COUNCIL RECOMMENDATION of 11 July 1994 on the broad guidelines of the economic policies of the Member States and of the Community (94/480/EC)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 103 (2) thereof,

Having regard to the recommendation from the Commission,

Having regard to the opinion of the Monetary Committee,

Having regard to the conclusions of the European Council of 24 and 25 June 1994,

HEREBY RECOMMENDS:

Article 103

of the Treaty provides the framework for economic policy coordination from the start of Stage II of the process towards economic and monetary Union. The economic policy guidelines adopted under that Article will constitute the reference for the conduct of the economic policies in the Community and in the Member States.

An economic recovery is currently under way in the Community. The key task of economic policy will be to sustain and to strengthen this recovery in the coming quarters, and to ensure that it lays the ground for strong employment growth. Furthermore, growth must be sustainable and take due account of the environment. To sustain the recovery, it will be necessary to maintain progress towards price stability and thereby to create the conditions for low interest rates. Budgetary policy will play a crucial role in this respect, by making budgetary positions sustainable again and by contributing to the necessary increase in national saving. Equally important will be the continuation of the structural adjustment reforms currently under way. The improvement in the economic situation must constitute a spur to step up efforts in these two areas and not to lead to complacency and a reduced determination. The errors of the previous economic cycle must not be repeated.

The current set of policy guidelines develops more concretely those adopted last December to take into account the economic outlook and the specific situation of the Member States. Their implementation will contribute to the improvement of the current policy mix, by fostering budgetary consolidation and by sustaining wage moderation and by easing the stabilization burden placed on monetary policy. If the policy mix is improved upon as inflationary expectations subside and budgetary consolidation progresses, and if effective structural adjustment efforts are implemented, the Community can return to sustained rates of growth and employment creation. Under these conditions, it should be possible to stabilize unemployment in the course of 1995 and to place it on a downward trend thereafter.

The present guidelines, adopted under Article 103 (2) of the Treaty, will constitute the reference for the conduct of the economic policies in the Community and in the Member States. The re-affirm the goal identified in the December 1993 guidelines of substantially increasing employment over the next few years to reduce the current high level of unemployment. The present guidelines confirm the medium-term strategy outlined last December to bring the Community economy back to a path of stronger, durable and more employment-creating growth.

Price and exchange rate stability

The favourable price trends which have been recorded over the past year, and the progress which is expected to be made in 1994 and 1995, will pave the way for the resumption of sustainable non-inflationary growth in the near-term. Macro-economic and financial policies should be firmly directed towards securing price stability as the norm in the Community. The return to, and maintenance of, price stability requires wage and budgetary trends to be consistent with this objective. A rate of inflation of no more than 2 to 3 % should be reached in most Member States at the latest by 1996, as a step towards price stability in the Community.

The commitment to sustaining low inflation depends, to a large extent, on the conduct of macro-economic and structural policies. The results obtained until now also reflect the working of the internal market and the effects of competition policy. To reduce further inflationary pressures and expectations, it is necessary that all policies are predictable, credible, and time-consistent. Success in this respect will help achieve lower interest rates. Price stability is also an essential ingredient of exchange rate stability between Member States. In turn, such exchange rate stability, when soundly based, can help in the achievement of price stability.

Member States which have already achieved inflation rates, reflected in consumer price indices, in the range proposed by the guidelines are Belgium, Denmark, Germany, France, Ireland, Luxembourg, the Netherlands and the United Kingdom. In most of these countries, wage trends have developed in a manner consistent with price stability. These countries should consolidate the gains made on inflation and should continue the cautious policies necessary to secure stable prices in the medium term.

Inflation in the other Member States has yet to decline into the range set by the guidelines. It is essential that, as their economies recover, possible lagged effects of past depreciations do not put price stability under threat. In all countries, additional efforts are required in order both to reduce inflation and to maintain price stability over the medium term.

Disinflation in Greece needs to be reinforced. A fundamental condition for lowering inflation and achieving price stability in Greece is the correction of budgetary imbalances. Credible policies for budgetary adjustment should be pursued in order to dispel adverse inflation expectations and to support the external stability of the drachma.

All Member States should ensure that policies are consistent with and support exchange rate stability within the Community. This is necessary to reap the full benefits of the increase in economic integration.

Sound public finances

As proposed in the December 1993 economic policy guidelines, from 1995 onwards budgetary policy will have to lay the ground for more investment and growth. The first priority will be making budgetary positions sustainable again; budgetary deficits should be brought within the reference value of 3 % of GDP, defined in the Treaty. Current forecasts indicate that, while the prospects for moving deficits within the reference value of 3 % of GDP by 1996/97 may now be more favourable, this will not be possible without a determined commitment to fiscal adjustment. At the Community level, the limits on EC spending and revenue agreed at the Edinburgh Council must be respected.

The deterioration in the public finances experienced since 1990 has led to worrying budgetary positions in most Member States and there is an urgent need to return to a path of sustained reductions in fiscal imbalances. Restoration of confidence requires that, as the recovery gets under way, the budgetary consolidation plans envisaged in convergence programmes are implemented and that, should deviations emerge, additional measures are taken to ensure that the targets of these plans for 1994 and beyond are met. Member States should use any room for manoeuvre created by stronger rates of economic growth, or lower interest rates, than those underlying the budgetary forecasts to accelerate the pace of consolidation. It is necessary to exploit the improving economic situation to implement a fundamental reversal in the path of budgetary deficits recorded since the early part of the decade. This would reinforce the authorities' commitment to budgetary consolidation and would improve the credibility of their actions.

Budgetary policy can make an important contribution to growth and employment creation not only by pursuing the priority goal of budgetary consolidation. In addition, it can help through re-orienting tax receipts and expenditure towards support of viable public and private investment and other spending conducive to stronger economic growth. At the same time, and where necessary, Member States should aim at modifying their tax structures in ways which are likely to favour employment and benefit the environment.

It is essential that budgetary consolidation should continue as the economic recovery progresses. The budgets for 1995 should therefore constitute a clear confirmation that fiscal consolidation is under way.

In Member States where interest payments constitute a significant budgetary item and where the debt ratio is high and increasing (Belgium, Greece and Italy), decisive efforts should be undertaken to reduce budget deficits, mainly through the containment of the growth of primary current spending. Among the countries having convergence programmes, Belgium, Denmark, Germany, France, the Netherlands, Portugal and the United Kingdom must follow up with determination the budgetary consolidation programmes already announced or implemented. Ireland and Luxembourg need to continue the progress already achieved.

In Greece, a determination to achieve fiscal consolidation through credible policies in a multiannual framework is crucial. Policies, aimed in particular at enhancing tax collection and restraining spending, should be quickly translated into concrete actions.

In Italy, following the progress made in 1993, it is necessary to strengthen the efforts to promote budgetary adjustment in a medium-term framework.

In Spain, the sharp deterioration in the budgetary position which took place in 1993 makes it necessary to embark upon a multiannual path of fiscal consolidation, thereby updating the 1992 convergence programme as already announced by the Government.

In certain Member States significant improvements in tax administration (for example, simplification of the tax system, more effective fight against tax evasion, etc.) are essential conditions to promote budgetary adjustment, while in some other countries there is also a continuing need to contain current expenditure pressures, including social security outlays.

A more dynamic Community economy

All Member States must increase their efforts aimed at improving the functioning of their economies along the lines indicated in the Commission's White Paper on 'Growth, competitiveness and employment' and, in particular, in the action plan adopted by the European Council in December 1993.

Member States should ensure that their economies will reap fully the benefits of the internal market and of international trade. Community firms, particularly SMEs, should be encouraged to improve their organization, their R& D efforts and their awareness of emerging opportunities, especially in the most dynamic world markets. Continued attention should be devoted to improving the competitive environment in which firms operate. Privatization, to the extent that Member States judge it compatible with their objectives, could further the progress already made in this direction.

The Community, for its part, will continue to implement those parts of the action plan falling under its competence (e.g. trans-European networks, maintenance of an open trading system, involving rigorous enforcement of rules on state aids and competition, improved research and development efforts, etc.). The combined efforts of Member States and of the Community will increase the dynamism and the competitiveness of the Community's economy.

Structural measures for creating more employment

Structural policies should be directed towards ensuring that growth delivers more and better jobs. They should also equip the workforce with the skills needed for those jobs and the capacity to adapt to change. Priorities include:

- improving training and education which must be focused on ensuring a match between skills and the new jobs that will be available. Central to this will be the need to foster a new attitude towards the balance between work, training and leisure. This involves:

- better basic education, particularly problem solving and adaptability,

- easing the school to work transition,

- employer involvment,

- life-long training,

- making markets, particularly labour markets and regulations much more flexible. This means looking anew at the whole range of policy areas that affect the operation of the labour market, including labour law, taxation, social security policy, to ensure that:

- equity objectives are achieved in a way that does not adversely affect the functioning of labour markets,

- labour market regulation, housing or other policies do not act as a constraint on labour mobility,

- obstacles to more flexible working time are dismantled,

- stepping up active labour market policies. These should target help towards particular groups (long-term and young unemployed), to counter the problem of exclusion and to remove potential inflationary bottlenecks,

- fully exploiting the job-creating potential of SMEs,

- promoting liberalization measures aimed at sheltered sectors of the economy, including, where appropriate, the liberal professions,

- improving the use of labour as a factor of production by reducing non-wage costs, especially on the low-paid, who are the hardest hit. In most Member States, measures are contemplated or are being implemented which aim at reducing the non-wage costs of employment for certain categories of workers, notably lower paid workers and young people. These steps should be pursued with determination, consistent with the objective of budgetary consolidation,

- ensuring that environmental costs are better reflected in prices throughout the economy and maintaining the principle according to which the polluter should pay,

- pay policies, beyond being consistent with the inflation targets, should contribute to making room for stronger investment and increased employment. Given the present high level of unemployment throughout the Community, any real wage increases should fall short of productivity increases; current trends suggest that this is already occurring in the Community. The policy task will be to ensure that the conditions are created whereby present trends are sustained over many years. Real wage increases should reflect changes in demand and supply between sectors and different areas of the Union. In some sectors of the economy, the need to maintain or create jobs may require in the short run a decrease in real wages.

Wage moderation should be maintained in all Member States. This is especially necessary as the projected recovery gains strength. Pay agreements in Member States need to be consistent with the proposals of the guidelines and they should be built upon to sustain wage moderation in the medium term. This is especially the case where unemployment is projected to decline. Wage moderation would help to secure these labour market gains and would pave the way for further employment growth in the medium term.

In the Member States, especially where unemployment might still increase this year, various specific measures are either planned or implemented to encourage employment opportunities and to halt the deterioration in the labour market. Whatever the effectiveness of these measures to create employment in the short term, it is essential that these policies are actively pursued and that their contribution to strengthening job creation is enhanced. As the recovery gains momentum, the benefits from these policies will become visible.

The Commission's White Paper has helped to stimulate the debate on growth, competitiveness and employment in numerous countries. Many Member States have taken measures consistent with the strategy proposed in the White Paper, as set out in the report of the Economic Policy Committee to the Ecofin Council. But as that report makes clear, much remains to be done to improve the employment situation and the efficiency of European labour markets.

Done at Brussels, 11 July 1994.

For the Council

The President

Th. WAIGEL