercountries ,cfTable8.

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/37
Inthiscontext,investment ,bothprivateandpublic,isakey
variable .probablygrowoverthesameperiodbyanannualrateof
0,7%,whichwouldstillnotbesufficient toreduce
unemployment significantly ;in1990,theunemployment
rate(EUR10)isthusexpectedtobearound9,7%ofthe
labourforce,insteadof10,8%in1986.IntheCommunity
ofTwelve,theunemployment ratewould,therefore ,exceed
10%.Underthecooperative strategy,investment firstofall
strengthens thedynamicsofdemand,withoutwhichany
increaseinthegrowthrateisimpossible .Fromthepointof
viewofsupply,itreinforcesthecapitalstock.Fortheretobe
areturntolasting,highergrowth,thecapitalstockneedsto
beincreasedmorerapidly,andhencetheproportion of
resourcesgoingeachyeartopublicandprivateinvestment
increased .FortheCommunity ofTwelve,thatproportion is
stillalmost4percentage pointsofGDPlowerthanitslevelin
the1960s,withagoodthirdofthisdeclinebeingattributable
tothefallingshareofGDPaccounted forbypublic
investment .Amoredetailedanalysisof1986and1987intermsofthe
imperatives ofthecooperative strategyistobefoundin3.2of
thisreport.Itwillmakeitpossibletoassesstowhatextentthe
morefavourable trendin1986and1987istheresultofa
changeinbehaviour patternsinthedirectionsoughtbythe
cooperative strategyandoftheexceptional improvement this
yearinthetermsoftradefortheEuropean economy .
Inanyevent,however ,itisclearthattheproblemof
unemployment willnotgoawaybyitself.Thisiswhy,while
takingintoconsideration recentshort-term economic
developments ,thisAnnualReportrecommends anumberof
measuresthatareconsistent withthecooperative strategy
definedlastyear.Thedataavailableonthemarketsector(excluding housing
andagriculture )inthefourlargestCommunity countriesalso
pointtotheneedforasignificant riseintheinvestment ratio.
Takingtheaverageforthosefourcountries ,thegrowthof
thecapitalstockisstillunchanged atitslowestlevelsince
1980,i.e.around2,5%(cf.Graph18).Forittogrowagain
atanunderlying rateof3,5%and,insodoing,tounderpin
onasustainable basisanequivalent rateofgrowthof
production ,investment wouldhavetorisebybetween2and
3percentage pointsofvalueaddedinthemarketsector
(assuming aconstantintensityofcapital).Theinvestment
driverequiredisthereforesubstantial .Thesemeasures andtheirmedium-term effectwillbe
discussed indetailbelow(3.3andChapter4).Theiraim
mustbetoreduceunemployment intwoways:firstthrougha
returntoasustainedrateofgrowththatshouldaverage
between3%and3,5%intheperiod1986to1990and,
second,bymaintaining andevenraisingtheemployment
contentofeachpercentage pointofgrowth .Basically ,these
measures arecentredaroundtwomainobjectives :the
macroeconomic objectiveaimsatholdingdemandatan
appropriate levelandatraisingtheprofitability ofmore
employment-creating investment bymaintaining amoderate
increaseinrealwagecostsperhead.Themicroeconomic
objectiveaimsatcontinuing toimprovetheadaptability of
themarketsforgoodsandthefactorsofproduction ,and
toprovidetherightclimateforthecreationofnew
businesses .Toachievethedesiredreduction intheunemployment rate,
thereisalsoaneedforacontinuing increaseinthenumberof
jobscreatedforeachpercentage pointofgrowth.Froma
historicalviewpoint ,therelationship betweengrowthand
employment has,inanyevent,shiftedsincethe1960sinthe
latter'sfavour.Thisisclearlyillustrated bythenarrowing of
thegapbetweeneconomic growthandtheincreasein
employment ,thatistosay,bytheloweringofaverage
productivity perpersonemployed (seeGraph17).Therather
favourable responseofemployment tothemodestrecovery
ingrowthsince1983isalsosignificant here.
Thefactthatproductivity gainsperpersonemployed inthe
wholeeconomyarestillrelativelymodestdoesnot,however ,
meanthatEuropemustbecontentwithadefensive
employment strategyandshouldsteerclearoftechnical
progress .Quitethecontrary ,modernization ofproductive
capacities ,coupledwithlargeproductivity gainswherever
thisispossible ,isdesirabletoincreaseeconomic efficiency
andlivingstandards ,andisnecessaryifEuropeistobeable
toreinforceitscompetitiveness andassertitspresenceon
thoseparticularly important future-oriented marketson
whichithaslostgroundduringthe1970s.Thus,forexample,inthescenarioillustrating the
cooperative strategythisyear,thegrowthrateisexpectedto
average3,5%intheperiod1986to1990,afigureindicated
inlastyear'sReport.Theunemployment ratecouldbecutby
some4percentage pointsby1990,tostandataround7%in
theCommunity ofTen(around8%intheCommunity of
Twelve).However ,growthaveraging closeon3,5%inthe
period1986to1990isassumedtoaccelerategradually .In
thissituation ,employment couldevenincrease ,towardsthe
endofthedecade,atarateofabove1,5%.Thedetermined
application ofthestrategyshouldthusleadtoasituationin
1990inwhichnotonlytherateofunemployment wouldbe
alreadysignificantly reduced,butalsotheEuropean
economywouldbeinabetterstatesothat,inthefollowing
years,anadequategrowthinconditions ofstabilitycouldbe
expected ,andfurtherrapidreduction inunemployment
achieved .Itisthereforenecessarytoreconcilethemodernization of
productive capacitywiththecreationofasufficientnumber
ofjobsintheeconomyasawhole.Thisispossiblesincethe

NoL385/38OfficialJournaloftheEuropeanCommunities 31.12.86
relationship ,atthemacroeconomic level,betweengrowth
andemployment isinrealitytheresultofseveralfactors:
(i)Inasituationofmoredynamicgrowth,therateof
utilizationofthecapitalstockisabletorisetoahigher
levelonadurablebasis,thusimproving capital
productivity andsocreatingconditions favourable to
extraemployment .fallalsobenefitsthosesectorswhereproductivity gains
areweaker.Ineffect,thankstothecorresponding
increaseintheirrelativeprices,sectorswithweak
productivity gainscanmaintainprofitability andsoare
inapositiontocreatejobs.Thereisthusatransferin
purchasing powerbetweensectorswhichisrelatedto
technical progress ,andwhichisfavourable to
employment (1).
Forthismechanism tofunctionwell,whichisdesirable
fromthepointofviewofemployment ,twoconditions
must,inprinciple,befulfilled:moderategrowthinreal
wagecostsperheadmustalsobenefitthosesectors
whereproductivity gainsareaboveaverage.In
addition,marketsmustplay,asefficientlyaspossible,
theirroleinformingprices:astrengthening of
competitive forcesandcompleting theinternalmarket
willcontributetothis.Astablemonetaryenvironment
alsomakesthemarketsignalsrelativetopricechanges
thatmuchclearer .(ii)Thereductionandreorganization ofworkingtimecan
contributetoanincreaseintheemployment contentof
growth.Suchareductioncantakeeffectthroughan
increaseinpart-timeworking,orbyareductioninthe
lengthoftheworkingweekoryear.However ,these
measures willonlybefullyeffectiveintermsof
employment iftheydonotputabrakeonthe
mechanisms whichlead,atthemacroeconomic level,to
strongerandmoreemployment-creating growth,andif
theyareneutralforthelevelofcosts.Inthiscase,the
productivity gainsdistributed canalsobeintheformof
areduction inworkingtime.Inaddition ,theincreasein
thenumberoftemporary workersandworkersonfixed
contractscanbeafurtherfactorinraisingthejob
contentofgrowthinparticularwherefirms,asaresult,
decidenottointroduce overtimeworking .Such
measures cominglargelywithintheambitof
agreements betweenthesocialpartnersshouldformthe
basisforadeeperdialoguebetweenbothparties.Thus,amoderategrowthinrealwagecostsintheeconomy
asawhole,modifying therelativeremuneration oflabour
andcapitalinadirectionfavourabletothelatter,alsoworks
—atthemicro-andmacroeconomic level—infavourof
employment .Therefore ,onacompanylevel,itencourages a
moreextensiveutilizationofthecapitalstock.Atthesame
time,however ,itcontributes tothecreationofbetter
conditions forthedevelopment ofactivitieswhicharemore
employment-creating .
Animportantaspectofthemeasuresrecommended bythe
cooperative strategyisthusclearlydiscernible ,viztheclose
complementarity thatexistsbetweenthem,irrespective of
whethertheyaremacroeconomic ormicroeconomic
measures .Anacceleration ingrowthwillbeallthemore
conducivetoemployment iffirmsareabletorespondflexibly
toincreaseddemand .However ,greateradaptability ofthe
marketsingoods,labourandcapitalisnotsufficientbyitself
toencouragefirmstoundertakeinvestment theprofitability
ofwhichisnotalsoassuredbyfavourabledemandprospects .
Inthefinalanalysis,itiswithinacontextofdynamicgrowth
thatincreasedmarketadaptability willbefullyjustified,both
economically andsocially.Failingthat,theremaybea
resurgenceofdefensivebehaviourthatwilljeopardizethe
veryfoundation oftherenewaloftheEuropeaneconomy .(lii)Finally,thereisalong-termtrendstemmingfromthe
gradualrestructuring ofemployment infavourof
sectorswithlowproductivity gainsperperson
employed ,notablytheservicesector,andtothe
detrimentofindustry,whereproductivity gainsare
higher.Thus,between1970and1983,theshareof
employment intheCommunity (EUR6)accountedfor
bymarketandnon-market servicesrosefrom48to
59%.Atthesametime,productivity intheservice
sectorroseatanannualaverageofonly1,6%during
thesameperiod,andthatinmanufacturing by
3,3%.
Thefactthattrendsinproductivity gainsbetween
sectorsandbetweenfirmshavedifferedisonlytobe
expected .Evenso,favourable conditions mustallow
theproductivity gainsrealizedinthemoredynamic
sectorstobeenjoyedthroughout theeconomyand,in
thefinalanalysis,tocreatejobs.Moderategrowthin
realwagecostsperheadinallsectorsoftheeconomy
andthemechanism ofrelativepricesplayakeyrole
here.
Ineffect,whensectorswithhigherthanaverage
productivity gainstakeadvantage ofthissituationto
lowertheirpricesinrelativeterms,notonlydothey
improvetheircompetitivity andareabletoincrease
production inresponsetoincreaseddemand,butthisWithoutarapidchangeinattitudesandpolicies,the
Community willstillbefacedwithunemployment ofover
10%in1990.Thisisanunacceptable prospect .Asignificant
v)Fortherelativegrowthofemployment ,productivity andprices
withinthedifferentsectorsoftheCommunity ,seechapterB.3of
theAnnualEconomicReview1986/87.Table14ofthisreport
showsthatthismechanism hasalsohadaparticularly strong
effectinJapan:thedifferencesbetweengainsinproductivity ,but
inadditionchangesinrelativeprices,wereparticularly large
betweenindustryandtheothersectors.Thedynamism of
Japaneseindustryhasalsoprofitedothersectorsoftheeconomy
which(takentogether )weretheonlyonestohaveincreasedtheir
employment .

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/39
consumption deflator,i.e.intermsofpurchasing power,is
expectedtoincreaseby2,3%,fasterthanatanytimesince
1980.
Furthermore ,loweroilpriceswillhaveapositivedirecteffect
onthelevelofeconomically productive capacities ,either
throughmoreextensiveuseoftheexistingcapitalstockor
becausefirmswillkeepinoperationlonger,plantthatwould
otherwisehavebeenscrapped .andlastingreduction inunemployment canbeachieved
throughmorebuoyantandemployment-creating growth,of
theorderof3to3,5%onaverageintheyears1986to1990.
Investment playsakeyrolehere.Itsshareofvalueadded
wouldhavetoincreaseprogressively byaround3percentage
pointsintotal.Furthermore ,therelationship between
growthandemployment mustimprove .Thisdoesnotmean
thatEuropecanbecontentwithadefensivestrategy
regardingemployment .Onthecontrary,competition from
outsidemakesitnecessary tomodernize production
structures .Therelationship thatisemergingbetweengrowth
andemployment is,however,determined byotherfactors,
suchasareductionandreorganization intheaverage
workingtimeofeachpersonemployed ,whichisneutralfor
theoveralllevelofcosts,morerapidjobcreationinsectors
withrelativelylowproductivity gains,andthemoderate
growthofrealwagecostsperheadinallsectorsofthe
economy .Ineffect,whensectorswithmorethanaverage
productivity gainsalsobenefitfrommoderategrowthinreal
wagecostsperhead,theyareabletoreducetheirrelative
prices.Thisimprovestheirowncompetitivity andalso
benefitsthesectorsofweakerproductivity growth,whothus
seetheirprofitability improving andsoareabletocreate
jobs.Technicalprogressandincreasingemployment canbe
reconciled witheachotheratthemacroeconomic level.
Thesefactorsareconditioned ,toalargeextent,byan
increasedadaptability ofmarkets .Suchadaptability will,
however,finditssocialjustification onlywithinacontextof
moredynamicgrowth .Thisunderscores theclose
complementarity ofthemeasures recommended bythe
cooperative strategy,eitheratthemacroeconomic or
microeconomic level.Variousindicators bearwitnesstotheturnaround inthe
trendofthe1970stowardsdeteriorating supply-side
conditions .Theturnaround ,infact,datesfromthe
beginningofthe1980s:
—since1980,reallabourcostsperhead(wagesplussocial
securitycontributions )intheCommunity haverisenon
averagebyonlysome1%ayearcomparedwith2,4%
between1973and1980.Majorsacrifices have,
therefore ,alreadybeenmadeinanumberofcountriesby
employees ,especially since,inmanycases,their
disposable incomehasbeenerodedbyevenhigher
taxationandparafiscalcharges,
—realunitlabourcostsintheCommunity ,whicharea
measureoftherelativemovements ofrealcompensation
ofemployees andlabourproductivity ,arenowbackata
level,approaching thatrecordedinthe1960s,
3.2.Forecastsfor1986and1987seenfromtheviewpointof
thecooperative strategy—theaccompanying riseinthemacroeconomic profitshare
(operatingsurplusonvalueadded)hasledtoafurther
increaseintheprofitability ofproductive capital
(operating surplusonthecapitalstock).Evenso,
profitability hasasyetmadeup,onaverageforthe
Community ,onlysomeofthegroundlostsincethefirst
oilshock(seeGraph18),
—forthefirsttimeinatleast20years,profitability is
outpacing realwagesperheadinalastingfashion.Intermsoftheambitious objectives setinthecooperative
strategy,forecastsfor1986and1987arehardlysatisfactory .
Inbothyears,economic growth (2,5%and2,8%,
respectively )andtheincreaseinemployment (0,8%on
average )willfallshortoftheunderlying ratenecessary .Of
course,thereturntoastrongergrowthratecantakeplace
onlygradually .However ,theslownessoftheprocessatthe
momentisworrying ,especially sincetheCommunity is
enjoyingthebenefitsofasubstantial improvement inits
termsoftradethatis,inprinciple ,influencing theconditions
ofsupplyanddemandinthemanneraimedatinthe
cooperative strategy .Nevertheless ,itwouldseemthatthedevelopment ofreal
labourcostsperheadisaccelerating in1987.According to
mostrecentforecasts ,theyareexpectedtoriseby1,3%,
theirfastestincreasesince1980.Realunitlabourcostswill
probablydeclinebyonly0,7%,arateslowerthaninany
otheryearsince1981.Atthesametime,thesituationisalso
lessencouraging asfarasexternalcompetitiveness is
concerned .Theimprovement inthetermsoftradehasprovidedthe
Europeaneconomies withanopportunity toobtainafurther
improvement inprofitability whilepermitting arelatively
sustained increaseinrealhousehold income .Thefallin
pricesofimportedgoodsishavingabeneficialeffectnotonly
onfirms,butalsoonhouseholds ,whichconsumefinal
products .Forexample,realpercapitacompensation of
employees islikelytobemoreorlessstableintermsofcosts,
whereasrealcompensation perhead,adjustedbytheprivateIndeed,theECUroseby42%againsttheUSdollarbetween
March1985andJune1986andfellbyonly7,4%againstthe
yen.Ofcourse,foreachoftheEuropeaneconomies taken
separately ,theeffectoftheselargeexchange-rate movements

NoL385/40 OfficialJournaloftheEuropeanCommunities 31.12.86
However ,theweaknessofdemandinrecentyearsandthe
uncertainties attachingtoitmayworktothedetriment of
investment .Inthisconnection ,themore-detailed analysisof
Graphs18and19,whichcomparethegrowthinthecapital
stockinthefourlargestCommunity countrieswiththe
profitability andtheutilization rateofthecapitalstock,
bringstolighttwointeresting points:wascushioned bytherelativestabilitybetweenCommunity
currencies ,notablythoseparticipating intheEMS.
Nevertheless ,theaveragerateofappreciation againstthe
currencies oftheCommunity 's19majortradingpartners
rangesfrom14,3%fortheFederalRepublicofGermanyto
1,2%fortheUnitedKingdom .TakingtheCommunity
countriestogether ,andexcludingintra-Community trade,
theaverageappreciation is17,8%.TheCommunity ,
therefore ,nolongerenjoystheadvantages affordeditona
numberofthird-country marketsbyastrongdollar.—althoughthegrowthinthecapitalstockfellinlinewith
profitability afterthefirstoilshock,thetemporary
improvement inprofitability between1976and1978and
theimprovement discernible since1982havenotyet
providedasufficientstimulustoinvestment ,
—thequitecloselinkthatappearstohaveexisteduntil1975
betweentherateofcapacityutilization andthegrowthin
thecapitalstockappearstohaveweakened since.Asin
thecaseoftheprofitability curveandthecurve
representing thegrowthofthecapitalstock,alargegap
hasopenedupsince1981betweenthegrowthinthe
capitalstockandtheutilization rateofproductive
capacity .Thechanginginternational environment has,ofcourse,had
implications forthegrowthandstructureoftotaldemand .
Animprovement inthetermsoftradeonthescaleenjoyedby
theCommunity isnaturallyleadingtoashiftofemphasis
betweenexternaldemandandinternaldemand .Yetthe
adverseaffectsonexportsoftheappreciation ofEuropean
currencies andtheslowdown ingrowthinsomeofthe
Community 'smajortradingpartnershavenotbeenlongin
makingthemselves felt.Sinceitwasdesirableforanumberof
otherreasons,thetransferofincomefromoutsidethe
Community equivalent toaround2%ofGDPhasbeenused
inseveralcountrieseithertoimprovethefinancialsituation
offirms,incaseswherenominalwageshaveadaptedrapidly
tofallinginflation ,ortoreturntoahealthierpublicfinance
positionmorequickly .Inthesecountries ,therevivalin
internaldemandismuchweakerandmuchmoredilutedover
timethanwouldhavebeenthecaseifconsumers had
continued tobetheonestobenefitmostfromthe
improvements inthetermsoftrade.In1986,therefore ,theimprovement inthetermsoftradehas
hadabeneficialeffectonbothsupply-side anddemand-side
conditions .Thiseffectwill,itistrue,continuewithregardto
internaldemandin1987butitwillremaininsufficient and
mayrapidlydiminish .Underthecircumstances ,an
improvement intheunemployment Qutlookwillhaveto
comefromaneffectiveimplementation ofthecooperative
strategy .Inall,totaldemand (internaldemandplusexports)is
expectedtoexpandbyonly3,6%in1987,andthisis
insufficient ,bearinginmindtheresponseofimports,topush
GDPgrowthabove3%.
Inordertoachievethecooperative strategy'sobjectives ,the
attitudesandpoliciesofallthoseinvolvedineconomic
activitywill,therefore ,havetobemodified ,insomecases
significantly ,asof1987.Thegrowthininternaldemandsince1985isattributable ,for
themostpart,toarapidincreaseinprivateconsumption
(3,6%onaveragein1986and1987)andinvestment in
equipment (between6and7%in1986and1987).The
recoveryininvestment inconstruction isnoticeable ,but
growthhereremainsweak(3,2%in1987).
First,firmsshouldrespond,withevengreaterresolve,tothe
improvement alreadyunderway insupply-side conditions by
increased investment .Itistruethateachinvestment decision
dependsoneconomiccalculations .Thisiswhyitisadvisable
tocontinuewitheffortstoimproveprofitability ,tolower
long-termrealinterestrates,onasoundbasis,andtodevelop
themarketforrisk-capital ;buttheinvestment decisionisalso
basedonconfidence andrisk-taking .Behaviour patternshere
mustalsobemodified inadirection whichisfavourable to
employment .Firstly,amoredynamictrendinbusiness
investment wouldbepositiveasfarasdemandisconcerned .
Secondly ,fromthepointofviewofsupply,itwouldenablea
paralleldevelopment ofproductive capacityandoutputto
takeplacewhichwouldallowaslackening ofinflationary
pressureswhichcouldresultfromrisingutilization rates.The
European economies wouldthusbenefitfullyfromthe
currentsituation .Inflationary pressureswhichcouldresultTheshareofresources inGDPdevotedtoinvestment andthe
growthincapitalstockstillhoweverremainbelowwhatis
requiredinthemediumterm.Someofthedeterminants of
businessinvestment are,however ,displaying favourable
trends.Theaverageprofitability ofthecapitalstockis
increasing (seeGraph18)althoughonlyintheFederal
RepublicofGermany isitbacktoalevelapproaching that
priortothefirstoilshock.InallCommunity countries ,the
utilizationrateofproductive capacityisclimbingrapidly(see
Graph19forthefourlargestCommunity countries ).The
ebbinnominalinterestratesiscontinuing ,andisalsooneof
thefactorsshiftingthepatternofreturnsonfinancial
investment andproductive investment infavourofthe
latter.

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/41
Thenecessaryeconomicpolicymixwasspeltoutinlast
year'sAnnualReport.Itmustnowbeeffectively applied.
Thisalsoimpliesthatthesocialdialogueatpresentunder
wayattheCommunity levelextendstotheMemberStatesso
thattherespectivecontributions offirms,employees and
governments canbebetteradaptedtoeachother.
Atcountrylevel,themixofpoliciesmustnotonlytake
accountoftheavailableroomformanoeuvre andthatwhich
isbeingcreatedbutitsimplementation requiresabroad
acceptability onthepartofthesocialpartnersand,tothis
end,mustbethesubjectofanin-depthdialogueatnational
levelwith,andbetween,thetwosidesofindustry .fromthisriseincapacityutilizationratesatpresentarevery
largelyneutralized bythemoderation inimportcostsand
wagecosts.Inaddition,theimprovedprofitability resulting
fromthismoderation encourages amoreextensiveuseofthe
capitalstock.Thirdly,anevenfasterrateofjobcreation
wouldalsofullyjustifytheeffortsalreadymadeinmany
countriesbyemployees .Itwouldimprovethechancesthat
realwagesremainfavourable toemployment fora
sufficiently longperiod.
However ,economicpolicymakershavetocontinuetoplay
theirpart.Theymustalsoshowbytheiractionsthattheyare
determined tocontribute tomorebuoyantsupplyand
demandconditions intheCommunity .Inanyevent,they
cannotavoidtheirresponsibility inthematter.
In1986,theimprovement inthetermsoftradehas
favourably influenced bothsupply-side anddemand-side
conditions .Therevivalinprofitability ,underwaysincethe
beginningofthe1980s,thanksalsotothemoderategrowth
inrealwagecosts,hasgatheredpace.However ,average
profitability intheCommunity hasnotyetreturnedtoits
levelofthe1960s.According totheforecasts ,thegrowthin
reallabourcostswillspeedupin1987.Inaddition,the
growthintotaldemandin1987willremainbelowthelevel
necessaryforthepurposesofthecooperative strategy .In
particular ,investment willnotstageasstrongarevivalas
couldbehopedinviewoftheimprovement inmostofits
maindeterminants .Astimuluscould,however,comefroma
betteroutlookfordemand .Underthecircumstances ,an
improvement intheunemployment outlookwillhaveto
comefromeffectiveimplementation ofthecooperative
strategybyallthoseinvolved .Firmsshouldreacttothe
improvement insupply-side conditions withamorerapid
investment andjob-creation effort.Thiswillcreatethe
conditions mostconducive to,andwillprovidefull
justification for,thecontinuing moderateincreaseinreal
labourcostsperheadthatisnecessary .Economic policy
makerswill,however,alsohaveaparttoplay.Budgetary policyhasakeyroletoplaythroughthe
restructuring ofpublicrevenueandexpenditure infavourof
moreemployment-creating growthandthroughthewayin
whichitunderpinsdemand .Inthisrespect,threetypesof
measuremaybeenvisaged ,theimplications ofwhichare
lookedatingreaterdetailinChapter4:
—Arecoveryineconomically profitablepublicinvestment
couldaddtotherevivalinprivateinvestment withaview
tomodernizing productive capacitiesinEurope .Itwould
alsoprovideadirectstimulustogrowth.
—Themoderategrowthinrealwagesshouldbeofthesame
order(around1%perannum)asthatintheReportof
lastyearandcouldbecomplemented bysomereduction
insocialinsurancecontributions .Fromtheviewpointof
firms,thismeasure,whichimprovessupplyconditions
andfavoursinvestment ,wouldalleviateindirectwage
costswhich,asaCommunity average,representabout
30%ofthetotalwagebill.Fromthepointofviewof
employees ,itwouldallowasomewhat fasterrateof
growthinpurchasing powerandmaintainthelevelof
demand .
Thefinancingofsocialsecuritysystemsshould,of
course,bekeptonasoundbasis.However ,accountmust
alsobetakenofthefactthat,forsocialsecuritysystems,
theeconomiccrisisispushingupexpenditure andadding
totheshortfallinrevenueandthiswillbereversedasand
whenthesituationimproves .Theroomformanoeuvre
thatwill,therefore ,becomeavailablewouldhavetobe
usedsystematically toalleviatetheburdenonlabour
costs,andthustoreverseinpartthetrendexperienced in
the1970s.Thebudgetization ofsocialsecurity
expenditure associated withthecrisiscouldfurtherbe
considered .3.3.Macroeconomic policyimperatives in1987and
beyond
Theconsolidation thathastakenplacesincethebeginningof
the1980sandtherecentchangesintheinternational
environment providetheEuropean economies withan
outstanding opportunity .Companyprofitability ispicking
up.Inflationary pressuresoriginating insidetheCommunity
arestillweak;theimprovement inthetermsoftradehaving
hadapowerfuldisinflationary effect,andinflation ,taking
theaveragefortheCommunity ,havingfallentoitslowest
levelsincethe1960s.Thereduction intheoilbillhaseased
theexternalconstraints andtheCommunity isshowingan
externalsurplusequivalent to1,2%ofGDPinspiteofthe
depressed levelofitsexports .
Theopportunity opentotheCommunity mustbeseizedwith
determination ,notonlywithaviewtoresolvingthemost
pressingproblemfacingtheEuropeaneconomies ,butalsoto
ensurethatEuropemakesitscontribution tocorrecting
current-account balancesworldwide andtoproviding the
responsenecessary totheproblems ofthedeveloping
countries .—Areduction indirecttaxationpaidbyhouseholds and
firmswouldalsohelpunderpindemandandimprove
conditions onthesupplyside.

NoL385/42 OfficialJournaloftheEuropeanCommunities 31.12.86
Together ,thesemeasures (1)-shouldnotjeopardize the
processofreducingthemedium-term deficit.Indeed,
combinedwithothermeasures ,improving inadditionsupply
conditions ,theycontributetostrongerandsustainedgrowth
andtoareductioninunemployment .Asaresult,expenditure
linkedtothecrisiswilldiminishprogressively andthetax
basewillincreasemorerapidly .
However ,fastergrowthisalsonecessary from1987
onwards .Thiscould,itistrue,beachievedthroughcloser
economicpolicycoordination withtheCommunity 'smajor
partners (seeChapter4.7).Itcouldalsobeachievedifthere
wereafurtheracceleration inthegrowthrateofprivate
investment stemmingfromincreasedconfidence onthepart
ofbusinesswithregardtothefuturetrendofdemandand
profitability .Inthecaseofanunfavourable trend,itcouldbe
necessarytoenvisagealimitedandtemporary increaseinthe
budgetdeficitonaveragefortheCommunity ,respecting
nevertheless theobjectiveofmedium-term consolidation of
publicfinances .
Thisdoes,ofcourse,posetheproblemofbudgetary policy
coordination intheCommunity .Somecountriesstillhavea
greatdealtodotoachievebudgetaryconsolidation .Others
havesomeheadroom orwouldhavesomeheadroom ina
contextofmoredynamicgrowth .
Thetaskofthecountriesintheformercategorywouldbe
considerably facilitated ifgrowthdidpickup.Forthe
countriesinthelattercategory ,budgetary consolidation in
otherMemberStates,achievedagainstabackground of
sluggishgrowth,maybeprejudicial totheirowngrowth .
Heretoo,thebenefitsofcooperation arecleartosee.
Acontinuing downward movement ofinterestratesinthe
Community ,whichwouldreflectthefallandincreased
alignment ofinflationrates,canalsomakeapositive
contribution todemand .Moreover ,themonetary
authorities mighthavetoacceptfurtherfallsininterestrates
inordertoresistthepressurestowhichthedollar'sexchange
ratewillbeexposed .Internally ,however ,measureswillhave
tobetakentoavoidabuild-upinpotentialliquiditythat
(])Thesemeasures areillustrated inmoredetailintheBox.couldatalaterstagejeopardize theheadwaymadeinthe
battleagainstinflation,whileensuringadequatefinancingof
realgrowth.Inthisrespect,themonetary authorities '
headroom willbeallthegreateriftheinflationratepressures
originating insidetheCommunity ,andinparticularthetrend
ofnominalwagecosts,remainweak.
Theapplication ofmacroeconomic policiesbasedonthe
broadlinesdefinedabovewillprovidefulljustification for
theeffortsmadebyemployees .Itisalsoindispensible ifthe
necessary microeconomic measurestomakemarketsmore
adaptablearetobefullyeffectiveasregardstheirimpacton
employment .
Theconsolidation effortsmadesincethebeginningofthe
1980sandtherecentchangesintheinternational
environment providetheEuropean economies withan
outstanding opportunity thatmustbeseizedresolutely ,not
onlywithaviewtoresolvingtheproblemofunemployment ,
butalsotoensurethatEuropemakesitscontribution to
correcting currentaccountsworldwide andprovidesthe
responsenecessary totheproblems ofthedeveloping
countries .Budgetary policyhasanimportantparttoplay
throughtherestructuring ofpublicrevenueandexpenditure
inadirectionfavourable totheimprovement insupply
conditions andemployment ,andthroughtheappropriate
supportitshouldprovideforgrowth .Thereductionand
closeralignmentofinflationratesshouldallowthedeclinein
interestratestocontinue .Evenso,whiletakingaccountof
theproblemsthatwouldarisefromafurtherfallinthedollar
onforeign-exchange marketsandoftheneedtoensuresound
financingofgrowth,measuresshouldbetakentoavertany
build-upofpotentialliquiditythatmightultimately prove
prejudicial tostability .Implementation ofthemeasures
recommended mustbethesubjectofclosecooperation
between(a)MemberStates,withdueregardbeinggivenin
particular tothedifferentdegreesofroomformanoeuvre
availableineachcountry,and(b)between,andwith,the
socialpartnersatnationallevelintheinterestsofassuringa
broadacceptance bythesocialgroups,andsothat
contributions ofeachcanbebalanced .
TABLE 12
Publicinvestment andtotalinvestment intheCommunity (!)
(in%ofGDP)
1970 1974 1979 19841985(2)1986(2)1990(3)
Publicgrossfixedcapitalformation 4,24,03,22,8.2,8 2,7 3,6
Grossfixedcapitalformation forthe
totaleconomy22,722,320,818,618,4 18,5 21,7
(')Excluding Greece,Ireland,SpainandPortugal .
(2)Economic forecastsoftheCommission services,October1986.
(3)Cooperative scenario .
Source:Eurostat andCommission services .

31.12.86 OfficialjournaloftheEuropeanCommunities NoL385/43
TABLE 13
Indicators ofsupplyanddemand
1961to
1973
(average )1974to
1981
(average)1982 1983 19841985«1986(')1987«
(i)Indicatorsofdemand(%changesper
annum):
Domesticdemandatconstantprices:
Community index
Gap:EUR/otherOECDcountries5,0
-0,51,6
-0,60,8
1,00,8
-1,91,4
-4,22,2
-1,13,8
0,43,5
0,9
Privateconsumption 5,03,00,61,00,92,23,73,5
GFCF 5,60,0-1,5-0,31,32,44,25,1
Exportsofgoodsandservices 9,24,61,53,17,65,72,23,7
(it)Indicators ofsupplyconditions :
Employment
(%changeperannum) 0,3-0,1-0,9-0,80,10,40,80,8
Productivity
(%changeperannum) 4,52,11,52,01,92,01,72,0
Realunitlabourcosts
(index100:average1961to1973) 100,0104,3103,0102,4101,199,998,197,4
Profitability (2)
(index100:average1961to1973) 100,068,061,859,864,768,477,982,8
Equipment investment
(%changeperannum)— —0,20,33,48,06,16,9
Costcompetitiveness (3)
(index100:average1961to1973) 100,0108,898,993,286,785,695,195,9
(')Estimates andeconomic forecastsofCommission services (October1986).
(2)EstimatefortheCommunity ofTen:grossoperatingsurplusinthewholeeconomyonthecapitalstockatreplacement
cost.
(3)RealeffectiveexchangeratesonthebasisofunitlabourcostsinthewholeeconomywithrespecttootherOECDcountries ,
excludingintra-Community trade.
Source:Eurostat andCommission services .

NoL385/44 OfficialJournaloftheEuropeanCommunities 31.12.86
TABLE 14
Sectoraldevelopments inEurope,theUnitedStatesandJapan(1970to1982)
EUR6(3 USA Japan
1,8
1,7
3,4
2.4
2.52,1
2,1
3.6
1,9
2.70,2
7,1
5.1
4.2
5,2
67,2
83,0
117,2
124,5
99,997,2
97,8
136,2
121,4
121,768,7
100,4
132,2
133.4
111.5(1)Valueaddedatconstantprices
(%changeperannum1970to1982)
Agriculture
Industry (!)
Marketservices
Non-market services (4)
Total(2)
(2)Employment 1982
(Index=100in1970)
Agriculture
Industry(')
Marketservices
Noil-market services (4)
Total(2)
(3)Productivity perpersonemployed
(%changeperannum1970to1982)
Agriculture
Industry (J)
Marketservices
Non-market services (4)
Total(2)
(4)Relativepricewithrespecttothe
pricesofindustrialproductsin1982
(Index=100in1970)
Agriculture
Industry (J)
Marketservices
Non-market services (4)
Total(2)5.2
3.3
2,1
0,5
2,52,3
2,3
1,0
0,2
1,03,5
7,1
2.7
1.8
4,3
83,5
100,0
110.3
138.4
110,6120,7
100,0
112,4
125.3
116.4147,9
100,0
161,3
240,8
147,8
(1)Narrowdefinition .
(2)Includingtheothersectors;energy,building ,andpublicworks.
(3)Belgium,Germany ,France,Italy,Netherlands ,UnitedKingdom .
(4)Essentially generalgovernment .
Source:Eurostat andCommission services .

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/45
GRAPH 17
GDPandemployment intheCommunity (EUR12)(annualpercentagegrowthrate)(')
(')Thehorizontal linesindicateaverageannualratesofgrowthineachoftheperiods.
Source:EurostatandCommission services(1985to1987:EstimatesandforecastsofCommission services,October1986).

NoL385/46 OfficialJournaloftheEuropeanCommunities 31.12.86
GRAPH 18
Profitability (*)andgrowthofthecapitalstock(2)intheCommunity (EUR4)(3)
(')Netoperatingsurplusasapercentage ofgrosscapitalstockatreplacement cost.
(2)Grosscapitalstockatconstantprices(%changesperannum).
(3)Germany ,France,Italy,UnitedKingdom .
Source:Commission services .

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/47
GRAPH 19
Growthandutilizationrateofthecapitalstock(J)(2)(Index:peakoflast25years=100)
GermanyFrance
Italy UnitedKingdom
(')Growthofthegrosscapitalstock.
(2)Utilization rateonthebasisofbusinesssurveydataformanufacturing industry .
Source:Commission services .

NoL385/48OfficialJournaloftheEuropeanCommunities 31.12.86
Medium-term scenariosforthecooperative strategy
AnillustrationofthepossibleevolutionoftheCommunity economyisgiven,ontheonehand,ina
medium-term projectionontheassumption ofnochangeinpresentpoliciesandeconomicbehaviour
and,ontheotherhand,inahighlystylizedrepresentation ofthecooperative strategy.Theselatter
figuresareonlyintendedtobeillustrativeandshouldnotbeinterpreted asformalobjectivesof
policy.
ThesescenarioshavebeencalculatedusingtheCompactmodelfortheCommunity ofTen.This
modelwasdescribedindetailinEuropeanEconomyNo27.
Hypotheses regardingtheinternational environment
Forboththebaselineprojectionandthecooperative strategyithasbeenassumedthatoilpriceswould
continuetoclimbagainbetweennowandtheendofthedecade.Thiswillproduceadeterioration in
thetermsoftradeamountingtosome7%duringtheperiod1987to1990.Theexchange-rate
hypothesis isforvirtualstabilization attheiraverage1986levelofthedollar/ECUandyen/ECU
exchangerates.
IntheUnitedStates,thegeneralgovernment deficitwouldbegraduallycutback,from3,4%ofGDP
in1986to1%in1990.ItwouldbestabilizedinJapanat0,5%ofGDPwitheffectfrom1987,after
touching 1%in1986.GrowthwouldbemodestintheUnitedStates(averaging2,7to2,8%inthe
period1986to1990,dependingonthescenariochosen),andfairlyfirminJapan(3,7to3,8%)over
thesameperiod.
Ascenarioillustrating thecooperative strategy
Thescenariousedtoillustratethecooperative strategythisyearleadstothesamegrowthrateasinlast
year'sAnnualReport (3,5%fortheaverageoftheyears1986to1990).Nominaldemandis
maintained atapproximately thesamerateofgrowthinthecooperative scenarioasinthebaseline
projection(6%orslightlymore).Thisgrowthrateissufficienttogenerateafallintheunemployment
rateequivalentto3,7percentagepointsofthelabourforcebetween1986and1990and,attheendof
thedecade,bringsthetrendrateofincreaseinemployment to1,5%perannumoralittlehigher.The
economicpolicymixisdesignedtobringabout,underconditionsofmonetarystability,fastergrowth
oftheEuropeaneconomiesthroughjointactiononsupply-side anddemand-side conditions .
Thesamehypothesisaslastyearwastakenforthegrowthinreallabourcostsperhead,thatistosay
anannualincreaseaf1%(averagefortheperiod1986to1990);thegapbetweenthisincreaseand
productivity gainsinannualaveragetermsbeing1,3percentagepointsperannum.
Thismoderategrowthinreallabourcostsisobtainedintwoways:firstly,throughaneffortonreal
wagesexcludingemployerssocialsecuritycontributions :asinthescenarioforlastyear,theyincrease
by1,1%onaveragefortheyears1986to1990;secondly,throughareductioninratesofsocial
securitycontributions whichisproportionally distributed betweenemployersandemployees .
Cumulated overfouryears(1987to1990),thefallinsocialcontributions assumed,amountsex-ante
to1%ofGDP.
Medium-term budgetarypolicyischaracterized byprogressive reductions indirecttaxationon
householdandanincreasinglevelofpublicinvestment .Thesetwomeasures ,cumulatedoverfour
yearseach,amountto1,2%ofGDP.Besidestheendogenous reductionsincertaintransferpayments
(inparticularunemployment benefits),itwasassumedthattheprogressive improvement inthe
economicsituationwouldenablethegrowthofexpenditure aimedatdirectlyeasingthesituationon
thelabourmarket(earlyretirementprogrammes etc.)tobemoderated .
Thelastingreductionininflation,theimprovement inthefinancialsituationoffirms,whichrelieves
pressureonthecapitalmarkets,andamonetarypolicywhich,whileremainingdirectedatstablility,
financesfasterrealgrowth,implyareductioninlong-terminterestratesofabout3percentagepoints
onaverageintheCommunity between1986and1990.Fortheperiodasawhole,therealinterestrate
amountsto3,6%onaverage .

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/49
Between1987and1990,themedium-term taxreductions andpublicexpenditure increasescumulate
toatotalof3,2%ofGDP.Thehighergrowthrateandlowerexpenditures onsocialsecuritytoalarge
degreeoffsetmeasuresintheirimpactonthebudgetdeficit.By1990,thebudgetdeficitis1,2%of
GDPlowerthanin1986,whichnonetheless represents aslowerdeclinethaninthebaseline
projection .
Inthecooperative scenario ,thecurrentbalanceonaveragefortheyears1986to1990is
0,5percentage pointsofGDPbelowthatofthebaselinescenario (0,1%ofGDPasagainst0,6%).A
variantofthecooperative scenarioispresentedinsection4.7.Theassumption behindthisvariantis
thatJapancontributes moretotheprocessofabsorbingthemajorworldimbalances .Asaresult,for
theyears1986to1990,theCommunity currentaccountimprovesby0,3percentage pointsofGDPon
thecooperative scenario .
Someprinciplemacroeconomic aggregates illustrating thecooperative strategy
Baselineprojection Cooperative scenario
Annualaveragegrowthrates
1986to1990(%)
GDPvolume
GDPprice
GDPvalue2,7
3,3
6,03,5
2,7
6,2
Employment
Productivity
Privateconsumption
Investment
Realwagesperhead
Realunitlabourcosts0,7
2,0
3,0
3,7
1,9
-0,31,2
2.3
3.4
6,8
1,1
-1,3
Annualaveragelevels,
1986to1990(%;
Long-term rateofinterest (%)
Balanceofpayments
Currentaccount(%GDP)7,7
0,66,3
0,1
1986actuallevel1990levelin
cooperative scenario
Unemployment rate(%) 10,8 7,1
Budgetdeficit(%ofGDP) 4,7 3,9
Note:ThedataareforEUR10.ForEUR12,themaindifference intheCommunity averagewouldbeintherateof
unemployment :1986:11,9%;1990:8,2%.
Theabovefigureswerederivedfromahighlystylizedmodelandareonlygiventoindicateapossiblerangeofmagnitudes .
4.CONTRIBUTION OFPOLICIES TOTHECOOPERATIVE STRATEGY
4.1.Monetary guidelines andcoordination questions
TheCommunity 'smembercountries havemadefurther
progressinconverging towardsamonetary policywhich
providesthescopeforrealgrowthinanenvironment of
monetarystability .Thedeceleration andmoreconvergent
development ofmonetaryaggregates areclearindications of
theincreasedcoherenceofnationalmonetarypolicies (Table15).Inthelate1970s,thegrowthofbroadmoneywasabout
15%ayearintheCommunity (EMS13%),whileitisnow
around9,5%(EMSunder7%),andisnotexpectedto
accelerate again.Thus,monetary policyhasmadean
importantcontribution tothedeceleration intheCommunity
inflationrate.Whileinflation intheCommunity still
averaged13%in1980,anaverageof3,7%isexpectedthis
year.

NoL385/50OfficialJournaloftheEuropeanCommunities 31.12.86
rateofinflation ,butthisdoesnotmeanthattheMember
Statesintheirmonetarypolicyshouldallreacttoimported
pricestabilityinthesameway.Oneoftheprimaryobjectivesofmonetarypolicyisto
achieveandpreserveahighdegreeofmonetarystability,a
rolewhichisinfullaccordance withthecooperative strategy.
Monetary stabilityistheindispensable basisfortheother
objectivesofeconomicpolicy.Byreducinguncertainties on
futurepurchasing power,itcreatesfavourable conditions for
acooperative patternofbehaviour bythoseinvolvedin
economic activityand,inparticular ,weakens the
justification forindexation mechanisms .Accordingly ,it
improvestheclimateforadjustments inrelativepricesand
contributes toanefficientallocation ofthefactorsof
production .Incountrieswheretheinflationrateandinflationary
expectations havealreadystabilizedatalowlevel,there
shouldbenofundamental changeinthecourseofmonetary
policyembarkeduponbeforeimportpricesstartedtofall.In
thisway,monetarypolicyunderpinshigherrealgrowth.In
otherrespects,ashort-lived andtransitory deviationfrom
thetargetedgrowthofmoneysupplydoesnotnecessarily call
forcorrectiveaction,sinceadverseeffectsonexpectations
areimprobable inthesecountries .Ifthepresentlyfavourable
preconditions forgrowthactuallyleadtoahigherreal
growthtrendin1987,monetarypolicyshouldtakethisinto
consideration indefiningthemoneysupplytarget.Amedium-term orientation ofmonetary policyis
appropriate forinfluencing expectations inthedesired
directioninadurableway,andforsafeguarding thesuccesses
alreadyachievedinreducinginflation .
However ,monetary policymusttakedueaccountofthe
scopeforrealgrowth.If,inthecourseoftheimplementation
ofthecooperative strategy,thegrowthrateofproductive
potentialweretorise,monetary policywouldhaveto
accommodate this.Highermoneysupplywouldalsobe
necessaryifapermanently lowlevelofenergypriceswereto
increaseproductive potential .Countrieswhichhavemadesignificant progressinfighting
inflation ,butwhoselevelofinflationisstillwellabovethe
Community average—e.g.Italy—shouldconsolidate the
importedcontribution tostabilitywhichinitiallyrepresents
aneffectonlyonthelevelofprices,andshouldaimtobring
inflationdownpermanently .Thisaimcanbeachievedifitis
madeexplicitly clearandcrediblysupported through
monetary policydecisions .Amonetary policywhich
continuestofocusonreducingmonetarygrowthwouldby
nomeanspreventfurtherfallsininterestrates.Onthe
contrary ,asinflationary expectations stabilizeatalowlevel,
nominalandreallong-term interestrateswillcomedown.Quantitative moneysupplyorcredittargetscontinuetoplay
animportantroleinamonetarypolicygearedtothemedium
termandbasedonahighdegreeofpricestability .However ,
financialinnovations ,theincreasingliberalization ofcapital
movements ,structural changesinthemoneyandcapital
markets,andchangesinmoneydemandbehaviour canin
certaincircumstances haveanimportantimpactonmonetary
aggregates .Thishastobetakenintoaccountwhenmonetary
developments areassessed .Theannouncement ofanannual
moneygrowthtargetmakesclearthebasiccoursethat
monetarypolicyisintendedtofollow.Employers ,unions
andthegovernment canadjusttheirdecisionsaccordingly .
Moneysupplytargetsincreasethelevelofinformation
availabletoeconomicagents;thescopeforfrictionisreduced
andconsultation withemployers andemployed ismade
easier.Countrieswhoseroomforconducting anindependent
monetarypolicyislimited,andwhoseprimaryobjectiveisto
stabilizetheexchangerate,wouldalsobenefitfromthe
medium-term orientedmonetary policyofthelarger
countries ;exchange-rate expectations wouldbestabilized
andthesecountriescanimportandsustainahighdegreeof
pricestability .Lastly,countrieswhicharenowregistering alowinflation
rate,butinwhichinflationexpectations arestillhigherthan
warranted bytheactualrateofpriceincreases (e.g.France),
shouldadheretoamoderategrowthofmoneysupply
consistentwiththescopeforrealgrowthinthemediumterm.
Therecentlyobserveddeclineandflatteningofinterestyield
curvesinFrance—betweenJanuaryandAugust1986
long-term interestratesfellby3percentage pointsand
short-term ratesby2percentage points—isanindication
thatmonetarypolicyhasgainedincredibility .Lowinterest
ratesonalastingbasisdependoninflationary expectations
stabilizing atalowlevel.
Thestanceofpolicyproposedheremeans,ontheotherhand,
thatshort-term cyclicalconsiderations shouldplayonlya
minorrole.Otherwise thesuccessesinachieving ahigh
measureofpricestabilitywouldagainbeputatrisk.Nor
shoulditbeoverlooked thatamonetarypolicygearedtothe
mediumtermalsohasstabilizing effectsonthecycle.During
arecession ,moneygrowthis,compared withGDPgrowth,
relativelyhigh.Liquidityincreasesbutwithoutadversely
affecting inflationary expectations .Conversely ,theAtpresent,thecyclicalsituationissimilarinmostmember
countries ;mostofthecountriesareinaphaseofmoderate
upswingandallofthem(exceptGreece)areimporting
stabilitythroughmarkedlyfallingimportprices.Thereisno
signofthedangerofarenewedacceleration ofinflation ,at
leastintheshortrun.However ,thepresentlowrateof
increaseinconsumer pricesnodoubtunderstates thetrend

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/51
reductionofliquidityinagrowthphasedampsdown
inflationary expectations ,butwithouttriggeringthepainful
effectsofastabilization policy.commonstabilityobjective .Thegreaterstabilityofexchange
rateswasthereforeboththeresultofthegreaterpriceand
coststabilityintheEMSanditscause.Theexchange-rate
adjustments ofAprilandAugust1986havechangednothing
inthisbasicinterdependence .
However ,inaflexibleexchangerateregimemonetarypolicy
maybefacedwithaconflictbetweendomesticandexternal
requirements .Thus,toavoiddistortionary realdisturbances
—whichultimately alsoendangertheprimaryobjectiveof
monetarystability—aflexibleresponseofmonetarypolicy
withrespecttoexchangeratedevelopments outsidethe
Community mightbenecessary .Sucharesponse ,however,
shouldnotrepresentafundamental changeinthechosen
stance .Nevertheless ,theEMSremainsasystemoffixedbut
adjustable exchangerates.Ifeconomic policiesarenot
perfectlycoordinated ,thedifferences whichaccumulate in
thefundamental factorsdetermining exchangeratesmust,
fromtimetotime,becorrected ;butsuchapolicydoesnotin
principlesupportdivergent economic trendsfromthe
beginning .Infuture,financialmarketswillbemoreclosely
integrated ,notleastbecauseofadesirableincreaseinthe
liberalization ofcapitalmovements .Interestrateswithinthe
EMShavealreadymovedconsiderably closertogether .
Indeed,thedifference between German andFrench
long-term rateshasnarrowed from3percentage points,
beforetherealignment ,to2percentage pointsthereafter .In
Belgiumalso,thedeclineinthelong-term interestratesis
spectacular .
Therealignment thushadrealconsequences forinterest
rates.Currencies whichwerethoughtlikelytobedevalued
hadtocompensate forthepressuretoadjustbymeansof
higherinterestrates.Thisshowsthat,inthecountries
sufferinghighercurrencyerosion,thedelayingofthe
realignment hadanimportant stabilizing effect.Inrecentyears,nominalinterestratesinEuropehave
declinedsignificantly .In1981,thelevelofshort-term
interestratesaveraged15%fortheCommunity .This
compares withthepresent8,8%,whichroughly
corresponds totheaverageforthe1970s(Table16).Itis
assumedthatinterestrateswillalsofallfurther—though
moreslowly—intheforeseeable future.Despiteallthe
progressmadeinreducinginflation ,reallong-terminterest
ratesarestillfelttoberelativelyhighatpresent.Inassessing
thepresentlevelofrealinterestrates,itmusthoweverbe
borneinmindthatinsomecountries thecurrentinflation
rateisbelowthemedium-term rateandthelevelofreal
interestratesistherefore overestimated .Realinterestrates
whicharetoolow,donotadequately reflectrelativescarcity
ofcapital.Inthe1970s,theyhaveledtoanexcessive
capital-intensity ofproduction ,denotingthemacroeconomic
misallocation ofrelativelyscarcesavings,andentailinga
deterioration inprofitability .Moreover ,realinterestrates
whicharetoolowreducesavingintheeconomyandthus
removethebasisforhighergrowth.AsshowninGraph20,
thelevelofrealinterestratesexperienced for1986roughly
corresponds tothelevelofthelate1960s.Ontheotherhand,
therateofreturnonphysicalcapitalisnotyetbacktothis
level.Becauselargermovements ofcapitalaretobeexpected ,the
increasingliberalization ofthemovement ofcapitalinitially
posesapotentialrisktothestabilityoftheEMS,butthiscan
becountered bytheincreasedconvergence ofmonetaryand
overalleconomicpolicy.Thus,continuing liberalization of
capitalmovements iscloselyassociated withanincreased
integration oftheeconomies oftheCommunity andwiththe
furthersounddevelopment oftheEuropean Monetary
System.
Ontheonehand,sufficiently highrealinterestratesare
necessary toavoidamisallocation ofresources andto
safeguardthemoreemployment-creating growthgenerated
bysupply.Ontheotherhand,itiscertainlydesirableforboth
nominalandrealinterestratestofallasaresultofinflation
expectations beingstabilizedatalowerlevel,andbecauseof
highertotalsavings.Amonetary strategygearedtothe
mediumtermistheappropriate waytoachieve,onasound
basis,thedesired'organic'fallinrealinterestrates.Theconsequence ofclosermonetaryintegration isagreater
needforcoordination .Thisistrueofeachcountry's
monetarypolicieswithintheEMS,butitisalsotruewithina
country'seconomyforconcertation oftheinstruments of
generaleconomicpolicy:theinstruments ofeconomicpolicy
mustbecombined insuchawayasnottoendangerthe
systemoffixedexchangerates.Aboveall,amonetarypolicy
whichisdirectedtowardsinternalandexternalstabilitymust
besupported bybudgetary policyandanappropriate
evolution ofincomes .WithintheEMS,theneedfor
coordination ,inparticular betweenthelargemember
countries ,hasgrown.Mostimportantly ,agreement mustbe
furtherstrengthened onthegoalsofstabilitypolicy.TheEMShasmadeadecisivecontribution totheincreasing
convergence ofmonetarypolicyandtoreducinginflation
bysubjecting theparticipating countries toaclear
exchange-rate discipline .Countries inwhichinflationhas
beenrelativelyhighimportedameasureofpricestability
duringlengthening periodsoffixedexchangerates;this
supportedthedisinflation process.ButtheEMScouldgainin
stabilityonlyagainstthebackground ofthestrictpursuitofaCoordinated actiononmonetarypolicydoesnot,however,
implythesamepolicyinallcountries .Eachcountryfaces
differentproblems .Inparticular ,differentmethodsare

NoL385/52 OfficialJournaloftheEuropeanCommunities 31.12.86
neededfordealingwiththeveryunsatisfactory convergence
ofbudgetary policiesandtherelateddivergence whichstill
existsininflationexpectations .Eachcountrymust,asfaras
itcan,findtherightpolicymixtobringitclosertothe
common goalofsteady,non-inflationary andmore
employment-creating growth.
Thecommoncourseofthemonetary policyoftheEMS
membercountriesmustalsotakeaccountofdevelopments
outsidetheEMSarea.Themorecloselytheeconomies
converge ,andthegreaterthedegreeofliberalization of
capitalmovements ,thelessofathreatwillbeposedtothe
stabilityoftheEMSbyexternalinfluences ,becausean
integrated monetary areawouldreducetheirrelative
importance .Capitalmovements toandfromthirdcountries
wouldbelessofadangertoEMSstabilitybecausethe
membercountrieswouldbeequallyaffected .Here,the
strengthening oftheECU'sroleisofspecialimportance .In
theeventofcapitalmovingoutofthedollar,thiswouldhelp
assureflowsintotheECUandnot,ashasoftenbeenthecase
inthepast,intotheGermanmark.Inviewoftheuncertainty
surrounding thefuturemovement ofthedollar,thisgreater
integration ofEuropean monetary andcurrencypolicy
wouldbewelcome .ItwouldalsomakeiteasierforEuropeto
actinconcertinsolvinginternational imbalances .Monetary policyintheCommunity shouldaimatan
adequatefinancingoftheavailablescopeforrealgrowthand
shouldatthesametimepreserveand,ifnecessary ,advance
thesuccessesachievedinreducingthetrendrateofinflation
onapermanent basis.Uptothepresent,thetaskofmonetary
policyhasbeenmadeeasierbyexternaldevelopments .The
depreciation ofthedollar,aswellasthethefallinoilprices
andinUSinterestrates,haveincreasedthepotentialfor
reductions inEuropeaninterestrateswithoutbringingthe
threatofinflationary pressure .Atendencyforthedollarto
fallsubstantially furthermightnecessitate aflexibleresponse
forEuropean interestrates,tocounteract thedangerofa
renewedsignificantfallinthedollarexchangeratewithits
negativemedium-term consequences .However ,attention
hastobepaidtothenecessityofavoidinganyaccumulation
ofnewpotentialforfutureinflation .TheEMShasprovedto
beastabilizing factor.Progresstowardsconvergence in
association withgreaterfreedomofcapitalmovements have
increasedthenecessityforaclosercoordination ofeconomic
policiesbothinternally —betweenmonetarypolicy,fiscal
policyandincomedevelopments —andamongMember
States.Theprogresswhichhasbeenachievedincreatinga
zoneofmonetarystabilityreducestheimpactofexternal
influences ,andisanimportant conditionforagreater
integration oftheEuropean economies .
TABLE15
Deceleration andconvergence inmonetarygrowth
(percentages )I1961to
19691970to
19771978 1979 1980 1981 1982 1983 1984 1985 1986 1987
Weightedaverage:
EUR
EMS 11,714,8
14,014,8
13,813,9
12,911,9
9,711,5
8,711,3
9,511,2
10,29,5
8,49,9
7,79,7
6,97,4
5,6
Measuresofdispersion
relatedtoaverage (1):
EUR
EMS 2,14,2
3,44,0
4,23,9
4,04,1
3,44,1
2,52,7
2,33,6
3,53.0
3.14,4
3,24,2
1,52,6
1,2
Measuresofdispersion
relatedtolowest('):
EUR
EMS 4,86,5
5,210,2
9,29.0
8.16,6
4,47.3
4.44,8
3,05,8
4,85,5
4,45,0
2,84,4
1,63,8
2,0
(*)Thedispersion indexisaweightedsumofabsolutedeviations fromtherespective referencevalue.
Source:Commission services .

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/53
TABLE16
Interestratedevelopments
fpercentages )
1961to
19691970to
19771978 1979 1980 1981 1982 1983 1984 1985 1986
Nominal short-term
interestrates:
EUR12
EMS
USA
Japan4,8
4,5
4,18,5
7,8
5,7
8,08,8
6,9
7,4
5,110,9
9,8
10,1
5,813,7
12,2
11,6
10,715,0
14,0
14,0
7,413,7
11.8
10,6
6,811,9
8,9
8,7
6,511,2
9,0
9,4
6,310,5
8,3
-7,5
6,58,8
6,3
6,5
5,3
Nominallong-term
interestrates:
EUR12
EMS
USA
Japan6.5
6,3
4.69,8
9,2
6,5
7,710,3
8,8
7,9
6,311,2
10,1
8,7
8,313,0
11,5
10,8
8,915,1
13,5
12,9
8,414,3
12,5
12,2
8,312.7
10,6
10.8
7,812,0
10,3
12,0
7,310,8
9,1
10,8
6,59.0
7,5
8.1
5,2
Reallong-term interest
rates(adjustedfor
GDPprices)C1):
EUR12
EMS
USA
Japan2,4
2,3
1,6-0,3
0,4
0,3
-1,00,1
0,6
0,5
1,70,4
1,3
0,2
5,70,1
0,8
1,2
6,14,2
3,5
4,0
5,73,7
2,1
5,3
6,64,4
2,7
7,7
7,15,7
4,5
8,2
6,74,8
4.1
7,0
5.22,6
2,1
3,9
3,9
(')Thedefinitionorrealinterestratesposesmethodological problems .Theseproblemsareaccentuated whensubstantial changesinthetermsoftrade,asin1986,
biasthemeasurement ofdomesticpriceswithrespecttothetrendrateofinflation (upwardsordownwards dependingontheindicators).Animprovement inthe
termsoftradetendstoincreasethepriceofGDP.
Source:Commission services .

NoL385/54 OfficialJournaloftheEuropeanCommunities 31.12.86
GRAPH 20
ThereturnoncapitalandinterestratesintheCommunity
(')Netoperatingsurplusoftheenterprisesector(excludingthehousingsector)asapercentage ofitscapitalstockatreplacement
costs(EUR4).(Index1960=100)
(2)Yieldongovernment securitiesdeflatedbytheGDPpriceindex(EUR10).
Source:Commission services .
4.2.Budgetary policy
4.2.1.Budgetdeficits,publicdebt,growthand
employment
Growthprospects intheCommunity canbeimproved bya
judiciousbalanceofbudgetpositionsamongMemberStates.
In1986,thereductionofbudgetdeficitswas,onthewhole,
somewhat morerapidthantheyearbefore.Forthe
Community asawhole (EUR12)netborrowing ,asa
percentage ofGDP,isbeingreducedfrom5,1%in1985
to4,7%in1986,whereasin1985thereduction was
three-tenths ofonepercentage point(Tables17and18).Thereduction ofnetborrowing wasmostmarkedinsome
countrieswhereitslevelwasveryhigh(Greece,Italy),aswell
asinDenmarkwhere,in1986,asurplusisbeingachieved .
Furtherreductions indeficitsareexpectedtotakeplacein
1987.
Thereductionofbudgetdeficitsmentioned isnotsufficient ,
however ,inseveralcountriestopermitastabilization ,let
aloneareductionoftheratioofpublicdebttogrossdomestic
product .Indeed,in1986and1987combined ,publicdebtas
apercentage ofgrossdomesticproductwillincreaseby4
percentage pointsormoreinhalfoftheCommunity
countries (Belgium,Spain,Ireland,Italy,theNetherlands

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/55
andPortugal—Table19).Thecontinuation ofhighbudget
deficitsisattherootofthisdevelopment .Inseveral
countries ,interestchargesaremoreorlessequaltooverall
deficits.Inthreecountries ,Germany ,Luxembourg ,and
especiallyDenmark ,thepublicdebtratioisinsteadexpected
tofall.orientednormative budgetconcept,suchasthatofthe
GermanCouncilofEconomic Advisers (Sachverstan­
digenrat),showsthatacertainannualincrease in
government debtislegitimate .TheCouncilofAdvisers
considersthis'legitimate 'increasetobe1,5%ofpotential
outputforGermany ,intermsofbudgetdefinitions .
Budgetdeficitsthatleadtohighpublicdebtburdenshavetwo
mainmacroeconomic consequences .Firstly,thepublicwill
bereadytoholdanincreasing fractionofitsassetsin
government bondsonlyatincreasing realinterestrates.
Secondly ,suchbudgetdeficitsincreasetherisksofan
inflationary monetary expansion leadingtoanadditional
increaseinrealinterestratesasapremiumforhigherrisk.
Becauseofthehighlevelofrealinterestrates,private
investment iscrowdedoutwithnegativeconsequences for
medium-term growth.Judgement ofthebestbudgetpolicystrategyhasalwaystobe
basedonbothsupply-anddemand-side considerations .In
presentconditions ,therearegoodreasonstoaimata
strengthening ofsupplyconditions andsustaining demand
conditions intheeconomy .ThemainCommunity countries
withapproximately stabilized publicdebtsituations are
Germany ,FranceandtheUnitedKingdom .InGermany ,the
burdenofthepublicdebtisevendeclining .InFrance,
existingroomformanoeuvre isbeingused,largetax
reductions alreadybeingforeseen for1987and
supplementary reductions announced for1988whilethe
budgetdeficitwouldbesimultaneously reducedineachofthe
twoyears.Ifexpansion strengthens abroad,andaboveallin
theCommunity ,budgetary policyinFrancewillbeallthe
morefacilitated .IntheUnitedKingdom ,theGovernment ,in
itsautumnstatement ,providedforanincreaseinpublic
expenditure ofsome£43/4billionin1987/88.Thiswill
meanthatpublicexpenditure in1987/88isplannedtobe
about2%higherinrealtermsthantheestimatedout-turnin
1986/87.Thus,ifthecooperative strategyshouldbecomeby
itsapplication thebasisforeconomic measuresforthe
Community asawhole,someofthesethreecountriescould
reasonably envisageafurthercombination oftaxreductions
andpublicinvestment ,themixtureofwhichcould
nevertheless bedifferentfromonecountrytotheother.A
partialcompensation forthesemeasurescouldbeexpected
withinareasonable periodoftime,throughtheimpactof
highergrowthintermsofsupplementary fiscalreceiptsand
lowerexpenditures relatedtothecrisis.Thus,sincedeficitsandpublicdebtarehigh,negativeeffects
predominate inthemediumterm,andtheirreductionshould
onlyhavebeneficial effects.Intheshortrun,negative
demandeffectsmaydominate but,wheretheinitial
condition isoneofthreatened financialinstability ,these
negativeeffectsfromcorrective actionmaybeofrelatively
shortduration .Denmarkhasprovidedanexampleofthisin
recentyears.
Ontheotherhand,wherethedangeroffinancialinstability is
limitedandthepublicdebtGDPratioisalreadydeclining ,
thenegativedemandaspectsofbudgetary contraction
increaseinimportance .Iftaxesarereducedandother
measuresaretakenwhichimprovethesupplyside,theinitial
deterioration ofthebudgetbalancemay,atleastpartially ,be
compensated forafterarelativelyshorttime.Budgetary policymusthaveamajorresponsibility in
achievingthecooperative strategy .Asregardsbudgetdeficits
andthepublicdebt,consolidation isstillapriorityforabout
halftheMemberStatesoftheCommunity .Othercountries ,
whoseshareinCommunity GDPisabouttwo-thirds ,arein
sustainable deficitsituationsandhavesomepossibleroom
formanoeuvre forbudgetary measuressupporting growth .
Thesecountriesshouldnowconsider ,wherethisisnotthe
case,acooperative acceleration ofbudgetary actionsto
strengthen supplyandsustaindemandconditions .Witha
higheractivitylevelinthesenationaleconomies ,theother
Member Stateswillbeablealsotoachieveconsolidation
objectivesathigherlevelsofactivityandemployment .Inpractice,judgingbythelevelofthepublicdebtaswellas
thespeedatwhichithasgrowninrecentyears,asubstantial
reductionofthebudgetdeficitasapercentage ofGDPshould
continuetobeaprimaryobjectiveinBelgium,Spain,Greece,
Ireland,ItalyandPortugal .Ifconvincing medium-term
budgetary consolidation measures arecombined with
effectivemonetary stabilization thenlargereductions in
nominalandrealinterestrateswillbepossible,whichcould
easetheeffortneededtolimitessential budgetary
expenditure .
4.2.2.Publicexpenditure ,taxation,growthand
employmentThereductionofbudgetdeficits,whileclearlyapriorityfor
abouthalfoftheMemberStates,isnotanobjectiveperse
whenthepublicfinancesareinasustainable condition .In
fact,acertaingovernment debtpositioninproportion
toGDPisconsistent withthemedium-term financial
equilibrium ofaneconomy ,forexample asupply-sideTheconceptof'roomformanoeuvre 'inbudgetary policyhas
attimesfocussedtoanunfortunate degreeontheimportant ,

NoL385/56 OfficialJournaloftheEuropeanCommunities 31.12.86
inthemediumterm.Inaddition ,thereareotherprojects
whichcouldberealizedinthelongerterm:motorway links
withtheScandinavian countriesthroughDenmarkandthe
BalticStraits,theVenice-Munich link,tidalpower
installations ontheSevern,abridgeattheStraitsofMessina,
etc.butonlypartialtopicofbudgetdeficits .Forquestionsof
medium-term growthstrategy,evenmoreimportant policy
issuessurroundthelevelandstructureoftaxationandpublic
expenditure .Intheselattercategories ,allCommunity
countries have,effectively ,veryimportant 'roomfor
manoeuvre 'inthesenseofdesirablepolicymovesthatcould
contribute significantly toraisingthemedium-term growth
rateofoutput,investment ,savingsandemployment .An
important issueforthesocialdialogueistoestablishmoreof
aconsensus onhowpolicyoverthelevelandstructureof
publicexpenditure andtaxationcancontribute tothe
objectivesofthecooperative strategy .Suchprojectswouldalsogeneratenationalpublicinvestment
opportunities ofaninfrastructural nature.Inaddition,inthe
majorityofcountries ,investment possibilities existinareas
suchasurbanrenovation andtheenvironment (water
treatment ,etc.).Incertainregions,particularly inthenew
MemberStates,therestillremainsanurgentneedto
strengthen theinfrastructure .Allinall,asignificant number
ofinvestment projectsaretherefore available witha
sufficientsocialrateofreturn.Progressinrealizingthese
projectswouldprovideanimportant andusefulcontribution
togrowthandemployment .Levelandstructureofpublicespenditure .Itmaybehelpful
todistinguish betweenthreebroadcategories ofpublic
expenditure .
(i)Afirstcategoryisinfrastructural investment andother 1
investment categories includingresearchanddevelopment '1
andeducation .Suchinvestments ,inawidesense,canalsoin
partbefinancedbytheprivatesector.Onconditions that
theseinvestment programmes areefficientlymanagedand !
subjecttorequirements ofahighoradequatesocialrateof
return,thereisnoreasontowanttocutsuchexpenditures
perse.Ahighlevelofsuchinvestments ,withgoodor
adequateratesofreturn,willnormallybepartofadynamic
economy .Publicinvestment programmes haveinparticular
beenmorethanproportionally affectedbybudgetary
economies ,fallingfrom4%ofGDPin1975to2V2%in
1985.Subjecttoefficiencycriteria,suchexpenditures could
nowbeexpanded foramulti-year periodaspartofthe
cooperative strategy .Giventhecloselinksthatexistbetweengrowth,employment
andtechnology ,mostgovernments haverecognized the
importance ofastrongresearchanddevelopment policyfora
morerobusteconomicgrowth.Inthisrespect,priorityis
beinggiventoresearchonadvancedtechnologies aimedat
favouring innovation andabetterlinkbetweenbasic
researchandindustry .European successes ,inactionssuchas
Airbus,Ariane,Jet,EspritandBrite,underlinethevalueand
effectiveness ofEurope'spotentialforR&D.Inaddition
theyillustratedifferentpossibilities forfinancingthrough
European programmes andfinancialparticipation in
precompetitive industrial research .TheCommunity has
established framework programmes toobtainanincreased
effectiveness oftheCommunity 'sresearchactivities .Alsoto
benotedistheEurekainitiative ,whichreflectsthewillof
governments tofindnewfinancialandeconomicsynergiesin
thefieldofEuropeanindustrialcooperation .
Asfarasinfrastructural investment isconcerned ,theState
hasanessentialroletoplayintheimprovement ofhuman
capitalthroughtrainingandtheupgrading ofprofessional
skills.Herealso,closecooperation betweenpublic
authorities andthoseconcerned shouldenableappropriate
formsoffinancingtobeestablished ,takingaccountofthe
possibilities availableandthegainstoeachpartyofimproved
professional qualification (seealsosection4.3.2).Aninfrastructural investment programme ,comprising
projectsofCommunity interest,assetoutinlastyear's
AnnualEconomic Report,fitswellintothestrategy .Such
projectsofEuropeaninterestcanbeundertaken andfinanced
bytheprivatesector.Theseconcernthefollowingprojectsin
particular :
—theestablishment ofatelecommunications trans-border
backbonenetwork (some3000millionECU),
—threelinkingnetworks :road,railandinlandwaterways
(20000to25000millionECU),
—theParis-Brussels-Cologne high-speed raillink(3000
millionECU)
—theChanneltunnel(4000millionECU).(ii)Asecondcategorycoversnormalpublicservices,suchas
healthcareandpensions .Ahighlevelofthesepublicservices
issociallydesirable .Thereare,ofcourse,important
management issuespresenthere,andreasonable disciplinein
economic termshastobemaintained sincethedemands for
increasedexpenditures ontheseprogrammes canoutstripthe
capacityoftheeconomy .Thequestionofthepublicversus
privatemixintheorganization oftheseprogrammes isalso
animportant issueforreasonsofmanagement efficiency as
wellassocialequity.However ,theoptionofpartial
privatization ofhealthcareandpensionshastobeassessedOverall,aninvestment volumeof30000to35000million
ECUoveraperiodoffivetosevenyearscanbeenvisaged

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/57
fallingonemployees ispassedontohigherlabourcosts.
Assumingthatahighercostoflabourtendstodampenthe
demandforlabourbyfirms,privateemployment willbe
discouraged andeconomicgrowthwillbelower;hencethe
importance ofmeasurestocutsocialsecuritycostsandtaxes
justdiscussedabove.withconsiderable caution .Inparticular ,thetransferofthese
socialchargestoprivateinsurance systemswillnot
necessarily easetheircosts.Itcouldbe,forexample ,that
lowersocialsecuritytaxesareoffsetbyhighercontractual
paymentspaidtoprivatebodiesandleviedinthesameway
byemployers .Theimpactonoveralllabourcostsandwage
behaviour wouldnotthenbeverysignificant .Overall,
reasonable economy inthemanagement ofthese
programmes isrequired ,butnottheirrun-down .
Taxationandsupplyoflabour.Highmarginaltaxratesmay
influencetheincentivetoworkinanegativewayandweaken
thefoundations ofeconomicgrowth.(iii)Athirdcategoryissocialbenefitsthatarepaidbecause
offaultsinthefunctioning oftheeconomic system.
Unemployment benefitsareanobvousexample ,atleastata
levelaboveaminimalunemployment rate.However ,this
categoryof'avoidable 'publicexpenditures isinfactmuch
moreextensive ,andincludesalsosupplementary family
benefitstounemployed persons,expandedprogrammes of
earlyretirement pensionsand,inseveralcountries ,disability
pensionprogrammes thathavebeenexpanded toinclude
peoplewithlittleornomedicaldisability .Thetotalofthese
'avoidable'publicexpenditures hasincreasedbyasmuchas
5%ofGDPoverthecourseofthelast15yearsinthe
Community onaverage .Intermsofincreasedsocialsecurity
charges,thisamountstoabout10%oflabourcosts,whichis
clearlyaverylargemargininrelationtoanydebateaboutthe
economically warranted leveloflabourcosts.Taxation ,disposable incomeandhousehold savings.There
areotherfactorswhichhaveindirecteffectsonemployment
bydiscouraging savingsandhencecapitalaccumulation .
Highertaxesonhouseholds 'incomereducedisposable
incomeandhousehold savings.Ifthegovernment spendsa
higherfractionofitsproceeds ,netoftransfers ,on
consumption goodsthandohouseholds ,nationalsavingsgo
down.
Taxationandresourceallocation .Wheremanycategoriesof
incomeorexpenditure benefitfromtaxexemptions therewill
bedistortions intheallocation ofresources thatwillreduce
theiraverageproductivity .Inthiscase,highergeneralrates
oftaxationwillhavetobeapplied,leadingtodampened
incentives towork,employ,saveandinvest,asalready
mentioned .Accordingly ,itisdesirabletoverifythateach
existingtaxexemption stillhasaneconomic orsocial
justification ,atthesametimetakingaccountofthefactthat
itsabolition wouldenablethetaxbasetobewidenedand
generalratestobelowered .Thisistheargumentbehindthe
recentUnitedStates'reductions inincometaxratesand
exemptions .Implementation ofthecooperative strategyshouldmakeit
possibletoreconsider thepertinence ofcertainofthese
programmes asemployment prospects improve .For
example,thecriteriafornewadmissions tosomespecial
pensionprogrammes maybereconsidered ,whilerespecting
theacquiredrightsofexistingpensioners ,aspartofapolicy
toachievearisingparticipation rateamongthoseofworking
age,aswellasdecliningunemployment .Policyinitiativesof
thiskindareenvisaged inseveralcountries ,suchasItalyand
theNetherlands ,wherespecialpensionprogrammes for
peopleofworkingagehaveexpandedtothepointofcovering
over10%ofthelabourforce.Inothercountries too,
analogous expenditures haveledtoagrowthofsocial
securitytaxesthathascontributed totheweakevolutionof
employment .Economies inpublicexpenditure andsocial
securitytaxescouldinthiswaythusbepartofanewvirtuous
circleofemployment creationandtaxreduction .Greater
efficiency inthesesocialexpenditures maybeobtained
throughimproving theemployment possibilities ofa
considerable proportion ofthepeoplecurrentlybenefiting
fromtheseprogrammes .WithintheCommunity atpresentthereareseveraltax
reformthemeswhichmaybehighlighted .
Asregardscorporate profitstaxes,severalcountries are
reducingratesoftaxation (UnitedKingdom ,France,
Netherlands ,Belgium,Luxembourg ),partlyoffsetbylower
depreciation allowances .Somecountriesenvisagereducing
oreliminating otherbusinesstaxeswhicharenotbasedon
profits,suchasawealthtaxonenterprises inGermany ,the
'taxeprofessionnelle 'inFranceandatradetaxin
Germany .Possibilities fortaxreform.Theeconomicpolicyobjectives
ofreforminthelevelsandstructure oftaxation fallunder
fourmainheadings ,concerning (a)thedemandforlabour,
(b)thesupplyoflabour,(c)thelevelofsavingsandthence
capitalaccumulation ,and(d)theefficiency ofresource
allocation .
Asregardsincometaxesonpersons,France,Germanyand
theUnitedKingdomareallengagedinaprocessofmaking
successive cutsinhighmarginaltaxrates,partlyfinanced
withabroadening ofthetaxbase(UnitedKingdom),partlyTaxation,labourcostsandthedemandforlabour.Itislikely
thataconsiderable partofthetaxandsocialsecurityburden

NoL385/58 OfficialJournaloftheEuropeanCommunities 31.12.86
throughgeneralbudgetaryeconomies .InFrance,Germany
andtheUnitedKingdom ,furtherreductions inpersonal
incometaxaremajorgovernmental objectivesforthenext
fewyears.
Inthecontextofthefallinthepriceofoil,severalcountries
havetakentheopportunity toraiseoilconsumption taxes,
oftenwithaviewtoreducingdeficits (Denmark ,Spain,
Greece,Italy,IrelandandPortugal).
TheCommission 'sproposals fortheapproximation of
legislation onindirecttaxescouldalsoimplychangesinthe
structure oftaxationincertaincountries .Importantcontributions tothecooperative strategyshould
comethroughspecificactionsaffectingtheleveland
structureofpublicexpenditure andtaxation .Public
investments withasufficientsocialrateofreturncouldnow
beincreasedwhichwouldalsosupporttheexpansion in
productive potentialandprivateinvestment .Socialsecurity
contributions shouldbereducedoveramedium-term period.
Theimprovement ingrowthandemployment andthe
resultingincreasesinpublicsectorrevenueandsavingsin
transferpaymentscancreateavirtuouscircle.Taxreforms
shouldalsoaimatreductions inincometaxratesandother
changesinthestructurehelpfultoemployment policyand
facilitateindirecttaxapproximation intheCommunity .
TABLE 17
Generalgovernment revenueandexpenditure (*),EUR12
*
1000millionPPS Percentage ofGDP Percentage changeI1985 1986(2)1984 1985 1986(2)1987(2)1985 1986(2)1987(2)
Indirecttaxes 517,3 568,3 13,5 13,3 13,4 13,5 7,4 9,9 6,8
Directtaxes 497,0 526,9 12,7 12,8 12,5 12,4 9,7 6,0 6,2
Socialsecuritycontributions
received589,1 631,8 15,2 15,2 14,9 14,9 8,1 7,2 6,1
Totaltaxesandsocialsecurity
contributions1603,4 1727,0 41,3 41,3 '40,8 40,8 8,4 7,7 6,3
Othercurrentrevenue 148,4 152,4 3,7 3,8 3,6 3,3 12,3 2,7-3,3
Totalcurrentrevenue 1751,8 1879,4 45,0 45,1 44,4 44,1 8,7 7,3 5,6
Currenttransferspaid 877,8 933,4 22,8 22,6 22,1 21,7 7,5 6,3 4,4
Actualinterestpayments 198,7 217,1 4,9 5,1 5,1 5,0 12,3 9,3 2,7
Government consumption 722,6 770,1 18,8 18,6 18,2 18,0 7,6 6,6 5,1
Totalcurrentexpenditure 1799,0 1920,7 46,5 46,3 45,4 44,6 8,1 6,8 4,5
Grosssaving -47,3-41,2-1,5-1,2-1,0-0,5— — —
Netcapitaltransfers 45,5 41,5 1,1 1,2 1,0 0,9 17,1-8,8-4,5
Grosscapitalformation 107,3 114,8 2,8 2,8 2,7 2,7 7,7 7,0 6,0
Netlending (+)
orborrowing (-) -200,0-197,5-5,4-5,1-4,7-4,1
Memorandum :nominalGDP 3882,24225,8100,0 100,0 100,0 100,0 8,6 8,9 6,4
(')Nationalaccountsdefinition ,excludingloans,advancesandparticipations .
(2)Forecasts .
Source:Commission services .

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/59
TABLE 18
Generalgovernment lending(+)andborrowing (-)
(as%ofGDP)
1970 1973 1981 1982 1983 19841985(')1986(')1987(>)
Belgium -2,2-3,3-12,6-11,1-11,7-9,5-8,4-8,0-6,2
Denmark 4,1 5,2-7,1-9,3-7,3-4,2-1,9 2,8 2,8
Germany 0,2 1,2-3,9-3,4-2,5-1,9-1,1-0,9-0,7
Greece — —-10,6-9,4-8,9-10,1-13,9-10,6-7,1
Spain 0,7 1,1-3,0-5,8-5,4-5,0-6,2-4,9-4,4
France 0,9 0,9-1,8-2,5-3,2-2,9-2,6-2,9-2,6
Ireland — —-.15,8-14,2-11,8-9,8-11,6-10,7-9,9
Italy -3,5-7,0-11,7-12,7-12,4-13,0-14,0-12,7-11,0
Luxembourg 2,7 3,3-2,3-1,3-0,8 1,5 4,1 3,72,6
Netherlands -1,2 1,0-5,2-7,1-6,5-6,2-5,1-5,5—6,6
Portugal— —-10,1-8,8-7,1-7,7-11,2-8,0-7,5
United
Kingdom 3,0-2,7-2,7-2,4-3,7-3,9-2,8-2,9-2,5
EUR12 0,3(2}1,0(2)-5,4-5,6-5,5-5,4-5,1-4,7-4,1
(')EstimatesandeconomicforecastsoftheCommission services (October1986).
(2)WithoutGreece,IrelandandPortugal .
TABLE 19
PublicDebt(2)
(as%ofGDP)
1973 1981 1982 1983 1984 1985(')1986(■)1987(>)
Belgium (3) 63,2 88,1 96,1 105,1 111,6 118,3 121,9 125,6
Denmark 5,043,6 52,7 62,7 67,6 66,3 62,1 57,6
Germany 18,6 36,4 39,5 41,7 42,0 42,7 41,9 41,7
Greece (4)-33,0 36,7 41,4 49,9 56,8 58,4 61,2
Spain 21,0 26,2 32,1 39,3 46,3 48,8 52,5
France 25,1 26,0 29,1 30,7 29,3 31,8 34,0 35,0
Ireland (4) 65,5 89,8 96,6 107,7 113,6 115,7 119,1 124,8
Italy 62,5 73,2 80,0 87,6 94,5 103,0 106,3 108,1
Luxembourg 20,5 14,0 14,4 14,8 14,8 14,5 13,8 12,8
Netherlands (3) 43,4 50,3 55,6 62,3 67,0 70,6 76,3 82,9
Portugal
United
Kingdom (5) 63,359.0
51.162,2
57,770,9
57,475,7
58,781,2
56,981,5
57,985,2
58,0
EUR12 40,3(6)45,0 49,8 53,5 56,0 58,9 60,3 61,8
(')Estimates andforecastsoftheCommission servicesonthebasisoftheOctober1986economic forecasts .
(2)Generalgovernment exceptBelgium ,Greece,IrelandandtheNetherlands .
(3)Generalgovernment withoutsocialsecuritysystem.
(4)Centralgovernment .
(5)Debtatmarketprices.
(6)WithoutGreece,SpainandPortugal .
Source:Eurostat andCommission services .

NoL385/60 OfficialJournaloftheEuropeanCommunities 31.12.86
TABLE20
Evolutionorpublicexpenditure onsocialprogrammes from1970to1983
(percentages ofGDP)
Belgium Denmark Germany France Ireland ItalyLuxem­
bourgNether­
landsUnited
KingdomEUR8(')
1970:
Healthcare,sickness
Invalidityandworkaccidents
Pensions
Maternity andfamily
Unemployment
Others3,8
2,2
7,1
3,5
0,6
0,05.6
2.7
6,9
2,7
0,4
0,15,7
2,6
9,4
2,1
0,1
0,34,9
1,8
7,5
3,1
0,3
0,04,1
1,3
4,6
2,3
0,4
0,1—2.7
2,9
7,8
1,8
0,0
0,05,7
3,1
7,7
2,6
0,6
0,83,9
1,2
6,7
1,5
0,3
0,15.0
2.1
7,9
2,3
0,3
0,2
Total 17,4 19,020,7 18,2 13,3—15,4 19,0 13,8 18,0
1983:
Healthcare,sickness
Invalidityandworkaccidents
Pensions
Maternity andfamily
Unemployment
Others6,5
3,3
11,5
3,0
4,2
0,57,1
2,5
10,4
3,1
4,1
1,17,5
3,1
12,1
2,0
2,0
0,66,8
2,3
11,2
3,1
2,7
0,28,4
7,4
3,15,7
5,4
11,5
2,0
0,8
0,011,1
12,0
1,2
0,0
0,88,4
6,4
10,3
2,7
4,2
0,04.7
2,2
9.8
2,8
2,3
0,36,7
2,9
11,1
2,6
2,5
0,4
Total 29,5 30,127,827,423,225,525,532,7 23,1 27,0
Increase ,1970to1983:
Healthcare,sickness
Invalidityandworkaccidents
Pensions
Maternity andfamily
Unemployment
Others2,7
1,1
4,4
-0,5
3,6
0,51,5
-0,1
3,5.
0,4
3,7
1,01,8
0,5
2,7
-0,1
1,9
0,31,9
0,5
3,7
0,0
2,4
0,24,3
2,8
3,0—8,4
4,2
-0,6
0,0
0,82,7
3,3
2,6
0,1
3,6
-0,80,8
1,0
3,1
1,3
2,0
0,21,7
0,8
3,1
0,2
2,3
0,2
Total 12,1 11,1 7,19,29,9—10,1 13,7 9,3 9,0
(')Excluding Italy.
Source:Eurostat (European systemofsocialprotection statistics )datafile.
Note:Figuresarenotcomparable sincethenatureofbenefitsdiffer;amountsofpublicversusprivateexpenditures onsomecategories of
expenditures (e.g.health,pensions )varyconsiderably betweencountries .
4.3.Wagesandthelabourmarket
4.3.1.Incomesandwagecostsaverageproductivity perheadwouldbe2,3%duringthe
sameperiod.Takingintoaccountthefallinsocial
contributions ofemployees anddirecttaxes,aswellas
modifications inthetermsoftrade,purchasing powerofnet
wageswouldgrowonaverageovertheperiod1986to1990a
littlemorerapidly .
Thesedevelopments intotallabourcostsandnetwage
incomesthusmeritthesupportofbothemployers and
employees ,sincetheyshouldbeconducive toamuch
stronger employment performance andimproved
profitability forenterprises aswellasmoderately growing
realincomesforemployees .
Allcountrieshavemadesomeprogresssincetheearly1980s
inthemoderation ofrealwageincreasescompared toThecooperative strategyproposesthatthesocialpartners
agreeonadevelopment oflabourcostswhichiscompatible
withasignificant increaseinemployment .Thescenario
illustrating thecooperative strategyaccordingly envisages
thatrealwages,intheformwhichisundoubtedly closeto
thatgenerallyconsidered inthewagebargaining process,
thatistosaynetofsocialcontributions ofemployers ,will
grow,inrealterms,onaveragefortheyears1986to1990at
amoderaterate,closeto1,1%perannum.Addedtothe
effectsofthismoderate growthwouldbethatofsome
loweringofemployers 'socialcontributions .Theincreasein

31.12.86 NoL385/61 OfficialJournaloftheEuropeanCommunities
productivity growth.Profitshavetherefore improved .
Between1981and1985,progresshashoweverbeenquite
differentbetweencountries (cf.Table21).caseofanimprovement inthetermsoftrade,thatthis
recoveryisspeededupandaccompanied byasatisfactory
development inrealwages.Effortsundertaken inrecent
yearstoreducetherigidityofindexation arrangements
shouldalsobecontinued .Thepresentstablesituationshould
makethiseasiertoachieve .
However ,in1986,agreaterdegreeofconvergence couldbe
attainedwithintheCommunity .Theimprovement inthe
termsoftradehasenabledcountrieslikeBelgium,Franceand
Italy,whereprogresshadbeenslowerupto1985,toachieve
considerable improvements intheprofitability offirmsthis
year.Thisisexplained forexample inBelgiumby
index-linking arrangements ,whicharestillfairlyrigid,and
havemadeitpossibletopassonthereduction ininflation
automatically tonominalwages.InFrance,intheframework
ofthepolicyofcollectiveagreements ,whichaimsataligning
nominalwagesexanteonthetargetforprices,accounthas
beentakenofafasterthanexpecteddeclineininflation .Withineachcountry,theformationofwagesatregionallevel
shouldbekeptfairlypliant.Greatereconomic andsocial
cohesionwithintheCommunity alsorequiresconvergence of
regionalunemployment ratestowardsthelowestrates,
withoutimplyingdepopulation inthepoorestregions.
ResourcetransfersorganizedeitherbytheMemberStatesor
bytheCommunity canandmustcontribute toachievingthis
aim.Tobefullyeffective,however ,theresourcesmustbe
supplemented byprivatecapitalattractedbyarateofreturn
atleastequaltothatprevailing inmorefavouredregions.Onlyinfivecountries ,Belgium,Greece,Spain,Franceand
Italy,willtheincreaseinreallabourcostsperheadin1987be
lowerthanorcloseto1%.InGreece,SpainandFrance,
indeed,theweaknessoftheemployment recoveryandthe
especially highlevelofunemployment seemtojustifyan
increaseinreallabourcostsbelowtheCommunity average .
ThesameappliestoBelgiumandPortugal ,wherereallabour
costsperheadareexpectedtoincreasebycloseon1%.Lastly,themoderateriseinrealwagecostsperheadshould
begeneralized ,andbenefitallsectorsandfirms.
IntheotherCommunity countries ,th'eincreaseinreallabour
costsperheadwillprobablybe2to3%(cf.Table22).In
thesecountries ,itisdesirablethatthesocialpartnerstake
accountofthedevelopment ofemployment andthelevelof
unemployment inpaynegotiations .Forexample,thechange
intrendbroughttolabourcostscouldbelessmarkedin
Germany ,whereunemployment isrelativelylowandprofits
haveincreasedfairlyrapidly.IntheUnitedKingdom ,onthe
otherhand,theproblemofarapidincreaseinrealwage
incomes ,despiteahighrateofunemployment ,isan
especiallyacuteone.Inthisrespect,productivity gainsrealizedinthemost
efficientsectorsshouldbeusedfirstofalltoimprovethe
competitiveness andprofitability oftheeconomy ,rather
thantoensurehigherthanaveragewagerisesinthose
sectors.Thispermitsanincreaseinthemarginfor
manoeuvre ofsectorswithlowergainsinproductivity .This
roomcanthenbeusedtoincreaseemployment .
Theneedforwagemoderation impliesthatbothsidesof
industrywillactinaresponsible manner .Wagesare
determined ineachcountryonthebasisoftraditional
procedures thathaveoftenstoodthetestoftime.Although
theyneednotbecalledintoquestion ,theyshouldensure
respectforsomebasicprinciples .Attheleveloftheindividual firm,itcouldhoweverbeuseful
tokeepratesofpayadaptabletoreacttothesituation .Thisis
oftennecessaryinordertoassurestabilityofemployment in
thefaceofcyclicalchangesindemandorprices.One
techniquewhichcouldbeenvisaged ispossiblytodividepay
intoafixedcomponent andavariablecomponent linkedto
thefirm'sprofits,whichmayhelpimprovethemotivation of
theworkforce.Adaptability ofthistypecanalsohelptogive
existingfirmsthemarginrequiredforrestructuring while
maintaining aparticular levelofemployment . Wageagreements shouldallowforrapidadjustments ,inthe
directionrequiredbythecooperative strategy,totake
accountoftheverymarkedchanges—largelyunpredictable
—inthetermsoftrade.Thesocialpartnersshouldexamine
thepossibility ofmaintaining someflexibility intheactual
development ofnominalwagesinsuchasituation .Oneof
thepossibilities whichcouldbeenvisaged wouldbethe
introduction ofsafeguard clausesintowageagreements
protecting toacertaindegreebothparties.Thisoughtto
ensurethateithertherecovery inprofitability isnot
compromised whenthetermsoftradedeteriorate ,or,intheThevariousaspectsofwageformation mentioned here
concernfirstandforemostthesocialpartners .Thesearethus
subjectsthatshouldbeexaminedthoroughly inthecontext
ofthesocialdialogue,withaviewtoassuringanappropriate
equilibrium betweenlabourmarketadaptability andthe
protection ofemployees .

NoL385/62 OfficialJournaloftheEuropeanCommunities 31.12.86
Thereorganization andreductionofworkingtimecanmake
growthmoreemployment-creating ,onconditionthatitbe
neutralforthelevelofcosts.Thisgoalcanbeattainedin
association withareorganization oftheproduction process
whichcombinesareductioninworkingtimewiththelonger
useofproduction facilitiesandamoreflexibleuseoflabour
withinthecompany .Thiscouldincreasecapitalproductivity
whichisdesirableasacontribution towardsboostingprivate
investment .Thepossibility ofusingexistingplantformore
production withalargerworkforce wouldalsohelptoreduce
theinsufficiency ofthecapitalstockinrelationtothelevel
whichwouldberequiredatahighemployment levelinthe
economy .Theevolutionoflabourcostshasinrecentyearspermitteda
certainimprovement oftheprofitability oftheenterprise
sector,andwillthushelpemployment .Thereductionofthe
priceofoiladdstothesetrends.Forthemedium-term future,
aconsensus needstobeformedfavouring moderate real
wageincreases ,coupledtotheextentpossibletodecreases
insocialsecuritycharges,thusallowing asustained
improvement inprofitability andcompetitivity .Toincrease
thechancesofarapidreduction inunemployment ,care
shouldbetakentoensurethatwageformation procedures
remainsufficiently adaptable bothinrelation to
unforeseeable developments intheinternational contextand
inrelationtoregionaldisparities .Atthelevelofindividual
firms,someadaptability inpaycouldbeexaminedinorderto
improvethemotivation oftheworkforce andtomakeit
possibletostabilizeemployment inthefaceofcyclical
changesindemandorprices.However,aboveaverage
productivity gainsrealizedinthemostefficientsectorsand
firmsshouldbeusedmainlytoimprovecompetitiveness in
theeconomyasawhole,andnottoachievehigherthan
averagepayrisesinthesesectors .Sincetheuncertainties andadjustment costsassociated with
areorganization oftheworkingprocesscanbeconsiderable ,
itmustbeincorporated inacooperative approach .In
particular ,capitalaswellaslabourcostincreaseshaveto
avoided .Inmanycases,publicsupportisalsonecessary in
theencouragement ofexperiments ,andtheexchangeof
experiences and,insomesituations ,inordertocover
adjustment costs.InanumberofMemberStates,the
government supportsthisrestructuring processinavarietyof
ways.
4.3.2.Adapting thelabourmarketformore
employment-creating growth
Thederegulation ofemployment protection systemsdoesnot
constitute anobjectiveinitself.Thereareadvantages in
havingageneralframework ofemployment laws,asseenin
allEuropeancountriesandJapan,inordertoassurestability
andfairnessinemployment conditions .Employment
protection lawcanalsoformpartofawidersocialcontract,
inwhichacooperative approachtoindustrialrelationsrelies
onforward-looking employment policies .Apartfromthemajormacroeconomic determinants of
employment alreadydiscussed —aggregatedemand ,pay
levelsandsocialsecuritycosts—thereexistalargernumber
ofmicroeconomic policyinstruments thatcanhelporhinder
theemployment propensity oftheeconomy .Someofthe
mainheadingsare:
—workingtimepractices ,
—employment protection regulations ,
—trainingandretraining facilities,
—regulations affectingthestart-upofsmallenterprises ,
self-employment andcooperative enterprises ,
—measurestohelpthelong-term unemployed backinto
activityandtointegratetheyoungunemployed intothe
workforce .Theconsiderable rangeofemployment protection practices
intheCommunity ,allwithinacontextofacomprehensive
legalframework ,givessomeevidenceofhowundulyheavy
regulatory burdensmaydamagetheemployment propensity
oftheeconomy .Surveysofemployers madebythe
Commission indicatethattheregulations governing
dismissalsandredundancies areperceivedinsomecountries
asbeingparticularly detrimental toemployment .Insuch
cases,theseverityofcosts,procedures orjudicialsystems
ofappealconcerning recruitment andtermination
ofemployment contractsshouldbereconsidered ,without,
however ,callingintoquestionbasicsocialrights.Such
reformsshouldbecompatible withtheobjectives setoutin
Article118AoftheSingleEuropean Act.
Inthesedomains ,initiatives haverecentlybeentakenorare
beingconsidered inmostMemberStatesandatthe
Community level.Moreover ,manydetailedmeasuresto
improvethelabourmarkethaverecentlybeenthesubjectofa
memorandum entitled .Employment Growthintothe1990s
—aStrategyfortheLabourMarketsubmitted inJune1986
totheCouncilforEmployment andSocialAffairsbythe
ministersfromIreland,ItalyandtheUnitedKingdom .Therulesgoverningpart-timeworkandfixed-term contracts
arealsoofconsiderable importance indetermining the
balancestruckbetweenthequalityandvolumeofjobs
offered.Evidenceofanincreasing supplyofpersonswilling
totakesuchemployment ,andofthesupplyofjobsofthis
typeissufficiently important inrelationtothejobshortagein
theCommunity thattheconditions ofthesetypesof
employment contractshouldnotbetoorestrictive .In

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/63
Thecontribution oftrainingandqualifications towardsthe
greaterregionalflexibilityofthelabourmarketwithinthe
Community waseffectively recognized bytheCouncil's
decisiontoworktowardsthecomparability between
vocational trainingqualifications forsemi-skilled (level2)
workers .Thedecisioncomplements theCommunity action
toaccelerate themutualrecognition ofprofessional
qualifications ,andwillbenefitinthefirstinstanceworkersin
thosesectorsinwhichahighlevelofcross-border mobilityis
alreadyprevalent .Itconstitutes asteptowardsachievingthe
humandimension oftheinternalmarket .particular ,iftheCommunity istosucceedinincreasing its
labourforceparticipation rate,whichitneedstodoinview
ofloomingproblemsofchangesindemographic structures ,it
willhavetorelyinpartontheseformsofemployment
contract ,whichareparticularly suitedtothepreferences of
certaingroups(forexampletotheneedsofthesecondworker
infamiliesandofelderlyworkers).Theseformsof
employment contractalsohavetheadvantage inpresent
conditions ofreducingtheregulatory costsatthemargin
fornewrecruitment ,withoutquestioning thesecure
employment statusofexistingpermanent employees ;they
wouldalsohelpassureamoreemployment-creating growth
process.Ontheotherhand,precautions havetobetakento
limittherisksfromdeveloping precarious jobsandassurethe
qualityofsuchformsofcontract .Theyshould,forexample,
begovernedbyminimalsocialsecuritycoverageandother
labourlawssuchasthosesettingminimumwages.Twoofthemostimportant factorsconditioning the
adaptability ofthelabourmarket,withaviewtoachieving
moreemployment-creating growth,aretheregulations and
negotiated practicesgoverning (a)workingtime,and(b)
employment protection .Inbothareas,surveysrecently
conducted bytheCommission (^suggestedthatthereexists,
intheopinionsofbothemployers andemployees ,awishto
easecertainrulesgoverning thelabourmarket.This
willingness shouldbefullyexploitedbydeepening thesocial
dialogueonthesevariousthemes .Education ,trainingandretrainingconstitute akeyvariable
intheeconomicadjustment processandmustbeconsidered
inconjunction withemployment policyinitiatives ifmajor
bottlenecks aretobeavoidedandthesocialconsequences of
industrialrestructuring aretobeattenuated .Thecentralrole
thateducationandtrainingisnowplayinginMemberStates
isunderlined bytheincreasing recognition ofthelinks
betweentraining,productivity andbusinesssuccess,andof
theimportance forenterprises toinvestmoreheavilyin
trainingprovision .Asatoolofsocialadjustment ,retraining
isparticularly necessarytoaccompany businessclosureand
sectoralshrinkage ,andevenmoresoinareasofindustrial
decline .AsstressedalreadyinaCommission communication tothe
Councilin1984(COM(84 )484final),thelong-term
unemployed willtendtobeamongstthelasttobenefitfrom
anyimprovement inoveralleconomicperformance .Policies
topromotegeneraleconomicandemployment growthmust
besupplemented bypolicyinterventions targetedspecifically
atthelong-term unemployed .TheCommission therefore
proposedasetofmeasuresdesignedbothtopreventpeople
frombecominglong-term unemployed andtoreintegrate
thosewhohadalreadybeenunemployed for12monthsor
more.Thesemeasures formedthebasisoftheCouncil
resolution ofDecember 1984(2)whichgaveacommitment
totackletheproblembyincreasing theefficiencyofexisting
socialandemployment policiesaspartofaneffective
Community policytocombatunemployment .These
commitments wereinadditiontothosesetoutintheCouncil
resolutionofJanuary1984concerning youthunemployment
inwhichtheMemberStatesagreedaseriesofactionsto
promotetrainingandemployment opportunities foryoung
people.Inthisregard,andwithintheframework ofthesocial
dialogueattheCommunity level(ValDuchesse),the
workingpartyontrainingandmotivation forworkersin
connection withnewtechnologies isseekingtocontribute to
apositiveenvironment .Thisisespecially important in
relationtotheEuro-Tecnet programme fornewinformation
technologies ,vocational training,andtotheComettdecision
oncooperation betweenuniversities andenterprises on
high-leveltraining .
Arangeofinitiatives specifically tohelpthelong-term
unemployed hasbeensupported throughtheEuropean
SocialFundandthroughthePovertyProgramme (3).Many
MemberStateshaveintroduced newmeasures infavourof
thelong-term unemployed orextendedexistingmeasures .Aparticular effortiscalledfortoensureeffectivelocaland
regionalmanagement ofhumanresources ,withsufficient
investment intrainingfrombothprivateandpublicsources
toensurethegeneralupgrading andmodernization ofskills
atalllevels.Smallandmedium-sized businesses face
particular trainingandretraining problems (intermsof
management development andadvice,accesstotraining,
flexibilityofdelivery);inthisconnection ,MemberStatesare
beinginvitedtorespondpositively toacomprehensive
packageofmeasuresproposedbytheCommission .Theneed
formoremanpower "flexibilitywithinthecompanyalso
stressestheimportance toincreasetheleveloftrainingto
facilitatethisinternalmobility .(!)'Employment prospects :viewsofbusinessmen andthe
workforce 'EuropeanEconomy ,No27,March1986.
(2)Councilresolution of19December 1984onactiontocombat
long-term unemployment .
(3)COM(83 )211final,25April1983.

NoL385/64 OfficialJournaloftheEuropeanCommunities 31.12.86
Areportintheformofacommunication willbesubmitted to
theCouncilinearly1987withproposalsforfurtheraction.
Thereportwillbebasedoninformation obtainedfrom
MemberStatesandonthefindingsofrecentreports
undertaken bytheCommission andbyotherorganizations
withaninterestinpolicyonlong-termunemployment .However ,theproportion ofthoseregistered asunemployed
whohavebeenwithoutworkforayearormorehas
continuedtoincreaseandnowstandsatanaverageofabout
40%acrosstheCommunity .Furthermore ,therehasbeena
significant increaseintheproportion ofpeopleunemployed
fortwoyearsormore.ThescaleoftheCommunity 's
responsetotheproblemclearlydoesnotreflectthescaleof
theproblemitself;agreaterpoliticalandfinancial
commitment toactionisneededtomeettheobjectives setout
inthe1984resolution .Concretemeasures ,suchaslower
socialsecuritychargesfortakingonthelong-term
unemployed ,couldthereforebeconsidered .
Inaddition,itisclearthat,withrespecttoyouth
employment ,itwillbenecessarytofocusattentiononthose
measureswhicharemostlikelytoleadtosubsequent
employment ,ratherthansimplydelayentryintothelabour
market.Particular attention needstobegiventothe
problemsofyoungpeopleover20,manyofwhomalready
riskbeingnumberedamongthelong-termunemployed when
trainingortemporary job-creation possibilities are
exhausted .
Attheendof1986,theCommission willreviewprogressin
implementing theactionsagreedintheCouncilresolution .Manytypesofregulatory policiesandjobcreationinitiatives
canhelpimprovetheemployment propensity ofthe
economy .Suchinitiatives needtofitcoherently witha
positivemacroeconomic policyasenvisaged inthe
cooperative strategy .TheCommunity shouldnotaimata
generalderegulation inemployment protection law,but
MemberStatesshould,insomecases,adjustundulyonerous
regulations soasnottodiscourage thegrowthofvarious
formsofemployment ,:;olongasbasicsocialsecurityand
otherconditions arerespected .Theadaptation ofworking
time,onconditions whichareneutralforthelevelofcosts,
canalsohelpachievemoreemployment-creating growth .
Strongeractionisrequiredtoeasetheproblemsofthe
long-termunemployed andofyouthunemployment ,andthe
Community willsoonbereviewing theadequacyofsuch
measures .
TABLE21
Realunitlabourcosts(Ratioofrealpercapitalabourcoststoproductivity )(Index100:average1961to
1973
Average
1961to
19731975 1981 1982 1984 1985(')1986(>)1987(')
Belgium 100 110,0 115,0 112,9 111,9 110,2 106,1 104,6
Denmark 100 104,6 100,5 99,2 96,1 94,4 92,9 93,5
Germany 100 105,9 103,5 102,2 98,9 97,8 96,1 95,7
Greece 100 90,2 106,4 106,1 107,2 109,2 101,2 98,9
Spain 100 104,0 102,9 100,7 94,4 91,8 89,1 87,7
France 100 105,9 108,1 107,3 105,3 104,4 102,1 100,2
Ireland 100 104,6 101,3 99,5 95,2 92,9 91,4 91,3
Italy 100 110,9 108,6 108,6 109,4 108,5 103,2 101,7
Luxembourg 100 123,4 124,9 120,4 111,2 109,3 106,4 107,5
Netherlands 100 108,8 102,5 101,1 95,8 94,3 95,4 97,8
Portugal 100 136,2 116,1 108,6 100,5 96,9 92,0 90,6
UnitedKingdom 100 110,1 100,3 98,5 98,8 97,9 99,9 100,3
EUR12 100 107,2 104,3 103,0 101,1 99,9 98,1 97,4
(')Estimates andforecastsoftheCommission services,October1986.
Source:Eurostat andCommission services .

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/65
TABLE22
Labourcostsandemployment forecastfor1987(*)
Employment
(percentage
changeper
annum)Wagecostsperemployee (2)
(annualvariationin%)Productivity
inthewhole
economy
(GDPper
occupied
person)Real
unitlabour
costs(5)
(percentage
changeper
annum)Unem­
ployment
rate(6)nominalreal(3)
onthebasis
ofGDP
pricesreal(4)
onthebasis
ofprivate
consumer
prices
1 2 3 4 5 6 7
Belgium 13,4-0,6 2,2 0,4 0,7 1,9-1,4
Denmark 7,7 0,3 5,9 2,1 3,0 1,5 0,6
Germany 7,7 1,0 3,2 1,8 2,1 2,2-0,3
Greece 8,3 0,0 9,6-2,4-2,6-0,2-2,2
Spain 21,5 1,2 6,3 0,2 1,0 1,8-1,6
France 10,7 0,3 3,0 0,3 0,7 2,2-1,9
Ireland 18,0 0,7 6,0 2,3 2,7 2,5-0,1
Italy 12,8 1,3 6,1 0,8 2,1 2,3-1,5
Luxembourg 1,2 0,7 5,6 2,9 4,2 1,9 1,1
Netherlands 11,1 0,9 1,7 3,4 2,7 0,9 2,4
Portugal 8,5 0,3 12,3 1,6 3,1 3,2-1,5
UnitedKingdom 12,0 0,8 6,6 2,3 2,6 1,9 0,4
EUR12 11,7 0,8 4,8 1,3 1,8 2,0-0,7
')Forecasts ofOctober1986.
2)Wagesandsocialsecuritycontributions .
3)Fromthepointofviewofcosts.
4)Fromthepointofviewofpurchasing power.
5)Column4dividedbytheincreaseinproductivity .
6)Registeredunemployed ,Eurostatdefinitionasapercentageofthecivilianlabourforce:exceptforGreece,SpainandPortugal
wherenationalsurveyresultsarepresented .
Source:EurostatandCommission services .
4.4.Theadaptability ofmarkets
Amongthelinesofactioninthecooperative strategy,action
toimprovetheadaptability ofmarketsisabasicfactorinthe
processofimproving thecompetitiveness offirmsandtheir
performance ,inparticularontheemployment front.Whileit
istruethatthisimprovement canbebroughtaboutby
medium-term measuresthatproduceeffectsonlygradually ,
thepolicythatissuggested canalsohavemoreimmediate
positiveeffectsinthatithelpstoguideandstabilizeeconomic
expectations .Thedeclaredaimistoimprovethefunctioning
ofmarketmechanisms :
—byestablishing alargeareawithnointernalbarriersto
thefreecirculation ofgoods,persons,servicesand
capital,
—byprovidingeachcountrywithconditions conducive to
thedevelopment ofcompanies andthepromotion of
enterprise .Thereinforcement ofthepotentialforgrowthandthe
resultingemployment performance necessarily gohandin
'handwithstructural adjustment ,butthisstructural
adjustment willbethatmuchsmootherifitunfoldsagainsta
background ofdynamicgrowthinwhichthesocial
dimension oftheadjustment canbemoreeasilytakeninto
consideration .
Progresstowardscompletion oftheinternalmarket:inJune
1986,theEuropeanCouncilmeetinginTheHaguestressed
thatiftheobjectivesfixednotonlyforthecurrentyearbut
alsofortheperiodupto1992weretobeattained ,thenthe
decision-making processleadingtothecompletion ofthe
internalmarketwouldhavetobesubstantially improved .
Considerable progressisneededtopassfromthepresent
situationofadvanced customsuniontoaneconomic area
withoutfrontiersin1992.
AmongthemajorinitiativesidentifiedintheWhitePaperon
theinternalmarket,themostsubstantial economic results
aretobeexpectedfromthefollowingmeasures :

NoL385/66 OfficialJournaloftheEuropeanCommunities 31.12.86
—Removing barrierstointra-Community trade:this
involvesfirstofallremovingbarriersatfrontiers,with
themajoreffectofreducingthecostofintra-Community
tradeandthusencouraging itsexpansion ,aftertheperiod
ofrelativestagnation thathasfollowedthestrong
expansion of1958to1973,whentheshareof
intra-Community tradeintotalCommunity traderose
from34to53%.Theremoval ofbarriersto
intra-Community tradealsoinvolvesamovetowardsa
commonmarketinservices,especiallyfinancialservices,
withincreasedcompetition leadingtoadeclineinthecost
ofservicesrendered (financialintermediaries ,pricesof
services )bothtobusinessandtoconsumers .marketwillacceleratetheprocessofstructuralchange.From
thisviewpoint ,itisnecessarytoensurethatthesocial
dimension isfullytakeintoconsideration ,asrequiredby
Article118AoftheSingleEuropean Act.Inaddition,in
ordertoavoidbothsocialresistanceandinjustice,itis
importantthatthecostsandburdensofchangearenotborne
bysomegroupswhileothersreapthebenefits.Economicand
socialpolicies,includingcurrentmeasurestoassistthe
processofstructuralchange,e.g.theSocialandRegional
Development Funds,willneedtobeparticularly attentiveto
ensuring afairdistribution ofthecostsandbenefitsof
integration andofpromoting greatereconomicandsocial
cohesion .
Itisalsoimportant togivethelargeinternalmarketitsfull
financialdimension .—Openinguppublicprocurement tocompetition :public
procurement isafairlysubstantial item,sincegeneral
government purchasesofgoodsandservices (including
grossfixedcapitalformation )represented about18%of
totalpublicexpenditure ,or9%ofCommunity GDP,in
1985;thisfiguredoesnotincludethepurchasesofthe
numerous publicsectorfirmsinthecompetitive sector
thatcomeunderprivatelaw.Openinguppublic
procurement tocompetition willleadtobudgetary
savingsthatmay,according toinitialestimates ,be
considerable incertainsectors.Moreover ,majorbenefits
willbeforthcoming forsuppliers ,whowillbeableto
specialize morenarrowly andtakeadvantage of
economies ofscale.Theliberalization ofcapitalmovements isaconcomitant of
thegeneralaimofensuringthebestpossibleallocationof
resources .Itshouldbebasedoncloseconvergence of
economicandmonetarypolicies,whichisafactorofstability
andconfidence favourable toinvestment behaviour andto
lastinggrowthintheCommunity asawhole.
Morespecifically ,liberalizing capitalflows,whileatthe
sametimeprogressing towardsthecreationofacommon
marketinfinancial services,willreinforceEurope's
attractiveness asafinancialareaandencourage the
development ofacompleterangeofinstruments basedonthe
mostrecenttechniques .Byofferingsaversawidervarietyof
investment opportunities ,andfirmsofallsizesan
international rangeoffinancing possibilities ,the
liberalization ofcapitalmovements shouldenlargethepool
ofEuropeansavingsthatcanbetappedforinvestment and
jobcreationatlowercost.—Thedevelopment ofsupplyeffects:themoststriking
effects,thoseofincreasedcompetition inEurope,willbe
agreaterspecialization offirmsandconsequently ,atleast
incertainsectors,economies ofscale.Theeffectscould
bereinforced bysuchdevelopments asmoreintense
industrialcooperation inEurope,andmoreefficientand
concentrated R&Dexpenditure .Veryfavourable effects
mayalsobeexpectedfromeliminating disparities
betweentechnical specifications (rules,standards ,
type-approval procedures ),whichareusedatpresent
bothbytheauthorities andbydominant firmsas
instruments tosegmentmarkets,andthusreduce
competitiveness intheCommunity economy asa
whole.Withthisinmind,theCommission adopted a
communication totheCouncilon21May1986,presenting a
programme fortheliberalization ofcapitalmovements inthe
Community .Theproposedprogramme hastwostages.
Thefirststagehasnowbegun;itsaimistoachieveeffective
liberalization ,throughout theCommunity ,ofthecapital
transactions mostdirectlynecessary forthesmooth
functioning ofthecommonmarketandtheinterlinking of
financialmarkets .—Finally,theapproximation oflegislation onindirect
taxes:thiscouldbeamajorelementinreinforcing
intra-Community competition ,inparticular becauseit
willintroducegreatertransparency intofinalconsumer
pricesinthedifferentcountries .Moreover ,incertain
casesorcountries ,itcouldprovideanopportunity to
adoptastructureofcompulsory leviesbettersuitedtothe
purposesofsupplypolicy(seepoint4.2).
Thismeansfirstofallthegradualdismantling ofexisting
exemptions fromCommunity obligations .Itisimportantto
ensurethattherestrictions stillauthorized —eitherunderthe
safeguardclausesoftheTreaty(Ireland,Italy,Greece)or
undertheActofAccession (Spain,Portugal )—canbe
graduallyremoved .Althoughitisdifficulttopredictthepreciseeffectsofcloser
economic integration onoutput,productivity and
employment ,itisclearthattheopening-up oftheinternal

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/67
Italsomeansextendingcurrentliberalization obligations .A
proposalforaDirectivewassenttotheCouncilinJune1986,
withaviewtoextending theliberalization obligation to
long-term creditsrelatedtocommercial transactions ,the
acquisition ofsecuritiesnottradedonastockexchange ,and
theadmission oftransferable securitiestonationalcapital
markets .averageproductivity gainsachievedinthehighperformance
sectorscanspreadtotheeconomyasawholeintheformofa
relativefallinthepricesofthesesectors'products .The
additional demanddirectedtothesesectorsthusreinforces
theirprocessofgrowthandemployment .Asaresultofthis
mechanism itisalsopossibletoimprovetheprofitability of
theless-efficient sectorsandhenceputtheminapositionto
createjobs.
Inthesecondstage,theprincipleofcompletely freecapital
movements shouldberecognized ,coveringfinancialcredits
andmonetary investments (deposits,moneymarket
securities ).Thetimetableforliberalizing thesetransactions
willhavetomakeallowance forthevarietyofeconomic
situations intheMemberStates,andthepresentwide
differences inexchangecontrols .TheCommission willbe
sendingfurtherproposalstotheCouncilduring1987.Moreover ,withaviewtoachieving greatereconomic
efficiency ,thegovernments ofanumberofcountrieshave
endeavoured toreducegovernment intervention intheir
economies .Whetheritisaquestionofderegulation ina
certainnumberofareas(transport ,energy,etc.),by
transferring (orrestoring )totheprivatesectorcertain
activitiespreviously entrustedtothepublicsector,orby
announcing theintentionofreducingthevolumeofpublic
intervention intheformofsubsidies ,theaimistoimprove
economicefficiency .Fromthispointofview,thecompletion
oftheinternalmarket,totheextentthatitimpliesstricter
controlofstateaids,requiresgreatertransparency and
periodicassessments ofallpublicintervention infavourof
firms,whateverformittakes(subsidies ,interestrebates,tax
expenditure ,guarantees ,purchaseofequity),inparticular so
astoassesseffectsandefficiency intermsofthe
competitiveness ofCommunity firms.Ensuringmorefavourable conditionsforthedevelopment of
businesses :ifmarketsaretobemoreadaptable tothe
fluctuations ofsupplyanddemandandtoexternalstocks,
firmsmustbeabletocarryouttheiractivities inan
environment thatisbothstableandfavourable totheir
development .
Theimprovement oftheenvironment offirmsfromthe
pointsofviewoftaxation,financialarrangements andlegal
administrative provisions ,isoneoftheCommission 's
continuing policyaims.Suchanimprovement —generally
basedon.recommendations foralignment onthemost
suitablenationalpractices withintheCommunity —
contributes toincreasing transparency andtoharmonizing
theconditions fortheactivityoffirmsintheCommunity ,as
wellasdiscouraging discretionary measuresthatmaywell
distortcompetition .Asafollow-up ,inparticular ,toits
communication of1983ontaxandfinancial measures in
favourofinvestment ,theCommission hastakenseveralsteps
toimprovefirms'taxenvironment (carry-over oflosses,
reducedcapitalduties),financialenvironment (promotion of
Europe-wide risk-capital activities )andlegaland
administrative environment (examination oftheimpactof
Community andnationalregulations onsmallbusinesses and
cooperatives ).Thispolicywillbeactivelypursued :itsimpact
willbethegreaterasitisrelayedandreinforced atnational
levelbymeasurestakenbothatcentralandregionallevel.Theimprovement oftheenvironment offirmsandthe
reinforcement oftheroleofcompetition areliabletohelp
smallbusinesses ;buttheCommission alsointendstodevelop
amoredynamicandmorespecificpolicytowardssmall
businesses andcooperatives ,becauseoftheirimportance in
jobcreation .Tothisend,ithasadoptedaprogramme (*)of
actionwhich,aswellasestablishing afavourable
environment forthecreationanddevelopment ofsmall
firms,isaimedatresponding tothespecificneedsofthese
firmsintermsoftheprovisionofcapitalandadaptability to
themarket (flexibility ).Themeasuresproposed inthis
contextrelateinparticular totraining (retraining ofstaff,
trainingofmanagers andheadsofsmallbusinesses ),
encouraging arrangements for'one-stop'information offices
ineachMemberState,andorganizing pilotCommunity
information centresforsmallbusinesses ,helpingsmall
businesses penetrate themarketsofthirdcountries ,
supporting creation andinnovation ,encouraging
partnerships betweenlargeandsmallfirms,adjusting
Community financing totheneedsofsmallfirms,and
developing risk-capital activityonaEuropean scale.
Theemphasisplacedongreatercompetition asafactorinthe
adaptability ofCommunity economies hasledsomemember
countriestotakemeasuresthatincreasefirms'marginfor
manoeuvre orimprovetheflexibility andeffectiveness of
theirmanagement .Forexample,thetrendinseveral
countries—inmanycaseshelpedalongbydisinflation —is
towardsrestoring firms'freedomtodetermine prices.
Indeed,mostmembercountriesconsiderpriceflexibility in
generalasaparticularly important factorinimproving
growthandemployment performance .Inparticular ,
through theactionofcompetition ,theabove­Allthesemeasures ,whichhavebeenthesubjectofdialogue
andconsultations withbothsidesofindustry (bodies
representing smallbusinessandtradeunions),shouldmake
foradynamicprocessofdevelopment andjobcreationin
(')Actionprogramme forSMECOM(86 )445of16July1985.

NoL385/68 OfficialJournaloftheEuropeanCommunities 31.12.86
pursuanttotheprovisionsofArticle130oftheSingleAct,
theCommission willimprovetheoperationofthestructural
funds,theinstruments oftheCommunity 'sfinancial
solidarity ,sothattheycancontribute aseffectively as
possibletoachievingeconomicandsocialcohesionandto
removingthehandicapsoftheless-favoured regionsandthe
decliningindustrialregions .Thedecisiontostreamline is
partofthecooperative strategy,which,bypromoting
dynamicgrowth,shouldreducethedisparities between
standards oflivingintheMembercountries andtheir
regions .smallfirms;theycanthereforeplayanimportantpartinthe
cooperative growthstrategyformoreemployment .
Criticaltothecooperative strategyareactionsbythe
Community andMemberStatestoimprovefunctioning of
goods,servicesandcapitalmarkets .Amongthemajor
initiatives proposed bytheCommission 'sinternalmarket
programme aremeasuresfor(a)theremovaloftechnical
barrierstotradeandfrontiercosts,(b)cooperation inpublic
procurement ,(c)indirecttaxapproximation ,and(d)capital
marketliberalization .Also,inthiscontext,thesocial
dimension shouldnotbeneglected .TheCommission has
alsomadeproposalsforimproving thefiscalandregulatory
environment oftheenterprisesector,withspecialattention
giventotheneedsofsmallandmedium-sized enterprises .Furthereffortsarethusnowneededinfavourofindustry,
researchandinnovation thusaidingandaccelerating
structuraladjustment andimproving thecompetitiveness of
firms.Thistypeofexpenditure isespeciallyimportanttothe
successofthecooperative strategy,inthatitimprovesthe
scientificandtechnological baseofenterprises ,providesa
favourable educational baseforthedissemination of
information technology ,andreinforces theprocessof
establishing theCommunity marketbyitseffectson
industrialsupply.4.5.Financing Community policies:thebudgetand
financialengineering
Structuraladjustment in,andconvergence of,theMember
States'economies constitute ,alongwiththecontrolofthe
financingofthecommonagricultural policy,prioritiesfor
thebudgetoftheenlargedCommunity .Inconformity with
thecooperative strategy,theCommunity budgetcouldmake
anevengreatercontribution toaimssuchasmore
employment-creating growth,strongereconomicandsocial
cohesion,trouble-free integration ofthenewCommunity
Member States,andanimproved internalmarket.
Moreover ,theCommunity 'sfinancialinstruments shouldbe
employedtoservethestrategyinthemostimaginative and
efficientwaypossible .TheCommunity 's1987budgetisinthecourseofbeing
established .TheCommission 'spreliminary draftbudget
totalled36,6thousandmillionECU,thusremainingwithin
themarginofthemaximum VATrateof1,4%.Thesmall
expansion inexpenditure forhteEAGGF-guarantee section
(3,8%),whichstillrepresents 62,5%ofallbudgetary
expenditure ,madeitpossibletoproposeappreciable
increasesinstructuralexpenditure .
ThebudgetadoptedbytheCouncilinitsfirstreading
amounted to35,9thousandmillionECU,withreductions ,
however ,inamountsallocated tostructural fundsand
research ,Inlinewiththeconclusions oftheFontainebleau European
Council,theCommission iscurrentlyconsidering proposing
totheCouncilanincreaseintheVATfinancinglimittotake
effectin1988.
Financialengineering :althoughbudgetary resources are
scarce,abundant privatefundsareavailableandthe
Commission proposestotakeadvantage ofthisfinancial
situationbyconcentrating onthedevelopment offinancial
engineering .Tothisend,anewchapterhasbeeninsertedin
thepreliminary draftbudgetfor1987proposed bythe
Commission .TheCommunity budget:theprecarious situationofthe
Community budgetreflectsthedifficultbalancebetweenthe
financingofthecommonagricultural policydecidedbythe
Councilandthedevelopment ofnon-obligatory spending ,
theroleofwhich,inthesearchforgreatereconomicand
socialcohesion intheCommunity ,hasgrownsince
enlargement .Insofarasagricultural spendingisconcerned ,
theproblemisaccentuated bythefactthatitsvolumealso
dependsonexternalfactors.Thus,forthisexpenditure ,the
framework forbudgetary disciplineadoptedbytheCouncil
hashadtoberevisedin1986asaresultoftheincreasing
competition withotherproducers onthirdmarkets .Thisnewactivitywouldmeanpersuading themarketto
createordevelopinstruments ormechanisms tofacilitatethe
financingofmeasuresorprojectswhichtheCommunity
considersofspecialinterest .Existinginstruments (loansand
subsidies )couldbeusedtothebestadvantage toactas
catalysts ,whilethescopeandfunctioning ofCommunity
intervention shouldbeexpanded andimproved ,andthe
relationship betweenCommunity andprivatefinancing
shouldbeorganizedtoenablethemarkettooffernewtypesInthiscontext,theprioritieslaiddownbytheCommission in
'AFutureforEuropean Agriculture 'aretheprogressive
reduction ofsupplyinsectorsproducing surpluses ,
qualitative improvements ofproductsandastructuralpolicy
whichmoreaccurately reflectsmarketrealities .Moreover ,

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/69
offinancing tailoredtoinnovation ,technology and
enterprise .
IntheCommission 'sopinionmanyprojectsexistinthe
Community thatcouldbemoreeasilylaunched and
completed ifsuitablefinancingarrangements wereavailable .
TheCommission hasdefined,fortheimmediate future,three
priorityareasofitsfinancialengineering activitywhereitis
studying,inclosecollaboration withtheEIB,thepossibilities
fordevelopment :
—Advancedtechnology projectswellupstreaminthechain
leadingfromresearchtoindustrial application ;in
particular ,projectsconstituting theindustrialfollow-up
tojointresearch programmes thathavebeen
part-financed bytheCommunity .Assuchprojectsare
bestfinancedfromequityresources ,theCommission has
putforwardsomeideas(privateinvestment companies
backedbyaguaranteemechanism ),afterconsulting the
financialcommunity toensurethattheywouldbe
appropriate .
—Smallandmedium-sized firms,inparticular innovative
firms,facingspecificfinancingproblems .Thisisthearea
withthewidestscopeforavarietyofinstruments (risk
capital,guarantee funds,creditinsurance ,consultancy
bodies,etc.)andtheCommission willbeengagedin
gettingtheseinstruments developed .—Majorinfrastructure projects,whichareparticularly
difficulttogetoffthegroundandfeasibleonlyifa
considerable volumeofcapitalwithspecial
characteristics isavailable .Thepossibleroleforthe
Community wouldbe:
—forlaunching majorprojects ('declaration of
European utility',budgetary aid),
—toimprovetheenvironment forprivateinvestors ,
—tomobilizethecapitalmarketbytheuseofarevised
formofCommunity aid(e.g.financing of
projects).
Theenlargement oftheCommunity ,thecompletion ofthe
internalmarketandtheneedtoreduceunemployment areall
factorstendingtoincreasetherateofstructuralchangeinthe
Community .TheCommunity budgetshouldfacilitatethis
processthroughuseofitsvariousfunds.Inaddition,inthe
opinionoftheCommission ,financialengineering activities,
whichwouldencourage themarkettocoverthemainshareof
thefinancingofworkorprojectstowhichtheCommunity
attachesparticular importance ,wouldalsomakea
contribution ;currentprioritiesforthedevelopment ofthese
financial instruments wouldincludehigh-technology
projects,innovation amongsmallandmedium-sized
enterprises ,andsomelargeinfrastructure projects .
TABLE23
EuropeanCommunity generalbudget,1985to1987:Paymentappropriations
(millionsofECU)
1985(')
EUR101986(2)
EUR121987(3)
EUR121987(4)
EUR12
Expenditure :I
Agriculture -—guarantee section 19726 22112 22961 22961
Agriculture —structural funds 738 802 966 983
Fisheries 82 190 221 208
SocialFund 1413 2533 2589 2499
RegionalFund
Integrated Mediterranean projects
Transport
Energyandindustry
Research andinnovation1624
9
76
129
5782373
133
27
114
6482495
240
34
173
8472422
175
21
147
744
Foodaid 544 553 616 524
Development aid 541 618 642 536
Otherexpenditure including
refundstoMember States 2763 5071 4892 4726
Total 28223 35174(5)36676(6) 35946
1)Out-turn .
2)BudgetadoptedbytheParliament on10July1986.
3)Preliminary draftbudgetfor1987presentedbytheCommission totheCouncilon21July1986.
4)DraftbudgetadoptedbytheCouncilon9September .
5)Thecorrection ofthebudgetary imbalance fortheUnitedKingdomwhichamountsto2685millionECUisincludedin
receipts .
(6)Thecorrection ofthebudgetary imbalance fortheUnitedKingdomwhichamountsto2366millionECUisincludedin
receipts .

NoL385/70 OfficialJournaloftheEuropeanCommunities 31.12.86
(millionsofECU)
1985(')
EUR101986(2)
EUR121987(3)
EUR121987(<)
EUR12
Receipts :
Agricultural levies 2179 2699 3297
Customs duties 8310 9700 9762
Valueaddedtax(VAT) 15218 22468 23130
Specialcontributions 1911 211 212
Miscellaneous 654 96 275
Total 28272(7)35174(5)36676(«) 35946
Maximum rateofVAT 1,0 1,4 1,4
Effective rateofVAT 1,0 1,39(8) 1,38(9)
Budgettotalasa%ofGDP 0,85 1,03 1,02
(')Out-turn .
(2)BudgetadoptedbytheParliament on10July1986.
(3)Preliminary draftbudgetfor1987presentedbytheCommission totheCouncilon21July1986.
(4)DraftbudgetadoptedbytheCouncilon9September .
(5)ThecorrectionofthebudgetaryimbalancefortheUnitedKingdomwhichamountsto2685millionECUisincludedin
receipts .
(6)Thecorrection ofthebudgetary imbalance fortheUnitedKingdomwhichamountsto2366millionECUisincludedin
receipts .
(7)Including asurplusof49millionECUcarriedoverto1986.
(8)ExceptfortheFederalRepublicofGermany (1,33697 )andtheUnitedKingdom (0,67663).
(9)ExceptfortheFederalRepublicofGermany (1,3296)andtheUnitedKingdom (0,8176).
Sources:1985,Management accounts ;1986,Budgetadoptedon10July1986bytheEuropeanParliament ;1987,preliminary
draftbudgetpresentedbytheCommission totheCouncilon21July1986,draftbudgetadoptedbytheCouncilon
9September .
TABLE24
EuropeanCommunity investment financingthroughcapitalmarketborrowing andon-lending
(millionECU)
1984 1985 1986
Lendingbyinstitution ormechanism :
European Investment Bank
Commission :
European CoalandSteelCommunity
Euratom
NewCommunity Instrument5007
825
186
11825641
1010
211
884
Total 7200 7746 7800to8300
Lendingbysectororpolicyobjective :
Privateindustrial sector
ofwhich:globalloanstosmallandmediumenterprises
Infrastructure2709
1719
21322830
1735
24132500to2800
1400to1600
2800to2900
Energy 2359 2503 2500to2600
Total 7200 7746 7800to8300
Source:Commission oftheEuropeanCommunities 'ReportoftheCommission totheCouncilandtheEuropeanParliament onthe
borrowingandlendingactivitiesoftheCommunity in1985'(COM(86 )289final).Thefiguresfor1986areforecastsby
theCommission .

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/71
4.6.Socialdialogue industryrepresented byUnice(UnionoftheIndustriesofthe
EuropeanCommunity ),CEEP(Confederation ofEuropean
PublicEnterprises )andtheETUC(EuropeanTradeUnion
Confederation ).Asaresultoftheworkcarriedoutintwo
groups,onedealingwithmacroeconomic ,theotherwith
microeconomic themes,anagreement coveringseveral
pointshasbeenreached .Itcanbesummarized asfollows :Thesuccessofthecooperative strategyimplieschanges,
sometimes marked,inbehaviour andeconomic policies.
Risingunemployment duringthe1970sandweakgrowth
havegonehandinhandwiththereinforcement ofdefensive
behaviour ,oftenasareactionaimedatpreserving legitimate
rightsandpositions inthefaceoftheradicalchanges
wroughtbytheoilcrisis.However ,suchbehaviour hasoften
notgivenenoughattentiontotheriseinunemployment and
makesasolutiontothisproblemmoredifficult .
Thisappliestofirms,whichbecamemorehesitanttoinvest
inacontextwhichtheyconsidered uncertain .Itappliesto
wageearnersendeavouring toprotecttheirpurchasing
powerandthestabilityofexistingjobs,butitalsonowseems
toapplytoeconomicpolicymakers ,who,considering the
durationandthecostofcutbacksatthebeginningofthe
1980s,maybereticenttomakeuseofavailableleeway.—theneedforallparties—firmsemployees andthe
authorities —toapplythecooperative strategyeffectively
inordertoobtainthedesirable decline in
unemployment ,
—theneedforarapidreallocation ofresources to
employment-creating investment through afurther
improvement inbusinessprofitability resultingfroma
moderateincreaseinrealwagesandthroughactionto
ensurethatthelagbetweenincreasesinprofitability and
investment activityisasshortaspossible ,
—theneedtopreserveastablemonetaryframework andto
reduceinflationwhereitisstilltoohigh,
—theneedtopromoteR&Dandthetrainingofthelabour
force,
—theneedtocompleterapidlytheinternalmarket,taking
fullaccountofitssocialaspects,
—theneedtobackupbusinessinvestment byreviving
economically andsociallyprofitable publicinvestment .Presentimbalances aretheresultofsuchmodesofbehaviour ,
andtherenewaloftheEuropean economycanonlybe
broughtaboutbytheirsimultaneous modification .The
propensity toinvestcanincreaseiftheoutlookfor
profitability anddemandisassured .Wageearnerscanbe
morereadytoacceptmoderaterealwagegrowthandgreater
labourmarketadaptability if,inreturn,theeffectson
employment areseentobecomingthrough ,andifthesocial
consequences ofmeasuresarefullytakenintoaccount .There
willbelessriskofmacroeconomic policiesmorefirmly
targetedongrowthleadingtorekindledinflationandthe
reappearance ofexternalimbalances ifdomesticcostsare
harnessed ,ifenterprises canincreasetheirproductive
capacity,andifthistakesplacewithinamoredynamic
Community context .
Theobjectiveofsocialdialogueshouldbethesimultaneous
modification ofthebehaviour ofallgroupsineconomic
activity .Naturally ,somedifferences inpointsofviewhavealso
emerged .Theseprincipally concerntheroleoftheStatein
economic activity,bothinitsexpenditure andtaxation
activitiesandinitsmarket-regulating responsibilities ,aswell
astheroleofthereorganization andreductionofworking
time,neutralwithrespecttothelevelofcosts,inthecreation
ofemployment .
Itthereforeseemsclearthatsocialdialogueshouldcoverall
thethemesofthecooperative strategy,bothatthe
macroeconomic andatthemicroeconomic level.Social
dialoguegatherstogetherrepresentatives ofemployers and
employees aswellasgovernments .Itshouldmakepossiblea
broaderconsensusonthecontributions ofeachgrouptothe
cooperative strategy .Bymeetingatregularintervals ,short
enoughtotakeintoaccountshort-term economic
developments ,theparticipants willbeabletoseethatthe
cooperative strategyiseffectively appliedandtoadjusttheir
actiontorecentdevelopments .Socialdialogueatalllevels
shouldtherefore enablethesocialandemployment
consequences ofthenecessarystructuralandtechnological
shiftstobeharnessed moreeffectively .AttheCommunity level,theCommission willcontinueforits
parttointensifythesocialdialoguebut,astheCommission
pointedoutinitscommunication ofJuly1986(COM(86 )
364final),thedesireforcooperation ,whichthesocial
partnershavedemonstrated atEuropean level,hasnotbeen
fullyutilizedatthenationallevel.Governments inallthe
MemberStatesshouldtakepracticalsteps,bearingnational
traditions inmind,butperhapsbreakingnewgroundaswell,
toenterintodialogueatnationallevelcoveringallaspectsof
thestrategy,andtocreateafavourable environment for
dialogueatthesectoralandenterprise level(*).Incountries
TheCommission hasstimulated afruitfuldialogueatthe
Community level,with,andbetween,thetwosidesof(')SeeArticle3ofCouncilDirective74/121/EECof18February
1974onstability,growthandfullemployment inthe
Community ,OJNoL63,5.3.1974,p.19.

NoL385/72 OfficialJournaloftheEuropeanCommunities 31.12.86
wheregovernments ,forparticularreasons,donotseetheir
waytoencourage socialdialoguethemselves ,thesocial
partnersareinvitedtotaketheinitiative .Inthisway,
dialogueonthethemesoftheCommunity strategycanalso
beenteredintointhesecountriesbetweenthesocialpartners
and,asfaraspossible,withtheparticipation of
government .complemented bydomesticpolicyadaptations inorderfor
eithertheUnitedStatesdeficitortheJapanesesurplustobe
reducedtoacceptabledimensions .Despitetherecognition in
theGroupofFiveagreementoftheneedforsuchchanges,
therehasinfactbeenlittleprogressinthisareasofar.Asa
result,boththeUSdeficitandtheJapanesesurplusarelikely
toremainexcessively largein1986and1987.Thesurplusof
theCommunity asawholemaybeexpectedtoincrease
temporarily fromits1985level,whileremaining within
acceptable limits.However ,withintheCommunity total,the
distribution ofsurpluses anddeficitsbetweenmember
countriesmayrequiremoreadjustment ,althoughthereis
clearlynonecessityforallmembercountriestorunexactly
balancedcurrentaccounts .Socialdialogueisanimportantelementofthecooperative
strategy .Bybringingtogetherrepresentatives ofemployers
andemployees ,aswellasgovernments ,theobjectiveisin
particular tocontribute tothenecessarychangesinthe
behaviourofallpartiesineconomicactivityandbringabout
abroadconsensus ontheirrespectivecontributions .The
themescoveredshouldcoveralleconomicandsocialaspects
ofthecooperative strategy .AttheCommunity level,the
Commission hasstimulated afruitfuldialoguewith,and
between,thesocialpartners .TheCommission will
endeavour tointensify stillfurtherthisdialogue .
Governments ofallMemberStatesshouldtakepractical
stepsinordertoencourage ,atnationallevel,dialogueonall
thethemesofthestrategy,buildingonthedesirefor
cooperation shownbybothsidesofindustryattheEuropean
level,andtakingaccountoftheparticularcircumstances in
individual countries .TheUnitedStateshasrepeatedly urgedsurpluscountries ,in
particularJapanandGermany ,totakeadditional measures
designedtostimulatedomesticdemandandthusaccelerate
thereductionoftheirexternalsurplusesandbythatthe
UnitedStates'deficit.However ,fastergrowthinthesetwo
countriesalone,whichaccountforonly15%ofUSexports,
wouldprobablynothavemucheffectinreducingtheUS
deficit.Ifallindustrialized countries outsidetheUnited
Statestookmeasurestoaccelerate thegrowthofdomestic
demandtheimpactontheUScurrentbalancewould,of
course,bemuchgreater,becauseinthiscasethebenefit
wouldbeextendeddirectlytosome60%ofUSexports.On
theotherhand,whilefastergrowthinallindustrialized
countriesoutsidetheUSwouldhelptoreducetheUSdeficitit
woulddolittle,ifanything ,toreducetheJapaneseand
Germansurpluses .Thisisbecauseadditional demandfor
JapaneseandGerman ^exportsfromotherindustrialized
countrieswouldtendtooffsettheincreaseinimports
generated bythefastergrowthoftheirowndomestic
demand .4.7.International economicpolicycoordination
Theprocessofcorrecting themajorbalanceofpayments
disequilibria ,whichhaveaffectedtheworldeconomysince
1982,hasnowbeenunderwayformorethanayear.
Already,witheffectfromMarch1985,whenthedollar
reacheditspeak,theexchangeratesofmajorcurrencieshad
beguntomoveinadirection moreconsistent with
fundamental economicfactors.Thisprocesswasgivenan
additionalimpetuswhentheGroupofFivefinanceministers ,
attheirmeetinginNewYorkinSeptember lastyear,agreed
thatadepreciation ofthedollar,andacorresponding
appreciation oftheothermajorcurrencies ,inparticularthe
yen,wouldbenecessary torestorethestructure of
international payments toasustainable basis.InordertobringdowntheUnitedStates'currentaccount
deficittosustainable proportions ,itseemsnecessaryto
envisageacertainslowdown intheevolution ofdomestic
demandthere,whichwouldimplyaperiodofrelatively
slowergrowthcompared tootherindustrialized countries .
UnitedStatesimports,unlikeUnitedStatesexports,are
highlyincome-elastic andcouldthusbeexpectedtorespond
sharplytoslowergrowthofdomesticdemand .Table25
showsthedistribution ofcurrentsurplusesanddeficitsthat
mightbeexpectedtoresultiffiscalpolicyintheUnitedStates
weremorerestrictive ,andassumingthatrealexchangerates
remained attheirmid-1986 levels.TheUnitedStatesdeficit
wouldbereducedtoabout2%ofGDPbythelate1980sand
theCommunity surpluswoulddisappear ,buttheJapanese
surpluswouldremainunacceptably large.BytheendofSeptember 1986,thecurrencies oftheother
GroupofFivecountrieshadallappreciated substantially
againstthedollar.Intrade-weighted terms,thedollaritself
haddepreciated by22%,andtheyenhadappreciated by
38%,fromtheiraverage1985levels.TheEuropean
currencies hadappreciated lessintrade-weighted terms,
sinceabouthalfoftheirtradeisconducted between
European countries .Theseexchange-rate adjustments ,at
leastasregardstheECUinrelationtothedollar,are
probablynowaboutsufficient .Adetermined application ofthecooperative strategyoverthe
nextfouryears,would,inthesecircumstances ,resultinsome
deterioration ofthecurrentaccountoftheCommunity .This
couldcertainlybeacceptable ,butwouldnotcorrespond toa
lastingeyuilibrium .Themainbeneficiaries ,inbalanceof
paymentsterms,wouldbeotherEuropeananddevelopingHowever ,inviewoftheenormous imbalances whichhave
builtupovertheyears,especially intheUnitedStatesand
Japan,theseexchange-rate adjustments willneedtobe

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/73
countries .TheimpactontheUnitedStatescurrentbalance
wouldbefairlysmall,andintheJapanesecaseprogress
towardsreducingthesurpluswouldbedelayedstillfurther
(seeTable26).Thiswouldnotbetheoptimaloption.
Therefore ,aninternational policymixdesignedtoreduce
imbalances tosustainable levelswouldappeartorequire
somefurthercombination ofyenappreciation andfiscal
stimulusinJapan,inadditiontoaperiodofrelatively
moderategrowthintheUnitedStatesandfastergrowthin
theCommunity .Table27showsthedistribution ofcurrent
balancesthatwouldresultfromfiscalexpansion equalto1%
ofGDPinJapanin1987andsustainedthroughout theperiod
until1990andafurther20%effectiveappreciation ofthe
yenduring1987/88.Thiscombination ofmeasures ,
togetherwithmeasurestoassurethecontinued openingof
goodsandfinancialmarkets ,wouldreducetheJapanese
surplussubstantially .Thisexampleshowsthattheoverall
outcomecanbesignificantly improvedthroughcooperation .
Itwouldbefurtherimproved bytheparticipation ofthe
EFTAcountries ,whichhavealreadysignaledsome
sympathy forthiseffort.economicpolicycoordination .Theparticipants attheTokyo
Summithavedecidedthatthemostpromising wayof
achievingsuchimprovement wouldbetodeveloparegimeof
indicators thatwouldenablecountries'objectives tobe
specifiedinfairlyprecisequantitative termsandtheirsuccess
inachievingtheseobjectives tobecloselymonitored .Itis
envisaged thatnationalforecastsshouldbecheckedfor
internalconsistency andmutualcompatibility withaviewto
diagnosing futuresourcesoftensionandreachingagreement
onwhatchangesinpolicywouldbemostappropriate to
forestalling them.Subsequently ,theindicators wouldbe
usedtocheckperformance inrelationtoobjectives andto
identifyappropriate remedialactionwherenecessary .
Clearlyaregimeofthiskindisnopanaceaforsolvingthe
problemsofinternational economiccooperation .However ,
totheextentthatitprovidesamorecompletequantitative
analyticalframework withinwhichthepoliciesofthemajor
countriescanbeexamined andthelikelyconsequences of
thosepolicies,bothforthecountryconcerned andforothers,
assessed,itshouldimprovetheprospectsforavoidingserious
incompatibility betweenthepoliciesoftheparticipant
countries andthetensionswhichsuchincompatibility
provokes .
Recentdevelopments inworldoutputandtradehavenot
beenhelpfultodeveloping countries .Sluggishgrowthinthe
industrialized worldhashelddowntherateofincreaseinthe
volumeofdeveloping countries'exportsandhasdepressed
commodity prices,withtheresultthatthepurchasing power
ofdeveloping countries 'exports (exportearningsdeflatedby
importprices)isestimatedtohavefallenthisyearby11%,
andtheaggregatecurrentdeficitofthisgroup,afterfour
yearsofsteadyimprovement ,hasdeteriorated sharplyagain,
inspiteofthedecreaseininterestpaymentsonexternaldebts.
Themainchanneltoimprovetheexternalpositionofthe
developing countriesmustbetoincreasetheirexports .More
openmarketsforthedeveloping countries 'productsarea
precondition forsomeprogress inrestoring their
creditworthiness .Inaddition ,freshcapitalisnecessaryfora
successfulrestructuring andadjustment oftheeconomies of
theindebtedcountriestowardsmoreeconomic growthas
proposedintheBakerinitiative .Therecentnegotiations over
Mexico'sexternaldebtanddomesticadjustment policiesare
apositiveexampleinthisregard.ThedecisiontakeninPuntadelEsteinSeptember tolauncha
newroundofmultilateral tradeundertheGATT,lends
strengthtothehopethatthetrendtowardsprotectionism can
behaltedandreversed .Thisisanessentialcondition toallow
thedevelopment ofamoreopenanddurablemultilateral
tradingsystem.Furthermore ,thesenegotiations should
strengthen thestructuresanddisciplines oftheGATT,ata
timewhentheyareperceivedashavingweakened againstan
unfavourable background .Inthiscontext,theconcerted
attempttobringagricultural tradewithinthescopeofthese
negotiations willbeofparticular significance .Last,butnot
least,GATTshouldadapttonewdevelopments inthe
structureoftrade.Animportant stepinthisregardisthe
decisiontoincludeliberalization oftradingservicesintothe
negotiations ,bringinganewmajorsectorwithinthescopeof
themultilateral tradingsystem.
Therevivalofgrowthinthedeveloping countries isnecessary
toavoidafurtherdeterioration ofthestandardoflivingof
theirpopulations andforprogresstowardssolvingtheirdebt
problems .Tothisend,itisvitalthattheadjustment of
currentaccountimbalances betweenthedeveloped countries
doesnothaveacontractionary overalleffectonthegrowthof
theindebteddeveloping countries .Indeed,theirgrowthcan
makeasignificant contribution tothesteadyexpansion of
worldtrade.Recentexchange-rate changeshavecreatedmorefavourable
conditionsforcorrecting thelargeexternalimbalances which
hadbuiltupoverpreviousyears.Theywillnot,however,
achievethisresultbythemselves .Thereturntoasustainable
patternofcurrentpayments will,aboveall,require
budgetary restriction intheUnitedStatesandexpansionary
budgetarymeasures ,accompanied byfurtherappreciation of
theyeninJapan.Intheeventofpolicyadjustments along
theselines,majorcorrections totheUnitedStatesand
Japanesecurrentaccountimbalances couldbeachievedby
1990.Themorefavourable growthtrendachievedintheItisclearfromrecentexperience thatthereisstillampleroom
forimprovement inthearrangements forinternational

NoL385/74 OfficialJournaloftheEuropeanCommunities 31.12.86
Community ,byimplementing thecooperative growth
strategyformoreemployment ,andintheEFTAcountries
willhaveabeneficialimpactonworldtrade.Thenewround
ofmultilateral tradenegotiations withinGATTcouldstrengthen thispositivetendency .Thiswouldhavea
favourable effectondeveloping countries'exportsandwould
increasethechancesofconsolidating theirexternal
payments 'positioninthemediumterm.
Projectedcurrentbalancesaspercentages ofGDP1986to1990
TABLE25
Presentpoliciesandmid-1986exchangerates(baselinescenario )
1985 1986Average
1987to1990
USA -3,0 -2,5 -2,2
Japan +3,7 +4,5 +3,2
EUR +0,5 +1,2 +0,4
AnnualaveragegrowthratesofrealGDPduring1986to1990inclusivewould,inthisscenario,be:USA2,7%,Japan:3,6%,
EUR:2,6%.
TABLE26
Cooperative strategy (withoutspecificcooperative measuresinJapan)
1985 1986Average
1987to1990
USA -3,0 -2,5 -2,0
Japan +3,7 +4,5 +3,5
EUR +0,5 +1,2 -0,1
AnnualaveragegrowthratesofrealGDPduring1986to1990inclusivewould,inthisscenario,be:USA2,8%,Japan:3,7%,
EUR:3,5%.
TABLE27
Cooperative strategycombinedwithfiscalexpansion andfurther20%effectiveyenrevaluation inJapan
1985 1986Average
1987to1990
USA -3,0 -2,5 -1,7
Japan +3,7 +4,5 +2,2
EUR +0,5 +1,2 +0,1
AnnualaveragegrowthratesofrealGDPduring1986to1990inclusivewould,inthisscenario,be:USA2,9%,Japan:3,4%,
EUR:3,6%.

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/75
PARTII
ECONOMIC POLICY INTHEMEMBER STATES
APPLICATION OFTHECOOPERATIVE GROWTH STRATEGY FORMOREEMPLOYMENT INTHE
MEMBER STATES IN1987
Theinescapable conclusion whichemergesfroman
examination ofemployment trendsinrecentyearsisthat
energeticactionisnecessary inalltheMemberStatesto
reducethelevelofunemployment substantially ;thesingle
exception isLuxembourg ,whereunemployment remains
low.Onanannualaveragebasis,theunemployment ratewill
fallinonlyfouroutofthe12MemberStatesin1986,whilein
1987itwillfallinhalfoftheMemberStates,butonlytwo
(GermanyandtheNetherlands )willregisterafalloverthe
twoyears.In1986,theGDPgrowthofonlytwocountries
(GermanyandPortugal )willbewithinthe3to3,5%range
considered necessary ,inthemediumterm,toreducethe
unemployment ratesubstantially .Theoutcomewillbe
decidedlybetterin1987,whensixMemberStateswillbein
thissituation ,threeofthemcountrieswhoserelativesharein
Community GDPishigh(Germany ,SpainandItaly)while
theresultforFranceandtheUnitedKingdom isonly
one-quarter ofapercentage pointoutsidethebottomofthe
range.Thus,althoughprogressisbeingmadeintheright
direction ,itisparticularly important toexaminewhether
andhowthisprogresscanbeconsolidated andimprovedin
eachoftheMemberStatesin1987andthereafter ,and,
similarly ,howfareconomicandsocialpolicyshoulddiffer
fromcountrytocountrytotakeaccountofthespecial
featuresoftheeconomic situation ineachMember State.market .Attheverymost,transitional measurescouldbe
envisaged totakeaccountofthespecialproblems inthe
accedingcountries .
ItisalsodesirablefortheMemberStatestoactlargelyin
parallelinregardtothelabourmarketsandlabourcosts(in
particular throughmoderation ofrealwageincreases ,
shortening workingtime,providedthatthisiscostneutral,
introducing moreflexibleuseofworkingtime,reducing
socialsecuritycharges,improving theregulatory systemsoas
tostimulatetherecruitment ofworkers ,encouraging the
creationofsmallbusinesses ).
Inthecourseof1987,whenthestimulatory effectsofthe
termsoftradegainsbegintoweaken,supportofdomestic
demandcouldbecomenecessary ;thissupportmust
necessarily differfromcountrytocountry,inviewofthe
requirements dictatedbythesituationineachMember
State.
Fromthemonetaryaspect,thecontinued fallininterestrates
ismuchtobedesiredasasourceofstimulusfortheexpansion
ofinvestment .However ,incountries suchastheFederal
RepublicofGermanyandtheNetherlands ,therehasalready
beenanappreciable fallininterestratesduetothesharpdrop
ininflation .Aforcedreductionwouldbeliabletoimperilthe
aimofstabilityinherentinasoundmonetarypolicy.Inmost
oftheotherMemberStates,andparticularly inFranceand
Italy,theabatement ofinflationary expectations pointstoa
continuing downward trendininterestrates.
Itwillnotbepossibletoattaintheseinternalobjectives ,
however ,unlesstheMemberStatesturntheirjointattention
totheexternalaspectsoftheseproblems withinthe
framework ofinternational monetary cooperation .Inall
probability ,thedownward pressureonthedollarwillremain
appreciable throughout 1987,giventheneedfora
deep-seated adjustment oftheUnitedStates'external
account .ItwouldnotbeintheCommunity 'sinterestto
tolerateanexcessivedepreciation ofthedollarwhichcould
haveadverseeffectsonitsowngrowth.Nevertheless ,the
adjustments todomesticmonetary policy,whichmightby
implication benecessary inordertopreventthedollarfrom
fallingtoofar,cannotgobeyondcertainlimits,otherwise
theywouldbecomeself-defeating .
Alltheseconsiderations indicatethat,withinthepolicymix,
monetarypolicycanstillhaveastimulatory effectongrowth
insomeMemberStates,butthatitsroleisverylimitedin
others.AswasalreadystressedintheAnnualEconomic Report
1985/86,itisclearlyverydifficult,ifnotimpossible ,to
implement inisolationmeasures toboostemployment ;
consequently ,thesuccessofanyactionofthistypealso
dependsonreinforcing thesocialdialogue ,notonlyat
Community level,butalsoineachMemberState.The
interaction ofgovernment initiativeswiththoseofthesocial
partnerswillbeanessentialprecondition forthesuccessof
anyactiontoincreaseemployment .
Anapproach whichtakesaccountofthespecific
characteristics ofeachcountry'seconomicsituationdoesnot
necessarily meanadifferentiation ,fromcountrytocountry,
inapplyingallthemeasuresrecommended inPartIofthe
presentreport .
Auniformandsynchronized application oftheproposals
madeinPartI,chapter4,sections4.3to4.6shouldbe
made.
Broadlycomparable effortswillhavetobemadebythe
MemberStatestoimprovetheoperationofthemarketsin
goods,servicesandcapital,andtoputintoeffectthe
Community programme forcompleting thelargeinternal

NoL385/76 OfficialJournaloftheEuropean Communities 31.12.86
theoutlookfor1987limittheroomformanoeuvre in
macroeconomic policy.
Consequently ,onlyafairlysmallgroupofcountrieswillbe
ablecomprehensively toinfluence supplyanddemand
conditions .However ,alltheMemberStateswillbeableto
createmorefavourable circumstances fortheexpansion of
employment bymodifying thestructure ofpublic
expenditure andrevenue .
Nevertheless ,anincreasing numberofcountries canbe
expectedtohavemoreroomformanoeuvre inthecourseof
1987and,inthecountries whereitalreadyexists,the
possibilities foractionwillbecomemoreevident.Thiswould
obviously bethecaseif,asislikely,theimprovement inthe
fundamental conditions foreconomic equilibrium already
experienced in1986weretobesustained in1987.Withregardtopublicfinance,thepossibilities foraction
differevenmore.IntheFederalRepublicofGermanyandin
Luxembourg ,thebudgetary situationseemscomfortable
enoughtogivethepublicauthorities someroomfor
manoeuvre .IntheUnitedKingdom ,theGovernment inits
autumnstatement provided foranincreaseinpublic
expenditure ofsome£43/4thousandmillionin1987/88.
Thiswillmeanthatpublicexpenditure in1987/88is
plannedtobeabout2%higherinrealtermsthanthe
estimated out-turnin1986/87.InFrance,substantial tax
cutsarealreadyplannedfor1987andfurtherreductions
havebeenannounced for1988,theintention being
simultaneously toreducethebudgetdeficitineachofthetwo
years.Bycontrast ,thestateofthepublicfinances,andin
particular thehighlevelofthepublicdebt,meansthat
consolidation mustcontinueinBelgium ,Greece,Ireland,
ItalyandPortugal .Inathirdgroupofcountries (Denmark ,
SpainandtheNetherlands ),thebudgetary constraints are
lesssevere,butcertain aspects of
BELGIUM
InBelgium,economicgrowthin1986islikelytobedistinctly
fasterthantheratesachievedintheperiod1981to1985;the
acceleration isduenotonlytothereverseoilshockbutalsoto
thedelaysinfinalizing anewfiscalconsolidation
programme .Realpersonaldisposable incomeandprivate
consumption arelikelytoincreasebyover2,5%,after
remaining virtually staticforseveralyears.Business
investment islikelytoexpandsharplybecauseofthe
improvement inprofitmargins .In1987,however ,growth
willinevitably beheldbackbytheeffectofthemoderation of
personal incomes following thefiscalconsolidation
programme decidedinthespringof1986.Growthwill
therefore havetobemorereliantonbusinessinvestment and
exports .Priceincreasesarelikelytoremainweakafterthe
sharpslowdown ininflationin1986(from4,9to1,3%).
Thecurrentaccountshouldproduceacomfortable surplusin
thetwoyearsunderreview.Generalgovernment net
borrowing ,bycontrast,islikelytoshownomorethana
slightimprovement in1986,butin1987shouldbereduced
by1,5to2percentage pointsofGDP.Theeffortsto
strengthen thepublicfinanceswill,inthefirstplace,havea
negativeeffectontheemployment levelinthepublicsector,
whichwillbeoffsettoalargeextentbyanincreaseinthe
privatesectorasaresult,inparticular ,oftheagreements
reachedintheframework ofthenationalnegotiations .Over
thetwoyears1986and1987,theleveloftotalemployment
andtheunemployment ratewillhardlychange.
Incomesin1986and1987willevolveinlinewiththepolicy
adoptedsince1982anddirectedtowards amoderate
development ofrealwagesinordertosafeguardthelevelof
competitiveness achieved after1982andtopromote
employment-sharing .Adherence oftheseobjectives willbefacilitated in1986bytheslowdown ininflationwhich,
throughtheworkingoftheindexation system,hasbeen
rapidlyreflectedinadeceleration ofnominalwageincreases .
Wagenegotiations fortheyearsafter1986willbesubjectto
therestriction imposedbytheGovernment 'spowersto
securecompliance withthegeneralcompetitiveness norm.
Statutorypowersofconstraint canbeinvokedwhensectoral
wageagreements departtoofarfromthegeneral
recommendations setoutinthenationalagreement reached,
inSeptember 1986,betweenthesocialpartners ;theseare
gearedtomaintain acertainlevelofcompetitivity andto
createjobs,especiallyforyoungpeople.Theslowdown in
wageincreaseshashelpedtoreducerealunit-labour costsby
nearly9%between1981and1986.Thiswasparalleled by
anincreaseintheprofitability ofcompanies andan
improvement intheirfinancialsituation .Afurtherreduction
incorporation taxwasalsodecided,bringingthetoprate
downfrom45to43%in1988.Lastly,monetarypolicywas
centredonthereduction ofshort-term interestratestothe
maximum degreecompatible withthemaintenance ofa
stableexchangerate,sothattheinterestrateoninvestment
creditwasdownto8,25%byApril1986,whereasitwasstill
12,75%atthebeginning of1985.Itwasonlyin1986,
however ,thattheseimprovedconditions begantogeneratea
significant growthincompany investment ,sincethe
implementation ofnewprojectswasheldback,probably
becauseofuncertainty astohowpersonalincomeswould
evolveinthecontextofthefiscalconsolidation measures .
Workinghourswillsoonbecomemoreflexible,and,as
legislation enshrinestheconsensus betweenmanagement apd
unionsonthegeneraluseofflexibletime,firmswillbebetter
abletoreacttofluctuations indemandoncenewwage
agreements enterintoforce.

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/77
Ontheotherhand,thecondition ofthepublicfinancesis
suchthattheonlypossiblepriorityisforavigorousandrapid
improvement soastobreakthe'interestcharges-debt 'spiral.
Inthespring,theBelgiangovernment gavedetailsofthefiscal
consolidation programme announced initsDecember 1985
investiture declaration ,whichaimstoreducetheTreasury
borrowing requirement totheequivalent of8%ofGDPin
1987and7%in1989,compared with11,5%in1985.The
mainemphasis isoncuttingexpenditure .Theprogramme of
reducingpersonaltaxation ,decidedearlier,hasbeen
retainedandheaviertaxationofpetroleum productshasbeen
rejected .Theseprogrammes ,takentogether ,should
temporarily counteract recentdevelopments favourable to
employment anddomesticdemand .Nevertheless ,thereverse
oilshockenablestheBelgianeconomytomaintainrelatively
favourable growthduringtheperiodofinternal
adjustment .
Thepublicfinancesituation necessarily restrictsthe
possibilities forboostingdemandbybudgetary action.As
before,priorityshouldbegiventobringingthepublic
financesbackintobalanceandeliminating supply-side
rigidities ,sincethesetwoobstaclesmustberemovedinorder
toreturntosteadierandmorelastinggrowth .The
implementation ofamonetary policyaimedatcutting
interestratesbyasmuchasiscompatible withthe
maintenance oftheBelgianfranc'sparitywithintheEMSis
alsolargelydependent onareduction inthepublicsector's
financingneeds.Thescaleofthebudgetimbalance meansthatthe
government 'sborrowing requirement targetmustbefully
attainedwithintheplannedtime-limits ,especially since,in
severalrespects,theinternational situation isrelatively
favourable while,in1986and1987,cuttingexpenditure will
beaidedbythefallininterestrates.Beforethespecialpowers
expire,itisessentialtoimplement ,ifnecessary ,new
corrective measurestoensurethatthetarget(aTreasury
borrowing requirement equivalent to8%ofGDPin1987)is
attained ,inordertoavoidthepublicfinancesbeingblown
offcourseshouldtheplannedmeasuresfalltoproducethe
desiredresults,orshouldexogenous factorsdevelopless
favourably .Theonlyroomformanoeuvre availableto
budgetary policyintheshorttermrelatestothestructureof
revenuewhichcouldbemodifiedwithaviewtogenerating
growthwithagreaterjobcontent .Oneofthepossibilities
wouldbetocompensate forareduction insocialsecurity
chargesonwagesbyincreasing indirecttaxesingeneral,or
thetaxationofpetroleum productsinparticular .
Itisdesirabletokeepopenthepossibility ofsettinglimitsto
wagedevelopments afterthespecialpowersinthisrespect
expire,giventheimperative needfortheBelgianeconomyto
remaincompetitive inmeetingexternaldemandduringthe
periodofinternaladjustment .Nevertheless ,themaintenance
ofapolicyofwagerigidityoveralongperiodcouldnow
justifysomelimitedcasesofrelaxation ,inordertorespond
tothesignalsemanating fromthelabourmarketwhen
bottle-necks appearthataredifficulttodealwithby
retraining measures .

NoL385/78 OfficialJournaloftheEuropeanCommunities 31.1286
TABLE28
Belgium :Maineconomicaggregates 1961to1987
(Annualpercentage changes)
1961to
19731974to
19801981 1982 1983 1984 1985 1986(')1987(2)
rvalue
Grossdomestic Jvolume
product |deflator9,2
4,9
4,110,0
2,5
7,53,4
-1,5
5,08,7
1,5
7,16,3
-0,1
6,36,8
1.4
5.56,7
1,5
5,16,7
2,0
4,63,1
1,3
1,8
Privateconsumption deflator
Grossfixedfprivate
capital -<public
formationvolume 1total
ofwhich : construction
equipment3,7
5,17.8
1.98,1
-18,1
-6,3
-16,3
-22,9
3,67,4
-0,3
-8,9
-1,7
-5,4
8,07,5
-3,6
-7,6
-3,9
-5,1
-9,55,9
4,4
-8,8
1,0
-4,2
9,94,8
3,8
-13,2
1,2
-0,4
3,61,3
7.0
-6,4
5,3
2.1
9,51,5
6,9
-9,8
5,0
2,2
84
Domesticdemandatconstantprices
GapwithrespecttootherCommunity
countries (3)
rnominal
Compensation
ofemployees ■<realA(4)
perhead 1g(4)
Productivity (s)
Realunitlabourcosts
Competitiveness (6)
Employment8,9
4,6
5,1
4,3
0,3
-0,2
0,611,6
3,8
3,5
2,4
1.4
1.5
0,1-4,1
6,4
1,4
-1,5
0,5
0,9
-8,2
-2,10,3
-0,8
8,1
1,0
0,7
2,9
-1,8
-11,5
-1,3-2,5
-2,6
6,4
0,0
-1,0
0,9
-0,9
-2,3
-1,61,7
-0,3
6,8
1,4
0,8
1,4
0,0
0,1
0,21,3
-0,8
4,5
-0,6
-0,3
1,0
-1,6
1,8
0,53,0
-0,5
2,5
-2,0
1,2
1,7
-3,6
2,9
0,31,3
-1,4
2,2
0,4
0,7
1,9
-1,5
-0,6
-0,6
Registered unemployed as%
ofthecivilianlabourforce(7)
Currentbalanceas%ofGDP
Long-term interestrate
Moneysupply(8)2,2
1,0
6,5
10,16,8
-1,4
9,4
11,211,1
-4,6
13,8
10,013,0
-3,3
13,5
7,514,3
-0,6
11,8
7,014,4
-0,4
12,0
6,113,7
0,4
10,6
6,712,9
2,3
8,0
5,813,4
2,8
7,2
4,0
Netlendingorborrowing
requirement ofgeneralgovernment
as%ofGDP
Publicdebtas%ofGDP
Publicdebtinterest
as%ofGDP-1,9-5,8
64,8
4,4-12,6
88,2
8,0-11,1
95,9
9,3-11,7
105,1
9,4-9,5
110,7
9,9-8,4
117,4
10,6-8,0
120,6
10,6-6,2
125,7
10,7
t1)Estimates oftheCommission services,October1986.
(2)ForecastsoftheCommission services,October1986,onthebasisofpresentpolicies.
(3)Differences inpercentage points.
(4)A:GDPdeflator ;B:privateconsumption deflator .
(5)Grossvalueaddedperoccupiedpersoninthewholeeconomy .
(6)Effectiveexchangerate(vis-àvis19industrialcountries )onthebasisofunitlabourcostsforthewholeeconomy .Positivefigure=lossof
competitiveness ,
(7)Eurostatdefinition .
(8)Endofyear.

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/79
DENMARK
InDenmark ,economicperformance inrecentyearshas
improvedsignificantly inimportantrespects :grossdomestic
productrosequicklybothin1984and1985(3,9and3,8%,
respectively ),employment expandedby2,4%intheformer
andby3,1%inthelatteryearand,althoughlaboursupply
roserapidlyinreactiontotheincreaseindemandfor
manpower ,therateofunemployment wasreducedfroma
peakof10,2%in1983to8,2%attheendof1985.The
upturnwasledbyapronounced recoveryingrossfixedasset
formation ,whichresponded stronglytoamarked
improvement intheprofitability ofinvestment resultingfrom
thepolicyofwagerestraintintheearly1980s.Adeclineintheprivatesavingsratio,reflectedalsoin
strongerborrowing byhouseholds ,wasamajorreasonfor
thisbuoyancy .Theexternalpaymentspositiondeteriorated
further,although itprompted government actionin
December 1985andinMarch1986inordertorestore
externalbalance .However ,asaresultofthesemeasures ,
consumerdemandlevelledoffandtherateofactivityinthe
construction sector,whileatahighlevel,alsoshowedsigns
ofweakening .Nevertheless ,therewasamoderate risein
otherbusinessinvestment exceptinafewsectorssuchas
energyandshipping .Although thetradebalanceshould
improveinthecourseoftheyear,interestpaymentsabroad
remainhigh,andthedeficitoncurrenttransactions maynot
improvefortheyearasawhole.TheslowingdownofGDP
growthduetotherestrictivemeasures ,tosome3%in1986,
reducedtheriseinemployment andtheunemployment rate
levelledoffatsome73/4%ofthelabourforce.Theriseinthe
consumerpricedeflatorshouldbeoftheorderof3V2%in
1986,asagainst5%in1985,despitetheincreaseinindirect
taxes.Thefastincreaseinemployment since1983,oftheorderof
2%perannum,isthemostspectacular resultofthe
economic policypursuedbytheDanishauthorities since
1982,corresponding inmanyrespectstothecooperative
growthstrategyadoptedbytheCouncillastyear.This
strategyhasaimedmainlyatstimulating thesupplysideof
theeconomythroughrealandnominalwagerestraint ,cutsin
publicexpenditure andadherence toaprincipleofexternal
andinternalmonetarystabilitywithintheframework ofthe
EMS.Realcompensation ofemployees actuallyfellfrom
1983to1985,androseslowlyfromthenonduetomoderate
settlements andtheendingofindexation .Theconsequent
riseinprofitability helpedtostimulateprivatebusiness
investment .Withasevererestraintonpublicexpenditure
andsomemodestriseinreceipts,thegeneralgovernment
borrowing requirement wasreducedintheprocessfrom
9,3%ofGDPin1982to1,9%in1985,whileasurplusof
some3%couldemergein1986.Tightbudgetary
management gavemoreroomfortheexpansion ofthe
tradeables sector.Thethrustofincomesandbudgetary
policymeantthatmonetary policynolongerhadtobear
alonetheburdenofstabilization ,andsodomesticinterest
ratesdeclinedsharply.InOctober1986,newmeasureswereintroduced inorderto
strengthen personalsavingsanddiscourage credit-financed
consumption .Theyincludeashortening oftheaverage
redemption periodofnewmortgage loans,higherstamp
dutiesonloandocuments andaspecialtaxoninterest
paymentsonpersonalloansforconsumption purposes .In
additiontothesemeasures ,themaineventsinfluencing
economicdevelopments nextyearwillbetheimplementation
from1January1987ofthetaxreformadoptedatthe
beginningof1986andthewagesettlement ofMarch1987.
Thepurposeofthetaxreformistoincreaseprivate
household savings.
Despitethisstrongcorrection inthepublicfinances,the
currentexternaldeficitwidenedconsiderably between1983
and1985,partlyasaresultofsomedeterioration ofthetrade
balanceandpartlyduetoasubstantial increaseinnetinterest
paymentsabroad.Thelatterwasaconsequence partlyofthe
riseinthedollarintheperioduptomid-1985,whichboosted
thedomesticcurrencyvalueoftheexistingdebt,andalsoof
thecontinued riseinthedebt.Although ,compared tothe
positionof1979,thetradedeficitby1985hadbeenreduced
by4,4percentage pointsofGDP,theoverallcurrentexternal
deficitin1985,at4,4%ofGDP,wasbarelylowerthanthe
deficitrecordedin1979(4,7%),andupfrom3,3%in
1984.In1987itcouldsomewhat stimulateconsumerspendingby
shiftingtaxationfromhouseholds tocorporations and
certainotherinstitutions ,including somenon-profit
institutions ,whichuntilnowweretax-exempt .This
stimulative effectishowevercounterbalanced bytheincrease
inlocalgovernment taxationandbymeasurestakenin
October1986.Asaresultofthefullcompensation forthecut
inworkingtimeandtheplannedextension ofsickness
payment ,averagewagecostswillhaveincreasedbymore
than3%atthebeginningof1987,reducingtheroomfor
wageconcessions duringthebiennialdealinMarch1987.
Investment inplantandequipment ,followingitssharprisein
1984-1986 ,willbemuchlessbuoyantin1987,particularly
intheenergysector.Overallthegrowthperformance willbe
considerably slowerthanin1986andwillthereforebecome
moredependent ontheinternational economicenvironment .
Therateofunemployment willbeslightlyhigherthanthe
likelyoutcomein1986.Onaverage,consumer priceswill
probablyincreaseataratesimilartothatof1986(3,5to
4,0%)whichincludestheeffectsofenergytaxrisesto
eliminatetheimpactofloweroilpricesandofthedollarIn1986,domesticdemandcontinuedtoincreasemarkedlyin
thefirsthalfoftheyear,againoutgrowing potentialsupply.

NoL385/80 OfficialJournaloftheEuropeanCommunities 31.12.86
ThereisalsotheneedtoadaptthestructureoftheDanish
economytothechanginginternational environment .Action
hasalreadybeentaken,andfurtherproposalsarepending,to
extendtrainingandresearchfacilitiesinareaswheretheir
application maybeparticularly effective .Opportunities to
reorganize existingworkpatterns,toderegulate andto
increasetheadaptability ofthelabourmarketshouldbe
considered anddiscussedwiththesocialpartners .exchangerateonconsumerspendingpower(!).Thecurrent
accountofthebalanceofpayments shouldshowa
considerable improvement .
Thewagedriftexperienced during1986,asaresultof
sectoralimbalances inthelabourmarket,togetherwiththe
envisagedriseinproductivity ,suggeststhatamoderatewage
settlement inlinewithpreviousexperience wouldbe
appropriate ,particularly takingintoconsideration the
expectedalleviation ofpersonaltaxationin1987.
Disregarding interestpaymentsabroad,thecurrentaccount
deficitappearstobeessentially theresultofexcessive
domesticabsorption ratherthantheconsequence ofreduced
pricecompetitiveness .Therecentweakening oftheDanish
kronewithintheEMSillustrates ,however,thatthemargin
ofmanoeuvre oftheauthorities remainsnarrowandthat
monetarypolicymusttakedueaccountoftheneedtoensure
sufficientcapitalimports .Measures toraisethelevelof
privatesavingsandtoreducethedebtofhouseholds-such
asthoseintroduced inOctober-arethereforeofprime
importance .Inthisrespect,anextensionofpensionschemes,
tocoverawidersectionofthepopulation ,basedonpersonal
contributions andpossiblyaspartofthewagesettlement ,
mightbeanotherusefulcontribution .Intheshorterrunthe
externalconstraint wouldthusbeloosenedwhereas,inthe
longerrun,increasedsavingswouldensurethefinancingof
higherinvestment andimprovegrowthpotentialwithout
endangering theexternalbalance .
(*)Theforecastsinthetextseektotakeintoaccounttheeffectsof
themeasuresadoptedinOctober,whereasithasnotbeen
possibletomakecorresponding revisionstothefiguresin
Table29.Asaresultofpastcurrentdeficits,theexternalgrossdebtis
nowcloseto40%ofGDP,withprivateandpublicdebteach
accounting forabouthalf.WithanincreaseinnominalGDP
ofsome6%peryearonaverageoverthecomingyears,the
externaldebt/GDPratiocouldbemaintained constantwith
acurrentexternaldeficitofsome2,5%ofGDP.Witha
lowerdeficit,theexternaldebtwouldtendtofallin
proportion toGDP.Asafirststep,itwouldseemurgent
alreadyin1988tobringtheexternaldeficitdowntothelevel
consistent withaconstantdebt/GDPratioand,intheshort
run,thiscanhardlybeachievedwithoutacontinued tight
fiscalpolicystanceinlinewiththeofficialobjectives .A
furtherreductionoftheexternaldeficitshouldtakeplacein
subsequent yearstotheextentthataloweringofthe
debt/GDPratioisaimedat.For1987,thegeneral
government netlendingimplicitinthefinancebillis,atabout
3%ofGDP,approximately unchanged from1986andis
consistent withasmallsurplusinthecentralgovernment
budget.Inviewoftheexistingexternalconstraint andthe
necessitytoensureabalanceddevelopment oftheDanish
economy ,theeffectiveachievement ofthistargetisdesirable ,
implyingavigorousimplementation ofthepolicyofzeroreal
growthinpublicexpenditure pursuedinrecentyears.

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/81
TABLE29
Denmark :Maineconomicaggregates 1961to1987
(Annualpercentage changes)I1961to
19731974to
19801981 1982 1983 1984 1985 1986(')1987(2
rvalue
Gross
domestic ■<volume
product deflator11,7 11,7
1,6
9,99,1
-0,9
10,114,4
3,0
11,310,4
2,0
8,19,9
3,4
5,89,5
3,8
5,47,8
2.9
4,8,5,5
1,8
3,7
Privateconsumption deflator
rprivateGrossfixed
capital -<public
formationvolume 1total6,6
6,610,1
-5,1
-2,2
-3,112,0
-19,7
-17,0
-19,210,8
10,9
-9,4
7,17,2
4,0
-15,4
0,96,6
12,4
1,7
11,05,0
15,9
5,4
14,63.3
10,7
2.4
9,82,8
-1,3
2,1
-0,9
ofwhich: construction
equipment-4,9
0,7-21,7
-15,0-1,3
20,11,1
0,67,2
15,813,1
16,56,3
13,7-0,7
-1,2
Domesticdemandatconstantprices
Gapwithrespecttoother
Community countries (3)
rnominal
Compensation
ofemployees <realA(4)
perhead 1g
Productivity (5)
Realunitlabourcosts
Competitiveness (6)
Employment10,7
3,4
3,8
3,2
0,2
1,7
1,10,6
11,7
1,6
0,8
1,2
0,4
-0,3
0,4-4,1
9,2
-0,8
-2,5
0,4
-0,9
-7,5
-1,33.5
2,7
12,1
1,4
1.6
2,7
-1,3
-3,2
0,30,9
-0,3
7,9
-0,2
0,6
1,6
-1,8
-0,5
0,54,0
2,6
5,4
-0,3
-1,1
1,2
-1,5
-3,5
2,45,3
3.3
4.4
-1,0
-0,6
0,7
-1,7
0,9
3,14,1
-0,7
4,0
-0,7
0,7
0,0
-0,7
3,8
1,91,8
-1,5
5,9
2,1
3,0
1,5
0,6
0,6
0,3
Registered unemployed as
%ofthecivilianlabourforce(7)
Currentbalanceas%ofGDP
Long-term interestrate
Moneysupply(8)1,1
-2,1
9,0
10,65,5
-3,5
16,0
11,78,9
-3,0
19,3
9,19,5
-4,2
20,5
11,410,2
-2,2
14.4
25,59,8
-3,3
14,0
17,08,7
-4,4
11,6
15,87,5
-4,1
10,4
7,77,6
—3,6
10,5
2,9
Netlendingorborrowing
requirement ofgeneral
government as%ofGDP
Publicdebtas%ofGDP
Publicdeptinterest
as%ofGDP2,0-0,6
19,2
2,2-7,1
43,6
5,3-9,3
53,0
6,0-7,3
62,8
8,1-4,2
67,7
9,6-1,9
66,4
9,82,8
61,1
8,82,8
57,1
8,0
0)Estimates oftheCommission services ,October1986.
(2)ForecastsoftheCommission services,October1986,whichdonottakeintoaccounttheeffectsofthemeasuresadoptedlaterinthatmonth.
(3)Differences inpercentages points .
(4)A:GDPdeflator ;B:privateconsumption deflator .
(5)Grossvalueaddedperoccupiedpersoninthewholeeconomy .
(6)Effectiveexchange rate(vis-a-vis19industrial countries )onthebasisofunitlabourcostsforthewholeeconomy .Positivefigure=lossof
competitiveness .
(7)Eurostatdefinition .
(8)Endoftheyear.

NoL385/82 OfficialJournaloftheEuropeanCommunities 31.12.86
FEDERAL REPUBLIC OFGERMANY
years,thetwosidesofindustryhavealreadytakenaccountof
thechangingconditions onthelabourmarket;thenegotiated
wagesettlements resultedinadeclineofthewageshareinthe
economyasawholebymorethan4%between1981and
1985.Thistrendhascontinued in1986,helpedbytheterms
oftradeimprovement ,eventhoughtheunexpectedly
favourable movement ofdomesticpricesin1986was,
understandably ,notanticipated inwagesettlements .1986marksthefourthyearofupswingintheFederal
RepublicofGermany .Atthebeginningoftheyear,however ,
thegrowthtrendwasoutweighed bythecombined effectsof
anumberofspecialadversefactors,suchastheunusually
harshwinter,uncertainties astofuturedollarandoilprice
movements ,andtheparticularly lownumberofworking
days.Despiterenewedstrongeconomicexpansion fromthe
secondquarteronwards ,theeconomy'sgrowthin1986,at
some3%inrealterms,islikelytobesomewhat lowerthan
wasstillexpectedatthebeginningoftheyear.Theprincipal
drivingforcesbehindgrowthhavebeenprivateconsumption
andbusinessinvestment .Consumer spendinghasbeen
boostedbywageincreaseswhich,inviewofvirtuallystable
consumerprices,arepermitting realprivateconsumption in
1986togrowatitsfastestratesince1971.Investment ,onthe
otherhand,hasbeensupported bystrongerdomesticsales
andafurtherincreaseinprofitsrelatedtotheimprovement in
thetermsoftrade.Theweaktrendofexportvolumesand
stronggrowthofimportvolumes ,bothofwhichhadbecome
evidentattheendof1985,haveledtoaconsiderable
deterioration oftherealexternalbalance (—1,4%ofGDP).
Nevertheless ,thecurrentaccountsurplushasclimbedtoa
newrecordlevel(almostDM63thousandmillion)asaresult
ofasubstantial improvement inthetermsoftrade.Themoderateincreaseofrealwagesinrecentyearshas
resultedinamarkedimprovement inenterprises 'profits,
withacorresponding riseinratesofreturnoninvestment .
Themorefavourable investment climatehasalreadyledtoa
riseinbusinessinvestment asawhole,whichisnowonce
againincreasingly servingtoexpandcapacity,and
investment inconstruction otherthanindwellingshasalso
risenagainnoticeably forthefirsttime.
Investment indwellingshasdeveloped lessfavourably ,with
thedecliningpopulation trendandthemismatch between
buildingcostsandincomesseverelyexacerbating the
prevailingunderlying tendencyofweakening demand .Here
muchwilldependinfutureyearsonbuildingcostsrisingata
slowerratethantheoverallpricetrend.Thechangeof
emphasisinresidential investment towardsmaintaining the
existinghousingstockandincreasing itsqualityprovidesan
opportunity forincreasing theemployment contentof
investment activityinthisarea.Althoughthespecialfactorswhichsupported demandin
1986willweakenin1987,therewillbefurtherinherent
strengthindomestic demandandexportprospects
(particularly intheEMSarea)shouldagainimprove
somewhat .Theupswingwillthereforecontinueintoitsfifth
year;in1987realgrossdomesticproductislikelytogrowby
31/4%.Withthetermsoftraderemaining moreorless
unchanged ,priceswillmoveinlinewithdomesticcostsand
riseonlymoderately .Thesurplusoncurrentaccountislikely
tocontractconsiderably toaroundDM44thousandmillion
(or2,1%ofGDP).Thecrisisinthebuildingindustrywasintensified inthelast
fewyearsbythedeclineinthepublicinvestment .Inthe
framework ofpublicfinanceconsolidation ,particularly with
respecttolocalauthoritybudgets,progresswasmadepartly
attheexpenseofpublicinvestment .Since1985,however,
publicinvestment hasagainbeenrising,inthecurrentyear
byabout6%innominalterms.Investment inthe
infrastructure ,environmental protection andurbanrenewal
hasbeensupported byadditional measures ,whichwerealso
ofbenefittoprivateinvestment .Thefirststageofthetax
reformandthesmallreduction insocialsecurity
contributions forunemployment insurance (by0,1%)has
alsohelpedtoimprovesupply-side conditions whileatthe
sametimeunderpinning demand .Furthermore ,the
medium-term financialplansoftheterritorial authorities
provideforannualgrowthofpublicinvestment of4to5%
(innominalterms)upto1990.Incontrasttorecentyears,the
increaseinsuchinvestment wouldthuscorrespond tothe
growthoftheeconomyasawhole.Employment islikelytoincrease,onanannualaverage,by
about280000in1986andbyanother250000in1987.
Unlikepreviousphasesofeconomicupswing ,inwhichthe
increasewasconcentrated intheservicessector,employment
inmanufacturing industryshouldalsogrowconsiderably ,at
ratesof1V2%thisyearand1%next.Despiteincreaseduse
ofmeasurestoimprovethelabourmarketsituation ,thefall
inunemployment ,by80000in1986andsome90000in
1987,isstillmuchsmallerthantheriseinemployment ,since
mostofthenewjobsarebeingfilledbyjobseekers not
registered asunemployed .
Althoughinrecentyears,bycomparison withitsEuropean
neighbours ,theFederalRepublicofGermanyhasenjoyeda
morefavourable economic situation ,theunemployment
problemisstillacute.Itshouldthereforebeatoppriorityto
redressthisstateofaffairsthroughdecisiveaction.InpastMonetary policyhasstayedonacourseofstability,
permitting afurtherfallintheinflationrateanda
market-induced reduction inloaninterestratestoahistorical
low.Sofarthisdevelopment hasbeenfavouredbyexternal

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/83
factors.Inthecourseof1986,thegrowthofcentralbank
moneycontinuously overshotitstargetrange,whichledthe
Bundesbank toproceedcautiously inrespectofafurther
reduction inshort-term interestrates.
Supplyconditions ofenterprises havebeenfurtherimproved
atthemicroeconomic level.Eventhoughskill-related wage
differentials havenotbeenpursuedextensively ,shorter
workinghourswereagreedinseveralmoreindustries ,anda
growingnumberofnewtypesofworkingtimearrangements
arebeingintroduced ,inordertoimproveemployment
opportunities .Inviewofthesignificant shortageofskilled
workerswhichhasarisenintheFederalRepublic ,employers '
endeavours toprovidevocational trainingandretraining
shouldbereinforced .
Monetary ,budgetary andwagespolicies,intheireffortsto
improvetheenvironment formoreemployment-creating
growth,havetogetherhadaneffectinthedesireddirection .
Inaddition,helpedbytheinprovement inthetermsoftrade,
theevolutionofinternaldemandhasbeenbuoyant .Asthe
positiveimpactoftheoilshockslowlydiminishes ,future
Germaneconomicpolicy,initseffortstoachievesteady
economicgrowthatanappropriate rateandwithprice
stability,facesanewtest.
Withregardtothebudgetary policyofrecentyears,the
publicdeficithasbeenreducedtosuchanextentthatan
easingofincometaxintwostages—in1986and1988—is
possiblewithoutendangering thesuccessofconsolidation .
Thecentralgovernment (consolidated federalgovernment
andLander)deficithasonlynarrowedslightlyin1986and,
againstthebackground ofpresentgrowthprospects ,the
deficitofapproximately 2%ofGNPforecastfor1987
appearsacceptable .Particularly inviewoftherisksto
economic activitywhichcouldemanatefromexternal
developments ,budgetarypolicyshouldbepreparedtoreact
rapidlytoanysignificant slackening ofdemandinthe
economyasawhole.Thesecondstepofthetaxcuts,which
in1988willprovidereliefofalmostDM10thousand
milliontohouseholds ,shouldraiseincentives ,by
reducingtheprogressive elementoftaxation,andsupport
demand .Thetaxreformannounced forthenextlegislative
periodshouldalsocontribute toraisingincentives and
therebystrengthen theforcesforgrowth .Thiswillbeallthemoresuccessful ,thesoonerthedetailsofthetaxreformare
decided .Iftheassociatednecessaryexpenditure cutswereset
outatthesametime,itwouldbeeasierfortherepeatedly
announced selectivedismantling ofsubsidiestotakeshape.
Inaddition ,onecouldenvisage ,whereappropriate ,and
withinthelimitsofavailable capacity,expanding
worthwhile publicinvestment beyondthebudgetary
provisions .Finally,consideration couldalsobegiventothe
possibility ofreducingsocialsecuritycontributions tothe
FederalLabourOffice;inrecentyearsitsbudgethasbeenin
surplus,andthisislikelytogrowinfuture,givenfalling
unemployment .
Wagedevelopments shouldalsofurthercontribute towards
employment policy.Thisisallthemorelikely,themore
securethedemandprospects .Theriseinrealpercapita
wagesshouldalsoremainbelowproductivity growthinthe
economy asawhole.Wagenegotiators mustthereforebe
awarethatnextyear,incontrasttotheuniquesituationof
1986,therewillbenoadditional incomegainsavailablefor
distribution arisingfromthetermsoftrade,andthatitis
importantthatexportpricesreflectaslittleaspossibleofthe
deterioration ofcompetitiveness duetotheappreciation
againstthedollar,whichnaturallyputspressureontheprofit
situationofenterprises .
Monetary policyshouldsticktoitspresentcourse,whichis
directedtowardsfinancingsufficientgrowthofproductive
potentialinthemediumtermwhilekeepingpricesstable.
Providedthatwagecostsdonothavetheeffectofpushingup
prices,suchapolicyislikelytooffersomescopeforfurther
market-induced reductions ininterestrates.Ontheother
hand,areductionofkeyinterestrates,necessitated by
externaleconomic developments ,couldevenhavean
unfavourable impactoninterestrateexpectations atthelong
endofthemarket,depending onthestrengthofmonetary
expansion .
Inordertoimprovesupplyconditions atthemicroeconomic
level,numerousmeasureshavealreadybeentaken,affecting
themarketsbothforfactorsofproduction andforgoods.
Administrative obstaclesand,insomesectors,excessive
government influencecontinuetostandinthewayofan
efficientallocation ofresources .Suchobstacles shouldbe
dismantled moreenergetically thanhassofarbeenthe
case.

NoL385/84 OfficialJournaloftheEuropeanCommunities 31.12.86
TABLE30
FederalRepublicofGermany :Maineconomicaggregates 1961to1987
(Annualpercentage changes)
1961to
19731974to
19801981 1982 1983 1984 1985 1986(>)1987(2)
value
volume
deflatorGrossdomestic
product
Privateconsumption deflator8,9
4,4
4.4
3.5
3,7
5,9
4,0
3,5
5,2
4,57.1
2.2
4,8
4,8
0,9
0,3
0,8
0,3
3,0
2,3Grossfixed
capital
formation
(volume)
ofwhich:private
public
total
construction
equipment
Domesticdemandatconstantprices
Gapwithrespecttoother
Community countries (3)
Compensation
ofemployees
perheadnominal
realA(4)
B(4)4,2
0,2
4,0
6,2
-3,9
-9,7
-4,8
-5,1
-4,3
-2,7
5.2
1,2
-0,9
0,9
0,3
70,9
-0,7
4,8
-0,8
10,4
5,0
-3,7
36,4
2.33.7
-0,6
4.4
4.8
-4,5
-9,3
-5,3
-4,3
-6,7
-2,0
-3,4
4.1
-0,3
-0,7
1,1
-1,4
4.2
73,9
2.5
-1,7
6.9
0,5
9,0
7.1
-3,3
39,5
2,84,8
1.5
3,3
3,2
5.1
-8,6
3.2
1.7
5.6
2.3
1,5
3.8
0,5
0,6
3,0
-2,4
11,2
82,2
1,5
-1,5
8.4
0,6
7,9
5,3
-2,5
41,0
3,04,7
2.7
1,9
2,5
1,2
-2,1
0,8
1.6
-0,5
1,9
0,2
3,4
1,4
0,9
2,6
-1,1
4,4
85.8
-2,0
0,1
8,4
1,0
7.8
4,7
-1,9
41.9
3,04,9
2,6
2,2
2,1
-0,3
-0,4
-0,3
-6,2
9.4
1.5
-0,9
3,0
0,8
0,9
1,9
-1,0
6,4
91,3
-2,5
0,7
8,4
2,2
6,9
5,0
-1,1
42,5
3,07,1
3,1
3,9
0,0
7.1
5,0
3,5
0,7
7.5
4,8
2,0
4,0
0,1
4.0
1.9
-1,8
12,6
102,8
5,4
1.1
8,1
3.2
5.6
5,6
-0,9
41,6
2,94,6
3,2
1.4
1,1
5.5
4.8
5,5
3,5
8,0
4,2
0,7
3,2
1,8
2,1
2,2
-0,4
2.9
105,8
1,8
1,0
7,7
2,1
5,1
5,4
-0,7
41,3
2,9Productivity (s)
Realunitlabourcosts(6)
Profitability (7)
idem(1961to1973=100)
Competitiveness (8)9,2
4,6
5,5
4.1
0,5
100
0,2
0,8
0,7
7.2
10,9
0,3
17,7
0,97.4
2.5
2,5
2.5
0,0
70,9
-0,3
3.6
0,4
7,8
8.5
-2,9
27,7
1.6Employment
Registered unemployed as%
ofthecivilianlabourforce(9)
Currentbalanceas%ofGDP
Long-term interestrate
Moneysupply(10)
Netlendingorborrowing ofgeneral
government as%ofGDP
Publicdebtas%ofGDP
Publicdebtinterest
as%ofGDP
(J)Estimates oftheCommission services,October1986.
(2)ForecastsoftheCommission services,October1986,onthebasisofpresentpolicies .
(3)Differences inpercentage points.
(4)A:GDPdeflator;B:privateconsumption deflator .
(5)Grossvalueaddedperoccupiedpersoninthewholeeconomy .
(6)Ratioofrealwagesperheadtoproductivity .
(7)Netoperatingsurplusrelativetonetcapitalstockatcurrentreplacement cost.
(8)Effectiveexchangerate(vis-a-vis19industrialcountries )onthebasisofunitlabourcostsforthewholeeconomy ,positivefigure=lossof
competitiveness .
(9)Eurostatdefinition .
(10)M3;endofyear.

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/85
GREECE
couldbeexceeded ,notonlybecauseofthedisappointing
resultsofthesalesofgovernment bondstothepublic,but
alsobecausethemarginforincreasing privatesectorcredit
wasoverestimated byreferencetotheactualtrendinthe
publicdeficit.InGreece,thestabilization measurestakeninOctober1985
tore-establish conditions fordurablegrowthandeventual
convergence oftheeconomywiththerestoftheCommunity ,
representaturningawayfromtheeconomicpolicythathad
allowedthedisequilibria togetworse.In1985,thepublic
sectornetborrowing requirement hadthusreachedsome
18%ofGDP,withthecurrentbalanceofpaymentsdeficitat
US$3300million,or10%ofGDP.Inresponsetothis
situation ,theGovernment ,inOctober1985,finalized a
rigorousstabilization planconsisting ,notably,ofa15%
devaluation ofthedrachma andtheintroduction ofan
obligatory non-interest bearingdepositoncertainimports .
Thistwo-yearplanaimsatbringingaboutamarked
slowdown intheriseinwagecosts,asharpreduction inthe
publicsectorborrowing requirement ,andasignificant
decreaseinmonetarygrowth .TheGovernment wasassisted
initseffortstoredressthebalanceofpayments bya
Community loan,thefirstinstalment ofwhichwaspaid
immediately ,withthesecondinstalment tofollowatthe
beginningof1987.Moreover ,otherfactorshavecontributed tothedelayofthe
adjustment indemand .Consumption ,aftermanyyearsof
growth,responded onlyveryslowlytothestabilization
measures ,thisinherentinertiaaidedbytheworkingofthe
underground economy .Ontopofthis,therewere
expectations intheearlymonthsofafurtherdevaluation ,the
effectsofwhichwereamplifiedbythehighdegreeofliquidity
intheeconomyreflectingtheexcesslevelofdomesticcreditin
thefirsthalfrelativetothetargetsset.Consequently ,real
domesticdemandin1986asawholeshowedonlyarelatively
smallfall,mainlybecauseofthedeclineinpublicsector
investment ,whileprivateconsumption willhavescarcely
changedfromitslevelofthepreviousyear.Thus,importsdid
notslowdowntotheextentexpected ,while,ontheother
hand,exportswerelessbuoyantthanforecast .Overall,GDP
willstillhaverecordedsomeslightgrowthin1986.The
belatedimprovement intherealexternalbalance,asaresult
ofatemporarily unfavourable structureofexportsanda
mediocreoutcomerecordedfortourism,combined withthe
unfavourable effectwhichdevaluation hadinitiallyonthe
termsoftrade,hasmeantthat,despiteanappreciable
improvement inthesecondhalfoftheyear,thecurrent
balanceofpaymentscouldshowadeficitfor1986asawhole
between4,5and5%ofGDP,sligthlymorethantheplanned
targetofUS$1700million.Wagepolicyisnowbasedontheadjustment ofwagestothe
targeted ,ratherthantheobserved ,rateofinflation ,which
excludes theeffectsofimportprices.Appliedwith
determination ,thispolicywillhavehelpedtoreducereal
wagesbymorethan7%in1986,andtolimittheriseinunit
wagecostsinmanufacturing industrytoanannualaverageof
13%,compared with20,5%in1985.Thistrend,together
withanexchange-rate policywhichisdisinflationary inthat
itoffsetsthedifferential inunitwagecostsandnotthe
differential inretailprices,andamoderateadjustment in
administered pricesduring1986,willhavealloweda
slowdown intheriseinconsumerpricesfrom25%attheend
of1985to16%attheendof1986.However ,becauseofthe
substantial overhangfromtheendof1985,theslowdown
willnotshowupintheannualaverage,whichislikelyto
reach22,5%in1986,compared with19,3%in1985(J).Thesedevelopments shouldencourage determination inthe
application ofthestabilization planin1987.
Wagepolicyshouldaimtoensuremoderate growthin
nominalwagesandsalariesonthebasisofaninflationrate
whichwillhavebeenbroughtdownto10%bymid-1987 —
iftheeffectsofintroducing VATareexcluded—andbystrict
application oftheindexation systemadoptedattheendof
1985.Thedisinflationary effectsofwagepolicyin1987will
nevertheless belimited,sothatthemainfocusofthe
stabilization policyshouldbeonbudgetary andmonetary
management .Onthepublicfinancefront,wheretheemphasishasbeen
moreonboostingrevenuethanoncurbingexpenditure ,the
publicsectorborrowing requirement in1986willbedownto
about14%ofGDP,inotherwordsanimprovement of4
pointscomparedto1985,areductioninconformity withthe
CouncilDecision grantingtheCommunity loanbut
considerably belowthatplannedatbudgettime.Moreover ,a
significantproportion oftheimprovement —about2,5%of
GDP—willhavebeenduetothefallinoilprices,mostof
whichtheGovernment decidedtooffsetbyanincreasein
taxationonpetroleum products .Inregardtomonetary
policy,thetargetforaggregate domesticcreditexpansionThestrengthening ofthepublicfinanceswillhavetobe
pursuedrigorously inordertobringthepublicsectornet
borrowing requirement in1987downtoalevelcompatible
withthebudgetary objectivesetinthestabilization plan.
Giventherapidriseintheinterestburden,thisrequiresvery
strictcontrolofotherexpenditure ,particularly thaton
publicconsumption .Inaddition,transferstofirmswillhave
tobesharplyreducedby,interalia,cuttingbackonexport
aids,agricultural subsidiesandfinancialassistancetofirms
indiffuculty .Thenecessary increaseinrevenuewillcome(!)InNovember 1986,theGovernment imposedafreezeonprices
untiltheendofJanuary1987inordertopreventexcessiveprice
rises,followingtheintroduction ofVAT.

NoL385/86 OfficialJournaloftheEuropeanCommunities 31.12.86
fromthewideningofthetaxbase,greatereffortstocombat
fraudandtheextrareceiptsgeneratedbytheintroduction of
VATon1January1987.
Strictcontrolofthepublicfinanceswillagainhavetobe
accompanied byanexpansion ofcredittotheprivatesector
belowthegrowthrateofnominalGDP,estimatedat12%.
Tothisend,policyoninterestrateswillhavetobemore
activein1987:themovement towardspositiverealinterest
rates,bearinginmindthescarcityofcapitalresources ,
shouldbemaintained andtheeffortstounifylendingrates,
alreadystartedin1986,continued .Inaddition ,thesaleof
medium-term government securitiestothegeneralpublic
shouldbedeveloped .Suchapolicywillallowmoreefficient •
allocationoffinancialresourcesandwillencourage saving
andcapitalinflowswhileatthesametimeexercising itsown
disinflationary effect.
Suchstabilization measures areessentialifmacroeconomic
equilibrium istoberestoredbutarenevertheless insufficient
toensuretheeconomy'slonger-term growth;thiscanonly
comefromachieving thetypeofinvestment thatwill
strengthen andmodernize thecountry'sindustrialbase.The
competitiveness oftheeconomycouldthusbeimprovedina
waywhichwouldenabletheexternalconstraint tobe
overcome forgood,whileatthesametimeincreasing
employment sufficiently tobringdownunemployment .In
thiscontext,thereisaneedtomakeprogressinderegulating
pricesandprofitsaswellasfreeingtheoperation ofthe
labourmarket .Implementation ofthepolicyoutlinedaboveshouldallow
theresultsachieved inthesecondhalfof1986tobe
maintained in1987and,inparticular ,toreducefurtherthe
externaldeficitandtherateofinflation .Thedeclineinreal
personaldisposable incomeandtherestrictivebudgetpolicy
stancewillleadtoadecreaseinconsumption ,while
industrialinvestment shouldpickupinresponsetothe
expectedimprovement inbusinessprofitability ,though
withoutentailinganincreaseinequipment investment asa
whole,asaresultoftherestrictions imposedbythebudgeton
publicenterprises .Thedeclinewhichthiswillbringaboutin
domestic demandshouldleadtoafurtherreduction in
imports,whileexportsshouldcontinuetobebuoyedupbya
relativelyexpansiveenvironment .Overall,realGDPcould,
nevertheless ,showaslightfallin1987asawhole.Sincethis
outlookdoesnotsuggestanyimprovement inemployment ,
unemployment couldverywellincrease .Bycontrast,ifoil
pricesremainattheir1986level,itwillbepossibletobring
thecurrentaccountdeficitdowntoUS$1300million,or
3,5%ofGDP,stillarelativelyhighlevel.
Therefore ,thestabilization planaimingtorestoremajor
equilibriawillhavetobeappliedrigorously in1987.Inthe
longerterm,itwillbenecessarytopursueanadjustment
policybasedoneffortstorestructure theeconomywithinthe
framework ofprudentmonetaryandbudgetary policies.
OnlyinthiswaywilltheGreekeconomybeabletobecome
competitive againandenjoylastinggrowth.

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/87
TABLE 31
Greece:Maineconomicaggregates 1961to1987
(Annualpercentage changes)
1961to
19731974to
19801981 1982 1983 1984 1985 1986(')1987(2)
rvalue
GrossdomesticJvolume
product ]deflator12,5
7,6
4,519,8
3,4
15,819,6
-0,3
20,024,5
-0,2
24,720,3
0,3
19,923,0
2,6
19,919,6
2,1
17,123,2
0,5
22,612,1
-0,2
12,3
Privateconsumption deflator .3,616,0 23,3 21,2 18,6 18,0 18,4 22,5 12,5
Grossfixedfprivate
capital <public
formationvolume rota] 10,0-1,0-7,5-1,9-1,9-4,7 3,4-3,0 0,5
ofwhich: construction -7,7-13,2 3,9-7,7 2,6 2,0 1,6
equipment -7,1 14,1-8,2-0,9 4,4-9,0-1,0
Domesticdemandatconstantprices 2,9-0,7 0,8 4,9-0,8-1,2
GaOwithrespecttoother
Community countries (3) 2$-1,4-1,0 2,8-6,1-4,5
rnominal
ompensation
ofemployees ■<realA(4)
perhead 1g(4)10,2
5,5
6,521,1
4,6
4,523,4
2,9
0,125,4
0,5
3,421,8
1,5
2,722,6
2,3
3,920,4
2,8
1,713,6
-7,3
-7,29,6
-2,4
-2,6
Productivity (5) 8,2 2,7-5,0 0,9-0,1 2,9 1,0 0,0-0,2
Realunitlabourcosts -0,3 1,6-0,6 1,9-7,3-2,3
Competitiveness (6) 2,6 0,0 3,5 9,0-3,4 1,4-2,8-16,0-2,9
Employment -0,6 0,8 0,1-1,3-1,0-0,2 1,1 0,5 0,0
Registered unemployed as%
ofthecivilianlabourforce(7) 7,9 8,1 7,8 7,6 8,3
Currentbalanceas%ofGDP
Long-term interestrate
Moneysupply(8)-2,9
18,2-2,2
11,3
23,7-0,2
17,7
34,7-3,8
15,4
29,0-4,7
18,2
20,3-4,1
18,5
29,4-8,4
15.6
26.7-5,8
14,0
19,0-3,7
14,5
14,9
Netlendingorborrowing
requirement ofgeneral
government as%OfGDP -10,6-9,4-8,9-10,1-13,9-10,6-7,1
Publicdebtas%odGDP 33,0 36,7 41,4 47,5 54,8 55,0 56,5
Publicdebtinterest
as%ofGDP 1,7 3,2 2,6 3,4 4,6 5,5 6,0 6,1
(')EstimatesoftheCommission services,October1986.
(2)ForecastsoftheCommission services,October1986,onthebasisofpresentpolicies.
(3)Differences inpercentage points.
(4)A:GDPdeflator;B:privateconsumption deflator .
(5)Grossvalueaddedperoccupiedpersoninthewholeeconomy .
(6)Effectiveexchangerate(vis-a-vis19industrialcountries )onthebasisofunitlabourcostsforthewholeeconomy .Positivefigure=lossof
competitiveness .
(7)Eurostatdefinition .
(8)Endofyear.

NoL385/88 OfficialJournaloftheEuropeanCommunities 31.12.86
SPAIN
continued tobetheobjectivein1985and1986,underthe
SocialandEconomic Agreement signedinOctober1984.
TheAgreement providedfornominalwageincreasestobe
heldwithinthelimitsofthetargetinflationrate.However ,
becausenominalwageincreaseswereaccompanied by
considerable wagedrift,theslowdown inthegrowthof
nominalwagesperheadseeninrecentyearswasinterrupted
in1986.InSpain,therewasamarkedacceleration ineconomic
growthin1986;GDP,underpinned byanappreciable
upturnindomesticdemand ,couldgrowbysome3%in
volumeterms.Privateconsumption hasbenefitednotonly
fromadegreeofimprovement inrealwagesbutalso,forthe
firsttimesincethefirstoilshock,fromaappreciable recovery
inemployment andareversalofthetendency ofthe
unemployment ratetogoonrising.Grossfixedcapital
formation hasfeltthefavourable effectsoftheimprovement
inprofits,ofbettermarketprospectsandoftheneedfor
industrialmodernization connected inparticular withthe
Community 'senlargement .Becauseoftheweakness of
exportmarketsandthejumpinimportvolume,notablyof
manufactures ,theexternalaccount'scontribution togrowth
wassubstantially negativeinrealterms.Nevertheless ,
balanceofpaymentsoncurrentaccountimprovedsharply
becauseoftheverylargetermsoftradegainresultingfrom
thefallinenergyandcommodity prices.Theacceleration
observed atthebeginning oftheyearfollowing the
introduction ofVATandtheupsurgeinfoodpricesinthe
middleoftheyeardidnotcompromise thebasicdisinflation
trendin1986.However ,intermsofannualaverages ,thereis
anappreciable inflationdifferential betweenSpainandother
Membercountries .Significant progresshasbeenrecordedinrestoringthe
fundamental conditions necessary toachieveabalanced
development oftheeconomy .Forthefirsttimeinmany
years,priceincreasesattheconsumption stagefelltoa
single-digit ratein1985.In1986,thedeclineintheinflation
rateisbeingfosteredbythefallinthepricesofoilandother
rawmaterials ,buttheintroduction ofVATandtherisein
foodpriceshaveactedintheoppositedirection .Nominal
unitlabourcostshaverisenslightlyfasterasaresultofa
slowerproductivity increase ,contributing particularly to
relativelyrapidpriceincreasesintheservicessector.The
currentaccount ,whichwasindeficituntil1983,showed
growingsurplusesthereafter asaresultmainlyofthesteady
increaseinthesurplusontheservicesaccountand,in
particular ,tourism .
Becauseoftheimprovement intheeconomicenvironment ,
corporateprofits,afterfallingtoarelativelylowlevelatthe
startofthe1980s,stagedarecoveryreinforced bythe
application oftaxmeasureswhichauthorized investments
for1985and1986tobefullywrittenoff.Theseinvestments
havebeenundertaken primarily forthepurposeof
rationalization ,and,untilrecently,inordertosaveenergy.
Moreoverthesignificant inflowofforeigndirectinvestment ,
whichhasexpanded inthelastfewyears,actuallycontinued
in1986,chieflyasaresultofthefavourable prospectsopened
upbyaccession .For1987,therealGDPgrowthrateshouldbeatleastofthe
sameorderofmagnitude asin1986,i.e.some3%.Inview
oftheexpectedrecoveryinthegrowthofthird-country
markets,exportsshouldprovemoredynamicandhelp
maintain alargeexternalsurplus .Domesticdemandwill
probablybenefitfromthesamefavourable influences asin
1986,butprivateandpublicconsumption willprobably
expandalittlelessrapidlythaninthepreviousyear.Therate
ofpriceincreaseshouldfallquitemarkedly whilestill
remaining abovetheCommunity average .Overall
employment shouldcontinuetoimprovein1987,underthe
impetus ofafavourable economic environment .
Nevertheless ,unemployment willremainveryhigh(21,5%
ofthelabourforce)chieflybecausetheactivepopulation will
goonincreasing rapidly (atarateofover1%ayear).
Theeconomicpolicyimplemented since1983corresponds ,
initsintentions andmanyofitsaspects,tothemainlinesof
the'cooperative growthstrategyformoreemployment '
adoptedbytheCommunity intheautumnof1985,andthe
socialdialogueiswelladvanced .Inparticular ,theaimis,by
moderating realwages,tostimulatejob-creating investment
whileensuringthatdomesticdemandexpandssufficiently
andthatthecompetitiveness oftheSpanisheconomy is
maintained .Inadditiontothemainchallengefacingthis
strategy—toobtainaverysignificant reduction in
unemployment ,whichisfarhigherinSpainthanintheother
MemberStates—thesepoliciesarealsoaimedatmeetingthe
challengepresented byaccessiontotheCommunity .
Thesevereovershooting oflabourcosts,observedafterthe
firstoilshock,wasfollowedbyamoremoderateevolutionin
recentyears.Maintaining thepurchasing powerofwageshasTheeffortstakeninhandtoreducethegeneralgovernment
borrowing requirement ,whichamounted to6,2%ofGDP
in1985,shouldallowittobebroughtdowntobelow5%of
GDPin1986despitetherelativelyrapidincreaseinthelocal
authorities 'deficit.Theeffectontaxrevenueofthe
introduction ofVATseemstohavebeenslightlypositive
ratherthanneutral,asoriginallyforecast,whiletwo-thirds
orsoofthereductioninoilpriceshasbeencompensated by
anincreaseingovernment revenue .Ontheexpenditure side,
thechieffactorswhichhavehelpedtocutthedeficitin1986
havebeenthesmallerincreaseininterestchargesandthe
stabilization ofcapitaltransfers .Monetary policywill
probablyachieveduring1986theplannedslowdown inthe
growthofthemonetaryaggregate (ALP).Theovershooting
recordedinthefirsthalfimpliedatightening ofmonetary
policyandariseininterestrates,whichonlyresumedtheir
downward movement afterJuly.Eventhoughrelativelyhigh
innominalterms,interestrateshaveremainedconsiderably
lowerinrealtermsthantheCommunity average.

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/89
Exchange-rate policyisaimedatstabilizing theeffective
nominalexchangerateofthepesetaagainstthetrading
partnersintheCommunity ;becauseofarelativelystrongrise
indomesticprices,thishasentailedaslightcompetitivity loss
in1986.
Onthesupplyside,theadjustment policyhasbeen
strengthened since1983andagainreinforced inMarch1986
byprovisions designedparticularly tostimulatesavingand
investment ,toreducetheimpactofbureaucracy onthe
economy ,andtoincreaselabour-market flexibility .
Ifemployment istostagealastingrecovery and
unemployment istobegraduallyscaleddown,itisessential
toconsolidate theresultsalreadyachievedinrestoringthe
majorequilibria andpursuing anenergeticadjustment
policy.TheoptionsadoptedbytheGovernment formedafter
thelastelections areinlinewiththisaim.
Becauseoftheparticularly severeimbalance betweenthe
supplyof,andthedemandfor,jobs,theobjectivetobepursuedwhenrenewingtheSocialandEconomic Agreement
shouldbethestrictcontrolofreallabourcostsperhead.This
isthepathwhichmustbefollowedbyahighlyprotected
economy ,whichisnowbeingliberalized andwhichhasa
largenumberofvulnerable smallandmedium-sized
enterprises ,ifitwishestomaintainitscompetitiveness while
continuing theprocessofreducinginflationandensuringits
smoothintegration intothelargecommonmarket .
Withregardtomacroeconomic policy,budgetary policyfor
1987shouldcontinue toconform withthemedium-term
objectives setbytheauthorities .Furtherprogressinthe
collectionofVATandincombating taxevasionshouldresult
inarelativelybuoyantevolutionofbudgetresources .Onthe
otherhand,thepolicyofmoderating operatingexpenditure
shouldcontinue ,themainaimbeingtocreatesomemargin
forthemoresustainedevolutionofpublicinvestment .It
seemsadvisabletoreducethegeneralgovernment borrowing
requirement tosome4%ofGDPin1987.Thiswill,
moreover ,easethetaskofmonetary policyand,in
particular ,willhelpinterestratestocomedownwhile
permitting afurtherreduction inexternalindebtedness .

NoL385/90 OfficialJournaloftheEuropeanCommunities 31.12.86
TABLE32
Spain:Maineconomicaggregates 1961to1987
(Annualpercentage changes)
1961to;
19731974to
19801981 1982 1983 1984 1985 1986(>)1987(2)
rvalue
Grossdomestic Jvolume
product |^deflator14,8
7,2
7,120,0
1,8
17,814,1
0,4
13,614,7
0,9
13,714,6
2,5
11,913,9
2,3
11,311,3
2,1
9,015,1
2,9
11,89,3
3.0
6.1
Privateconsumption deflator 6,718,2 14,9 13,9 12,5 19,8 8,4 8,6 5,3
Grossfixedf
capital Ipub'":
formationvolume total -2,0 1,2-2,5-1,0-3,0 5,4 7,2 7,0
ofwhich: construction -2,2-2,0 1,5 1,5 6,0 5,8
equipment -1,7 5,2-7,1 12,0 9,0 8,8
Domesticdemandatconstantprices 7,8 2,2-1,5 0,5 0,8-0,9 2,4 4,9 ■3,9
Gapwithrespecttoother
Community countries (3)
rnominal
Compensation
ofemployees -jrealA(4)perhead 1g(4)14,7
7,2
7,622,3
3,9
3,916,3
2,3
1,012,8
-0,7
-1,2.13,5
1,5
1,113,0
1,2
1,79,5
-0,5
1,19,7
-1,9
1,06,3
0,2
0,9
Productivity (s) 6,4 3,9 3,3 1,4 2,9 6,6 3,4 1,0 1,8
Realunitlabourcosts 0,8 0,0-1,0-2,1-1,4-5,1-2,8-2,9-1,6
Competitiveness (6) -0,5-10,9 3,1 0,3-0,2-0,5
Employment (-1,9)(-2,8)-1,0-0,7-2,9-1,2 1,8 1,2
Registered unemployed as%
ofthecivilianlabourforce(7) (7,1)14,4 16,2 17,7 20,7 22,1 21,7 21,5
Currentbalanceas%ofGDP -1,7-2,4-2,3-1,4 1,3 1,7 3,5 3,7
Long-term interestrate 15,8 16,0 16,9 16,5 13,4 11,6 10,6
Moneysupply(8) 17,6 17,0 16,6 16,0 13,2 12,9 11,0 8,0
Netlendingorborrowing
requirement ofgeneral
government as%ofGDP -0,9-3,0-5,3-5,3-5,0-6,2-4,9-4,4
Publicdebtas%ofGDP 13,8 21,0 26,2 32,1 39,3 46,3 49,0 52,7
Publicdebtinterestas%ofGDP 0,6 0,7 1,0 1,3 2,1 3,5 3,4 3,3
(')Estimates oftheCommission services,October1986.
(2)ForecastsoftheCommission services,October1986,onthebasisofpresentpolicies .
(3)Differences inpercentage points.
(4)A:GDPdeflator;B:privateconsumption deflator .
(5)Grossvalueaddedperoccupiedpersoninthewholeeconomy .
(6)Effectiveexchangerate(vis-a-vis19industrialcountries )onthebasisofunitlabourcostsforthewholeeconomy .Positivefigure=lossof
competitiveness .
(7)Eurostatdefinition .
(8)Endofyear.

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/91
FRANCE
inadditiontotheadjustments madetotherulesand
regulations governingworkinghoursattheendofthelast
parliament ,thenewGovernment hasintroduced provisions
designedtoeasetheconditions governingredundancies ,thus
removing ,witheffectfrom1January1987,theobligationto
obtainprioradministrative authorization .Newredundancy
procedures areatpresentundernegotiation betweenthetwo
sidesofindustry .Afurtherseriesofmeasuresintroduced by
decreeareintendedtoextendtheuseoffixed-period
employment contracts ,part-timeworkingandcasuallabour.
Finally,inadditiontothemeasuresalreadytakenbythe
previousgovernment regardingthesocialsecuritytreatment
ofunemployment ,provisions wereincorporated intheJune
1986amendingbudgettogivedirectecouragement tofirms
totakeonyoungpeoplebetweentheagesof16and25
through temporary reductions insocialsecurity
contributions ;othermeasurestoboostemployment are
beingprepared .InFrance,privateconsumption hasheldupbetterin1986
thanin1985thankstotheappreciably fastergrowthin
spendingpower,due,interalia,totheprogressmadein
reducinginflation .Helpedbytheimprovement infirms'
financialsituations ,theupturnininvestment hasalsobeen
maintained andhascontinued tospreadtothedistributive
tradesandservices .Domestic demandhasthusbeenmuch
morebuoyantthaninpreviousyears.Thishasresultedina
highlevelofimports;exports,however,havegrownonly
slightly,implyingfurtherlossesofmarketshares.Giventhe
normalreactionlags,theAprilexchange-rates adjustment
hasonlyverypartially checkedthetrendtowards
deterioration oftherealexternal balance in1986.
Nevertheless ,thetermsoftradegainswillhavebeen
sufficienttobringaboutamarkedimprovement inthetrade
balanceinvalueterms.Moreover ,considerable progresshas
beenmadeinreducinginflation ,asaresultofmoderating
wagecostsandthesharpfallinenergyandrawmaterial
costs,withconsumerpricesrisingatanannualrateof2,4%.
Inthissituation ,realGDPshouldgrowby2,3%and
employment intheenterprise sectorshouldincreasevery
slightly,thoughnotenoughtoreversetheupwardtrendin
unemployment .Nevertheless ,anyupturninemployment dependsmore
fundamentally onthecompetitiveness oftheeconomyand
ontheprofitability ofenterprises .Thesearethetwo
determinants oftheincreasedpick-upofinvestment required
toexpandproduction capacities .Theinadequacy of
investment inthecompetitive sectoroveraperiodofmany
years,itsunsatisfactory distribution acrossindustries ,its
belatedrecovery,andthefactthatithasbeenpredominantly
directedtowardsrationalization ,haveprevented the
productive systemfromresponding satisfactorily tochanging
andpotentially accelerating demand .TheGovernment is
thereforeaimingtogivedirectorindirectsupporttothe
effortthatfirmsstillhavetomaketomeetthispriority
need.In1987,thetrendofdomesticdemandshouldbesimilarto
thatin1986if,asthecontinuing improvement infirms'
financialpositionswouldsuggest,thelevelofinvestment
increases .Furthermore ,thelaggedimpactofimproved
competitiveness followingthe1986currencyadjustment is
likelytoreducetherestraining effectofexternaltradeon
growth.Allinall,GDPgrowthshouldreach2,5%;this
shouldpermitaslightlygreaterincreaseinemployment but
stillnofallinunemployment .Theriseinconsumer prices
shouldagaintendtofallsomewhat andthetradebalance
shouldcontinuetoimprove .
Thestabilizingmeasurestakensince1983andtheimproved
termsoftradehavethereforebroughtaboutamarked
acceleration ingrowth,butthehoped-for recoveryinthe
employment situationhasnotyetbegun.Althoughtherehas
beenaslightincreaseinthenumbersemployed ,themeasures
takeninconnection withthesocialsecuritytreatment of
unemployment havebeeninsufficient tocompensate forthe
naturalincreaseofthelabourforce,sothatunemployment
hasagainrisenslightly .Thus,thenewGovernment hasresolutely continued the
liberalization policyintendedtorestorefirms'pricing
freedom,removingtherestrictions ontheirforeignexchange
transactions andmakingiteasierforthemtoobtainfinance.
Onthepricesfront,anumberofmeasureshavebeentaken
sincetheautumnof1985,whichwillhaveled,bytheendof
1986,tothevirtuallycompleteliberalization ofindustrial
pricesandtrademarginsandtoatotalfreeingofpricesand
marginsintheservicesector.Exchangecontrolshave,forthe
mostpart,beenabolished forfirmsandforprivate
individuals .Finally,majorreformshavebeenmadetothe
operation ofthefinancialmarket;theseincludethe
opening-up ofthemoneymarkettonon-financial operators ,
andasetofmeasurestorestorecompetition between
financialintermediaries throughtheabolitionofcertain
privilegesregardingdeposit-taking ,throughthereplacement
ofceilingcontrolsoncreditbyliquidityregulation basedon
interestratesandthroughthegradualliberalization of
interestratesinbanking .Thispackageofmeasures is
intendedtocreateaclimatemorepropitious toenterprise ,
enablingbusinesses toadaptmorereadilytomarket
trends .Concerned bytheinadequate achievements onthe
employment front,theGovernment electedon16March
1986hastaken,orispreparing totake,anumberof
socialmeasures intended tostimulate recruitment .Ithas
madeaseriesofamendments tolabourlegislation ,which
aredesigned ,bymakingemployment conditions more
flexible,toencourage firmstotakeonmorestaff.Thus,

NoL385/92 OfficialJournaloftheEuropeanCommunities 31.12.86
Inthewagesfield,thepolicyfollowedinthepublicsectorand
behaviour intheprivatesectorshouldcontinuetoexhibit
considerable restraint ,implyingonlyalimitedriseinthe
purchasing powerofearnings .Thesedevelopments should
allowfirms'competitiveness tobestrengthened andenable
themtoinvestsufficiently tomakepossibleagradual
acceleration incapacityexpansion .
Publicfinancepolicyshouldalsohelptoachievethisgoalasit
seekstoreducetheburdenontheeconomyoftaxationand
socialsecuritycontributions andofthepublicdeficit.While
itistruethatthedirecttaxconcessions alreadymadeor
plannedwillbepartiallyoffsetbytheincreaseincertain
socialsecuritycontributions intendedtoforestallasocial
securitydeficit,themeasuresadoptedshouldgenerallybe
neutralinregardtohouseholds ,butfavourable tofirms,not
onlybecauseofthedirectbenefitsbutalsobecausethey
shouldpromoteaflowoffundstothefinancialmarket.
Furthermore ,althoughtheneedtomaintainthepublic
financesinequilibrium isboundtoleadtofurther
expenditure cutsandthereforetotheabolitionofcertain
subsidies ,firmsshouldnevertheless derivegreaterbenefit
fromthefactthatthecontraction inthedeficitislikelytohelpbringinterestratesdown.Inattempting ,inthemanner
described ,toreducethecentralgovernment 'sborrowing
requirement andthegeneralgovernment netborrowing to
approximately 2,6%ofGDP,budgetary policyin1987
iscommitted topublicfinanceconsolidation while
encouraging thegrowthofproductive capacityand
employment .
Themonetarypolicystancehascontinued tobeoneofgreat
caution,buthas,nevertheless ,permitted anappreciable fall
innominalinterestrates.Thecapitalinflowswhichfollowed
theApril1986currencyadjustment havemadepossiblethe
earlyrepayment ofcertainexternaldebts.Togetherwith
otherneutralizing factors,thishashelpedtokeep"thegrowth
inthemoneysupplyataroundthe5%target,whichis
appreciably lowerthanthegrowthrateofnominalGDP.The
samecautionshouldprevailin1987inordertoconsolidate
thesubstantial progressalreadymadeinreducinginflation .
Providedthattheinternational environment isfavourable ,it
shouldnotpreventafurtherfallininterestrates,thenormal
outcomeoftheimprovedfinancialequilibrium offirmsand
ofcentralgovernment .

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/93
TABLE33
France:Maineconomicaggregates 1961to1987
(Annualpercentage changes)
1961to
19731974to
19801981 1982 1983 1984 1985 1986(')1987(2)
rvalue 10,7 13,9 12,3 14,7 10,3 8,7 7,2 6,9 5,3
Grossdomestic Jvolume
product ]
1^deflator5,6
4,92,8
10,80,5
11,81,8
12,60,7
9,51,3
7,31,4
5,82,2
4,62,5
2,7
Privateconsumption deflator 4,710,8 12,8 11,2 9,5 7,3 5,5 2,5 2,3
rprivateGrossfixed
capital ■<public
formationvolume 1total7,7
3,2
7,61,5
0,3
1,3-1,0
-1,4
-1,1-0,4
9,7
0,7-2,2
-3,0
-2,3-2,0
2,3
-2,22,8
2,2
3,15.7
2.8
5,36,2
2,4
5,7
ofwhich: construction 0,3-2,1-3,5-3,5-4,4-0,6 1,0 3,0
equipment 1,8-1,6 6,7 1,6-1,5 5,1 6,9 6,0
Domesticdemandatconstantprices 5,8 2,9-0,4 3,8-0,2 0,6 2,1 3,6 2,9
Gapwithrespecttoother
Community countries (3) 1,1 0,8 1,4 3,0-1,1-1,2 0,1 0,2 0,6
rnominal
Compensation
ofemployees \realA(4)
perhead.1B(4)9,9
4,8
5,114,7
3,6
3,514,3
2,2
1,313,7
1,0
2,310,7
1,1
1,17,8
0,5
0,56,7
0,9
1,24,5
-0,1
2,03,0
0,3
0,7
Productivity (5) 4,8 2,5 1,0 1,7 1,2 2,4 1,7 2,1 2,2
Realunitlabourcosts 0,0 1,1 1,6-0,7-0,1-1,8-0,6-2,2-1,9
Ratesofreturn(s) -1,5 5,5 5,0 5,714,0 9,9
idem(1961to1973=100) 100 57,8 46,3 45,6 48,1 50,5 53,4 60,9 66,9
Competitiveness (7) -0,8 0,9-5,3-2,2 —1,0-0,1 3,0-0,2-2,3
Employment 0,6 0,2-0,7 0,1-0,6-1,0-0,3 0,1 0,3
Registered unemployed as%
ofthecivilianlabourforce(8) 1,1 5,0 7,7 8,7 8,8 9,910,3 10,5 10,7
Currentbalanceas%ofGDP 0,2-0,7-1,4-3,0-1,7-0,9-0,8 0,1 0,4
Long-term interestrate 7,0 11,1 16,3 16,0 14,4 13,4 11,9 9,5 7,5
Moneysupply(9) 13,7 13,6 10,4 10,8 11,2 8,3 5,6 4,8 4,5
Netlendingorborrowing
requirement ofgeneral
government as%ofGDP 0,5-0,8-1,8-2,5-3,2-2,9-2,6-2,9-2,6
Publicdebtas%ofGDP 25,4 26,0 29,1 30,7 32,9 35,2 36,9 39,2
Publicdebtinterest
as%ofGDP 1,3 2,1 2,2 2,6 2,8 2,8 2,9 2,9
*)Estimates oftheCommission services,October1986.
2)ForecastsoftheCommission services,October1986,onthebasisofpresentpolicies .
3)Differences inpercentage points.
4)A:GDPdeflator;B:privateconsumption deflator .
s)Grossvalueaddedperoccupiedpersoninthewholeeconomy .
6)Netoperatingsurplusonthenetcapitalstockofcurrentreplacement cost.
7)Effectiveexchange rate(vis-a-vis19industrial countries )onthebasisofunitlabourcostsforthewholeeconomy .Positivefigure=lossofthe
'competitiveness .
8)Eurostatdefinition .
9)Endofyear.

NoL385/94 OfficialJournaloftheEuropeanCommunities 31.12.86
IRELAND
Scheme,whichsubsidizes incremental employment ,have
alsobeensuccessful ,atleastintermsofparticipation .InIreland,theimmediate economicoutlookhasbrightened .
Favourable externalfactorshavepowerfully reinforced the
gradualrecoveryalreadyunderway.Privateconsumption
regainedanupwardpathin1985/86,butthishastobeseen
inthelightofthesteepfallinthefirsthalfofthedecade.
Aggregate investment hasnotyetstabilized ,butislikely
tostrengthen gradually nextyear,particularly asthe
contraction inpublicsectoractivityslows.Asyet,building
andconstruction activityshowslittlesignofrenewedvitality;
ontheotherhand,privatesectorinvestment incapitalgoods,
whichhadfallenbackfollowing apeakinthereplacement
cyclein1984/85,islikelytoreturntoamorepositivetrend
in1987.Exportvolumesarenolongerincreasing atthevery
highlevelsofrecentyears,butcontinuetogrow,thoughat
moremodestrates.Importmovements havetendedtobe
volatilebutareexpectedtorespondtostrongerfinal
demand .In1987therefore ,whenthebeneficialeffectsofthe
fallinthepriceofcrudeoilearlierthisyeararemorefullyfelt
intheeconomy ,andonthebasisofexistingpolicies,real
GDPshouldgrowbyover3%,withinflation ,atabout3%,
thelowestsince1966andthecurrentaccountinsmalldeficit.
Onthenegativeside,relativelyslowprogressisbeingmadein
reducingthelargepublicdeficitswhilethesituationinthe
labourmarketremainsveryserious.In1986,thefallin
employment slowedwhiletheunemployment rate
steadied .TheveryopennatureoftheIrisheconomymeansthatwages
policymustbedesignednotonlytoimprovetheprofitability
ofinvestment ,andtoreducetheshareoflabour-saving
investment ,butalsotomaintain international
competitiveness .Recently ,competitiveness pressureshave
intensified ,inparticular asaresultoftheweakness of
sterling,andhaveprompted an8%devaluation oftheIrish
poundwithintheEMSinAugust1986.Viewedunderall
theseaspects,recentwagetrendsinIrelandhavenotbeen
appropriate .Realpercapitawagesforthetotaleconomy ,
measured usingtheprivateconsumption deflator,fell
somewhat intheearly1980safteraperiodofsharpincrease;
theyrecovered thereafter andinboth1986and1987are
expectedtogrowby3%(andby1V4and23/4%,
respectively ,measuredusingtheGDPdeflator);therelatively
high1987figureispartlyduetothecurrentpublic-service
wageagreement ,whichwillgivepublicservantsa3%real
wageincreaseinthatyear.Realwageincreases in
manufacturing industryhavetendedtoexceedthoseforthe
totaleconomy .Moreover ,whilethedispersion inthelevel
andtimingofwagesettlements hasallowedgreaterwage
flexibilityinweakerfirms,ithasnotprotectedthemfromthe
impactontheircostsofdevelopments intheshelteredsector
oftheeconomy ,whereapolicyofmoderation inrealwages
hasbeenlessrigorously pursued .Anacceleration innetemigration andadeclinein
participation rateshave,atleasttemporarily ,checked
growthinthelaboursupplyandallowedtheunemployment
ratetostabilizeataround18%.IntheyeartoApril1986,net
emigration reached30000,causingasmallpopulation fall
forthefirsttimeinaquarterofacentury .Nevertheless ,the
interplayofdemographic influences overthemediumtermis
stilllikelytoproduceanaverageannuallabourforcegrowth
ofl/z°/o.Thus,ifunemployment istobereduced
substantially ,employment mustriseatamuchfasterrate.
Ultimately ,thelevelofemployment growthrequiredcan
onlybeachievedifthecapacityoftheeconomyitselfto
generatesignificant numbersofnewjobsisconsiderably
enhanced .AspecificfeatureoftheIrisheconomyistheleadingroleof
branchesofforeign-owned firmsintheexportbase;theseare
established mainlyinafew'high-tech'sectors.Currentpolicy
recognizes thecontinuing importance ofdirectforeign
investment ,butaimsatsecuringabetterbalanceofoutput
andemployment throughencouraging native-owned firmsto
competemoresuccessfully inexportingandrelatedactivities .
Thiswillrequiremajorinvestment .Inthisregard,adequate
levelsofcorporate profitability havebecomeamore
important determinant forinvestment ,givencurrent
constraints onpublicspendingand,inparticular ,amore
selectiveuseofinvestment incentives .Inaddition ,highreal
interestrateshavereversedatrendtowardstax-basedcapital
borrowing bycompanies fromthebanks.Whileglobalprofit
levelsinrecentyearshaveimproved ,therelativelymore
dynamicperformance oftheforeign-owned sectorimplies
thatmanynativefirmshavebeendoingbadly.Thegeneral
boosttoprofitsimpartedbytheoilpricefallmaythusbe
directedinitiallytoconsolidating balancesheetpositionsand
onlylatertonewinvestment .Bearinginmindalsothatrecent
trendsininvestment incapitalgoodsreflectreplacement or
capitaldeepening activitytoagreaterextentthanthedesired
capitalwidening amongnativefirms,investment in
manufacturing seemslikelytofallconsiderably shortoftheThiswillrequireappropriate macroeconomic policies,in
particular alooseningoftheconstraints imposedonthe
economybythehighpublicdeficits,moremoderateincreases
inrealwages,andmoreattentiontotheefficientandflexible
functioning ofmarkets .Therecentlyexpandedtrainingand
marginal employment schemes haveanimportant
contribution tomakeintheshorterterm.Asocial
employment scheme,introduced inearly1985,offering
10000longer-term unemployed part-timeworkforone
year,mainlyonlocalauthority projects,reachedits
participation targetbymid-1986 afteraninitiallyslow
response .Otherschemes,particularly theEnterprise
Allowance Scheme,designedtohelpunemployed persons
starttheirownbusiness ,andtheEmployment Incentive

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/95
budgetandthecurrentpublic-service wageagreement ,imply
asubstantial commitment ofresourcesalreadyandtherefore
acorrespondingly limitedscopefortheauthorities toachieve
theplannedlevelofadjustment in1987.Inthese
circumstances ,theauthorities shouldmakeeveryeffortto
reachtheirdeclaredtarget,butinanyeventshouldreducethe
Exchequer deficitbysome1V2percentage pointsofGDP
relativetotheexpectedout-turnofnearly12%for1986.Itis
equallyimportanthowever,thattheytakeadequateaccount
ofthemedium-term dimension inframingbudgetary policy
for1987.Inparticular ,itisessentialtoavoidbudgetary
commitments whichreducethescopeforasubstantial degree
ofadjustment in1988andthereafter ;itisequallyimportant
todecideonappropriate expenditure cutstosetspendingon
afirmdownward trendinthenearfuture,evenifnothaving
theirmajorimpactin1987.Theseexpenditure cutsmustbe
correspondingly largertotheextentthatanyadjustments in
taxratesorallowances andanymodestexpansion ofpublic
investment areaccommodated withinoverallresource
constraints .levelrequiredtomeetthetargetof7%annualgrowthin
outputsetinthe1984WhitePaperonIndustrial Policy.
Iftheimprovement intheeconomynowintrainisto
stimulatebetterbalancedinvestment andoutputanda
resumption ofgrowthinemployment ,increasedeffortsare
necessarytosecuremoderate increasesinincomes .Inthis
context,theGovernment 'srecentguidelines onnewpay
settlements aretobewelcomed .Itisequallyessentialto
correcttheimbalances inthepublicaccountsatafasterpace.
Anappreciable reduction intheExchequer deficitoverthe
mediumtermistheonlywayofarrestinggrowthinthepublic
debt,andwouldalsocontribute tolowerrealinterestrates,
moremoderate levelsoftaxationand,ingeneral,an
environment morefavourable tothehealthygrowthof
outputandemployment .Declaredofficialpolicy(!)isto
reducetheExchequer deficittojustunder10%ofGNP
(8V2%ofGDP)by1987.In1986,however ,itnowappears
likelythattheplannedbudgettargetforthedeficit,103/4%
ofGDP,willbeexceededby1percentage point.Whilepart
oftheexcessisduetocircumstances ofanon-recurring
nature,anumberoffactors,principally thefullyear
incidence oftheincometaxreductions madeinthe1986(')Setoutinthemedium-term macroeconomic plan'Buildingon
Reality'.

NoL385/96 OfficialJournaloftheEuropeanCommunities 31.12.86
TABLE34
Ireland:Maineconomicaggregates 1961to1987
(Annualpercentage changes)
1961to
19731974to
•19801981 1982 1983 1984 -1985 1986(')1987(2)
rvalue 12,0 19,4 21,3 17,3 9,110,8 7,1 7,6 6,8
Grossdomestic Jvolume
product (3) |
{deflator5,4
6,42,7
16,23,4
17,41,4
15,7-1,9
11,34.2
6.32,0
5,01,8
5,63,1
3,6
Privateconsumption deflator 6,316,2 19,6 15,9 10,0 7,5 4,2 3,7 3,2
rprivateGrossfixed
capital 1public
formationvolume 1total
ofwhich: construction9,3
8,04,1
3,67,3
6,6-5,5
-4,8-9,3
-12,2-2,7
-13,54,7
-5,2
-0,3
-7,54,0
-7,6
-1,6
-4,58,3
-3,7
2,9
1,3
equipment 11,2 4,6 8,1-6,3-6,1 8,1 5,5 0,5 4,0
Domesticdemandatconstantprices 5,4 2,2 3,0-2,9-4,1 1,0-0,4 1,5 2,5
Gapwithrespecttoother
Community countries (4) I
rnominal
Compensation
ofemployees <realA(s)
perhead 1g(5)11,5
4.1
5,219,6
3,8
3,018,3
0,8
-1,115,3
-0,3
-0,511,1
-0,2
1,012,3
5,7
4,57,3
2,2
3,06,9
1,3
3,16,0
2,3
2,7
Productivity (6) 4,1 2,5 4,0 1,9 0,0 6,2 4,6 2,9 2,5
Realunitlabourcosts(7) 1,0 2,0-3,1-2,2-0,2-0,5-2,3-1,6-0,1
Competitiveness (8) \
Employment 0,2 1,1-0,7 0,5-2,0-1,9-2,5-1,1 0,7
Registered unemployed as%
ofthecivilianlabourforce(9) 4,7 8,110,2 12,2 15,0 16,6 18,0 18,4 18,0
Currentbalanceas%ofGDP -4,7-7,4-14,0-9,9-6,4-5,5-3,2-1,3-1,3
Long-term interestrate 7,214,2 17,3 17,0 13,9 14,6 12,7 9,8 8,8
Moneysupply(10) 12,1 19,5 17,4 13,0 5,610,1 5,3 5,4 7,3
Netlendingorborrowing ofgeneral
government as%ofGDP -10,1-13,2-13,8-11,8-9,8-11,6-10,7-9,8
Publicdebtas%ofGDP(n) 76,2 89,8 96,2108,3 114,9 118,2 121,5 125,1
Publicdebtinterest
as%ofGDP(n) 5,4 7,0 8,6 9,1 9,710,6 10,0 9,6
(')Estimates oftheCommission services,October1986.
(2)ForecastsoftheCommission services,October1986,onthebasisofpresentpolicies .
(3)Expenditure measureatmarketprices.
(4)Differences inpercentages points.
(5)A:GDPdeflator;B:privateconsumption deflator .
(6)Grossvalueaddedperoccupiedpersoninthewholeeconomy .
(7)Ratioofrealwagesperheadtoproductivity .
(8)Effectiveexchangerate(vis-a-vis19industrial countries )onthebasisofunitlabourcostsforthewholeeconomy .Positivefigure=lossof
competitiveness .
(9)Eurostatdefinition .
(10)M3;endofyear.
(n)ReferstoExchequer debt.

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/97
ITALY
companies havebeenauthorized torecruitpartoftheir
workforce fromthepersonsappearingontheemployment
officelists,solelyonthebasisoftheirprofessional skills,
ratherthanbeingconstrained tofollowtheorderof
inscription onthelists.Attemptshavealsobeenmadeto
developfixed-term employment contractsandtraining
contractsforyoungworkers ,butwithlimitedsuccess .The
MinistryofLabourhasalsoproduced animportant
medium-term programme forreformingthelabourmarket,
intendedtomodifyitsstructureandincreaseitsflexibility .
Thisprogramme hasledtotheadoptionofanemergency
planfortherecruitment ,overtwoyears,of40000young
peopleintothepublicandsemi-public sectors,withthehelp
offinancialcontributions fromthecentralgovernment .
Finally,attheendofSeptember ,theGovernment provided
fortheallocation offundsforinfrastructure and
reconstruction workinthesouthofItaly,whichshouldallow
anestimated200000temporary jobstobecreated.InItaly,measurestendingtoreducetheautomaticnatureof
wageandsalaryadjustments ,andfiscalchangesdesigned
partlytoachieveabetterbalanceofdirecttaxationas
betweenwageandsalaryearnersandtheself-employed ,had
theeffectofcurbingprivateconsumption atthebeginningof
theyear.Thisfactor,tendingtoslowactivitytemporarily ,
wasoffsetbythestrength ofexports .Subsequently ,domestic
demandasawholegrewfaster,helpedbytheeffectsofthe
markedfallinimportpricesonhouseholds 'purchasing
powerandonenterprises 'profits,whileexportshave
remainedonanupwardtrend.Overall,realGDPislikelyto
expandby2,6%in1986,inducingemployment growthof
0,5%.Thisfastergrowthiscoupledwithasubstantial
slowingofinflation,theprivateconsumption deflator,onan
annualaveragebasis,fallingfrom9,4%in1985to6,2%in
1986.Atthesametime,despitethehighimportelasticity ,the
tradebalancehasrecoveredsharplyundertheinfluenceof
theconsiderable termsoftradeimprovement .Thecurrent
balanceshouldthusregisterasurplusamounting tosome
1,2%ofGDPin1986,compared withadeficitof1%in
1985.
In1987,consumer demandwillbestimulated bythe
application ofthenewcollectivewagesettlements ,agreed
towardstheendof1986,andbythecontinuedrapidriseof
non-wage incomes ,whileenterprises 'propensity toinvest
shouldstrengthen further.Moreover ,themomentum of
externaldemandshouldbemaintained .Demandasawhole
isthereforelikelytobestrong,sothatrealGDPcould
increasebyabout3,5%,which,however ,inallprobability
impliesasignificant reductionoftheexternalsurplus .The
rateofinflationcoulddropbelow4%,andthustoalevelnot
seensincetheendofthe1960s.Also,attheendof1985,asaresultofconciliation bythe
Government ,thewage-indexation systemwassubstantially
modified ,bytacitagreement ,forafour-year period;
indexation nowcompensates foronlyabouthalfofinflation .
Inamorerelaxedclimateoflabourrelations ,aframework
agreement wassignedinindustryinMay1986,settlingthe
disputeconcerning thedecimalpointincreasesonthesliding
scalewhichwerenotpaidin1985(J),andsettingoutthe
principleofmeasurestohelptherecruitment ofyoung
people,amongwhomtheunemployment rateisparticularly
highinItaly.Theconclusion ofthree-year collective
agreements inindustryshouldratifytheframework
agreement signedinMayinamorerelaxedclimatethan
usual;theonlyseriousproblemremaining isthereductionof
workinghours.
Thesocialdialoguehasthushelpedtowardsanappreciable
easingofproduction costs,whichisbeingreinforced bythe
largefallinimportprices,andwhichisboundtospread
progressively fromthesectorswhicharecloselylinkedtooil
importstowardsthoselessdirectlylinked.Againstthisbackground ,theauthorities shouldcontinue
theireffortstoreducethestructural imbalances onthelabour
marketandinthepublicfinancesandthusrestoreconditions
forlastingandbalancedgrowth.Thetwoproblemareasare
notunconnected ,sincethestillexcessively highlevelof
absorption ofresources bythepublicsectorhindersthe
progressoftheproductive systemtowardsgreaterefficiency
andahigherlevelofemployment .
Eventhoughtheeconomic background described above
should,intheshortterm,beconducive toaprogressive
improvement inthelabourmarketandtobringingdownthe
unemployment rate,thishasnot'yetbeenevidencedduring
1986.Infact,companies havebegunbytakingbackworkers
whoweretemporarily laidoffandusingtheauthorized scope
forovertimebeforetakingonnewrecruits .Furthermore ,the
improvedemployment prospectshavehadapositiveimpact
ontheactivityrate.Asaresult,theunemployment ratehas
notfallenashoped,remaining at10,6% .
Thisunsatisfactory evolution doesnotreflecttheefforts
alreadymadebythepublicauthorities inthelastthreeyears
toimprovethefunctioning ofthelabourmarket .Since1984,In1987,theprogressmadeinreducinginflationandthe
foreseeable acceleration ofeconomicactivitywilltendto
stabilizethepressureofthepublicdeficitonthefinancial
markets ;thiswillstillbeexcessive ,however ,andwill
continuetobeamajorproblem ,thusjustifyingthestated
intentionoftheGovernment toeliminategraduallythepart
ofthedeficitinexcessofinterestcharges.Theeconomic
outlookfor1987offersanexceptional opportunity tomake
(*)TheItalianindustrial confederation andthetradesunions
differedontheinterpretation ofonepointoftheircollective
agreements of1983,whichhadforthefirsttimemodifiedthe
indexation systembuthadnotsetoutclearlywhetherfractions
ofapointoftheindexwouldbecancalledortakenintoaccount
atalaterdate.

NoL385/98 OfficialJournaloftheEuropeanCommunities 31.12.86
definiteprogressinthedirectionindicatedbytheTreasury
Minister'sconsolidation plan.Inordertoensurethatthis
comesabout,anewbudgetary procedure wasadoptedin
June.Eachyear,bytheendofJuly,Parliament istoapprove
athree-year economic andfinancialplanningdocument
comprising thechiefmacroeconomic objectives andthe
majorbudgetaggregates .Theautumndiscussion in
Parliament wouldthustakeplacewithinanagreed
framework ,andasafeguard clausewouldfreeze
appropriations totheextentofthespendingcutssetoutin
legislation yettobeadopted .Thedocument ,Oproduced bythe
threeresponsible ministers (Treasury ,FinancialAffairsand
Budget),andadoptedbyParliament withalengthydelay
following thegovernment crisis,setsamacroeconomic
framework for1987whichisclosetotheCommission 's
forecasts .ItreflectstheGovernment 'sintentiontobringthe
Treasuryborrowing requirement downtobelowthetarget
setfor1986andtoreduceittoLit100000000000000or
12,2%ofGDP,compared withLit110000000000000,
or14,6%ofGDP,in1986.Theachievement ofthis
objective ,withtaxesandsocialsecuritycontributions asa
wholeunchanged asapercentage ofGDPcomparedto1986,
dependsonimplementing ,asistheGovernment 'sdeclared
intention ,afurthershiftofemphasis intaxationtowards
indirecttaxes,togetherwithastrictlimitation ofcurrent
expenditure ,inlinewithinflation,andofcapitalspending ,in
linewithnominalGDPgrowth.
Monetary policyissetonacourseofprogressively easing
interestratesasinflationary forcesmoderate .Thethree
successive cutsinthediscount ratewhichweremadein
March,AprilandMay1986,nevertheless ,slightlyexceeded
thedeclineininflationbecauseoftheeasingofinternationalinterestrates.Afurtherdeclinecouldcomeaboutasaresult
oftheeffectiveimplementation oftheannounced budgetary
policy.Whilereaffirming itsdetermination todefendthe
lira'spositionontheforeignexchanges ,theGovernment has
alsoembarked onacautiousbutresolutepolicyof
liberalization ofcapitalmovements .
Nowthattheseeconomic policiesareinthecourseof
implementation therearealreadysignsthatthefundamental
equilibria canbedurablyrestoredasmainlyevidenced
inthereturntostabilityoftheliraexchangeratewithin
theEMS.Thiscourse,and,inparticular ,thepolicy
ofbudgetary austerity ,shouldbepursued,takingall
necessary measures tolimittheTreasury deficittothe
targetofLit100000000000000setfor1987.
Thedisappointing evolutionofemployment isevidencethat
theadjustment ofrealwageratesinrelationtoproductivity
doesnotyetappearadequate ,andthattheproductive base
hasnotdeveloped atthedesiredpace.Thesedeficiencies ,
whilebeingreducedinthenorthandcentre,arestillvery
evidentinthesouth.Whilstthissituation callsforfurther
prudence inwagetrends,itcouldalsobeimproved by
adjustinggovernment receipts,withoutimpairingtheoverall
equilibrium ofthepublicfinances,inordertoeasetoa
greaterextentsocialsecuritycontributions inthesouthern
regions .Withthesamegoalinview,theimprovement ofthe
financialstructureofenterprises ,achievednotablythrough
directingsavingsintoinvestment inshares,andthecontinued
strengthening ofdeficitareasofthepublicsectorwouldhelp
tostrengthen thecompetitiveness oftheeconomyand,in
consequence ,promoteemployment onamorestable
basis.

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/99
TABLE35
Italy:Maineconomicaggregates 1961to1987
(Annualpercentage changes)
1961to
19731974to
19801981 1982 1983 1984 1985 1986 -0)1987(2)
rvalue
Grossdomestic Jvolume
product |^deflator11,0
5.3
5.420,9
2,8
17,618,5
0,2
18,317,2
-0,5
17,814,6
-0,4
15,013.6
2,6
10.711,3
2,3
8,812,7
2,8
9,79,1
3,6
5,3
Privateconsumption ,deflator 4,917,3 19,2 17,0 15,1 11,1 9,4 6,2 4,0
Grossfixedf^
capital ^publicformationvolume Itotal
ofwhich: construction5,7
6,60,9
-0,20,6
0,5-5,2
-3,2-3,8
-2,04,1
-0,44,1
-1,74,6
1,97,2
2,4
equipment 5,0 2,2 1,8-6,8-5,710,1 9,9 7,111,3
Domesticdemandatconstantprices 5,3 2,5-2,2-0,3-2,0 3,3 2,4 3,6 5,1
Gapwithrespecttoother
Community countries (3) 0,6 0,4 0,4-1,0-3,2 1,9 0,2-2,0 1,6
rnominal
Compensation
ofemployees ■<realA(4)
perhead 1g(4)11,6
5,9
6,520,2
2,2
2,321,9
3,0
2,317,2
-0,4
0,216,5
1,2
1,212,0
1,1
0,810,0
1,1
0,56,7
-2,7
0,46,1
0,8
2,1
Productivity (5) 5,7 2,2-0,3-0,4-0,5 2,2 1,8 2,3 2,3
Realunitlabourcosts 0,0 1,8-1,0-0,8-4,9-1,5
Ratesofreturn(6) -8,6-28,5 21,0 7,940,8 10,4
idem(1961to1973=100) 100 51,7 51,1 46,7 33,4 40,4 43,6 61,4 67,8
Competitiveness (7) -0,3-0,1-0,7 2,211,3 3,7-0,5 0,8 1,9
Employment -0,4 0,8 0,5-0,1 0,1 0,4 0,5 0,5 1,3
Registered unemployed as%
ofthecivilianlabourforce(8) 5,2 5,9 8,0 9,710,9 11,9 12,9 13,4 12,8
Currentbalanceas%ofGDP 1,5-0,5-2,3-1,6 0,2-0,8-1,1 1,2 0,9
Long-term interestrate 6,913,3 20,6 20,9 18,0 14,9 13,0 10,6 8,7
Moneysupply(9) 14,7 21,5 15,9 17,2 13,2 12,1 11,1 7,5 7,5
Netlendingorborrowing
requirement ofgeneral
government as%ofGDP -3,3-9,0-11,7-12,7-12,4-13,0-14,0-12,7-11,0
Publicdebtas%ofGDP 44,8 67,7 70,2 76,8 84,3 91,1 99,5103,1 106,8
Publicdebtinterestas%ofGDP 1,8 4,9 7,2 8,5 9,0 9,6 9,3 9,6 8,8
(')EstimatesoftheCommission services,October1986.
(2)ForecastsoftheCommission services,October1986,onthebasisofpresentpolicies.
(3)Differences inpercentage points.
(4)A:GDPdeflator;B:privateconsumption deflator .
(5)Grossvalueaddedperoccupiedpersoninthewholeeconomy .
(6)Netoperatingsurplusonthenetcapitalstockofcurrentreplacement cost.
(7)Effectiveexchangerate(vis-a-vis19industrialcountries )onthebasisofunitlabourcostsforthewholeeconomy .Positivefigure=lossof
competitiveness .
(8)Eurostatdefinition .
(?)Endofyear.

NoL385/100 OfficialJournaloftheEuropeanCommunities 31.12.86
LUXEMBOURG
InLuxembourg ,economic activityhasremainedatahigh
levelin1986,duetotheincreaseindomesticdemand ;its
drivingforce,privateconsumption ,hasbenefitedfromthe
bigriseinpersonaldisposable income.Totalexportshave
advancedlessrapidlythanlastyearbecauseofaslightdipin
thesalesofsteelproducts .Allinall,grossdomesticproduct
shouldgrowbyabout2,5%.Inflationhasabatedsharply
andtheunemployment ratehasfallenslighty.
In1987,grossdomesticproductshouldgrowataratesimilar
tothatrecordedin1986.Astabilization inthelevelofsalesof
steelproductsandthecontinuing vigorousincreasein
deliveriesofotherproductswillunderpinthefastergrowthof
totalexports .However ,theexpansion ofbusiness
investment couldrunoutofsteam.Theupwardmovement of
consumerpricesisliabletopickupspeedbecauseofasharper
increaseinwagecostsintheservicessector,andbecausean
openeconomy isveryexposedtoexternally induced
inflationary risks.Onthelabourmarket,theincreasein
numbersemployed willbeaccompanied ,asinthepreceding
year,byafallinthenumberofunemployed andasharpcutin
thenumberofpersonscoveredbyspecialemployment
schemes .
Inmostrespects,theeconomic policypursuedbythe
Government iscompatible withtheguidelines ofthe
cooperative strategyforgrowthandemployment .Budgetary
policyhasalsocontributed bymeasures underpinning
demand :partoftheroomformanoeuvre whichbecame
availableafterthesteelindustrywasrestructured wasusedto
reducepersonalincometaxin1986,andin1987itwillagain
bepossibletoreducepersonalandcompanytaxation .There
willalsobescopeforsupplementing thepublicinvestment
fundsinordertoguarantee thefinancing oftheir
medium-term programmes .Theeffortstodiversifythe
structureoftheLuxembourg economyhavebeencontinued
byselectiveactiontoassistnewenterprises .Thetrendofwagesandsalariesstartedtopickupspeedatthe
endof1984,leadingtorisesin1986and1987whichare
makingupforearlierlosses.Inrealterms,compensation of
employees perheadwillprobablyincreasebymorethanthe
growthoflabourproductivity .Evenifthishaspositive
effectsondomesticdemandintheshortterm,theriskisthat
competitiveness ofenterprises willbedamaged while
rationalization investment —unsuited tothecreationof
morejobs—willbeencouraged andindustrial
diversification heldback.Asaresult,thenextwage
negotiations willbeparticularly important .
Theintegration ofyoungpeopleintothelabourmarketwill
requireanadditional efforttoadaptvocational trainingto
enterprises 'skilledlabourrequirements ,inordertoeliminate
theexistenceofahardcoreofyoungunemployed ,although
itisalsonecessarytorecruitnon-resident workersfornew
jobs.Againstthebackground ofinternational competition ,it
isbecomingincreasingly desirabletomodifyworkinghours
inlinewiththeneedsofcompanies .Lessrigidlegislation
wouldenablemanagement andunionstonegotiate ,atthe
levelofthefirms,moreflexiblesystemsofwork
organization .
Asaresultoftheslowriseintaxreceipts,partlyduetoacut
indirecttaxes,andasteadyriseinexpenditure ,inparticular
onsalariesandtransfers ,generalgovernment netlendingwill
fallin1986and1987.Althoughtheinvestment fundreserves
aresufficienttofinanceprojectsfortheprovisionofadequate
infrastructure inthefieldsofbothtraditional public
investment andoftelecommunications andelectronic data
processing ,acertainamountofprudencewillhavetobe
exercisedinthemanagement ofotherexpenditure ,inorder
tomaintainequilibrium inthecentralgovernment budget
andthusensuresomeroomformanoeuvre forthefuture.

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/101
TABLE36
Luxembourg :Maineconomicaggregates 1961to1987
(Annualpercentage changes)
1961to
19731974to
19801981 1982 1983 1984 1985 1986(')1987(2)
rvalue
Grossdomestic Jvolume
product |^deflator8,6
4,1
4,48,5
1.5
6.69.8
-0,1
9.910,3
0,9
9,49,4
1,6
7,712,4
5,3
6,77,7
2,2
5,48,0
2,4
5,45,3
2,6
2,6
Privateconsumption deflator 3,1 7,5 8,610,6 8,0 6,4 4,0 0,5 1,3
rprivateGrossfixed
capital 4public
formationvolume 1total5,1-0,3-7,7
-1,4
-6,2-0,7
0,6
-0,4-5,2
2,3
-3,3-0,2
-4,9
-1,42,5
-0,5
1,73,0
3,0
3,02,1
1,1
1,9
ofwhich: construction -2,5 1,1-1,4-3,1 0,7 2,1 0,8
equipment -13,2-3,7-7,5 2,5 4,0 5,0 4,0
Domesticdemandatconstantprices 1,8-0,2 0,4 0,2 1,8 3,0 3,0
Gapwithrespecttoother
Community countries (3) 0,4 0,4-0,9 0,2-0,8-0,4
rnominal
Compensation
ofemployees ■<realA(4)
perhead 1g(4)7,3
3,0
4,211,1
4,3'
3,58,8
0,6
0,17,2
-2,5
-3,17,6
-0,6
0,46,8
0,2
0,44,5
-0,8
0,54,2
-1,2
3,75,6
2,9
4,2
Productivity (5) 3,1 0,9-1,7 1,1 2,8 4,9 0,8 1,6 1,9
Realunitlabourcosts -0,1 3,4 2,3-3,6-3,3-4,5-1,6-2,8 1,0
Employment 1,0 0,8 0,4-0,4-0,1 0,6 1,4 0,8 0,7
Registered unemployed as%ofthe
civilianlabourforce(6) 0,0 0,4 1,0 1,3 1,6 1,7 1,6 1,3 1,2
Currentbalanceas%.ofGDP 6,720,1 19,0 25,0 28,2 30,2 29,6 31,5 30,7
Long-term interestrate .I
Moneysupply(7)
Netlendingorborrowing requirement
ofgeneralgovernment as%ofGDP 2,0 2,9-3,1-2,3-0,6 1,5 4,1 3,7 2,6
Publicdebtas%ofGDP 15,9 14,0 14,4 14,8 14,7 14,3 14,0 14,0
Publicdebtinterestas%ofGDP 0,8 1,0 1,0 1,1 1,2 1,3 1,3 1,3
(')Estimates oftheCommission services,October1986.
(2)ForecastsoftheCommission services,October1986,onthebasisofpresentpolicies .
(3)Differences inpercentage points.
(4)A:GDPdeflator;B:privateconsumption deflator .
(s)Grossvalueaddedperoccupiedpersoninthewholeeconomy .
(6)Eurostatdefinition .
(7)Endofyear.

NoL385/102 OfficialJournaloftheEuropeanCommunities 31.12.86
THENETHERLANDS
IntheNetherlands ,economicperformance in1986hasbeen
markedbyalessrapidgrowthinexportvolumeduetothe
fallinsalesofnaturalgas.Bycontrast,theriseinthe
purchasing powerofhouseholds -resultingfromthe
reduction insocialsecuritycontributions andthefallin
inflation,duetoanimprovement inthetermsoftradewhen
moneywageshadalreadybeenfixedtoalargeextent-has
ledtoasharpincreaseinprivateconsumption .Business
investment hasagainbeenbuoyant ,whereasinvestment in
residential construction andpublicsectorinvestment have
remainedsluggish .Overall,at1,6%,GDPwillhavegrown
almostasmuchaslastyear,whiletheoutputofthecorporate
sector,excludingtheenergysector,islikelytohaveincreased
by2,7%.Therateofinflationisdowntozero,andinterest
rateshavefallenbyalmostapercentage point.Theless
favourable movement ofthetradebalanceandoftransfers
hasledtoaslightreductioninthesurplusoncurrentaccount,
inspiteofthe2,6%improvement inthetermsoftrade,due
tothefactthatthefallintheexportpriceofnaturalgashas
laggedbehindthefallinoilprices.moderation andbetterbalanceforthebudget.Themeasures
takentoincreasetheadaptability ofthelabourmarket
haveconcentrated mainlyonthedecentralizing wage
negotiations ,freezingminimum wages,reducingworking
hoursandextendingopportunities forpart-timeemployment
andearlyretirement .Supplyconditions havealsobeen
helpedbythetwo-stagereduction incorporation tax.Real
wageriseshavebeenmoderateinrecentyears;thepolicyof
decentralized negotiations hasworkedsatisfactorily ,andthe
Government hasnotparticipated directlyintheframingof
agreements .Inthepublicsector,afreezeonnominalsalary
levelswasintroduced andtheGovernment iscurrently
imposingverystrictlimitsonpaynegotiations inthissector,
whichwillhavetotakeaccountofbudgetary policy
constraints anddevelopments inthemarketsector.In
1984/85,thiswagepolicycausedprivatedemandtoslacken;
in1986,however ,thereductioninemployees 'socialsecurity
contributions isboostingtherealspendingpowerof
households ,whoarealsobenefiting fromthedeclinein
inflation .Fallinginterestrateshavereinforced the
stimulatory effectthattheimprovement inbusiness
profitability hashaduponinvestment .
ThepolicypursuedbytheCentralBank,basedmainlyon
maintaining theguilder'sparityagainsttheGermanmark
withintheEMS,hashelpedtoreduceinflationtoaverylow
level,andhasallowedinterestratestobebroughtdownin
linewiththeinternational trend.Liberalization measures
havebeentakenonthefinancialandmoneymarketsto
facilitateaccessbyforeignbankinginstitutions totheDutch
marketandtheuseofnewfinancinginstruments byDutch
companies .Priorityhashadtobegiveninbudgetary policy
toreducingthemedium-term publicsectordeficitinorderto
reinforcebudgetmanagement andtounderpinthestructural
adjustment oftheeconomy ;thishasleftlittlescopefor
supporting economicgrowthintheshort-term .Despitethe
substantial reduction madeinthedeficitin1985,
developments ontheenergymarketshaveworsened the
budgetproblem .Inordertoforestalltooseriousa
deterioration inthedeficitin1987,decisionshavehadtobe
takentocutexpenditure andtoincreaseindirecttaxes;thus,
activemeasurestosustaindemandthroughthebudgetwillbe
virtuallyimpossible .In1987,GDPgrowthisnotlikelytoaccelerate greatly,
probablyreachingarateofapproximately 1,8%.Exports
arelikelytogrowmorerapidlyoverall,asthevolumeofsales
ofnaturalgaswillshowalessmarkedfallthanin1986.The
1986oilpricefallwillcausearedistribution ofincomein
1987,takingintoaccountitslaggedeffectontheprice
ofnaturalgas(oftheorderof3%ofGDP),from
thegovernment budgettocompanies ,households and
abroad.Notwithstanding Government measures ,affecting
expenditure andcurrentreceipts,topreventatoo-strong
deterioration ofitsdeficit,whichwillslowdownprivate
consumption ,internaldemandshouldincreaseatarate
comparable withthatof1986.Theimprovement in
corporateprofitability andtheincreaseincapacityutilization
rateswillstimulatebusinessinvestment further,residential
construction willprobablyincreaseslightlybutpublicsector
investment islikelytoslowdown.Thegenerallevelofprices
maywellbelowerthanin1986.Thedeterioration inthe
termsoftradebymorethan1%shouldreducethesurpluson
currentaccount .Thankstothegrowthinmanufacturing
output,employment willincreaseand,inaddition,because
ofthereorganization ofworkingtime,theunemployment
ratewilldecline,thoughstillremaining veryhigh
(11,1%).ThenewGovernment 'secondmic policyobjectives areto
reducethebudgetdeficit,tostabilizeorlowertheburdenof
taxesandsocialsecuritycontributions ,tomaintain
purchasing powerandtoreduceunemployment .Becauseof
thehighlevelofunemployment ,continuedprioritywillneed
tobegiventoexploring allpossiblemeansofincreasing
employment ,andthemeasuresalreadytakenwillneedtobe
extended ,eventhoughsomeofthem,suchasthereductionin
workinghours,havenotyetproduced theexpected
equivalent increaseinrecruitment .Itisthereforehighly
important toensurethattheagreement betweenemployers
andunionsandtheGovernment 'sprogramme forprovidingTheeconomicpolicywhichtheGovernment haspursuedin
recentyearsonthebasisofitsautumn1982programme has
alreadybeenbroadlyinlinewithcertainprinciplesandideas
nowunderlying thecooperative strategyforgrowthand
employment .Thishasbeentrue,forexample ,ofthe
improvement intheworkingofthelabourmarket,wage

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/103
theyoungunemployed withvocational trainingorwork
experience areimplemented assoonaspossible .The
emergence ofbottlenecks insomesectorsofthelabour
marketdemonstrates howurgentitistoimproveskills.
Theresultsofthedecentralized wagenegotiations appearto
allowthecompetitive positionoffirmstobemaintained .
Similarly ,theGovernment 'spolicyofstandingbackfrom
wagenegotiations isunlikelytoaffectthetrendofpublic
expenditure ,sincethelinkbetweenadjustments topayand
transferpaymentsinthepublicsectorandadjustments to
wagesandsalariesintheprivatesectorhasbeenseveredand
therearenoplanstorestoreit.Thepublicsectorwill
probablynotescapeentirelyfromsomeadjustment towage
andsalarylevels,atleastforcertaincategories ,sinceitwill
otherwisebeimpossible torecruitqualifiedstaff,thelackof
whichisalreadybeginningtobefelt.
Theappreciable fallinnaturalgasrevenuefrom1987will
makeitconsiderably moredifficulttoreducethecentral
government budgetdeficit,which,according totheGovernment 'sprogramme ,shouldbecutto51/4%ofnet
nationalincomein1990compared with6,7%in1986.
Somedeterioration inthegeneralgovernment borrowing
requirement (excludingearlyrepayment ofsocialhousing
loans),whichisexpectedtoexceed8%ofnetnational
incomein1987,withacentralgovernment deficitof
7,9%,isthusunavoidable .Thisoutcomepresumesthe
implementation ofanextensiveprogramme formakingup
theshortfallduetochangesinhydrocarbon prices,both
throughcutsinexpenditure andthroughtheraisingofnew
revenue .In1987,government debtincreasesfurther,by
morethan7percentage pointsofGDP,anditistherefore
important topursueatightbudgetary stanceinorderto
containthecentralgovernment netborrowing requirement
withinthelimitsimplicitinthebudget,andtocreatethe
necessaryconditions forsubsequent reductions .
Thisguideline innowaydetractsfromapolicyof
restructuring publicexpenditure and,asfaraspossible,
revenue,intendedtostimulatethegrowthoftheprivate
sectorandincludingdirectemployment measureswhichhave
alreadyproducedsatisfactory results.

NoL385/104 OfficialJournaloftheEuropeanCommunities 31.12.86
TABLE37
Netherlands :Maineconomicaggregates 1961to1987
(Annualpercentage changes)I1961to
19731974to
19801981 1982 1983 1984 1985 1986(')1987(2)
rvalue 11,3 9,6 4,8 4,5 3,0 4,9 4,2 2,0 0,1
Grossdomestic Jvolume
product |
{deflator5,3
6,02,4
7,1-0,7
5,5-1,4
6,01,4
1,62.4
2.51,7
2,41,6
0,41,8
-1,7
Privateconsumption deflator .5,2 7,3 6,3 5,3 2,7 2,5 2,6 0,0-1,0
rprivateGrossfixed
capital -<public
formationvolume 1total 6,3-0,2-11,5
-4,6
-10,4-3,5
-7,1
-4,13,3
-4,6
2,13,7
7,6
4,35,2
-4,3
3,76,2
0,4
5,43.7
-3,1
2.8
ofwhich : construction -10,8-6,4-3,4 2,5-3,3 4,1 2,4
equipment -9,6 0,210,0 7,013,7 7,0 3,3
Domesticdemandatconstantprices -4,6-0,9 1,5 1,4 2,2 2,3 2,4
Gapwithrespecttoother
Community countries (3) -1,2-0,2-0,7 0,7-1,5-1,4
rnominal
Compensation
ofemployees -<real^(4)
perhead 1g(4)11,4
5,0
6,09,5
2,2
2,03,5
-1,9
-2,75,8
-0,3
0,53,2
1,5
0,40,8
-1,7
-1,71,4
-1,0
-1,22,1
1,7
2,11,7
3,4
2,7
Productivity (5) .3,9 2,1 0,8 1,1 3,0 2,2 0,6 0,5 0,9
Realunitlabourcosts 1,1 0,1-2,7-1,4-1,5-3,8-2,6 1,2 2,5
Competitiveness (6) 2,7 0,7-9,7 2,5-2,7-6,2-3,9 4,4 0,6
Employment 0,9 0,3-1,5-2,5-1,9-0,4 1,1 1,1 0,8
Registered unemployed as%
ofthecivilianlabourforce(7) 1,3 5,3 8,611,6 14,0 14,3 13,1 12,0 11,1
Currentbalanceas%ofGDP 0,5 0,8 2,2 3,2 2,9 4,1 4,3 3,9 2,8
Long-term interestrate 5,9 9,412,2 10,5 8,8 8,6 7,8 6,8 6,1
Moneysupply(8) 10,3 9,6 5,3 7,610,5 7,710,5 5,1 3,5
Netlendingorborrowing
requirement ofgeneral
government as%ofGDP -0,4-2,5-5,5 —6,6-5,9-6,2-5,1-5,5-6,6
Publicdebtas%ofGDP 41,7 50,3 55,6 62,3 66,3 70,0 75,5 82,6
Publicdebtinterest
as%ofGDP 3,1 4,4 4,7 5,3 5,6 6,0 6,4 6,4
(')Estimates oftheCommission services ,October1986.
(2)ForecastsoftheCommission services,October1986,onthebasisofpresentpolicies .
(3)Differences inpercentage points.
(4)A:GDPdeflator;B:privateconsumption deflator .
(5)Grossvalueaddedperoccupiedpersoninthewholeeconomy .
(6)Effectiveexchangerate(vis-a-vis19industrial countries )onthebasisofunitlabourcostsforthewholeeconomy .Positivefigure=lossof
competitiveness .
(7)Eurostatdefinition .
(8)Endofyear.

31.12.86OfficialJournaloftheEuropeanCommunities NoL385/105
PORTUGAL
preceding years,investment increased bysome8%in
volumetermsduring1986,andacomparable ,oreven
higher,rateisanticipated for1987.
Thesizeofthepublicdebtanditsrapidexpansion (47,4%of
GDPin1980and81,2%in1985)have,inparticular ,
promptedtheauthorities toaimatasharpreductioninthe
generalgovernment borrowing requirement in1986.Inthe
past,budgetary policyhadbeenconducted onashort-term
perspective ;thiscauseddistortions inresourceallocation ,in
particularbysupporting unprofitable publicenterprises and
exercising acrowding-out effecttothedetrimentofprivate
enterprises .Fromnowon,theauthorities intendtopursue
theobjectiveofmedium-term consolidation based,in
particular ,onthegreatertransparency ofcentralgovernment
accounts,bringingpublicexpenditure undercontrol,
establishing anewsystemoftaxincentivesforinvestment ,
andfinancingtheborrowingrequirement bygreaterresortto
themarket .
Despitesomeprogressobservedinthemodernization of
financialchannels,thesearestillinadequate tosustainthe
properdevelopment oflong-termsavingandriskcapital.In
particular ,interestratesarestillatveryhighlevels,mainly
becauseofthestrongdemandforfinancefromgovernment
departments andpublicenterprises ,theinstabilityofthe
escudo'sexchangerateandexpectations ofhighinflation .Becauseofitsheavydependence onimportedenergy,the
Portuguese economyderivedparticular benefitfromthe
reverseoilshock,andcontinueditsexpansionatarateabove
theCommunity averagein1986.TherateofgrowthofGDP
(involume),estimatedatnear4%,wasclosetotheone
recordedin1985.Atthesametime,themainsourceor
buoyancyshiftedfromexportstodomesticdemand.After
decliningforsomeyears,realwagesembarkedonastronger­
than-forecast catching-up processmainlybecausethe
inflationrate,thoughremainingwellabovetheCommunity
average,turnedouttobeappreciably belowtheinitial
forecasts .Thisprovided alivelystimulusforprivate
consumption .Fixedinvestment ,whichhadfallenback
markedly until1985,recovered asaresultofthe
improvement incompanies 'financialpositions ,thegrowing
supportprovidedbythemeasurestopromoteproductive
investment andinvestment indwellingsaswellasthepublic
investment programme .Therewasaslowdown inexport
growth,mainlybecausethirdcountrymarketscontracted .
Due,however,tothesubstantial improvement inthetermsof
trade,thebalanceofpaymentssurplusclimbedtoarecord
level(5,4%ofGDP).Thedeclineinemployment washalted,
andtheunemployment ratefellslightlyforthefirsttimein
manyyears.
In1987,privateconsumption willbeslightlylessbuoyant,
buttheincreaseingrossfixedcapitalformation could
accelerateundertheimpetusoflowerinterestratesandthe
sharpexpansionofpublicinvestment .ThegrowthofGDPin
volumetermsshouldbeslightlyslowerthanin1986(inthe
regionof3,5%).Developments onPortugal'sexternal
marketsshouldpermitamoderateexportrecovery;even
thoughitwilldeteriorate slightly,thebalanceofpaymentson
currentaccountshouldremaincomfortably insurplus.
Inflationshouldcontinuetofall,buttheconsumerpricerise
(+9%)remainsmarkedlyabovetheCommunity average.
Employment willbenefitfromthefavourable economic
situation .However ,therecordedunemployment ratewillbe
slowtofall(from8,6%ofthelabourforcein1986to8,5%
in1987),mainlybecauseofafurtherincreaseinthe
population workingage.
Withregardtotheevolution ofwagesin1986,the
Government granteda16,5%increasetocivilservantsand
recommended increasesof17%totheprivatesector.The
collectivenegotiations produced sometimes evenlarger
increasesinitially,particularly inthepublicenterprises .
However ,whentheprospectoflowerinflationwas
confirmed (anannualized rateof12insteadof14%),the
authoritiestookasomewhattighterlineonpayandnominal
wageincreasesperheadhavedecelerated .Overallthe
increaseinnominallabourcostshasbeennotablyhigherthan
theCommunity average .However ,theshareofwagesin
nationalincomehasdeclined,although intermsof
purchasing power(deflatedbytheconsumerpriceindex)the
realwagelevelincreased .
Grossfixedcapitalformationhasgrownsatisfactorily .After
acumulative fallof25,5%inrealtermsinthethreeThemainchallengefacingPortugalistofindawayoutofthe
viciouscircleofa'stop-go'cyclewhichhasseverelyhampered
itsdevelopment inthelastdecade,sothatitcangrapplewith
itsfundamental problems ,particularly thatofmodernizing
thesystemofproduction .Thishasbecomemoreurgent
becauseofthecountry'saccessiontotheCommunity .Asa
resultofinsufficient investment ,theexportstructurehas
hardlybeendiversified ,whileanyupturnindomestic
demandisrapidlyblockedbytheexternalconstraint .The
government whichtookofficeintheautumnof1985has
chosenasitspriorityobjectivetobringabouttherecoveryof
investment andtoimprovetheconditions conducive to
economicgrowthbyputtingthepublicfinancesonasounder
footing,eliminating theinflationdifferential withtherestof
theCommunity and,atamicroeconomic level,making
marketsmoreflexible .
In1987,significantprogressshouldbemadeineliminating
theunderlying imbalances intheeconomy .Toachievethis,
thepublicsectorborrowing requirement ,whichisacrucial
strategicvariable,shouldbeconsiderably reduced .Thedrive
tomoderateoperatingexpenditure andtolimitsubsidiesto
publicenterprises willhavetobekeptup,aswilltheactionto
combattaxevasionandavoidance .Asaresult,itshouldbe
possibletobringthecentralgovernment borrowing
requirement downtounder8to8,5%ofGDP.Thispolicy

NoL385/106 OfficialJournaloftheEuropeanCommunities 31.12.86
would,inparticular ,permittherequireddeceleration in
domesticcreditexpansion ,whilestrengthening thetendency
fortheescudo'sexchangeratetostabilize .Thesearethe
essentialconditions forthecountrytorealizetheambitious
objectiveofkeepingpriceincreasesunder10%,andforrealwages,inconformity withthespiritofthetripartite
agreement concluded lastJune,tofollowacoursecompatible
withanimprovement inthecompetitiveness ofthe
Portuguese economyandhencewithitsparticipation ,in
favourable circumstances ,inthewidercommonmarket.
TABLE38
Portugal :Maineconomicaggregates 1961to1987
(Annualpercentage changes)
1961to
19731974to
19801981 1982 1983 1984 1985 1986(')1987(2)
Cvalue
Grossdomestic Jvolume
productLdeflator
Privateconsumption deflator11,2
6,9
4,0
3,423,2
3,3
19,8
21,418,7
0,4
18,2
20,026,1
3,5
21,8
22,523,7
-0,3
24,1
25,523,4
-1,7
25,6
29,325,9
3,7
21,3
19,323,8
3,8
19,2
11,814.4
3,5
10.5
9,0
Grossfixedfprivate
capital <public
formation volume total
Ofwhich: construction
equipment
Domesticdemandatconstantprices
Gapwithrespecttoother
Community countries (3)8,0
7,55,4
2,94,6
4,4
4.8
2.92,9
2,0
4,0
3,4-7,5
-3,0
-13,1
-7,0-18,0
-13,5
-23,0
-7,0-1,8
-4,0
1,0
0,67,8
6,1
10,0
6,78,5
8.5
8.6
4,8
rnominal
Compensation
ofemployees •<realA(4)
perhead 1g(4)
Productivity (5)
Realunitlabourcosts
Competitiveness (s)
Employment12,0
7,8
8,4
7,4
0,4
-0,525,2
4,5
2,8
3,4
1,1
-0,120,6
3,5
3,2
-0,2
3,7
0,618,5
-2,7
-3,3
4,0
6,4
-5,7
-0,521,6
-2,0
-3,1
1,4
-3,4
-8,4
-1,719,8
-4,6
-7,4
-0,4
-4,2
-1,5
-1,322,0
0,5
2,2
4,2
-3,6
0,4
-0,517,1
-1,8
4,7
3,5
-5,1
-1,1
0,512,3
1,6
3,0
3,2
-1,6
-2,9
0,6
Registered unemployed as%
ofthecivilianlabourforce(7)
Currentbalanceas%ofGDP
Long-term interestrate
Moneysupply(8)0,7
6,5-6,2
16,4-11,7
22,6
23,8-13,5
25,2
24,67,9
-7,2
30,3
16,38,5
-3,0
32,5
24,58.7
1.8
25.4
28.58,6
5,4
19,5
26,08,5
4,2
16,5
16,0
Netlendingorborrowing
requirement ofgeneral
government as%ofGDP
Publicdebtas%ofGDP
Publicdebtinterestas%ofGDP-10,1
59,0
5,4-8,8
62,2
5,5-7,1
70,9
6,4-7,7
75,7
7,1-11,2
81,2
7,7-8,0
83,5
9,7-7,5
88,0
9,3
(!)Estimates oftheCommission services,October1986.
(2)ForecastsoftheCommission services,October1986,onthebasisofpresentpolicies .
(3)Differences inpercentage points.
(4)A:GDPdeflator;B:privateconsumption deflator .
(5)Grossvalueaddedperoccupiedpersoninthewholeeconomy .
(6)Effectiveexchangerate(vis-a-vis19industrialcountries )onthebasisofunitlabourcostsforthewholeeconomy .Positivefigure=lossofcompetitivenes .
(7)Eurostatdefinition .
(8)Endofyear.

31.12.86OfficialJournaloftheEuropeanCommunities NoL385/107
UNITED KINGDOM
IntheUnitedKingdom,economicactivityisagainexpanding
atamoderatepace,afteraperiodofslowergrowthduring
thelatterpartof1985andthefirsthalfof1986.GDPislikely
toriseby2V4%inrealtermsin1986andtoaccelerate
somewhat in1987,withanexpectedgrowthrateof23/4%.
Themaincontribution togrowthinbothyearsiscoming
fromprivateconsumption ,thestrengthofwhichisexplained
bysteadygrowthofearningscombined witharenewed
slowingofinflationin1986,andafurthereasingofthe
personalincometaxburden.Otherelementsofdemandhave
beenrelativelysubdued,althoughexportsandinvestment
activityareexpectedtogrowsomewhat fasterin1987.Themoderation ofwageincreases ,bothinnominalandreal
terms,isoneofthekeyissuesinimproving employment
prospectsintheUnitedKingdom .Thegrowthofnominal
earningsdecelerated sharplyatthebeginningofthe1980s
but,sincemid-1982 ,theunderlying annualrateofincrease
hasbeenroughlystableatabout7V2%,whileconsumer
priceinflation (privateconsumption deflator)hasbeen
aroundorbelowthe5%perannummark.In1986,
particularly undertheinfluenceoflowerenergyandother
commodity prices,inflationshouldturnouttobeabout4%
(or,asmeasuredbytheretailpriceindex,some3%),butas
yetthishashadlittleimpactonwagesettlements .Giventhe
fasterprogressoninflationachievedbyotherindustrialized
countries ,thisimpliesafurthererosionoftheUnited
Kingdom'scompetitive position;thisprocesswasmorethan
offsetbytheexchange-rate movements during1986,butthe
underlying weaknessremainsathreattoemployment .TheforecastrateofGDPgrowthissufficienttopermita
continuing expansionofemployment but,withmuchofthe
increaseaccounted forbynewentrantstothelabourforce
goingintoself-employment orpart-timejobs,itisnotenough
tomakeseriousinroadsintotheunemployment level.Over
theperiodfromMarch1983toMarch1986total
employment rosebyaboutonemillion,whilethenumbers
unemployed stillgrewbymorethan150000;thisrepresents
ariseintheactivityrateofsomethreepercentage points,a
trendwhichcanbeexpectedtotaperoff.Therisein
employment wasmadeupofincreasesofhalfamillionin
self-employed peopleandofmorethan550000women
inpart-time employment ,whilefull-timedependent
employment fell.Despitethesteadyriseinrealwages,profitability hasalso
beenimproving significantly inrecentyears.Thiswasmade
possibleinitiallybyamorerapidexpansion oflabour
productivity thanofrealwagesduringthefirstthreeyearsof
therecovery ,andsubsequently bytheweaknessofnon-wage
inputcosts.ABankofEnglandstudyconcluded thatthe
pre-taxrealrateofreturnofUnitedKingdomindustrialand
commercial companies rosefrom6%in1980to12V2%in
1985.Thisfigurewillhavefallenin1986,becauseofthe
setbacktooilcompanies 'profits,buttherewillhavebeena
furtherimprovement intheprofitability ofcompanies in
othersectorstakenasawhole,theirrateofreturnhaving
alreadyrisenfromthetroughof3%in1981to8%in
1985.TheeffectsofthesharpfallintheoilpriceoritheUnited
Kingdom ,asamajoroilproducer ,aredifferentfromthose
onmostoftheotherCommunity economies .While
industrialanddomesticenergyinputcostshavebeenlowered
(asinothercountries),theeconomyasawholehassuffereda
terms-of-trade lossand,associated withthis,therewasa
downward adjustment tothesterlingexchangerateinearly
1986andagaininthesummer,particularly againstother
European currencies .Thefinancialpositionofnon-oil
companies hasimprovedsubstantially ,althoughprofitsof
thewholeeconomyhavefallenbecauseofthedeterioration
intheoilsector.Despitetheimprovement inprofitability ,thegrowthof
privateinvestment hassloweddownoverthelasttwoyears.
Thismaybeareactiontotherelativelyrapidexpansionof
capitalspendingin1982to1984andtothehigherlevelof
realinterestratesintherecentperiod.Anotherimportant
influenceonthepatternofinvestment hasbeenachangein
thecorporation taxsystem,intendedtoreducethe
distortions betweendifferenttypesofinvestment andsources
offinance,andbetweencapitalasawholeandlabour.This
consistedofareductionofthetaxrate(inthreesteps,from
50to35%),accompanied bythegradualremovalofinitial
investment allowances .Inrecentyears,thestronginvestment
performance intheserviceindustrieshasbeenparalleledbya
substantial riseinemployment inthesesectors,evenifmany
oftheadditional jobsareparttime,whilethemoremodest
recoveryofinvestment inmanufacturing hasbeen
insufficient toreversethecontinuing declineinjobs.Becauseoftheloweroilexportprices,thecurrent-account
surplushasshrunkandadeficit(0,6%ofGDP)isexpected
for1987.Therehasalsobeenasharpfallingovernment oil
revenues (roughlyhalvingtoanestimated£5000millionin
the1986/87financialyear),butgreaterthanexpected
buoyancyofothertaxrevenueshaslimitedtheimpactonthe
fiscalposition .Thedifferentmeasuresofmoneysupplyhave
beengrowingatstrikinglydifferentrates,withbroadmoney
expanding ataratewellaboveitstargetrange.United
Kingdominterestrates,however ,whilefollowing the
international downward trend,haveremainedhighinreal
terms,perhapspartlybecauseariskpremiumarisesfromthe
uncertainty associated withfutureinflation and
exchange-rate movements .Theareainwhichprogressismosturgentlyneededinthe
UnitedKingdomisthatofaslowerincreaseinwages.Lower

NoL385/108 OfficialJournaloftheEuropean Communities 31.12.86
wagesettlements wouldopenthewayforslowerinflation,an
improvement intheUnitedKingdom'scompetitiveness ,a
furtherstrengthening ofprofitability ,andlowerinterestrates
(bothnominalandreal),whichwouldincreasethe
attractiveness ofinvestment innewcapacityandaugmentthe
employment contentofgrowth.Itishoweverclearthat,
despitethehighunemployment level,thepresentfunctioning
ofthelabourmarketisresultinginlittleslowingofwage
settlements .TheGovernment hastakenstepsintendedto
improveflexibilityofthelabourmarketand,inparticular ,of
thewagedetermination processbymeasures suchasthe
reductionofthescopeofwagescouncilstosetminimum
wagesforyoungpeopleandhasalsointroduced proposals
foraformofprofit-sharing ,inwhichapartofgrosswages
couldbelinkedtocorporateprofitperfomance .Againstthe
background ofthedeclaredaimofgovernment policyto
guardagainstanyshortfallofdemandintheeconomy ,
contactbetweengovernment andtherepresentatives of
employers andemployees cancontribute toagreater
awareness onallsidesoftheimportance oflowerwage
increasesforemployment creation .
Inrecentyears,theemphasisoffiscalpolicyintheUnited
Kingdomhasbeenonreducingthebudgetdeficitasa
proportion ofGDP,containing thegrowthofpublic
expenditure ,andintroducing anumberoftaxreductions and
changesintendedtoencourage enterprise andtopromote
marketflexibility .Thepublicsectorborrowing requirement
(PSBR)inthefinancialyearendingMarch1986,at1,7%of
GDP,turnedouttobeslightlylowerthanplanned,while
generalgovernment expenditure asaproportion ofGDPwas
(at44,5%)twopointslowerthanin1984/85.Thefiscal
stanceforthecurrentyear,setintheMarch1986budget,is
broadlyunchanged ,withonlyaslightwidening (to1,9%of
GDP)oftheforecastPSBR.Inspiteofthesubstantial lossof
oilrevenue,theGovernment ,inthisyear'sbudget,wasstill
abletoimplement afurthercutinpersonalincometax
amounting toonepercentage pointoffthebasictaxrate,thus
helpingtoreducethetaxation 'wedge'betweenwhatan
employee coststotheemployerandwhattheemployee
receivesasnet-of-tax income.Asinthepast,therehasbeen
someupwardslippageofsuccessive plansforpublic
expenditure ,althoughtheimpactonthePSBRislargely
offsetbytheaccelerated programme ofprivatization .
Beforetheautumnstatement ,theoutlookforfiscal
developments in1987suggestedthattheGovernment would
againhaveatitsdisposalsomeroomformanoeuvre toreduce
thetaxburdenortoraisepublicspendinginthe1987/88
financialyear,withintheframework ofitsmedium-term
financialstrategy .Thispositionisnowovertaken bytheannouncement intheGovernment 'sautumnstatement ofan
increaseintheprovisionforpublicexpenditure in1987/88
ofsome£4750million.Thiswillmeanthatpublic
expenditure in1987/88isplannedtobeabout2%higherin
realtermsthantheestimatedout-turnin1986/87.Ifoutput
weretogrowlessrapidlythanproductive potential (about
2V4%),itmaybeappropriate toallowsomeincreaseinthe
PSBRabovethefigureof£7000million(1,7%ofGDP)
includedintheMTFS,providingthatthereisnoupsurgeof
inflation .However ,therecanbenoautomatic relationship
betweentheappropriate PSBRandthestateoftheeconomic
cycle.Anyfiscalrelaxation beyondthatforeseeninthe
MTFSwouldneedtobeaccompanied bythemaintenance of
downward pressureontheincreaseinrealwagesandthe
maintenance ofafirmmonetary stancesoastoavoidan
exacerbation oftheviciouscircleofwageandpriceincreases ,
andtheassociated riskoffurtherexchange-rate depreciation .
Itshouldalsobeseenwithintheframework ofactiondecided
atCommunity level.
TheGovernment iscommitted tousingthefiscalroomfor
manoeuvre ,atleastinpart,forafurthereasingofthe
personalincometaxburden,soastoincreaseincentiveand
boostafter-taxincomes .Inviewofthelikelycontinued
stronggrowthofrealpersonalincomesin1987,however,
therewouldbeamorebalancedpatternofgrowthifsomeof
theroomwereusedtosupportdemandcomponents other
thanprivateconsumption .Thescopeforadditional public
sectorinfrastructure investment offeringanacceptable rate
ofreturnshouldbeexamined .Suchinvestment mighthavea
greatershort-term impactonemployment thanincometax
cutsand,likesuchcuts,wouldtendtostrengthen productive
potential .
TheGovernment hascontinued itsprogramme of
microeconomic measures aimedatimproving supply
conditions andincreasing incentives forenterprise .The
programme ofprivatizing public-sector businesshas
continued ,andanumberofdevelopments arecontributing
tothecreationofamorecompetitive marketinfinancial
services .Inthesummer,newproposalswereintroduced as
partofthecontinuing deregulation programme toliftthe
burdensonbusinesses .Proposalsincludesimplifying taxand
accounting procedures forsmallbusinesses ,easing
requirements forpermission tochangetheuseofbuildings ,
andmodification ofemployment rightsincertain
circumstances .Thederegulation programme complements
othermeasuresintendedtostimulatebusinessstart-upsand
expansion ,withparticularbenefitstotheself-employed and
smallbusinesses whichhaveanimportant influenceonjob
creation .

31.12.86 OfficialJournaloftheEuropeanCommunities NoL385/109
TABLE39
UnitedKingdom :Maineconomicaggregates 1961to1987
(Annualpercentage changes)
1961to
19731974to
19801981 1982 1983 1984 1985 1986(>)1987(2)
rvalue
Grossdomestic Jvolume
product(3)1
^deflator8,4
3,1
5,117,7
1,0
16,510,2
-1,2
11,58,8
1,0
7,99,0
3.8
4.96,3
2,2
4,19,8
3.7
5.86,3
2,3
3,97,0
2,7
4,2
Privateconsumption deflator 4,815,7 11,4 8,7 5,0 4,8 5,3 4,0 3,9
Grossfixedf
capital <public
formationvolume 1total4,61,6
-10,6
-0,6-7,0
-26,2
-9,55,6
—6,6
4,32,4
36,6
5,78,7
11,8
9,12,5
-2,8
1,80,8
10,2
1,94,1
-0,8
3,5
ofwhich: construction -2,0-8,4 6,4 6,7 8,3-3,1 2,8 3,0
equipment 1,6-10,7 1,8 4,510,1 7,8 0,9 4,0
Domesticdemandatconstantprices 3,2 0,3-1,7 2,2 4,7 2,8 2,8 3,2 3,2
Gapwithrespecttoother
Community countries (4) 2,6 4,4 0,8 0,4-0,8-0,3
rnominal
Compensation
ofemployees ■<realA(5)-
perhead 1g^8,3
3,1
3,317,5
0,9
1,513,2
1,2
1,59,1
1,5
0,59,2
4,0
3,95,5
1,1
0,47,3
1,3
2,07,5
3,5
3,46,6
2,3
2,6
Productivity (6) 3,3 4,7 0,2 2,4 1,4 1,9
Realunitlabourcosts -1,7-0,6 1,0-1,1 2,1 0,4
Profitability (7) -4,4 1,5 4,8 9,4-3,8 3,2-7,1-0,6
idem(1961to1973=100) 100 69,0 62,1 65,1 71,2 68,5 70,7 65,7 65,3
Competitiveness (8) -1,5 4,0 2,1-3,7-5,4 1,4 1,7-9,2-2,1
Employment 0,2 0,1-3,9-1,4-0,8 1,5 1,3 0,8 0,8
Registered unemployed as%
ofthecivilianlabourforce(9) 2,1 4,5 9,210,6 11,6 11,8 12,0 12,0 12,0
Currentbalanceas%ofGDP -0,0-0,8 2,4 1,4 1,0 0,4 1,0-0,1-0,6
Long-term interestrate 7,613,7 14,8 12,7 10,8 10,7 10,6 9,5 9,5
Moneysupply(10) 9,411,9 13,7 8,910,3 9,813,4 15,4 8,0
Netlendingorborrowing
ofgeneralgovernment as%ofGDP -0,7-3,9-2,8-2,3-3,7-3,9-2,8-2,9-2,5
Publicdebtas%ofGDP(n) 56,6 51,1 57,8 57,5 59,2 57,8 59,0 57,8
Publicdebtinterestas%ofGDP 4,4 5,0 5,1 4,7 4,9 5,0 4,8 4,6
(')EstimatesoftheCommission services,October1986.
(2)ForecastsoftheCommission services,October1986,onthebasisofpresentpolicies .
(3)Expenditure measureatmarketprices.
(4)Differences inpercentage points.
(5)A:GDPdeflator ;B:privateconsumption deflator .
(6)Grossvalueaddedperoccupiedpersoninthewholeeconomy .
(7)Netoperatingsurplusrelativetothenetcapitalstockatcurrentreplacement cost.
(8)Effectiveexchangerate(vis-a-vis19industrialcountries )onthebasisofunitlabourcostsforthewholeeconomy .Positivefigure=lossof
competitiveness .
(9)Eurostatdefinition .
(10)SterlingM3;endofyear.
(n)Generalgovernment grossdebtatmarketvalues.