31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/1
II
(Actswhosepublication isnotobligatory )
COUNCIL
COUNCIL DECISION
of20December 1985
adoptingtheannualreportontheeconomicsituationintheCommunity andlayingdown
economicpolicyguidelinesfor1986
(85/619/EEC)
THECOUNCIL OFTHEEUROPEAN COMMUNITIES ,
HavingregardtotheTreatyestablishing theEuropean
Economic Community ,
HavingregardtoCouncilDecision74/120/EECof18
February 1974ontheattainment ofahighdegreeof
convergence oftheeconomicpoliciesoftheMemberStatesof
theEuropean Economic Community I1),asamended by
Decision 75/787/EEC(2),andinparticular Article4
thereof,
HavingregardtotheproposalfromtheCommission ,HASADOPTED THISDECISION :
Article 1
TheCouncilherebyadoptstheannualreportonthe
economicsituationin,andeconomicpolicyguidelinestobe
followedby,theCommunity ,contained inPartIofthe
attachedreport,andlaysdowntheeconomic policy
guidelinestobefollowedbytheMemberStates,contained in
PartIIoftheattachedreport.
Article2
ThisDecision isaddressed totheMember States.
HavingregardtotheopinionoftheEuropean
Parliament (3),
HavingregardtotheopinionoftheEconomic andSocial
Committee (4),DoneatBrussels,20December 1985.
FortheCouncil
ThePresident
R.KRIEPS
(»)OJNoL63,5.3.1974,p.16.
(2)OJNoL330,24.12.1975,p.52.
(3)OJNoC345,31.12.1985.
(4)OJNoC344,31.12.1985.

NoL377/2 OfficialJournaloftheEuropeanCommunities 31.12.85
ANNUAL ECONOMIC REPORT 1985/86
CONTENTS
PartI—TheCommunity economy
Page
Introduction andsummary 3
I. Evolution oftheeconomyandconvergence 7
1.1.ThecurrentsituationandoutlookforEurope 7
1.2.Imbalances andconvergence intheCommunity 12
1.3.Someriskfactorsinthemedium-term outlook 13
II.Acooperative strategyformoreemployment-creating growth 14
II.1.Thebackground andordersofmagnitude 14
11.2.Theneedformoreemployment-creating growth 16
11.3.Labour,capitalandtechnology 18
II.4.Pay,profitsandjobs 20
11.5.Acooperative medium-term growthstrategy 22
III.Economic policyintheframework ofacooperative growthstrategy 26
III.1.Publicfinances 26
III.1.1.Thepublicsector 26
III.1.2.Taxationpolicyforeconomicgrowth 27
III.1.3.Theroleofpublicdebt 28
III.1.4.TheEuropeanCommunity budget 29
III.2.Monetary policyandtheEuropeanMonetary System 31
III.3.Marketandsectoralpolicies "> 35
III.3.1.Improving theinternalmarket 35
III.3.2.Infrastructure projectsofEuropean interestandinfrastructure financing 37
III.3.3.Adaptability ofthelabourmarket 38
III.3.4.Specificemployment programmes 40
III.3.5.Education ,trainingandtechnology 41
III.3.6.Sectoralpolicies,technology andenterprise 42
IV.European interestsintheinternational economy 43
IV.1.Theworldtradingsystem 43
IV.2.Improving theinternational monetary system 44
IV.3.European economic space 45
IV.4.International cooperation forworldeconomicadjustments 46
V. Conclusions :objective ,instruments andmethod 47
PartII—Economic policyintheMemberStates
Belgium 50
Denmark 51
FederalRepublicofGermany 53
Greece 56
France 58
Ireland 60
Italy 62
Luxembourg 65
Netherlands 66
UnitedKingdom 68

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/3
ANNEX
PARTI
THECOMMUNITY ECONOMY
INTRODUCTION ANDSUMMARY
unemployment problemcanonlybesolvedifthereisa
distinctimprovement intherelationship between
growthandemployment .1.ThepresentAnnualEconomic Reportfor1985to
1986,heresubmitted totheCommunity institutions
inaccordance withregularprocedures ,buildsonthe
reportwhichtheCounciladoptedlastyear,the
principalthemeofwhichwastheneedtoachievea
substantial anddurableimprovement inthe
employment situation .Itspotential isincreased by
proposals foracooperative strategycallingfor
balanced contributions fromtheCommunity ,
Governments ofMember Statesaswellasfromthe
socialpartners .Thisstrategywillbeevenmore
effectiveifitcanrelyoninternational cooperation .4.Weshouldnot,however ,ignorethefactthatthe
processofmoderation ofrealwageincreases
established sincetheendofthe1970shasalready
helpedtomakegrowthpotentially more
employment-creating .Thegrowthratesofrecent
years,however ,werenotsufficienttopermitthe
necessaryriseinemployment .Itisthereforenecessary
tostrengthen growthinEuropefurtherandtomakeit
moreemployment-creating .
5.Inordertoachievethisobjective ,aseriesofmacro­
andmicro-economic conditions needtobefulfilledto
thegreatestpossibleextent.2.In1984/85theCommunity countrieshaveachieved
someprogressinrespectofeconomicpolicy:
—themoderateeconomicrecovery ,whichhasbeen
underwayfor2V2years,iscontinuing ,
—considerable progresshasbeenmadetowards
restoringpricestability,
—therehasbeenfurtherimprovement withrespect
tothebudgetary andexternalimbalances .5.1Atthemacro-economic level,itdependsinparticular
onahigherlevelofjob-creating investment inthe
comingyears.Thisisfirstofallthetaskof
entrepreneurs .Itis,however ,alsonecessarythatthe
profitability ofjob-creating investment should
continuetoimprove,andthatthereisasufficiently
strongoutlookfordemand .Job-creating investment is
mostlycapital-widening investment ,requiring
favourable prospects fordemand andthe
continuation foracertainperiodofmoderation ofreal
wageincreasesataratelaggingbehindproductivity
growth.Ifwagesweretorisetoofast,profitability
wouldsufferandrationalization (capital-deepening
investment ),whichdestroys jobs,wouldbe
unnecessarily encouraged .Avoiding suchan
eventuality innowayimpliesthattechnological
progress shouldberelinquished ;job-creating
investment alsoincorporates technological progress .
Butbecauseoftheinadequate capitalstockandthe
highunemployment rate,Europeneedsforsomeyears
anewbalancebetweencapital-widening and
capital-deepening investment .3.Thesesuccessesaregroundsneitherforcomplacency
norforhopingthatthemajorproblemofthe
Community —unemployment —willberesolvedif
currenttrendscontinue .Indeed,allmedium-and
long-term forecastsofgrowthandemployment agree
that,onthebasisofpresentpoliciesandbehaviour ,
thereisnoprospectinthemediumtermofraisingthe
growthrateintheCommunity abovesome2,5%.
Thiswouldnotleadtoasignificant declinein
unemployment inthisdecade.Adisorderly
adjustment processintheUSA,afurtherriseinreal
interestratesandaworsening ofthedebtproblemin
developing countriescouldmaketheoutlookeven
moregloomy .
Theapparent inevitability oftheprospect of
persistently highunemployment hasledtowidespread
pessimism withregardtoeconomic policy.Ifthe
relationship between growthandemployment
observedinthe1960sstillapplied,medium-term
growthratesabove6%wouldbenecessarytoachieve
theincreaseinemployment (1-1,5%peryear)thatis
neededinordertobringdownunemployment
graduallybutsignificantly .Suchratesofgrowthare
atpresentquiteunattainable .Consequently ,the5.2Thecombination ofmoderaterealwageincreasesand
safeguarding anappropriate development ofdemand
isalsoanimportant element inimproving
profitability ,strengthening growthandmakingit
moreemployment-creating .Wagemoderation alone
wouldnot,oronlyveryslowly,leadtotherequired
employment effects.Simplyexpanding demand
would,giventheinadequate levelofproductive

NoL377/4 OfficialJournaloftheEuropeanCommunities 31.12.85
capacity ,runtheriskofproducing higherinflation
and/orpublicdebtwithouthavingthedesiredeffect
onemployment .Acombination ofbothistherefore
necessary .
5.3Withrespecttothemaintenance ofmoderate real
wageincreases ,whichhasbeenachievedinmany
countriesinrecentyears,thecooperation ofthesocial
partners,andinparticularoftheunions,isrequired .
Moderate wagedevelopment shouldcontinueuntil
thereisaclearandlastingfallintheunemployment
rate,afterwhichrealwageincreasescouldagain
becomeclosetoproductivity growth .6.Thestrategyproposed inthisAnnualEconomic
Report,however,consistsnotonlyofmacro­
economic elements .Employment-creating growth
alsodependsuponimportant micro-economic
conditions .Action,withtheaimofimproving the
adaptability ofmarkets,andnotonlythelabour
market,shouldbereinforced .Withregardtothe
labourmarket,theextenttowhichgreaterwage
differentiation andreorganization andreductions of
workingtime,withoutraisingcosts,couldbenefit
employment shouldbestudiedinthelightofresults
alreadyachieved .Thenationalgovernments andthe
Community shouldalsoexaminewhetherexisting
rulesandregulations impedethefunctioning of
marketsandthesettingupofnew,andinparticular
smallandmedium-sized businesses .
Thespiritinwhichthedebateaboutmarket
adaptability isheldisimportant foritssuccess.The
objectivebehindeffortstoincreaseflexibility isnotto
destroyachievements madeonthesocialfrontbutto
createmorejobs.Asfarasatallpossible,therefore ,
economic efficiency shouldbereconciled withthe
maintenance andfurtherdevelopment ofsocial
achievements .5.4Thesafeguarding ofanadequatelevelofdemandis
thetaskofgovernment ,tobecarriedoutuntilthe
processbecomesself-sustaining bymeansofstrong
investment andanappropriate riseinprivate
consumption .
7.Thecentralstrategyofmoderategrowthofrealwages
accompanied bythemaintenance ofanadequatelevel
ofdemandrequiresthemonetary andbudgetary
policiesoftheMemberStatestobebasedonthe
followingprinciples :5.5WhatEuropeneedsisadualstrategyofmoderation of
realwageincreasesandsupportfordemand .Indeed,
theaccompanying measurestounderpindemandhold
thekeytothesuccessofthestrategyandsocial
acceptance ofwagemoderation .Thisis,atanyevent,
trueinatransitional phaseduringwhichconsumer
purchasing powerwill,tobeginwith,inevitablygrow
moreslowlyandaggregatedemandwillnotriseata
sufficiently rapidpaceasaresultofextrabusiness
investment toexpandcapacity .
Onlyifwagemoderation isaccompanied bya
sufficient levelofaggregate demandcanonehave
confidence thattheprocessofimproving profitability
andrestructuring demand (relativelymoreinvestment
andrelativelylessconsumption )willberapidenough
andnotinvolvedrasticdeflationthatwouldplace
socialconsensus underconsiderable strain.Onlyin
thiswaycanwagemoderation fulfilitsemployment
function .7.1Monetary policymustcontinuetoprovidethe
framework forstability .Theproposeddualstrategy
mustthusnotleadtoanacceleration ofinflation .On
thecontrary,inmostCommunity countries ,therates
ofinflationneedtobebroughtdownfurther.
Monetary policycanbestsafeguardthis,withinthe
EMSframework ,bycontinuing tosetanominal
framework whichisorientated towardseconomic
stability .Suchamonetarypolicyoffersconsiderable
potentialforcutsininterestratesintheCommunity
onasoundbasis,particularly ifthedollarfallsfurther.
Ifthiscouldbeachieved,withthenecessarycaution
andcoordinated withintheEMSframework ,itwould
addanadditional ,notinconsiderable stimulusto
businessinvestment andsignificantly reducepressure
ongovernment budgets .Thisisapositiveeffect
benefiting allcountries .5.6Asaresult,thelong-term tendency forcapital
productivity todeclinewouldalsobearrested .
Togetherwithrisingemployment ,growingdemand
andmountingconfidence infuturetrends,thiswould
providethemosteffectivestimulustothepropensity
toinvest.Asinvestment rises,morerapid
technological progresswouldatthesametimebe
incorporated intotheproductive apparatus ,andthis
wouldinturnhaveabeneficial effectonthe
productivity oflabourandcapital.Profitability and
thepropensity toinvestwouldthereforecontinueto
increase .Thiswouldcreatea'virtuous circle'of
technological progress,capitalproductivity ,
profitability ,investment andrenewedembodiment of
technological progress .7.2Budgetary policymustunderpin thestrategyof
employment-creating growthinthefollowingways:
Macro-economically ,itmustcontinuetosafeguard
theconsolidation objective ,i.e.deficitsmustbe
furtherreducedinthosecountries whichstillhavea
levelofindebtedness whichiseitherexcessiveorrising

31.12.85OfficialJournaloftheEuropeanCommunities NoL377/5
toofast.Atthesametime,itmustsustaindemand
wherethereisroomformanoeuvre ,themoresosince
wagemoderation leadstemporarily toafall-offin
demand.Inaddition,budgetary policyshould
continuetorestructure theexpenditure sideofthe
publicbudgetstoreducesubsidiesmorestronglyand
inaselectivewayandtoincreasepublicinvestment ;
particularly inrespect ofinfrastructure ,
environmental protection andurbanrenewal,a
considerable backlogofneedshasbuiltupinrecent
years,whichcouldbemetwiththesparecapacityin
theconstruction sector.Finally,giventheimportance ofafavourable
international environment forgrowthand
employment ,theCommunity shouldatthesametime
continueitseffortstoimprovetheinternational
tradingandmonetarysystems.Itshouldalso,together
withothercountries ,attempttomitigatethedebt
problemofdeveloping countries,andtowork
towardsmaintaining thegrowthinworldtradeasthe
inevitableadjustments intheUSAaremade.
Thecontributions oftheCommunity referredtohere
correspond tonumerousresolutions oftheEuropean
Parliament .
Budgetary policyshouldalsoprovideforfurther
measurestostrengthen supply,whichgenerallyhave
animpactondemandatthesametime,andsafeguard
theimprovement inrelativefactorpricesbyreducing
taxesandsocialsecuritycontributions —wherever
possible,attheexpenseofthecentralgovernment
budget.Inaddition ,micro-economic measures to
promoteemployment (job-creation schemesand
promotion ofvocational training )shouldbetaken
whereverpossible .9.Whatevertheinternational environment ,thepolicies
setoutabovearenecessary .Itisevidentthatthe
international environment wouldbeconsiderably
reinforced bythesuccessoftheCommuniy strategy .
Givenaplausiblemarginofuncertainty asfarasworld
developments areconcerned ,suchapolicyshould
makepossibletheachievement ofanincreaseinthe
economicgrowthrateintheCommunity fromits
presentlevelof2,5%toanaverageof3-3,5%over
thenextfewyears,andatthesametimemakegrowth
muchmoreemployment-creating .Thiswould
produceanaverageannualincreaseof1-1,5%in
employment ,opening uptheprospect of
unemployment beingbroughtdowntoaround7%by
1990.8.Thesuccessoftheproposedstrategydependsona
coordinated application ofpoliciesbetweenMember
StateswithinaCommunity framework .
10.Suchadevelopment isonlypossible,however,when
allconcerned —theCommunity ,national
governments ,employers andunions—workfully
togethertoimplement theproposedstrategy.TheeconomicpotentialoftheCommunity willbe
considerably reinforced bytheaccelerated completion
ofthelargeinternalmarket,including the
liberalization ofnationalfinancialmarkets,andbythe
promotion oftechnicalprogress ,astheCommission
hasproposed .Thecompletion oftheinternalmarket
liesattheheartoftheCommunity ;bygenerating
supplydynamism andbypermitting ,atthesametime,
amoresustainedgrowthindemand,ittiesindirectly
tothecooperative macro-economic strategy .The
promotion oftechnical progress isessentialto
safeguard andpromotetheCommunity 'sposition
amongthemostdeveloped economies oftheworld.In
addition,inthosesectorsforwhichtheCommunity is
directlyresponsible ,agreaterweightshouldbegiven
totheoperationofthemarket.Inalltheseareas,the
socialdimension shouldbetakenfullyinto
account .10.1Thisoverallstrategy'offers'governments andthe
socialpartnersanopportunity toachieveajoint
solutiontothemajorproblemconfronting the
Community ,namelyunemployment .However ,the
strategyprovidesonlyageneralframework within
whichmuchofthedebateshouldbeheldwiththe
governments andwithandbetweenthesocial
partners .Thisgeneralframework shouldalsoincite
thoseconcernedatleasttoreflectupontheirrespective
positions .Forthepresent,thereisnopolitical
approach insightotherthanthisstrategyproviding
anyprospectofsignificantly reducingunemployment
bytheendofthedecade.Itisthereforeanurgenttask
toproceedviaawidedebatetotheimplementation of
thiscooperative strategy .Therealization ofmajorinfrastructure projectsinthe
transport ,telecommunications andenvironmental
fields,aswellasexploitation oftechnological
potential ,wouldsubstantially improve the
functioning oftheinternalmarket .Theaccelerated
implementation ofnumerous projects,whichare
alreadyavailableandhaveanadequatesocialrateof
return,wouldreinforce economic dynamism and
contribute tothesuccessoftheproposedstrategy .10.2Exploratory discussions whichtheCommission has
hadwiththeEuropeanTradeUnionConfederation
(ETUC)andwiththeUnionofIndustries of
theEuropean Community (UNICE)havebeen
encouraging .Theyhaveshownthatthereisinterest
andawillingness totalkaboutsuchanapproach .This

NoL377/6 OfficialJournaloftheEuropeanCommunities 31.12 .85
dialogueshouldbecontinued (2).Itisevidentthat
socialdialogueshouldalsobereinforced atnational
level.Themoreprogressismadeinsuchdialogueat
alllevels,theeasieritwillbeforthenational
governments andtheCommunity itselftomaketheir
owncontributions .
10.3Thestrategyshouldgradually betransformed into
reality.Thisappliestothecooperation ineach
countrybetweengovernments ,unionsandemployers .
Eachshouldmaketheircontribution andatyearly
intervalstheprogressshouldbeexamined inorderto
determine thenextsteps.Thisapproach should
continueoverseveralyears.Thisalsoapplies,
however,tocooperation betweentheCommunity
countriesandataninternational level.Eachpartner
shouldactaccording totheiravailableroomfor
manoeuvre .
11.Thecoordinated application ofthestrategyinthe
MemberStatesshouldengageandfosteramutually
reinforcing processofsupply,demand and
employment .Inthisrespectananalysisof
developments forecastforGermany in1986isof
considerable interest.Economicgrowthcouldexceed
3%andemployment risebymorethan1%,sothat
unemployment declines,albeitslowlyatfirst.The
priceoutlookcontinues tobefavourable .A
considerable currentaccountsurplusand,despitethe
taxreform,afurthersignificant declineinthe
government deficitisexpected .Thus,apositivechain
reactionisdeveloping betweenpricestability,more
growthandemployment andmoreroomfor
manoeuvre inthefiscalandexternalfields.Thisroom
shouldbeusedforhigherpublicinvestment in1986
andbringingforwardto1987thetaxreformplanned
for1988.Thisappearsnecessary sothatthe
favourable economicdevelopment continues inand
beyond1987.EveninGermanyitisnecessarytohaveagrowthrate
ofsome3,5%andariseinemployment ofabout
1,5%perannumforseveralyearsinordertoachievea
lastingdeclineinunemployment .Thisisinboththe
nationalandtheCommunity interest.
11.1Intheothercountries suchroomformanoeuvre isnot
yetavailable .Insomeofthecountries,however,itis
possiblethat,withacertaintime-lagascompared to
Germany ,similarpositivechainreactioncould
developfrommoregrowthandemployment togreater
roomformanoeuvre onthefiscalandexternalfronts.
Suchadevelopment seemspossibleinDenmark ,the
Netherlands ,theUnitedKingdomandFrance.Its
speedwilldependuponhowfavourably developments
proceedinGermanyanduponappropriate behaviour
ofthesocialpartnersinrelationtotherequirements of
thestrategy .Everyeffortshouldbemadetoextendthe
positivechainreactionasquicklyaspossibletothis
groupofcountries .Thiswouldalsoconsiderably
improvethesituationinthethirdgroupofcountries
whereroomformanoeuvre isnotyetinview.
11.2Thedifferingsituations intheMember States
naturallyrestrictarapidimplementation ofthe
proposedcooperative strategy .Inthisrespect,the
Community 'scontribution couldprovideacertain
compensating factor.Thisrefersnotonlytothe
accelerated completion oftheinternalmarketbut
abovealltothelargeprojectsoftheCommunity
interest inthefieldsoftransport and
telecommunications infrastructure andof
environmental protection .Thestronger the
commitment ofgovernments andthesocialpartners
totheimplementation oftheoverallstrategy,the
greaterthechancethattheCommunity 'scontribution
willsucceedinbeingofsignificant macro-economic
importance .
(*)TheCommission willthusasktheETUCandUNICEforwritten
opinionsonthedraftAnnualEconomicReport.Theseopinions
willbetransmitted totheCouncil,theParliament andthe
Economic andSocialCommittee sothattheycanbebornein
mindinthefuturediscussion .

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/7
I.EVOLUTION OFTHEECONOMY ANDCONVERGENCE
suchterms,itisclearthatthesituationreachedremains
fragileandthisreportacknowledges thatfutureprogresswill
bedifficultifbothpolicyandbehaviour arenotchanged .
InsomecontrasttotherelativelysubduedgrowthinEurope,
theinternational economyhasbeenundergoing amuchmore
markedcyclicaldevelopment .FortheUnitedStates,1984
wasayearofexceptionally strongoutputgrowth(+6,8%)
andevenmoresoofimports(+30%).WithJapanese
importsalsogrowingfastinthatyear(4-10,7%),total
worldtradegrewbyasmuchas9,3%.For1985worldtrade
growthisestimatedtoslowtoamorenormalrate(4,8%)
andonpresentforecastsasimilarresultisexpectedin1986.
Thisissubject,however,toanumberofuncertainties which
arediscussedbrieflyinalaterSection.Theforecastincludesa
moremoderatebutstillpositiverateofoutputgrowthinthe
UnitedStateseconomy (+2,3%in1985,+2,5%in1986)
andasustainedgrowthrateof4-5%inJapaninboth
years.1.1.ThecurrentsituationandoutlookforEurope
ThepresentEuropeanrecoverysofarhaslastedabout2V2
years.Fromastartingpointdominated bystructural
imbalances accumulated overalongperiodasevidenced by
largebudgetdeficits,highandcontinuing inflation,poor
growthperformance andahighlyunsatisfactory labour
marketsituation ,policymanagement hasreliedheavily
onsupply-side considerations .Moreover ,thedegreeof
imbalance asbetweenmembercountrieshasvariedgreatly
acrosstheCommunity .
Bymid-1985grossdomesticproductintheEChadrisento
nearly5percentage pointsabovethepreviouscyclicalpeakof
1980.Industrial production ,whichsufferedadeeper
recessionthantherestoftheeconomy ,alsoreturnedtothe
1980peaklevelinJune1985.TheCommission 'srecent
forecasts(*)pointtoacontinuation ofthistrend,witha
growthrateofabout2,5%fortheCommunity asawhole
beingforecastfor1986,whichismarginally morethanthat
expectedfor1985.
Theoutlookforgrowth,therefore ,remainsoneofmodest
proportions .Evenso,inanumberofrespects,therehave
beenpositivesignsofprogressinsomeareas.Therehasbeen
ageneralawarenessthat,startingfromapositionofacute
imbalance coupledwithaworldrecession ,theadjustment
necessarywouldbeaslowone.Moreover ,thedegreeof
imbalance inMemberStatesisbynomeansthesame.The
fundamental approachsuggested bytheCommission inthe
lasttwoAnnualReportshasbeentostresstheneedfor
improvements tosupplyconditions inmembercountriesset
withinaframework ofcontrolovernationalbudgets .A
component judgednecessary inthisapproachhasbeento
ensurethattheevolutionofrealemployment costscontinues
tobemaintained belowthegrowthorproductivity .Itmaybequestioned whytheEuropeaneconomydidnot
respondmorestronglytotheacceleration ofworldtradethat
occuredin1984.ItisindeedstrikingthatwhileCommunity
exportsgrewby7,7%in1984,importsgrewalmostasmuch
by7,1%compared tothemodest2%growthofdomestic
demand .Asaresult,thenetimpactofexportandimport
tradevolumegrowthwasnegligible .However ,special
factorssuchasstrikesintheUKcoalindustryandGerman
metalindustries ,togetherwitharelativelyhighrateof
stockbuilding ofhighimportcontenthelptoexplainwhythis
happened .For1986theforecastssuggestacontinued
gradualstrengthening ofdomesticdemand .
Thisviewissupported byevidencefromsurveysofboth
businessandconsumeropinion .Theindustrial confidence
indicatorfortheECasawholehasimproved onlyvery
slightlyoverthe12monthstoSeptember 1985.Confidence
intheconstruction sectorremainsverydepressed .Consumer
confidence recoveredonlyalittlein1983measuredfromthe
lowpointsreachedinprecedingrecessionyearsbutsincethen
hasremained stable.Theremaining component ofthe
Commission 'scomposite economicsentimentindicator ,and
theonlyonetohaverisenatallsignificantly overthelast
year,isthesharepriceindex.Experience acrossMemberStateshasvariedagooddealbut,
lookingataverageCommunity performance overthepast
year,therearesomeencouraging signs.Toadegree,there
hasbeenrealwagemoderation .Ofsignificance isthefact
thatafteradecadeinwhichthecreationofnewjobshasbeen
negative ,theCommunity isbeginning toexperience some
growthinemployment .TableIshowsthatfor1985
employment growthisestimatedtobe0,4%withanincrease
to0,5%for1986.
Byfarthegreaterpartofthisgrowth,however,hascome
fromincreasesinactivityrates,particularly ofwomen,and
newentrantstothelabourforce.Tobegintohaveaneffect
onthecurrentandwidespread unemployment problem
therefore ,itisnecessarythatthisprogressbeimprovedupon
andcontinued intothemediumterm.Whenappraised inTheriseinthesharepriceindexmaybeassociated withthe
welcomeriseinprivateindustrial investment ,whichin
Europeasawholeisnowthefastestgrowingdemand
component .Afterthreeyearsofdeclinein1981to1983a
recoverybeganin1984,witha7%volumeriseinindustrial
investment .Firstindications for1985frombusinesssurvey
sourcespointedtoa9%volumerise,andmorerecent
surveyshaverevisedthisupto11%.WithintheseEC
averagefigurestherearesomeexamplesofamuchstronger
privateindustrial investment upswing .InDenmark ,for(')Commission oftheEEC,European Economy ,Supplement A,
October1985.

NoL377/8 OfficialJournaloftheEuropeanCommunities 31.12.85
example,thegrowthrateisestimatedtobenearly40%and
fortheNetherlands over20%inboth1984and1985.In
1985Germanindustrialinvestment isexpectedtoriseby
13%involume .
Ofconsiderable significance ,however,isthefactthatthe
levelofinvestment isstilllow.In1985thevolumeof
investment isonlythatattainedin1980.Itisstillsome14%
belowthelevelin1973.Sustained andsubstantial risesin
investment arenowrequirediftheeconomy'spotential
growthrateistobeimproved .Additional evidence is
providedbythebehaviour ofcapacityutilization .Despite
slowoutputgrowth,capacityutilization inindustryroseto
82%inJuly1985,whichisclosetothe84%levelrecorded
atthecyclicalpeakin1979/80.Thusinspiteoftheexistenceofhighunemployment ,theEuropeaneconomyisalready
beginningtoexperience production capacityconstraints .
Asalreadynoted,inthemeantime ,totalemployment has
increasedmodestly .Indeed,employment growthofover1%
isexpectedin1985inDenmarkandtheUnitedKingdom ,
buteventhisisclearlyinsufficient giventhegrowthoflabour
supplyandthehighunemployment levelatthebeginningof
therecovery .
AfteralongperiodinwhichEuropehasdemonstrated a
remarkable incapacity tocreatenewjobs,thesesignsare
indeedwelcome .Theydo,however ,underlinetheneedto
strengthen furtherthoseconditions necessary tosecure
sustainedgrowthembodying employment creation .
TABLE 1
Maineconomic aggregates ,EC(2),1961-1986
GDP
current
pricesGDP
real
termsGDP
deflatorPrivate
consump­
tion
deflatorCompensa­
tion
per
employeeCurrent
accountof
balanceof
paymentsGeneral
govern­
ment
netlending
orborro­
wingMoney
supply
(M2/3)
(3)Unemploy­
ment
(%of
labour
force)Employ­
ment
%change %ofGDP %change %%change
1961-1970
1971-1980
1981
1982
1983
1984
1985
Lastreport
Thisreport(!)
1986H9,0
13,4
10,4
10,7
8,9
8,0
(7,5)
7.6
6.74,6
2,9
-0,2
0,5
1,0
2,2
2,3
2,3
2,54,2
10,2
10,6
10,1
7,8
5,7
(5,0)
5,1
4,13.7
10,1
11,7
9.8
7,6
6,2
(5,2)
5,2
3.98,8
13,6
12,6
10,6
8,7
6,7
(6,7)
6.3
5.40,4
-0,1
-0,5
-0,6
0,1
0,1
0,3
0,5
0,6-0,4
-2,8
-5,4
-5,6
-5,5
-5,4
-4,8
-5,2
-4,810,2
14,4
10,9
10,7
9,7
8,7
7,2
8,4
6,72,1
4,2
7,6
9,2
10,3
10,8
(11,5)
11,2
11,10,2
0,2
-1,3
-1,4
-0,5
0,2
0,0
0,4
0,5
(1)ForecastoftheCommission services,onthebasisofpresentpolicies,September 1985.
(2)ECaveragecalculated withcurrentGDPweightsatpurchasing powerparities .
(3)Endofyear(annualgrowthrate).
Note:Percentage changesaregivenasannualrates.
TABLE2
Worldimportsofgoods
(%increaseinvolumej
1981 1982 1983,1984 1985 1986
EUR
US
Japan
OPEC
Other
developing countries-2,9
6,6
-2,4
27,4
3,52.4
0,1
-0,6
5.5
-5,22,3
11,8
0,3
-8,2
-1,27,1
29,9
10,7
-9,0
6,05,0
10,0
3,0
-10,9
4,05,3
6,6
4,7
-4,0
4,5
World 2,5-0,1 2,2 9,3 4,8 4,8
Source:Commission services .

31.12.85OfficialJournaloftheEuropeanCommunities NoL377/9
TABLE 3
Rateofchangeofdemandcomponents ,EC
(In%)
1982 1983 1984 1985 1986
Privateconsumption
Publicconsumption
Fixedinvestment0,5
1,1
-1,61,1
1,6
0,01,0
1,2
2,31,7
1,2
1,62,7
1,1
3,7
Contribution tochange
inGDPof:
Finaldomesticdemand (])(2)
changeinstocks(')
foreignbalance(\)0,2
0,5
-0,31,0
-0,2
0,11,3
0,5
0,21,6
0,2
0,42,5
0,1
-0,2
GDP 0,5 1,0 2,2 2,3 2,5
Exports
Imports1.5
2.61,9
1,57,2
6,66,4
5,04,6
5,3
(J)Changeaspercentage ofGDPofprecedingperiod.
(2)Excluding changeinstocks.
Source:Commission services .
TABLE4
Forecastincreaseingrossdomesticproductin1985and1986,in%
1985 1986
Nominal
GDPGDP
output
volumeGDP
price
deflatorNominal
GDPGDP
output
volumeGDP
price
deflator
Belgium
Denmark
Germany
Greece
France
Ireland
Italy
Luxembourg
Netherlands
UnitedKingdom6,7
6.3
4.4
19,3
7.0
8,7
11,0
6,0
4.5
9.11,9
2,3
2.3
1,9
1,2
2,5
2,7
1,7
2,1
3.44,7
3,9
2,1
17,1
5,7
6,1
8,1
4.2
2.3
5,56,2
5,4
5.4
16,8
5,8
7,5,
9.5
6,4
3,0
7,01,7
3.2
3,5
1,0
1,9
2.3
2,7
1,3
2,0
2,04,4
2,2
1,9
15,7
3,9
5,0
6,6
5,0
1,0
4,8
European
Community 7,6 2,3 5,1 6,7 2,5 4,1
Source:Commission services .

NoL377/10 OfficialJournaloftheEuropeanCommunities 31.12.85
GRAPHS 1to4
Comparative evolutionoftheEC,USandJapaneseeconomies ,1980to1985 .
2.Industrialproduction
3-monthmovingaverage,s.a.1.Grossdomesticproduct ,s.a.
1975=100
1975=100
3.Unemployment rate 4.Tradebalance
fob/cif,'000millionECU
3-monthmovingaverage,s.a.

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/11
GRAPHS 5to8
Comparative evolutionoftheEC,USandJapaneseeconomies ,1980to1985
5.Consumer prices
6-monthchange,s.a.,annualrates6.Exchange rates
IndexofSDRspercurrencyunit
March1979=100
7.Long-term interestrates 8.Short-term interestrates

NoL377/12 OfficialJournaloftheEuropeanCommunities 31.12.85
ThepresentEuropeanrecovery,sofarof2V2yearsduration,
isexpectedtocontinuethrough 1986atagrowthratearound
2,5%.Althoughprivateindustrialinvestment isshowinga
significantupturn,thisisfromaverylowbase.Morerecently
employment hasalsobeguntoincrease .However ,thereare
indications thatinsomecountries ,despitethepresenceof
continuing ,unacceptably highunemployment ,theeconomy
isbeginning toexperience capacityconstraints .This
emphasizes theneedforsustainedgrowthofinvestment in
newcapacity .
1.2.Imbalances andconvergence intheECeconomy
Thesituationin1985maybecomparedwiththatin1980,a
periodwhichconveniently spansabusinesscycle.In1980as
in1985,amoderateeconomicrecoveryhadbeenunderway
forabout2V2years,andcapacityutilization ratesinindustry
weresimilar.Someofthemoreimportant macro-economic
indicators aresetoutinTable5.
Inthelabourmarket,thefourlargerMemberStateshave
experienced ariseintherateofunemployment ofbetween4
and6percentage points.Amongthesmallercountries
Belgium,theNetherlands andIrelandhavesufferedhigher
thanaverageincreases .Insofarasaconvergence processisat
workherethesimilarityofthegrowthinunemployment
isstrikingandthisdevelopment remainswholly
unacceptable .
Althoughemployment growthhasbecomepositiveinthelast
year,innocountryexceptDenmark isthelevelof
employment currentlyhigherthanitwasatthebeginningof
thedecade.ThusvirtuallythewholeoftheCommunity is
facingalabourmarketproblemofcomparable gravity .
Asregardspricestabilization ,onthewholetherehasbeena
strikingandpositiveconvergence process.GermanyandtheNetherlands havereducedtheiralreadybelow-average
inflationratestoaverylowlevel.TheUnitedKingdom ,
IrelandandItalyhavereducedtheirinflationratesfrom1980
to1985bywellover10percentage points,andFranceby
over6points.Denmarkhasalsomadenotableprogressin
achieving ameasureofpricestabilization .Greecehasnot
progressed inthisrespect.
OnthebalanceofpaymentstheCommuniy asawholehas
movedfromsubstantial currentaccountdeficitin1980toa
surplusin1985,butdivergences inindividualperformance
remainconsiderable .Inaddition,whenseenagainstthevery
largecurrentaccountdeficitoftheUnitedStates,the
Community retainsadegreeofvulnerability inthisrespect.
Themostimpressive adjustments havebeenthoseofBelgium
andIrelandwhichimprovedtheircurrentaccountpositions
by5%and9%ofGDPrespectively overthefive-year
period,thuseliminating orverymuchreducingtheir
previously alarmingdeficitlevels.FranceandItalyhavealso
madesubstantial progressinreducingtheirdeficits,evenif
morerecentlyintheItaliancasethedeficithasbeguntogrow
again.GermanyandtheNetherlands ontheotherhandhave
movedintosituationsofwideningsurplus .
Inspiteoftheseverityofbudgetconsolidation efforts,EC
government deficitsin1985are,onaverage,significantly
higherthanin1980(5,2% ofGDPversus3,5%).Moreover ,
inthisareaalso,thedegreeofdivergence continuestobe
relativelywide.Fourcountries (Belgium,Greece,Irelandand
Italy)havedeficitsofnearly10%ofGDPormore.Belgium
andIrelanddespiteconsiderable effortshavenotbeenableto
reducesubstantially thedeficitleveloverthefive-yearperiod,
evenifoveramorerecentperiodsomeimprovement hasbeen
made.TheGreekandItaliandeficitshavebecomemore
seriousstill.Germanyhasreduceditsdeficitto1,2%of
GDP,whilstLuxembourg hasmovedintosurplus.France,
theUKandDenmarkarenowinanintermediary category
withdeficitsofaround3%ofGDP.
TABLE 5
Indicators ofdisequilibria anddivergence ,1980and1985
Unemployment
in%GDPdeflator
in%Currentaccount
%ofGDPBudgetdeficit
%ofGDPGross
publicdept
%ofGDP
1980 1985 1980 1985 1980 1985 1980 1985 1980 1985
Belgium
Denmark
Germany
Greece
France
Ireland
Italy
Luxembourg
Netherlands
UnitedKingdom9.1
6,7
3.3
6.4
8.2
7.1
0,7
6.2
6,013,8
9,1
8,4
8,3
10,7
17.1
12,6
1,7
13.2
12,03,9
8,2
4,3
17.7
12,2
14,2
20,6
7,8
5,7
19.84,7
3,9
2,1
17,1
5,7
6,1
8,1
4.2
2.3
5,5-4,5
-3,7
-1,8
0,3
-1,4
-12,0
-2,5
-1,5
1,80,6
-3,4
2,1
-5,2
-0,5
-3,3
-1,7
4,5
1,1-9,9
-3,3
-3,1
-5,4
0,3'
-11,8
-8,4
-0,8
-4,0
-3,4-8,6
-2,9
-1,2
-12,5
-3,2
-11,5
-13,6
2,1
-5,9
-3,376,1
33.5
32.6
27.7
25,0
85,9
93,9
13.6
45,9
59.7116,0
68,6
42,6
54.5
35,9
124.3
120.4
15.6
72,3
59.7
EUR10 5,8 11,2 12,6 5,1-1,3-0,5-3,5-5,250,5 64,3
Source:Commission services .

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/13
Overthefive-yearperiod,virtuallyallcountrieshaveseena
substantial buildupintheirstockofpublicdebt.Thelevels
howeverareverydifferent .Thegrossstockofpublicdebtin
Germany ,FranceandtheUKappearstobeofrelatively
moderatesize(40%,30%and60%ofGDPrespectively ).
ThedebtlevelsofBelgium,IrelandandItalyaremuchlarger
(wellover100%ofGDP),andtheinterestrateburdenin
thesecountries isnowintheregionof20to25%oftotal
currentpublicexpenditure andsome10%ofGDP.sensitivityoftheEuropeaneconomytopossibleinternational
events.Indeedthepastdecadehasseenasequenceofmassive
worldeconomicshocks:oilpricerises,largeexchangeand
interestratemovements ,debtcrises.Forthenextfewyears
potentialexternalsourcesofdisturbance wouldlieprimarily
inthemannerinwhichtheprocessofcorrection oftheUS
externaldeficitandrelatedbudgetdeficitandexchangerate
imbalance takesplace,andaresurgence ofthedebtcrisis.A
largefallinthepriceofoilwouldhavepositiveandnegative
effects.
Virtuallynocountryhasavoidedaverylargerisein
unemployment whichhasthusbecomethemostserious
imbalance intheEuropean economy .Asregardstheother
imbalances :Someveryapproximate ordersofmagnitude aregivenin
Table6.Itshouldbestressed,however,thatinprinciple ,a
widerangeofdifferentestimates couldbediscussed ,
depending onassumptions aboutparticular circumstances
andondifferentreactions inprivatemarketsaswellas
officialpolicies .—Germanyhasachievedabroadlysatisfactory position,
butisaccumulating anincreasing currentaccount
surplus,
—FranceandtheUnitedKingdom havesucceeded in
reducing theseimbalance tomoremoderate
proportions ,
—Italyhasmadeconsiderable progressoninflationand
untilrecentlyonthebalanceofpayments ,butstillhasa
gravepublicfinanceproblemtoovercome ,Thebroadpicturewhichemergesisthat,asregardsthelevel
ofoutputintheEC,therearebothnegativeandpositiverisks
inherentinthepotentialdisturbances considered ,although
thenegativeriskslookonbalancetobegreater.Asregards
therateofinflationtherearepossibilities forsignificant
disinflationary impactsbutnonethatappearlikelyto
increaseinflationsignificantly .
theothercountriesaremostlyinratherhetereogeneous
situations ,withsuccessonsomescoresbutproblemson
others.Denmark hasthemostgenerally improved
situation .Greecehasproblemsonmostaccounts .TheactualpositionintheUnitedStatesandwhat
developments arelikelyoverthemediumtermremain
debatable .Onthisscoreitmustbeadmittedthatthedegree
ofuncertainty onsuchmattersasfutureUSgrowth,its
budgetandexternaldeficits,andthebehaviour ofinterest
ratesandthedollarexchangerateislarge.Intheabsenceof
anyfirmview,onecanonlyresorttosomestylized
assumptions .Thus,forillustrative purposes ,whatmightbe
judgedtobeasubstantial budgetary contraction ,ora
substantial exchange ratedepreciation would (inthe
amountsspecifiedinTable6)lowerthelevelofoutputinthe
ECbyamountsintherangeof0,75to1,25percentage points
forthreeyearstakencumulatively .1.3.Someriskfactorsinthemedium-term outlook
Eachelementonitsownwouldthereforerepresent asmall
butnottrivialset-backtotheEuropean recovery .Taken
together,however ,theimpactbecomesconsiderable .Undertheassumption ofanapproximately stableinfluence
fromtherestoftheworldontheEuropean economy ,and
withbroadlyunchanged policiesandeconomicbehaviour in
theCommunity ,theCommission wouldexceptarather
steadymedium-term economicgrowthrateofabout2,5%
perannumintheEConaveragefortherestofthepresent
decade.Inflationmightstabilizeataround4%onaverage,
withnominalGDPthereforegrowingbynearly7%per
annum.Unemployment wouldnotfallsignificantly ,and
thusthecentralemployment probleminternaltothe
Europeaneconomywouldremain .Thereislittlehopethatit
couldbealleviated bytheendofthedecade.Theseestimatesalreadytakeintoaccountsomedecoupling
ofEuropeaninterestratesfromthoseintheUnitedStates(in
thesenseofrelativelylowerEuropeanrates).Themagnitude
ofsuchchangesishardtojudge.However ,ifonesupposed
thatanextramarginof2percentage points'reduction in
European interestratesbecamepossible,forexampleasa
reactiontoaverysharpweakening ofthedollar,theremight
beacompensating boosttoactivityinEuropeofaround0,66
ofapercentage pointcumulatively overthreeyears.Howevertheassumption ofastableinternational economy
maywellnotholdandbeforeturningtotheCommunity 's
domesticobjectivesandpoliciesitisnecessarytoconsiderthe

NoL377/14 OfficialJournaloftheEuropeanCommunities 31.12.85
TABLE 6
SensitivityoftheECeconomytochangesintheworldeconomic
environment
(In%)
ImpactonEC,cumulative totalfor
threeyearsonlevelsof:
nominal
GDPprices
-V2output
-V4
-1V4
-2-iv4
-3V4
-5USbudgetrestriction inthree
successiveyearsof1%ofGDP
perannum,cumulatively
USexchangeratedepreciation
of20%H
USbudgetrestriction and
exchange ratedepreciation
combined
Monetaryconditions permitting
a2%fallinEuropean real
interestrates
Fallinoilpriceof20%with
respecttothe1985level-2V2
-3Realincomesofcompanies andhousehoulds wouldgainon
thetermsoftrade,whichwouldstimulateinvestment and
consumption .However ,oilandgasproducers wouldlose
incomes .WesternEuropeproducesasubstantial partofits
ownoilandgas(takingproduction oftheUK,the
Netherlands andNorwayasashareofECandEFTA
demand).ExportstoOPECcountries wouldsurely
weaken .
Thedisinflationary impactwouldbeconsiderable inthe
eventofasubstantial dollarexchangeratefall(2,5%offthe
ECpricelevelafterthreeyearswitha20%depreciation
againttheECU).The20%fallinthepriceofoilwouldalso
haveasignificant butsmallerdisinflationary impact.
Oneofthemainissuesarisingfromthesescenarios ishowto
judgereactionstoasimultaneous weakening intheECof
bothoutputandinflation .Insomeofthehypotheses
discussedtherewouldremainasignificant reduction in
aggregatenominaldemand .Compensatory policyreactions
wouldthenneedtobeconsidered ,especially incountries
whichhavealreadymadegoodprogressinreducinginflation
(seefurtherbelowinrelevantpolicysectionsofthis
report).
Potentialdisturbances intheinternational economyoverthe
foreseeable future(adjustments intheUS,apossiblefallin
thepriceofoil)pointtothepossibilityoffurtherreductions
ininflationintheEC.Asregardsthelevelofoutputthereare
differentrisksarisingfromnegativeandpositiveimpacts
fromtherestoftheworld;thenegativerisksseemtobe
greater .Intheeventofexternalconditions transmitting
disinflation andrealcontractionary influences totheECat
thesametime,thequestionoftheadequacyofnominal
demandwouldarise.+2/3
+2/,+
-v, -i
(')WithrespecttotheECUandyen.
Source:Estimates oftheCommission services .
Asubstantial fall(20%)inthepriceofoilwouldhavea
beneficial impactonconjunctural trendsintheEC.(The
fiscalaspectsofsuchadevelopment aretreatedinSection
III.1.2.)Thisisestimatedatcumulating to0,66%ofGDP
overthreeyears,butthemarginofuncertainty hereiswide.
II.ACOOPERATIVE STRATEGY FORMOREEMPLOYMENT CREATING GROWTH
II.1.Thebackground andordersofmagnitude
Theprincipalthemeofthisreportisfocusedontheprime
necessityofrenewedeconomicgrowthbutofacharacter
whichwillbegintocreateasignificant numberofnewjobs
andthusrepresent asteptowardssolvingtheproblemof
unemployment (').Initiallytherefore ,itisusefultooutline
themedium-term prospectforEuropeintheabsenceofany
significant changestointernational trendsandtoexisting
policyandbehaviour .Inotherwordshowmighttheoutput,
employment andunemployment situations inEuropeunfold
if,atthebroadmacro-economic level,recenttrendswere
maintained .Projections ofthisnature,whilstdifficultto
make,nevertheless arenecessaryasameansofassistinginthe
policyjudgement process .Recognizing thewell-known limitations ofmodel-based
scenarios ,presentpoliciesandtrendsarerepresented inthe
firstcolumnofTable7byabaselineassumption .Inthis
initialentirelyillustrative caseGDPgrowthintheECasa
wholeisseentobestabilizing ataround2,5%untiltheend
ofthedecade,withinflationdecelerating furthertoalittle
over4%andnominalGDPthusgrowingbetween6,5%
and7%ayear.Budgetdeficitswouldbefurtherreduced,
andmoneysupplykepttonearitspresentgrowthrate.
Labourproductivity mightincreasebyaboutasmuchasthat
observedduringthelastdecade,atalittleover2%peryear.
Realwagesmightgrowalittlebelow2%,thusallowingfor
somemodestimprovement intheshareofprofitsinnational
income.Investment wouldbegrowingfasterthanGDP,
perhaps5%peryear,reflectingsomeresponsetothemore
recentslowdown intherateoftechnological advanceandto
therestructuring needsoftheeconomy .
Intheseconditions therateofreturnoninvestedcapital
wouldnotincreaseverysubstantially .Inparticularthecost
oflabourrelativetotherateofreturnonfixedcapitalwould(*)ApartfromtheProgramme forEuropean economicrecovery,
adoptedinMarch1984,theEuropeanParliament hasadvocated
onmanyoccasionsanemployment-generating investment effort
(seeresolution of16April1985,OJNoC122,20.5.1985,p.
57,point4).

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/15
notchangemarkedly .Employment growthwouldbequite
modest,perhapsnotquite0,5%peryear,albeitbetter,
however,thantherecentrecordofstagnantordeclining
employment .Unemployment mightthendeclineonlyvery
slightly,maybeto10,5%by1990.
Thecharacteristics ofthisassumedbaselineprojection ,
althoughdisappointing ,arenotunreasonable giventhefact
thatcurrently inEuropeitremainsquestionable asto
whethertheunemployment levelhasstabilizedwhenthe
economicgrowthrateisaround2,5%.Whatthebaseline
projection underlines isthestronglikelihood thatitwill
requireasetofpolicychangesandbehavioural changestobe
introduced andmaintained ifthegrowthpathforoutputand
employment istobeimprovedinasignificant way.Giventheimprovedsituationwithrespecttobudgetdeficits
showninthebaselineprojection ,amoreobvioussuggestion
mightbetoadoptapolicyofpronounced budgetary
expansion .Although thisparticular courseisnotthe
judgement oftheCommission ortheCouncil,itis
nevertheless usefultooutlinewhatthiskindofpolicymight
implyoverthemediumterm.
ThesecondcolumnofTable7illustrates theeconomic effects
ofastraightforward fiscalreflationoptioninwhichthetarget
forasignificant reductioninthelevelofunemployment isset
at8,5%by1990.Inthissimplecase,theinstrument for
achievingthisisassumedtobeafiscalexpansion withno
otherconstraints observed andtheinternational
environment asinthebaselineprojection .
TABLE7
Someillustrative ordersofmagnitude inabaselinescenarioandalternative policyscenarios ,EC,1986to
1990
(annualaveragegrowthrates)
Baseline
scenarioFiscal
reflation
scenarioCooperative
growth
scenario(ECscenario
without
international
cooperation )
GDP,volumegrowth
GDPdeflator
GDP,nominal
Investment
Employment
Unemployment rate(')
Labourproductivity
Realwagecost
Profitshareinnationalincome
Budgetbalance (2)
Rateofinterest (3)2,5
4,2
6,7
5.0
0,4
10,4
2,2
1,7
1.1
-3,8
10,93,4
5.4
8,8
5,1
0,8
8.5
2.6
2,5
-0,8
-7,1
12,53.5
3.7
7.2
6.6
1,1
7,0
2,4
1,0
3.8
-4,0
8.3(3,2)
(4,0)
(7.2)
(5,9)
(1,0)
(7,4)
(2,2)
(1,0)
(3.3)
(-4,4)
(9.4)
(*)Percentage oftotallabourforceatendofperiod.
(2)Percentage ofGDPatendofperiod.
(3)Long-term rateofinterestatendofperiod.
Source:Estimates oftheCommission services .
Note:
—The'baselinescenario'supposesthemaintenance ofpresentbudgetary andmonetarypoliciesinthe
Community ,theabsenceofbudgetary adjustment intheUnitedStatesandnormalgrowthofworld
trade.
—The'fiscalreflationscenario'comprises ,forthebudgetdeficitintheECincreasedbyasmuchasis
necessary toreach8,5%unemployment by1990,othervariablesreactingendogenously ;the
international environment isthesameasinthe'baselinescenario'.
—The'cooperation growthscenario'comprises ,fortheCommunity ,amoderategrowthinrealwages
untilthereisasignificant fallintheunemployment rate(1988/89).Thedevelopment ofrealwagesthen
movesgraduallytowardsthatofproductivity perpersonoccupied .Budgetary andmonetary policies
maintainGDPatalevelclosetothebaselinescenario ;while,outsidetheEC,theUSreducesitsbudget
deficit,offsetbyexpansionary actioninJapanandsomeothercountries ,thedollardepreciates against
theECUand,moresubstantially ,againsttheyen.Thisscenarioisexplained inSectionII.5
below .
—The'ECscenariowithoutinternational cooperation 'assumesthesameeconomicpolicymeasuresinthe
Community asthe'cooperative growthscenario'.Ontheotherhand,theinternational environment
remainsthesameinthe'baselinescenario'.

NoL377/16 OfficialJournaloftheEuropeanCommunities 31.12.85
Whattheprojectionshowsisthattorealizetheemployment
target(8,5%unemployment ),theEuropean economy
wouldexperience acontinuously mountingincreaseinthe
budgetdeficit,which,fortheECasawhole,risesfrom
4,8%ofGDPin1985to7,1%in1990.Growthisincreased
butsoalsoisinflationwhichaccelerates from4,5%in1985
to7,1%in1990.Theprojection periodendsthereforewith
acombination ofaccelerating inflationandpublicdebt
burdens,afteronlyarathermoderate reduction in
unemployment .Themomentum ofaccelerating inflation
andpublicdebtburdensattheendoftheperiodpointstothe
prospectoffurtherharmfulinteraction betweenthetwo.In
shortthepolicywouldbeunsustainable andhavetobe
reversed .Theintroduction ofanaccompanying and
unavoidable stabilization policywouldresultinarenewed
riseintherateofunemployment .
Thesetwoscenarioscanbeinterpreted asusefulreference
pointsinthedevelopment ofafeasiblestragey.Neithera
continuation oftheexistingstateofaffairsnoranisolated
demand-based reflationary policyembodytheingredients
necessary tosecuretheimprovement ineconomic
performance desired.
Model-based simulations forthemediumtermconfirmthat
neitherascenariobasedonunchanged policiesand
behaviour norasimplefiscalreflationwillleadtoa
sustainable acceleration ofoutputgrowthandjobcreation .
Theycorroborate theresultsofotheranalyseswhichshow
thatneitheraspontaneous development norbudgetary
reflationwouldresolvetheproblem .Afterthecrisisyearsof1974to1975andtherecoveryin
1976—yearswhichwereexcludedfromtheestimating
periodsbecauseoftheextremeinstability whichthey
introduced intotheresults—anewrelationwasestablished
overtheperiod1977to1985(R2).Thisshowsashiftofthe
curvetowardstheleft,i.e.agiveneconomicgrowthrateis
paralleled byalargerincreaseinemployment .However ,
becauseeconomicgrowthremainedlowduringthisperiod
(increasing byanaverageof1,8%ayear),nogrowthin
employment resulted .Theincreaseinthelabourforcewas
thereforereflectedinanincreaseinunemployment .Ifthe
newrelationestablished betweengrowthandemployment
weretoprovestable,growthratesof3,5to4,5%ayear
wouldbesufficienttoobtaintheincreaseinemployment
necessarytoreduceunemployment .
Graph9alsoillustrates therelationbetweenemployment
andgrowthresultingfromthethreescenariospresented in
Table7.Thus,annualaveragegrowthratesofGDPand
employment overtheperiod1986to1990are,inthecaseof
thebasicscenario,situatedvirtuallyonthestraightlineR2.
Thismeansthat,withnochangeinpoliciesandbehaviour ,
theloweconomicgrowthrateassociated withafairlymodest
rateofincreaseinemployment (pointD)wouldbeentirely
consistent withtherelationrecordedinthelastfewyears.
Theisolatedfiscalreflationscenariowouldbereflected in
fastereconomicgrowthandemployment wouldincrease
moreorlessaccordingtotherelationR2(pointE).Lastly
thepointcorresponding tothecooperative growthscenario
(pointF)wouldbesituatedabovethepresentrelation :it
wouldclearlyrepresentgrowthwhichwasfasterandwhichis
moreemployment-creating .Thisthirdcaseistreatedinmore
detailinSectionII.5.
11.2.Theneedformoreemployment-creating growth
Currentdemographic fendsandparticipation rates
demonstrate thatinordertobringtheunemployment rate
downfromitspresentlevelofaround11%toalevelofsome
7%ofthelabourforcebetweennowand190,employment
growthiatesofbetween 1and1,5%ayearwouldbe
necessary .
Graph9providesasimpleillustration oftherelationbetween
thegrowthratesofemployment andoutputinthe
Community andtheUnitedStates.
Therelationship observedintheCommunity overtheperiod
1961to1973(R1)showsthat,despiterapideconomic
growthaveraging4,6%perannum,theriseinemployment
wasverymodest (anaverageincreaseof0,2%).Ifthe
relationestablished forthisperiodwerestillvalidatthe
presenttime,growthratesaveragingover6%ayearwould
beneededinordertoachievethedesiredincrease in
employment .Suchagrowthratewouldappeartobequite
outofreachinpresentcircumstances .Itshouldbenoted,
however ,thatthecapital-intensive typeofgrowthofthe
1960ssuggestedbythegraphwasperfectlycompatible with
theverymodestgrowthinthelabourforceat.thattimeand
permittedthemaintenance ofaverylowunemployment rate
(2to2,5%ofthelabourforce).Severalelementscancontributetotheachievement ofgrowth
whichcreatesmorejobs:
(1)aslowerincreaseinrealpercapitalabourcosts
associated withanappropriate growthindemand;
(2)acontinuing efforttoimprovetheadaptability ofall
markets (labour,goodsandservices,capital);
(3)onthelabourmarket,changesinworkingtimeand
arrangements forintroducing shorterworkinghours
whichhavenoeffectonproduction costs;
(4)wagedifferentials whichgiveamoreappropriate picture
oftherequirements forlabourindifferentindustriesand
regions,andwithdifferentskills.
Anadjustment processguidedbytheseprinciples iscapable
bothofpermitting growthwhichcreatesmorejobs,butalso
oflayingthefoundations foramoresatisfactory growth
dynamicforthefuture,totheextentthatitrestoresthe
economicconditions ofsupply.
Hereitshouldbestressedthatanotheressentialfeatureis
markedlymoresustainedinvestment growth.Thereporthas
shownthat,whilegrowthperformance remainedmodest,
theeconomywasalreadybeginning torunintocapacity
constraints .Irrespective oftheinadequacy ofthelevelof

31.12.85OfficialJournaloftheEuropeanCommunities NoL377/17
investment (theinvestment sharefellby5percentage points
between1970and1985),itisprobablethat,followingthe
shockscausedbyenergyprices,partoftheexistingstockis
obsoleteandlessefficient .Hence,iftheadjustment processis
tocreatenewjobs,itmustbebasedonconditionspropitious
tonewinvestment expenditure .
Lastly,itisatleastasimportant tocreateandmaintaina
socialframework withinwhichthechangesdeemed
necessaryareacceptedandinwhichtheirimplementation is
encouraged .Here,companies ,governments ,employees and
theirtradeunionshaveanessentialroletoplay.Companies
mustcarryoutthejob-creating investment whichis
necessary .Theywillbeallthemoreinclinedtoinvestandmoregenerallytospendiftheyexpecttheirmarketsto
expandandtobeprofitable .Thetradeunionswillonthe
wholebemuchmorereceptivetocallsforwagemoderation if
theyconsiderthatsuchmoderation willpermitmoregrowth
andemployment .Governments willbemorereadytocut
taxesiftheycanseecompanies andtradeunionsworking
togethertoimproveproductive capacityandhencethetax
base.
Afterthere-examination ofthesequestionsinSectionsII.3
andII.4ofthisreport,suggestions aremadeinSectionII.5as
tohowtoimplement anintegratedapproachtotheproblems
posed.
GRAPH 9
Relationships betweengrowthandemployment (')
(1)ThelinesR1,R2andR3summarize theobservedassociation betweenthegrowthofemployment and
thegrowthofrealoutput.Thelengthofeachlineisrestrictedtotheextremeobservations .R2onlyhas
beenextendedasadottedlineinordertoindicatehow,onthebasisofmorerecentexperience ,
employment intheEuropeaneconomymightevolveifgrowthperformance weretoimprove .
A=Averageof1961-1973
B=Averageof1977-1985
C=Averageof1966-1985
D=Basicscenario :+4,6%GDP;
+1,8%GDP;
+2,9%GDP;
+2,5%GDP;
+3,4%GDP;
+3,5%GDP;+0,2%employment
-0,03%employment
+1,9%employment
+0,4%employment
+0,8%employment
+1,1%employmentE=Fiscalreflation scenario :
F=Cooperative growthscenario :
Thecoordinates ofpointsD,EandFaretakenfromTable7.
FortheUnitedStatestheapparently favourable positioning ofthelineR3isinfluenced byspecific
demographic considerations .Theactivepopulation hasbeengrowingatarateofmorethan2%per
annum.Between 1960and1970,however ,theunemployment ratewasalwayshigherthaninEurope.
Itisonlysince1980thatunemployment inEuropehasconstantly exceededthatintheUnited
States.

NoL377/18 OfficialJournaloftheEuropeanCommunities 31.12.85
Performance increatingjobsintheCommunity hasbeen
generallypoorfor25years.Howeverthemodelof
capital-intensive growthdeveloped inthe1960swas
appropriate forthatperiod,becausethelowincreasein
employment wasparalleledbythesmallgrowthofthelabour
force,sothatunemployment couldbekeptatalowlevel.
Timeshavechangedandinresponsetothepoorgrowth
outlook,itisurgentfortheunemployment curvetobe
reversed .Theproblemistoachieveeconomicgrowthwhich
isbothfasterandalsocreatesmorejobs.Themainpointsof
theeconomicpolicytobeimplemented inordertoattainthis
objective havebeenclearlyidentified .Essentially they
combineamoderategrowthofwageswiththerightdegreeof
supportfordemandandmustbeaccompanied byimproved
adaptability onallmarkets .Itisthereforetheconditionsfor
thecooperative implementation ofthispolicywhichmust
nowbeconsidered .notingthatthereisacorroboration ofevidencefrom
statisticalestimatesfortheindustrialandmanufacturing
sectors,aswellasfromsurveysofindustrialists 'opinions .
Theargument isalsosupported incomparisons withthe
UnitedStates,wheretheuseoflabourandcapitalhasbeen
rathermoreeven-handed thaninEurope.
Muchofthemoreconventional analysisofproductivity
appearsdeceptively comfortable fromaEuropeanpointof
view.AsGraph10shows,labourproductivity inEuropehas
risenmuchmorestronglythanintheUnitedStates.The
graphalsoprovidesinformation onthetrendincapital
productivity (outputperunitofcapitalstock).This
progressed duringthe1960satamoderaterateintheUnited
Statesandweakened thereafter .InEuropecapital
productivity declinedmarkedly allthroughtheperiod1960
to1985.Inotherwordscapitalintensity (i.e.theamountof
capitalusedperpersonemployed ),appearstohaverisen
steeplyinEuropealongsidethetrendinlabourproductivity ,
whereasbothhavegrownlessstronglyintheUnitedStates.
Thusacomparison oflabourcostincreaseswithlabour
productivity growthwillbemisleading inaperiodwhena
majorpartoflabourproductivity growthistheresultofan
increasing labour-saving biasininvestment .Ifincreased
productivity growthresultsfromadeclineinemployment ,or
aninsufficient increaseinemployment withrespecttothe
growthofthelabourforce,thelabourforceasawholeisnot
reapingthebenefitsoftheseapparentproductivity gains.II.3.Labour,capitalandtechnology
Thereisnowastrongsuspicionthatthemixofcapitaland
labourusedintheEuropeanproductive processhasbecome
biasedtoomuchagainsttheuseoflabour.Thestagnation of
employment aswehaveobserved isanuncontested fact.
Evidencehasalsobuiltupshowinganincreasingly distorted
useofcapitalforlabour-saving ratherthanforcapacity
expansion .Whilsttherearemanydataproblems ,itisworth
GRAPH 10
Labourproductivity ,capitalproductivity andcapitalintensityinthefourmainMemberStatesandthe
UnitedStates,1960to1985
Indices1960=100
Labourproductivity :realGDPperheadofoccupiedpopulation .
Capitalproductivity :realGDPperunitofcapitalstock.
Capitalintensity :capitalstockperheadofoccupiedpopulation .
Source:Commission services .

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/19
Increasesincapitalperemployeeareregardednaturallyasa
desirablethingandexperience throughthe1960ssuggests
thatthegrowthofcapitalperemployeedidyieldareasonably
acceptable growthofGDPandoutputperemployee .A
questionwhicharises,therefore ,iswhycapitalaccumulation
inEurope,particularly fromthe1970sonwards ,hasnot
generatedmoreemployment .Thereislittledoubtthatenergy
priceincreasesreducedthenetworthoftheexistingcapital
stock.Actionbygovernments tocontrolinflationwith
restrictivepoliciesalsoledtounder-utilization ofcapacity .
Lookedatoverthelongerterm,however ,anotherimportant
partoftheansweristhatthesetrendshavebeenaccompanied
byasustaineddeterioration intheprofitability oforreturnto
investment and,relatedtothis,amarkedincreaseinthereal
rewardtolabourrelativetothatofcapital (seeGraph
11).
Threeotherfactorswhichmayhelpinanexplanation are,
firstly,theexistenceoflabourmarketrigiditieswhichmay
haveimpededtheeffectiveworkingofthelabourmarketin
thefaceofrisingemployment costs.Secondly ,theconscious
policyonthepartofgovernments toincreasetaxeson
labour,particularly socialsecuritycontributions .Non-wage
costsintheCommunity haverisenbyaround0,5ofa
percentage pointperannumoverthepasttwodecades .
Thirdly,theneedtoexercisecontroloverinflationandthe
necessarynon-monetary financingofbudgetdeficitshasled
toahighrealinterestrateintheCommunity .Taken
together ,thesefactorshaveproduced asustained
deterioration intheprofitability ofinvestment .Referenceto
Graphs11and12indicatesthatthereisastrongassociation
betweenratesofreturnandgrowthofthestockof
capital.
Theincreased relativerealcostsofemployment and
weakenedprofitability offixedcapitalhastendedtomake
labour-using orcapital-widening investment increasingly less
attractiverelativetothemorecapitalintensivemethodsof
production .Overall,thedeclineincapitalproductivity and
fallinratesofreturninEuropepointtoapronounced declineintheefficiency ofitsinvestment ,perhapsforsome
considerable time.Theimplication isthatnewinvestment
hasnotprovidedthecontribution toproduction capacity
needed .
Insummary ,thepositionreachedinEurope,therefore ,isone
wheretherehasbeentoomuchemphasisonlabour-saving
investment ;but,inducedbypoorprofitability ,theeconomy
isfacedwithashortageofinvestment fornewcapacity .Inthe
lowefficiencysituation ,thegapbetweenthemarginal
productofcapitalandtherealinterestrateistoolarge.
Sincetheearly1980stherehasbeensomecorrectionofthese
trends.Thetrendgrowthofrealwagecostshasmoderated to
1.0%perannumovertheperiod1983to1985comparedto
2.1%for1974to1982and4,4%for1961to1979.The
rateofreturnonthegrosscapitalstockisestimatedtohave
increasedsomewhatfromitslowpointatthebeginningofthe
1980sfollowingthesecondoilshock,butthisisstillalong
waybelowthelevelobservedinthe1960swhentherewasa
fasterrateofgrowthofthecapitalstock(seeGraph12).
Investment hasbeguntopickupin1984and1985,butfrom
averylowbase.Asnoted,however,theincreaseintherateof
capacityutilization inindustryhascontinuedthroughthelast
12months,risingfrom79%inthemiddleof1984to82%
in1985.Giventhissupplyconstraint ,ifthepotentialrateof
growthoftheEuropean economy istobesignificantly
increased ,therewillhavetobeamajorinvestment effortand
oneorientated awayfromlaboursavingandmoretowards
capacityextension .Thisinturnimpliesthattherecent
improvement intherelativerewardtocapitalascomparedto
labourwillhavetobecontinued foraconsiderable numberof
years.Suchatrendwould,ofcourse,bemorereadily
acceptedaspartofasocialconsensus iftheeconomywere
seentobemovingontoamorefavourable growthpathandat
thesametimecreatingmoreemployment .Thisraisesa
questionofanappropriate demanddevelopment whichmust
gooninparallelwithsmallincreasesinrealwages.

NoL377/20 OfficialJournaloftheEuropeanCommunities 31.12.85
GRAPHS 11and12
11.Relativerewardsoflabourandcapital
Constantprices—indicesI960=100)12.Ratesofreturnandgrowthofthecapitalstock
Constantprices
(u)Compensation ofemployees perwageandsalaryearner,includinganestimatedlabourincomeofthe
self-employed ,assumedtobeequaltothecompensation ofemployees perwageandsalaryearner.
(2)Netoperatingsurplus,excludingestimatedlabourincomeoftheself-employed ,asa%ofthegross
capita!stock.
(3)Relativerewardoflabourandcapital=Labourincomeperheadoftheoccupiedpopulation /Netrate
ofreturnonthegrosscapitalstock.
(4)Three-year movingaverage .
Thestructureoftheeconomyhasbecomebiasedtoomuchin
favourofcapital-deepening andlabour-saving investment ,
sothattherehasbeeninsufficient capacityexpanding
investment .Thisseemsdueinnosmallmeasure to
inappropriate relativefactorpricetrends,withdeclining
profitability matchingweakoverallinvestment andrising
labourcostsmatching stagnant employment .More
appropriate relativefactorpricescouldseeadvanced
technology helpachievehigherpotential outputand
employment growth .Inthiscontext,theroleoftechnological innovation andthe
growthoftechnicalprogressmoregenerally isparticularly
important .Thereissomeevidencenowthatthepaceof
technicaladvanceinEuropeweakened duringthe1970s.
Contrarytosomebeliefs,thiswillhaveweakenedratherthan
helpedtheemployment situation .Whilsttheprocessof
technicaladvancenecessarily involvestheelimination of
obsoletejobs,italsocreatesnewjobsinindustriesthatmake
andusethetechnologies .Someofthemoreimportantrecent
technological improvements ,information technology for
example ,haveastrongcapital-saving andlabour-using
dimension .Thepaceandnatureoftechnicalprogress ,
however ,isnotinvarianttorelativepricesinmarketsfor
labourandcapital.Ifrealwagesrisetoomuchrelativetothe
rateofreturnonfixedcapital,thismightbeexpectedto
inducemoreinnovations ofalabour-saving kind.Amore
appropriate structureofrealemployment costsandrewards
tofixedcapitalwillhelptoavoidthiskindofbias.Solongas
advancesintechnicalknowledge improvetheefficiencyof
investment andworkingmethodstherewillbelessneedto
slowdownrealwagegrowthinordertoachieveagiven
employment objective .II.4.Pay,profitsandjobs
Duringthecourseofthelastyear,theEconomic Policy
Committee oftheECconcluded anexamination concerned
withtheadequacyofthereturnonfixedcapitalinthe
Community (1).
(•)Economic PolicyCommittee oftheEC,'Profitability andthe
rateofreturnintheCommunity ',reporttotheCounciland
Commission (Doc.II/02/85-Efinal)May1985.

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/21
employment .Thisissueofcourseposesconsiderable
problems inthecontextofcentralized wagebargaining ;
theappropriate balancebetween centralized versus
decentralized negotiation isanimportant topicofdialogue
betweenthesocialpartners .Someevidence onthe
significance ofinter-sectoral realwageflexibility forthe
employment-creating performance oftheeconomy is
suggested inarecentwork(J).Whileinterpretation ofthis
kindofevidencemustbemadewithcaution,itdoesappear
tobethecasethatECcountrieshaveshownarelativelylow
realwageflexibility ,bothinter-sectorally andatthe
macro-economic level,thisrunningalongside increasing
unemployment .TheCommittee observedthattherateofreturnoninvested
capital,whichisthemostsignificant indicator of
profitability ,declinedinthe1960sandthe1970sinthe
Community .In1984thenetrateofreturnonthenetcapital
stockintheECisestimatedonaveragetohavebeen4,2%
(seeGraph14),whichcompareswith11%inthe1960s(on
thebasisofthedefinitions usedinGraph14).Thisdeclinein
therateofreturn,however ,appearstohavebeenarrestedin
themorerecentpast,astherateofincreaseofrealwages
moderated toanannualaveragegrowthof1%intheperiod
1983to1985(compared with2,1%intheperiod1974to
1982and4,4%intheperiod1961to1973).Nonetheless ,
therecoveryoftherateofreturn,whilevariableacross
countries ,hasonaveragebeenverymodestwhencompared
withthelevelsobservedduringperiodsoffastergrowthin
Europe .
ThewageshareinnationalincomeinEuropehasfallenback
closertothelevelsobservedatthebeginningofthe1970s,
andtheprofitssharehasincreased correspondingly .
However ,thischangeinincomedistribution hasmerely
matchedthechangeincapital-labour mix.Thisexplainswhy
therateofreturnonfixedcapitalhashardlyincreased ,and
whytherefore thereremainsaproblemofinsufficient
profitability inEurope.Itiscrucialimportance thatagreaterconsensus bereached
overhowtheseseveraldifficultissuesofpay,profits
andemployment performance shouldbehandledinthe
Community intheyearsahead.Europeancountriesmustno
doubtfindsolutionswhichcanbeadaptedtotheparticular
politicalandsocialtraditions ,whilsttakingfullnoticeof
theingredients ofsuccessful employment performance
elsewhere .Inthisconnection theroleofmorenovelmodesof
paydetermination couldbeexamined ,includingforexample
alargercomponent ofprofit,bonusorperformance-related
pay.Inpaysystemswhichembodysomeofthese
characteristics ,employees couldhavesomemeasureof
guaranteeagainstexcessiveswingsofthependulum infavour
ofreturnstoshareholders .Moreover ,theemployerwouldbe
morepreparedtorecruitextrastaffintheknowledge that
labourcostsweremoreflexible .Inviewoftheneedfora
periodoffasterinvestment andhigherprofitability ,itcould
alsobehelpfultofosteraclimateofwiderparticipation
onthepartofemployees inschemesforcapital
accumulation .Whilethereareseriousstatistical difficulties inthe
measurement ofprofitability offixedcapital,thereexistalso
othercriteriaforjudgingthelevelofprofitsandwages,
notablyintheinvestment andemployment performance of
theeconomy .Highrealwagegrowththroughthe1970shas
contributed toaweakinvestment performance accompanied
byanunfavourable investment mix.
Inthejudgement oftheEconomic PolicyCommittee ,the
greatmajorityofMemberStatesdostillexperience alevelof
profitability onfixedcapitalthatis,inmostsectors,probably
toolowfromthestandpoint offostering sufficient
investment andemployment growth .Sustained moderate
increasesinrealwagescoupledtoadequatedemandgrowth
would,ofcourse,leadtothedesiredoverallincreaseinthe
rateofprofitability offixedcapital .Anexampleofthevery
positiveresponseofemployment andinvestment torealwage
moderation andimproved profitability isbeingseen
currentlyinDenmarkwhere,inasmallopeneconomy ,the
increaseinexportshasprovidedthenecessary demand
stimulus .Wagemoderation inrecentyearshasallowedthedeclinein
profitability offixedcapitaltobearrested .However ,
profitability isstilltoolowforthepurposeofachieving
higherinvestment andemployment growth .Realwage
flexibility intheEC,bothatmacro-economic andsectoral
levels,isalsoratherlowandapparently relatedtothe
weakemployment propensity intheEuropean economy .
Thereforerealwagemoderation ,ofakindactuallywitnessed
inmostMemberStatesinthelastfouryearsorso,needsto
besustainedforaperiodofyearsaheaduntilasubstantial
andcontinuing reductionofunemployment isachieved .
Employers fortheirpartmustensurethatthenecessary
investment isforthcoming .Withinabroadframework of
concertation betweenthesocialpartnerstherearethree
particular areasofconcern:(i)howgovernments might
formulate thenecessarydemandpoliciestoaccompany wage
moderation agreements ;(ii)theadjustment ofrelativefactor
pricesandattainment ofemployment objectives ;(iii)the
scopefornewmodesofwagedetermination designedto
attainmorereadilytheobjectivesofhighemployment .Thecaseexiststhereforeforanadjustment tobesustained
forseveralyears.Indeed,itmaywellbenecessaryforreal
wagegrowthtoremainverymodestandbelowthegrowthof
labourproductivity ,aslongasunemployment hasnotfallen
significantly .However ,thiswouldneedtobeaccompanied
byanappropriate evolution ofdemand sustained
progressively inpartbyspending onnewprivate
investment .
Theissueofwagedifferentials ,andflexibility inrealwage
evolution isalsorelevantinthepursuitofahigherlevelof(*)OECD,'Labourmarketflexibilityandexternalpriceshocks',
ESDworkingpaperNo24,September 1985.

NoL377/22OfficialJournaloftheEuropeanCommunities 31.12,85
II.5.Acooperative medium-term growthstrategy Itisenvisagedthattheimplementation ofagrowthstrategy
oftheabovekindwouldrequireanundertaking byboth
employers andtradeunionstoholdtheevolutionofreal
wagestothecourseofmoderation witnessedinrecentyears
forafurtherperioduntilasufficient reduction in
unemployment isachieved .Itshouldbeexamined inthe
wage-profit-investment-employment nexuswhetherthere
couldbearoleforwageshavingalargerflexibleandmore
profit-related component .Thiscouldhelpboost
employment bymakinglabourlessofafixedcost.Inpresent
conditions ,suchaninitiativewouldservealsotoassistan
investment upswing ,byenablingcompanies torelylesson
externalsourcesoffinance .Theearlierpartsofthissectionofthereporthaveattempted
toprovidewhatareineffectbuildingblocksforasuggested
strategyaimedatsecuringasubstantial andemployment­
creatinggrowth .Giventhisearlierdiscussion ,thejudgement
inthisreportisthatthepossibility ofrealizingsuchan
outcome willdependheavilyonasmallnumberof
particularly important conditions butsetwithina
cooperative framework .Particularemphasisisplacedonthe
contribution requiredfromthedifferentactorsforthe
purposesofimproving theprofitability ofcapital,providing
aggregate demandsupportandthusgenerating the
investment necessary forgrowth ofamore
employment-creating kind.
Withinthiscooperative framework ,therecentmoderation in
mostcountriesintheriseofrealemployment costs,aftera
periodofstrongincreases ,mustbemaintained .Itisclearthat
thosecountrieswhichhavenotyetachievedthedegreeof
moderation requiredmustmakeeffortstodoso.Associated
withthisistheneedtoencourage amoreeven-handed
evolutionoftherelativerewardstolabourandcapital.Over
themediumterm,areduction inthecostsofemployment
relativetothoseofnewinvestment willbegintochangethe
investment mixandhencereversewhatisnowthoughttobe
anexcessiveamountofcapitaldeepening andsheddingof
labour .TheCommunity couldgiveaboosttoacooperative strategy
byinitiatingmeasurestoimprovethesupplysideofthe
economywhich,atthesametime,havedemandeffects.
Thesecouldconsistofinitiativestoacceleratecompletion of
theinternalmarket,developaprogramme ofEuropean
infrastructure andenvironmental projects,rapidadvanceof
theproposed European technological community ,and
agreement withothercountriestolaunchthenewGATT
roundoftradeliberalization .Arapidrun-down in
sector-specific subsidiesandintra-Community protective
practicesbygovernments wouldopenupthewayfor
reductions intaxes.Employers 'organizations wouldbe
expectedtoreactfavourably tothesemeasures .Employers '
organizations couldalsopromotesupportintheprivate
sectorforasetofimportant European infrastructural
projectsandforanaccelerated openingoftheEuropean
internalmarket .Theycouldgivemoreurgentattentiontothe
adaptation ofinvestment andemployment plansinthelight
oftheexpectedchangeinwage-profit relationsandthe
openingofmarketopportunities .Overtheshorterperiod,amoremoderategrowthofreal
wageswilltendtoincreasetheprofitability offirms.
However ,sincewageincomesformsuchalargepartoftotal
domesticincome,toadegreethereislikelytobeanadverse
effectondemand .Giventhestartingpointwhichisone
wherethereissomeevidenceofcapacityconstraints already,
thelinkbetweenexpectedfutureprofitability ofinvestment
andspendingonnewinvestment forcapacityexpansion is
important .Totheextentthattotaldemandisreducedmore
bywagemoderation thaninvestment isincreasedbecauseof
improved profits,itwillbenecessary forsomeaggregate
demand-sustaining measuresonthepartofgovernments to
beeffectedifthedesiredemployment response istobe
realized .Asregardsdemand-side policies,governments wouldbe
expectedtoensurethemaintenance ofsufficientdemand
overthemedium-term inorderthatthesupply-side
responses ,particularly newjobs,berealized .Intheeventofa
weakening ofdemand,forexamplebecauseofthewage
moderation proposed orinternational priceordemand
shocks,governments wouldbeabletoexploitroomfor
manoeuvre therebycreatedforeconomic policy.In1986
initiatingcontributions toacooperative strategycouldtake
theformofadvancing publicinfrastructure programmes and
taxreductions wherepossible,leavingfurtherfiscalmeasures
openfor1987and1988depending uponprogressinthe
overallstrategy .Thewayinwhichthemarketforlabourisabletorespond
occupiesacentralplaceandinthisrespecttheadaptability
andfunctioning oflabourmarketshasbeenidentified asa
problemareainEurope .Factorssuchasjobtenureand
severanceconditions ,moreflexibleuseofworkingtime,the
adequacy ofprofessional training ,therelationofwage
differentials tolabourneedsindifferentsectors,regions
andskillsandthegrowthofnon-wage costsshouldbe
re-examined inordertoimprovemarketefficiencywithout
jeopardizing socialprotection .Themacro-economic effectsexpectedifapolicystanceofthe
kindoutlinedcanbesummarized brieflyintermsofastylized
model-based simulation exerciseofthekinddescribed in
SectionII.1.
Theelementsnotedaboveconstitute theessentialcoreofthe
approach ,acharacteristic ofwhichisthattotaldemandhas
animportantsupporting roleratherthanoneofleadinginthe
growthprocess .ACooperative growthscenarioisconstructed wherebyitis
assumedthatCommunity countriespursuejointlyapolicyof
sustainedwagemoderation .Inthesimulation itisassumed
thatbothmonetary andfiscalpolicyoperatesoasto

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/23
maintainaggregate nominaldemandclosetoitsbaseline
growthpath.Declininginflationandwagecostscontribute
toafasterincreaseinrealmoneystock.Outsideofthe
Community ,itisassumedthattheUnitedStatesreducesits
budgetdeficitwithsomeoffsettingexpansionary action
beingtakenbyJapanandtherestoftheworld.Actioninthe
UnitedStatesmakesitpossibleinparticularforEuropeto
reducenominal andrealinterestrateswhichstimulate
privateinvestment directlyandhelptoreducepublic
expenditure fordebt-servicing purposes .Inthiscontext,
somemoderate expansion ofpublicinvestment and
reductions intaxationarecompatible withthedesired
controlofbudgetdeficits,largelybecauseoftheimpactof
highergrowthonbudgetrevenuesandthelowerinterest
rates.Inthecaseofalessfavourable assumption aboutthe
international environment ,someadditionaldemandsupport
wouldbenecessary toobtainthedesiredreduction in
unemployment .
Theresultsofasimulation ofacooperative strategyofthis
kind,onaninternalandinternational level,areillustrated in
thethirdcolumnofTable7andGraph13.
Themajorfeatureisthattheinitiatives proposed ,if
implemented ,offertheprospectofagrowthrateof3,5%
between1986and1990beingassociated withanaverage
employment growthof1,1%.Indeed,inthefinalyearofthe
projection ,outputgrowsby3,5%andemployment
increasesby1,5%.Thisreducestheunemployment ratein
1990to7%.Thisdevelopment couldbesustainedafter
1990andthereforeopensuptheperspective ofafurther
substantial reduction inunemployment .
Theassumedpolicyofwagemoderation withdemand
supportreducestherateofinflationandincreasescompany
profitability .Thisinducesariseinprivateinvestment ofover
6,5%which,overthesimulation period,issufficientto
overcome capacityconstraints atthemacrolevel.
Significantly ,thepublicsectordeficitmeasured asa
percentage ofGDPisonaveragelittledifferentfromthatin
thebaselineprojection .
Itshouldbenotedthatthegrowthrateof3,5%onaverageas
simulated isnottobejudgedasexcessivewhenseenagainst
thebackground ofaconsiderable increaseinproductive
capacityduringthisadjustment phase.Labourproductivity growsonaverageonlyalittlefasterthan
inthebaselineassumption inspiteofthemuchmore
substantial acceleration ofgrowthfrom2,5to3,5%.Thisis
theresultofagradualbutwidelydiffusedshiftinthe
labour/capitalmixintheeconomy .Fastergrowthanda
gradualchangeinthelabour/capitalmixcombinetogivethe
favourable resultsforemployment andunemployment .
Themacro-economic modelsimulation cannottakeaccount
of,ordescribe ,thedetailedsectoralevolution of
productivity .However ,suchproductivity growthmightbe
expectedtohavesomeofthefollowingcharacteristics .For
thosewhoarealreadyinemployment ,onecanassumea
reasonable highskilllevel,thattheirproductivity
performance willalsobehighand,whencombinedwiththe
anticipated newinvestment ,maywellincrease .Ofthose
enteringemployment ,theyoungerentrantswillbelargely
unskilledandrequireaperiodoftraining .Overthistime,
theirproductivity contribution willcertainlybelow.The
samewillbetrueforpeoplewhohavebeenunemployed fora
longtime.
Insummary ,thesimulation asconstructed impliesthata
fulfillment oftheconditions outlined couldleadthe
European economyontoagrowthpathwhichhassome
characteristics ofa'virtuouscircle'.Higherprofitability and
demandsupportgeneratetheinvestment andoutputgrowth
sufficienttoabsorbnewjobsonascalewhichreducesthe
poolofunemployed .Stronger growth,increased
employment andlowerunemployment inturn,improve
publicsectordeficitsbymorerevenuesandlesscrisis-related
expenditure ,andthiscontributes ,withincreased
self-financing ofenterprises ,toproducelowerinterest
rates.
Evenso,therearesomefactorswhicharenotmodelledinthe
scenarioandwhichcouldgeneratefurtherimprovements in
theeconomy'sperformance .Theseincludevarious
supply-side improving measuresthathavebeentakenin
recentyearsinmanycountries ,butwhichtakealongtimeto
bearfruit.Improvedmarketadaptability withcostneutral
reorganization andreduction ofworkingtimeandthe
accelerated realization oftheECinternalmarket,asnow
proposed ,wouldaddtogrowthandemployment .Loweroil
pricesalso(asmentioned inSection1.3)couldhelpboost
activityintheworldeconomymoregenerally .

NoL377/24 OfficialJournaloftheEuropeanCommunities 31.12.85
GRAPH 13
Someillustrativeordersofmagnitude inabaselineassumption andalternative policystrategies,EC,
1985to1990
GDPdeflator GDPvolume
GDPnominal Unemployment rate

31.12.85OfficialJournaloftheEuropeanCommunities NoL377/25
GRAPH13(continued )
Budgetdeficit Long-term rateofinterest
Investment share(gross)('j
Realwageperhead(yearlyrateofchange)
(*)Asa%ofGDPmarketprices.
Source:Eurostat ,Commission Services .

NoL377/26 OfficialJournaloftheEuropeanCommunities 31.12.85
Thestrategythusdependsheavilyonthemutualsupporting
actionofthemajorpartners—employers ,tradeunionsand
governments .Theremustbeaconscious willtobothensure
thedesiredsupplyresponseontheonehand,andtoensure
thatthenominaldemandissufficienttoabsorbthissupplyon
theother.
Apolicystrategyissuggested ,fordiscussion bythesocial
partnersandgovernment ,designedtoraiseemployment
growthandreduceunemployment verysubstantially over
themediumterm.Ifpursued,itisconceivable that
unemployment couldfalltoabout7%by1990and,inthisevent,thegainstorealoutputwouldalsobesignificant .The
coreelements,namelyatemporary moderation ofreal
employment costs,relativefactorpriceflexibility ,and
nominaldemandsupportarehighlyinterdependent .
However,animportantcontribution willalsobeprovidedby
extensiveimprovements inthefunctioning oflabour,goods,
servicesandcapitalmarketsandnotablyintheECinternal
marketinmanyfields.Theimplementation ,successand
credibilityoftheadjustment strategyrests,however,ona
jointwillingness byallpartiestoensurethatthenecessary
conditions aremetwithastep-by-step implementation
startingin1986,extending overseveralyears.
III.ECONOMIC POLICY INTHEFRAMEWORK OFACOOPERATIVE GROWTH
STRATEGY
III.1.Publicfinances
III.1.1.ThepublicsectorThereasonswhythescaleofbothpublicexpenditure and
taxationcaninfluenceeconomicgrowthandemployment
overthelongertermareextremelycomplex .However ,three
channels ofinfluence canbeidentified whichcreatethe
possibility ofriskstotheachievement ofanefficient
economicperformance .
Asthetaxationonlabourincomerises,soalsodoesthe
differenceor'wedge'betweenwhatanemployeecoststothe
employer ,andwhattheemployee receivesasnet-of-tax
income.Higherlabourcoststendtoreducethedemandfor
labourandthereforeprivateemployment .Further,insofar
aslowernet-of-tax incomesinducewageearnerstoclaim
higherwagesincompensation ,thiswillcreateinflationary
pressureandworsenemployment prospectsagainwhenthis
inflationhastobereversed .Highertaxationonwageincome
helpsalsotoaccountfortheincreaseinthepriceoflabour
relativetocapitalandhencetheincreaseinthecapital-labour
ratioobservedinthe1970s,andnotedearlierinthisreport.
Theincreaseinthistaxation'wedge'hasbeenpronounced in
mostEuropean countriesoverthelasttwodecades,as
compared withexperience intheUnitedStatesandJapan.
Forexample,between1960and1983,thedifference
betweengrossandnetwagesexpressed asapercentage ofnet
wagesgrewonaverageinthefourlargerECcountriesfrom
36to60%.IntheUnitedStatesoverthissameperiod,the
increasewasfrom29to37%.
Asecondchannelconcernstheefficiencyandvalueofpublic
services .Ifwageearnersperceivepublicservicesand
transferstobegivinggoodandfairvalue,therewillbeamore
readyconsensus overaccepting thetaxburdenimplied .
Inefficientandundulyextensivetransferpaymentsystemson
theotherhandwilltendtoundermine suchaconsensus and
thusleadtohigherwagepressurewithdetrimental effectson
growthandemployment .
Athirdchannelofinfluenceoccurswhenpublicborrowing
ratherthantaxation isusedtofinancecurrentpublic
expenditure .Here,giventheneedtopursueanti-inflationary
policies,thedeficitsshouldnotbefinancedbymoneyLastyear'sAnnualReportadvocated areversalofthe
mounting shareofpublicexpenditure andtaxationinthe
grossdomesticproductoftheEuropeanCommunity .Recent
estimatesbytheCommission suggestthattheprevioustrend
isnowbeingcheckedifnotreversed .Thevolumeofpublic
expenditure isexpectedtogrowbyunder1%in1986.Total
publicexpenditure intheECasashareofGDPisestimatedto
declineslightlyfrom51,9%in1984to51,5%in1985,and
thenmoresubstantially to50,8%in1986.Similarly ,the
totaltaxburdenisestimatedtobedeclining ,althoughbya
somewhat smallermargin,because ofbudgetary
consolidation .Totaltaxesamounted to46,4%in1984,are
expectedtobe46,3%in1985and46,0%in1986.
Giveninstitutional differences intheorganization andextent
ofthepublicsector,suchhighlyaggregated datamustbeused
withcaution,especially ininter-country comparisons .Some
summarycomparisons betweentheECandUSareshownin
Table8whichpointtosimilarities aswellasdifferences
betweenthetwoeconomies .Government consumption
expenditures ,forexample ,standinbothcasesatabout19%
ofGDP,andtheweightofdirectincometaxationisalso
similaratabout13,5%ofGDP.Thehigherleveldf
government capitalformation inEuropenodoubtreflects
thewiderextentofpublicintervention incertainservices,for
exampletransportandhealth.Strikingdifferences arisein
themagnitude ofgovernment currenttransferpayments
whichreflectthegreaterinvolvement ofgovernment inthe
provision ofhealthandsocialsecurity .Socialsecurity
contributions inEuropeasapercentage ofGDPare
correspondingly higherthanthoseintheUnitedStates.The
ECaveragetaxandsocialsecurityburden,however ,coversa
considerable range;in1985forexample ,fromaround55%
inDenmark andtheNetherlands to41%intheUnited
Kingdomand35%inGreece.

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/27
creation .Theimpactonperformance willthusoperate
primarilythroughahigherrateofinterest .Insofarasthis
reducesprivateinvestment itwillharmthegrowthof
productive potential .
Althoughthetimingandnatureofthefinalincidenceofthese
effectsoneconomicperformance arehighlyuncertain ,thereisapresumption thatinEuropetherapidgrowthofpublic
expenditure andchangesinitscomposition togetherwiththe
evolution ofthetaxburdenhashaddetrimental effectson
economicperformance whenmeasuredoverthelongerterm.
ThefactthattheCommunity isbeginningtoreversesomeof
thetrendsobserved indicates anawareness ofthese
possibilities andthisistobeencouraged .
TABLE 8
Levelandstructureofpublicexpenditure ,receiptsandpublicdebtintheUnitedStatesandtheEC
(%or%ofGDP)
UnitedStates Europe
1970 1982 1970 1982 1985
A.Generalgovernment expenditure ,
total 32,8 37,6 37,9 51,2 51,5
(1)Generalgovernment capital
formation 2,5 1,5 4,2 3,0 2,8
(2)Netcapitaltransfers -0,5-0,3 0,8 1,0 1,1
(3)Government finalconsumption
expenditure ,total 19,2 18,7 15,3 19,3 19,2
(4)Subsidies 0,5 0,5 1,8 2,3 2,4
(5)Interestpayments 2,3 4,5 2,0 4,7 5,3
(6)Currenttransfers 8,3 12,4 13,8 20,9 23,1
B.Generalgovernment receipts,total 31,0 33,6 38,2 45,8 46,3
(1)Indirecttaxes 9,5 8,5 13,9 13,5 13,8
(2)Directtaxes 13,9 13,6 10,3 13,0 13,2
(3)Socialsecuritycontributions * 4,7 6,8 11,0 15,4 15,5
(4)Othercurrentreceipts 2,9 4,7 2,9 3,8 3,8
1971 1982 1971 1982 1985
C.Publicdebt
(1)Grosspublicdebt 26,in28,5(1)47,8 57,5 64,3
(2)Netpublicdebt 14,7(2)26,3(2)33,4
D.Generalgovernment share
intotalemployment ,% 18,1 16,7 13,7 17,5
E.Generalgovernment financial
balance(in%ofGDP)(3) -1,8-3,9 0,3-5,6-5,2
(*)Federalgovernment .
(2)AverageforEUR5(D,F,I,UK,DK).
(3)Projectedfinancialbalancefor1985fortheUnitedStates:-3,7%ofGDP.
Itishighlyunlikelythateconomicperformance isinvariantto
boththeweightandshapeofthepublicsector.Undesirable
consequences canfollowfromthedifference betweengross
andnetincomes,aweakening ofsocialacceptance ofthetax
burdenandtheeffectsofpublicdebtoncapitalformation .
Therearesignsofincreasing awareness intheCommunity
thatthesearerealproblems ,andtheobservedtendencyto
beginareversalofearliertrendsistobewelcomed .III.1.2.Taxationpolicyforeconomicgrowth
Thereareanumberofwaysinwhichtaxationpolicycan
contribute toastrategyaimedathighergrowthofamore
employment-creating nature.
Onequestioniswhethersuchastrategycouldbefurtheredby
meansofincreased incentives andsubsidies forinvestment .

NoL377/28 OfficialJournaloftheEuropeanCommunities 31.12.85
Thereareseveralwaysinwhichtaxationpolicycan
contribute toastrategyforhighergrowthandmore
employment-creating growth:(i)aswitchinemphasisaway
fromspecificfiscalincentivesforinvestment ,whichwillhelp
tofosteremployment andenterprise profitability ;(ii)
reductionofindustry-specific subsidiescoupledwithgeneral
taxreductions ;(Hi)reductionofotherspecifictaxoffsets
accompanied bylowertaxrates;and(iv)intheeventofan
energypricefall,theraisingofdutiesortaxesonenergycould
provideroomformanoeuvre foremployment creation .Thishasbeendiscussed extensively intherelevant
Community bodiesduringthelastyear.Thepredominant
judgement isthattheexperienceoftryingtostimulategrowth
throughincreased specificinvestment subsidieshasbeen
ratherdisappointing .Although asustained increasein
investment spending isneedednowaspartofagrowth
strategy,itisfeltthatinducement ofthisthroughthe
introduction ofspecificinvestment incentivescreatestherisk
ofworsening anytrendinthedirectionofcapital-deepening
andlabour-saving activities .Giventhepresentconditionof
theEuropeaneconomy ,withitsnotablypooremployment
record,itmaybedesirabletocreateconditions whichare
moreeven-handed withrespecttobusinessexpansion .Any
feasibletaxconcessions shouldthereforebeusedprimarilyto
cutlabourcosts,soimproving theprofitability ofprivate
enterprise inordertoinitiateamorebalancedmixof
labour-using andlabour-saving investment .
Arelatedissueiswhetherpublicdeficitconsiderations
permitting fasterprogressinthereductionofbothsubsidies
andtaxesinvarioussectorsoftheeconomycouldbemade.
Therearesomepersuasive reasonsfordoingthis.Notably ,it
willhelptore-allocate resourcesfromthemorestagnantor
decliningsectorstothemoreproductive andgrowingsectors
oftheeconomy .Thisisanareaofpolicywherethe
responsibilities oftheEuropean Community itselfare
considerable ,incompetition policyingeneralandinsome
specificsectors (seefurtherbelowonagriculture ,steel,and
shipbuilding ).Amutually reinforcing actionbythe
Community andMemberStatesisneededtoeffectamore
rapidseriesoftaxcutsandofsubsidies ,soaddingafurther
dynamicelementtotheeconomicstrategy .III.1.3.Theroleofpublicdebt
Fluctuations isbudgetdeficitsandpublicdebtcanhave
important effectsonbothsupplyanddemandconditions in
theeconomy .However ,thesearenoteasytodefineina
simpleway.Risingpublicdebtburdenstendtoincreasethe
rateofinterestand,otherthingsbeingequal,depressprivate
capitalformation .Thisinterestrateeffect,however,need
notnecessarily beadominant factorsince,undercertain
conditions ,budgetdeficitmovements cancontribute
positively toeconomic growth.Ifanappropriate policy
succeedsinraisingthepotentialoutputoftheeconomy ,a
temporary riseinborrowing mayincreasedemand,inaway
whichmatchesbroadlytheincreasedpotentialtaxbaseofthe
economy .Thestructuralpublicdebtburden,asmeasured ,
forexample ,bythemedium-term valueofpublicdebtasa
percentage ofGDP,maythennotrise.
Whatlevelofthepublicdebtburdenmightbejudged
appropriate dependsverymuchonspecificeconomic
circumstances .However ,atveryhighlevelsofthepublic
debtburden,suchasaround100%ofGDPormore,as
currentlyisthecaseinBelgium ,IrelandandItaly,theserious
economicproblemscausedbyexcessiveborrowing andthe
resultingdebtburdenbecomequiteobvious .Interest
paymentsonthepublicdebtcanreach10%ormoreofGDP,
andaccountfor20to25%ofpublicexpenditure .Therateof
interestitselfis,underconditions ofnon-inflationary
monetarypolicy,subjecttostrongupwardpressure .Ifthe
riskassociated withariseinthedebtburdenbecomes
important ,acountry'sdomesticinterestrateeventually will
incorporate asubstantial riskpremium .Thisisadirect
reflectionofmarkets'viewofthefinancialproblem .There
mayalsodevelopincomedistribution problems between
bond-holders andsalaryearners.Acombination of
arguments ,concerned witheconomic growth,monetary
stabilityandincomedistribution therefore ,allpleadin
favourofactiontoreversewhatcaneasilybecomean
unsustainable trendsituation .
Asfortheadjustment processrequired,examplesshowthat
comprehensive stabilization programmes neednot
necessarily beexcessively costlyordisruptive eveninthe
shortrun.Denmark ,inparticular ,hasbeenreducingits
government borrowing requirement massively ,from9%of
GDPasrecentlyas1982(whichiscomparable orlowerthan
thepresentdeficitsofBelgium,Greece,IrelandandItaly)to
under2%ofGDPforecastfor1986.Inthemeantime ,theInthesameclassofideas,butthisisclearlyamatterof
nationalcompetences ,isadetectable notionoftaxreform.
Examples areseencurrently intheUnitedKingdom ,
Denmarkandothercountries .Whatisenvisaged isthata
simplification ofexistingtaxsystems,throughthe
elimination ofthenumerous taxoffsetsandadvantages for
specialpurposesespecially intheincometaxationofpersons
andcompanies ,willenablebasicratesoftaxationtobe
reducedwithinexistingrevenueconstraints .Thisencourages
themarkettoallocateresources inresponse tomore
appropriate pricesignalsandthushelpstoavoidthekindof
biaswhichhavebecomealltooobviousoverthepast
decade .
Finally,thepossibility ofasubstantial fallinthepriceofoil
raisesissuesconcerned withthetaxationofenergy,labour
andcapital.Theobjectiveofamoreemployment-creating
growthiseasiertoattaininthepresenceofreductions inthe
taxationofemployment income .Apronounced fallinthe
priceofoiloverafewyearscouldendangerprogressbeing
madetowardssecuringasituationwherebytheeconomyis
lessvulnerable toimportedpriceorsupplyshocks.Itis,of
course,difficulttojudgewhatthelong-term equilibrium
priceofenergymightbe.Nevertheless ,theraisingofduties
ortaxesonoilproductswouldcontribute tobudget
flexibilityandthusprovidemoreroomformanoeuvre inthe
job-creation investment strategyproposedhere.

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/29
profitability andhighunemployment ,wage
moderation helpscreateandincreaseprofitable
productive capacity .Itincreasesthepotentialtaxbase,
andinasituationwherepublicfinancesarein
reasonable balance,justifiestaxratereductions .Wage
moderation itself,however ,maycreateatransitional
problemofdemandweakness ,andthisisanothercase
whereaccompanying supportfromdemandpolicyis
desirable .
Publicdebtstrategyisanimportantingredientofbothsupply
anddemandpolicy.Suchastrategycannotalwaysbedefined
insimpleterms.TherearecasesintheCommunity wherethe
growthofthepublicdebtburdenisclearlyalarmingandmust
nowbeputontoacorrectedtrend(Italy,Belgium,Ireland).
Elsewhere publicdebtburdensaregenerallylowerand,in
somecases,approximately stabilized .Whetherthereisa
soundcaseforusingroomformanoeuvre hereforsome
increaseinthepublicdebtburdenduringanadjustment
periodtohelptheeconomyontoahighergrowthtrajectory ,
dependsuponaspecificsetofsupplyanddemandconditions .
Ifsupplypotential isimproved bywagemoderation and
micro-economic policiestoimprovemarkets,andifdemand
istemporarily weakbecauseof,forexample,wage
moderation orinternational influences ,thensometransitory
increaseinthepublicdebtmaycontribute avaluableelement
tothewidergrowthstrategy .Danisheconomywillhavegrownby15%(from1981to
1986),whereasinthesameperiodtheEConaveragegrew
onlyby8%.Danishemployment growthwasalsomuch
fasterthaninanyotherECeconomyduringthisperiod.
InotherECcountriesthedebtburdencurrently isnotso
great.ThegrosspublicdebtburdeninGermanypresently
appearstobestabilizing ataround42,5%ofGDP.Thatof
Franceiscurrentlyrisingbutremainsatalowerlevelof36%
ofGDP.ThatoftheUnitedKingdom ishigher,at60%of
GDPin1985,buthasbeendecreasing since1983.Thusthese
countriesperhapshavesomemarginwithinwhichthe
evolutionofthepublicdebtburdenasashareofGDPcould
vary,dependingupontheireconomicpolicystrategy .Ifsome
temporary riseinthepublicdebtburdenweretobeaccepted
inthenextfewyears,greatcareshouldbetakentoensure
that(a)thisformedpartofacombined supplyanddemand
strategythateffectively raisedtheprofileofactualand
potentialproduction and(b)remainedwithintheconstraints
ofasoundmedium-term financial stratgegy .These
conditions shouldbeeasiertosatisfyifthefollowingcriteria
areobserved :
(i)Onthesupplyside,thecounterpart toincreasedpublic
debtwherepossible ,shouldrepresentinvestment in
productive potential ,eitherintheformofpublic
investments offeringacceptable socialratesofreturn,
or,inthecaseoftaxreductions ,inastimulation of
privateinvestment whichwillleadtoawideningofthe
futuretaxbaseoftheeconomy .Suchtaxreductions
mightbeexpectedtohavebeneficialincentiveeffectsin
themarketsforlabourandcapital.Inthiswaya
virtuous circleofinterrelated movements canbe
possible .Withenhancedproductive capacitythetax
baseisincreased ;thustaxratescanbereducedwhich
furtherstimulatesgrowth,evenwithintheconstraintof
givenbudgetdeficitlevels.
(ii)Onthedemandside,expansionary measures inthe
budgetshouldbejustifiedbytheneedtocorrectany
inadequacy inthegrowthofdemand .Intheeventof
furtherdisinflationary effectsontheEuropean
economyresultingfromdollardepreciation orfallsin
commodity prices,itmaybedesirabletosustain
demand,inparticulartopreventexcessivedeflationof
thetaxbase.Intheseconditions itmakeslittlesenseto
raisetaxesorcutexpenditure tooffsetsuch
shortfalls .
(iii)Theevolution ofwageincomeshasimportant
implications forbothsupplyanddemandsidesofthe
economy .StartingfromasituationofinadequateHI.1.4.TheEuropean Community budget
Anadditional levelofpublicfinanceisdeveloping inEurope .
Witharevenueorexpenditure volumeofaround1%of
Community GDPtheCommunity budget,admittedly ,has
notamajormacro-economic impactbutisplayingagreater
roleinstructuraladaptation .Withtheenlargement ofthe
Community thetotalownresourcesofthebudgetarebeing
increased ,asfrom1986,withrevisioninthemaximum rate
ofvalueaddedtaxcallfrom1,0to1,4%.Atthesametime,
anincreasedeffortisbeingmadetocontainthelargeshareof
agricultural pricesupportexpenditure intheCommunity
budget.
ThepolicyprioritiesfortheenlargedCommunity budgetare
tofacilitatethestructuralimprovement andconvergence of
theCommunity economy .ThiscomesoutclearlyinTable9.
The1986figuresaretakenfromthepreliminary draft
budget.Inseveralofitsfastergrowingfunctions ,thebudget
iscontributing aidstocompensate fortheeffectsofthe
openingoftheCommunity 'smarketsandhelptorestructure
regionsorsectorsindifficulty .

NoL377/30 OfficialJournaloftheEuropeanCommunities 31.12.85
TABLE9
EuropeanCommunity budget,1984to1986—Preliminary draftproposedbytheCommission
(millionECU)
Expenditures1984
EUR101985
EUR101986
EUR12
Policyfunctions
Agriculture —guarantee section
Agriculture —structural funds
Fisheries
SocialFund
RegionalFund
Integrated Mediterranean projects
Transport
Energyandindustry
Research andinnovation
Foodaid
Development aid
Otherexpenditures includingrefunds
toMember States18126
667
87
1212
1413
10
505(0
659(2)
.533
737
527
273319691
687
105
1410
1610
10
36
130
570
772
531
288120688
946
236
2399
2600
151
74
105
673
954
697
5527
Total 27208 28433 35050
Revenues1984
EUR101985
EUR101986
EUR12
Agriculture levies
Customs duties
Valueaddedtax(VAT)
Specialcontributions
Miscellaneous2435
7961
14594
596
4662106
8596
15198
2247
2862699
9700
22184
204
263
Total 26052 28433 35050
p.m.
Maximum rateofVAT 1,00 1,00 1,40
Effective rateofVAT 1,00 1,00 1,34(3)
BudgettotalasshareofGDP 0,94 0,85 1,10
(')Includes471millionECUofspecialmeasuresintheUnitedKingdomandGermany .
(2)Includes456millionECUofspecialmeasuresintheUnitedKingdomandGermany .
(3)ExceptforGermany 1,31andUnitedKingdom0,82.
Source1984—Management accounts ;1985/86preliminary draftbudget1986adoptedbythe
Commission on14June1985.
Theincreaseinexpenditure in1986ispartlyduetothe
accessionofSpainandPortugal ,butalsoreflectsanincrease
inrespectoftheotherMemberStates.Thisisparticularly
trueoftheRegionalFundwhich,underthenewRegulation
applicable from1985,increasestheshareofexpenditure
goingtomoreselectively definedregionswiththemostsevere
problems .Expenditure onintegratedMediterranean projects,aimedat
helpingmediterranean regionsadapttotheconsequences of
theCommunity 'senlargement ,becomessignificant forthe
firsttimein1986.Expenditure ontransportinfrastructure
projects,theSocialFund(retraining andjob-creation
projects),andR&Dandinnovation anddevelopment aid
alsobecomesmoreimportant in1986.About50%ofnew

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/31
expenditure in1986canbeattributed totheaccessionof
SpainandPortugal .Thispart,however ,willbecoveredby
ownresourcespaidinbythenewmembers .Theremaining
partoftheincreasetakesplacebecauseofthesubstantial rise
inpaymentstofinancecommitments incurredbefore1986
andalsobecauseofnewcommitments .
PrioritiesfortheCommunity budget,endowedfrom1986
withincreasedownresourcesare(i)tocontainagricultural
expenditures moreeffectively and(ii)todevoteincreasing
resourcestostructuralimprovement andconvergence ofthe
Community economy .Finally,theleveloftherealreturnoncapitalisakeyfactorin
theinvestment Decision .Presentdistortions betweenthecost
ofcapitalandtheprofitability ofproductive fixedcapital
originate ,asillustrated inGraph14,inthedeclinein
profitability whichoccurredinthe1970s,ratherthaninthe
morerecentriseinrealinterestrates.Thus,whilstafallin
realinterestratesof,say,oneortwopercentage pointsfrom
theirpresentlevelwouldcertainlyhelptostimulate
investment ,itwouldcomenowhereneartorestoringthe
differential whichprevailedbetweenrealinterestratesand
theprofitability ofproductive capitalinthe1960s,aperiod ,
offullemployment ,andexistedagainduringpartofthe
secondhalfofthe1970s.
Asisevidenced bythedownward convergence ofinflation
ratesintheCommunity ,considerable progresshasbeen
madetowardsthecreationinEuropeofaninternaland
externalzoneofmonetary stability (seeTable5ofthis
report).SinceMarch1983therehasbeennochangeinthe
centralratesofalmostallthecurrencies participating inthe
EMS.Theadjustment oftheItalianlira'sparity,whichtook
placeinJuly1985byunanimous decisionofthepartner
countries ,remainedlimitedinscale.Thestabilityofnominal
andrealexchangeratesbetweenthecurrenciesparticipating
intheEMSexchangeratemechanism providesastriking
contrastwiththeoftensharpvariationsrecordedbeforethe
establishment oftheEMSandthosewhicharetodaystill
affectingothercurrencies .Thisstabilityisnaturallyreflected
insmallexchangeratevariations betweentheECUandits
chiefcomponent currencies .Itsatisfiesaneedfeltbyprivate
operators ,ascanbeseenfromthedevelopment oftheprivate
ECUasaborrowing andinvestment currencyandits
growinguseforcommercial transactions .Monetarypolicies,
pursuingthecommonobjectiveofstability,butwhichhave
tobedifferently framedtotakeaccountoftheprogressstill
necessary ineachcountry,areaguarantee thatthese
achievements willbeconsolidated andimproved .III.2.Monetary policyandtheEuropean Monetary
System
Inrecentyears,aconsensus hasgraduallyemergedonthe
needtocreateastablemonetaryenvironment andonthe
contributory roleofmonetary policy.Thisconsensus
contrastswiththemarkeddifferences inthemanagement of
nationalmonetary policiesinthe1970s.Byimposing
exchangeratedisciplineontheparticipating countries ,the
European Monetary Systemhasshownitselftobean
essentialfactorinthecohesionofmonetarypolicieswitha
common objective ofstability .Suchconsensus isan
important achievement whichmustbepreserved :monetary
stabilitymust,forseveralreasons,beanessentialpartofany
strategywhichaimsatrestoringlastinggrowth,capableof
creatingmorejobs.
Firstofall,monetarystabilitycreatesanenvironment which
encourages thoseinvolvedintheeconomic processto
cooperate witheachotherandinparticular reducesthe
justification forindexation mechanisms .Someofthese
mechanisms ,arelicofperiodsofhighinflation ,both
obscuredandheldbackthenecessaryadjustment ofrelative
pricesandcostsandsocontributed topresent
macro-economic imbalances .
Secondly ,expectations ofapermanently lowinflationrate
enableinterestratestoplaymoreefficiently theirrolein
establishing thebalancebetweensupplyanddemandonthe
capitalmarket.Anartificially loworevennegativerealcost
ofcapital,suchasthatwhichobtainedincertaincountriesin
the1970s,givesadistortedindication ofthescarcityof
capital,encourages thewasteofscarceresourcesformed
fromsavingsandleadstoapatternofgrowthwhichcreates
fewerjobs.Ofcourse,excessive realinterestrates(for
examplegreaterthantheunderlying growthrateofthe
economy )accompanying budgetdeficitswhicharetoohigh,
haveconsiderable structuralconsequences .Butnowthelevel
ofrealinterestratesmustmakeitpossibletoattractthefunds
neededtofinancenotonlypublicdeficits,stillexcessivein
certaincasesinsideandoutsidetheCommunity ,butalsoto
financetherequiredinvestment drive.Furthermore ,an
essentialjustification forthepolicyindicated forcertain
countriesofacontinued reduction inthepublicdeficitisthat
itcontributes tolowerrealinterestratesinthemedium
term.Anumberofcountries—inparticulartheFederalRepublic
ofGermany ,France,ItalyandtheUnitedKingdom —are
pursuingnormative targetsforthegrowthofmonetary
aggregates ordomesticcreditexpansion .Forcountrieswhere
theinflationrateisstilltoohigh,theaimshouldcontinueto
beaprogressive reduction inthegrowthratesofmonetary
aggregates ofdomesticcreditexpansion ,soastounderpin
thestabilization process.Wheretherateofinflationand
inflationary expectations aresufficiently low,monetary
growthshouldreleaseamarginforrealgrowthinlinewith
themedium-term trendofproductive capacitywhile
preserving whathasbeenachievedintermsofstability .This
wouldprovidelastingsupportforeconomicactivity.Inthese
countriesthesettingofthetargetformonetarygrowthmust,
however ,belargelyinfluenced bythejudgement madeonthe
growthofproductive potential ,notablywithregardtothe
effectsofsupplypoliciescarriedoutinotherareasandthe
increaseincapacityutilization rateswhichcanbeachieved
withoutcreatinginflationary strains.Totheextentthat
supply-side policiesspeedthegrowthoftheproductive
potential ,suchastrategygoeshandinhandwiththesound
financingoftheincreaseindemandwhichthenbecomes
desirable .

NoL377/32 OfficialJournaloftheEuropeanCommunities 31.12.85
Itistruethatthepresentchangesonfinancialmarkets,
especially thespreadoffinancialinnovations whichare
tendingtomakethedemandformoneymoreunstable,
sometimes complicate theimplementation ofpoliciesbased
onmonetaryaggregates orcredittargets.Butexperience has
shownthat,wheretheauthorities oftheEMScountriesare
determined topursueapolicywhichconforms with
guidelinesbasedontheabovecriteria,theexchangerate
mechanism isstabilized anditsmacro-economic effects
reinforced .ForEMScountries ,thequantitative intermediate
objectivesofmonetarypolicyandtheexchangerateobjective
thusmutuallyreinforceoneanother .Furthermore ,the
UnitedKingdomauthorities aretendingtoattributemore
importance tothesterlingexchangeratealongsidetheir
quantitative intermediate objectives .
IntheotherEMScountries ,whichareevenmoreopentothe
outsideworld,thechiefintermediate objectiveremainstheir
currencies 'centralrateswithinthesystem,andthedomestic
intermediate objectivesare,perhaps,lessbindinginnature.
Theauthorities must,however,ensurethatdomesticmoney
creationcontinuestobecompatible withpricestabilityanda
sustainable externalposition .
Amarkedfallinthedollar,andtheimprovement intheterms
oftradewhichcouldresult,wouldeasethemonetarypolicy
burdeninpursuingthefinalobjectiveofpricestability .With
thesamerateofmonetarygrowth,afasterfallininflationassociated withexternalfactorswouldinitselfreleasean
additional realmarginforgrowth.Butgiventhepresent
instability oftheInternational Monetary System,lasting
stabilitycanbeguaranteed onlybythecontinuing controlof
monetary growth.However ,following therecent
declaration bytheMinistersofFinanceofthefivemajor
industrialized countries ,itistobehopedthatasolutionto
thisinstability willbefoundwhich,atthesametime,will
helptorelaxevenfurthertheexternalconstraints whichmay
stopinterestratesfromfallinginEurope.
Intheconvergence process,thestabilityofbilateralexchange
rateswithintheEMSisofprimeimportance .Foronething,
inthecountrieswhereinflationishighest,suchstability
reinforcesinternaleffortstobringdowninflation .Inthese
countries ,becauseofthegreatercovergence ofinflationrates
andallowingfortheliraparityadjustment inJuly1985,the
riseinnominaleffectiveexchangeratesweightedbyinflation
differentials againstpartnercountries (realexchangerates)is
stillmoderate ,butnevertheless illustrates thestabilizing
effectofanexchangeratemechanism whichprovidesfor
fixedbutadjustable parities.Secondly ,thecompetitiveness
gainsobtainedbythemorestablecountrieshelpthemto
acquireacomfortable externalpositionandcontributetothe
releaseofarealmarginforgrowth.Buttheseconsiderations
donotexcludearealignment ofcentralratesintheeventof
fundamental disequilibria .

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/33
GRAPH 14
Rewardsoflabour,fixedcapitalandfinancialcapitalintheCommunity (J)(2)
(')TheabovegraphhastakenfromthereportofEconomic PolicyCommittee concerning 'Profitability
andtherateofreturnintheCommunity '.Thegraphprovidesanillustration ,onthebasisofdifferent
definitions ,ofthedevelopment ofprofitability aspresentedinGraphs11and12above.
(2)Community averageweightedwithGDPof1975and1975purchasing powerparities .
(3)DeflatedbyGDP-prices .
(4)Netoperatingsurplusofenterprises (excluding housing )as%ofcorresponding netcapitalstock
(left-handscale).Becauseofwellknownstatisticalproblems ,thelevelofthiscurvehastobeinterpreted
withcautionanditisitsevolutionwhichisofgreaterrelevance .
Source:Deutsches InstitutfurWirtschaftsforschung (Berlin)onbehalfoftheBundesministerium fur
Wirtschaft (Bonn).RecentyearsandtheCommunity averagehavebeencalculated bytheCommission
services .
(s)Interestrateongovernment bondyields.Deflatedbyconsumerpriceindex(left-handscale).
Inthelastfewyears,theinternalcohesiveness oftheEMS,
whichadmittedly hasatcertaintimesalsobenefitedfrom
favourable externalfactors,hasaboveallbeenguaranteed by
thestrongerconsensus ontheprioritiestobeadoptedandthe
methodstobeusedinallareasofeconomic policy,the
increased convergence ofperformances andtheclose
coordination ofmonetary policiesbothinternaland
external .However ,majorprogress isstillnecessary to
achieveasatisfyingdegreeofconvergence .Inthisrespect,
somecountriesmust,inanyevent,stillmakesubstantial
effortswithregardtobudgetsandincomessoastoreducethe
sometimes excessiveburdenbornebymonetarypolicyinthestabilization process.Thegreatergrowthisinthe
Community ,themorerapidlywilltheseeffortsbecrowned
withsuccess .
Theroomformanoeuvre available totheauthorities for
influencing interestratesislargelydetermined byinterestrate
levelsoninternational marketsandbythepursuitofthe
intermediate andfinalobjectives ofmonetary policy.As
regardstheexternalconstraint ,Europeanshort-term interest
ratesdidnotcompletely followtheupwardmovement of
UnitedStatesshort-term ratesinthefirstsixmonthsof1984,
andthentheirmarkedfallinthefollowing12months.Asan

NoL377/34OfficialJournaloftheEuropeanCommunities 31.12.85
formation ofnominalinterestratesmorerationalandcreates
asuitableenvironment fortheirsteadyandlasting
reduction .averagefortheCommunity countries ,thefallinshort-term
ratesbetweenDecember1983andJuly1985wassteadierbut
slightlylessmarkedthanintheUnitedStates(1,1percentage
pointsforEuropecomparedwith1,7percentage pointsin
theUnitedStates).Theprudentmanagement ofshort-term
interestratesinEurope,tailoredtotheneedswhichstillexist
asregardsinternalstabilization andtotheseverityofthe
externalconstraint ,andamorefavourable trendof
fundamentals (externalandbudgetdeficits)reinforces ,on
thissideoftheAtlantic,thecredibility ofthepolicies
implemented .Thishascontributed toanotablefallin
nominallong-term rates(1,7percentage points)which,
betweenDecember 1983andJuly1985,wasmoremarkedin
EuropethanintheUnitedStates.WithintheCommunity ,theupwardconvergence ofreal
interestratesisevidence ofthenowcommon courseof
monetary policiesinacontextofgenerallyhighpublic
deficitsandseverestrainsoninternational capitalmarkets,
particularly intheUnitedStates.Theirprogressive fall,
whichisdesirable ,willhavetobesoundlybasedandwill
dependmainlyonboththesatisfactory progressandthe
credibility ofthedisinflation processandontheabsorption
offinancialimbalances ,particularly ofthepublicdeficits
insideandoutsidetheCommunity .
Theeffectiveliberalization ofcapitalmovements insidethe
Community and,atthesametime,effortstowardsagreater
convergence ofeconomic policiesforhighergrowth,will
makepossiblethecompletion oftheEuropean Monetary
System,whichisnecessary inordertocreateaEuropean
monetaryandfinancialarea.Liberalization wouldfavourthe
development inEuropeofadynamicandattractivefinancial
marketandwouldthuscontribute tothebetterallocation of
savings .UntilMarch1985,thestrengthofthedollarimpededthefall
ofshort-term interestratesinEurope,butthesituationhas
sincechanged ,andsomeroomformanoeuvre hasappeared .
ItisalreadybeingutilizedintheCommunity countrieswith
thelowestinflationrates.InGermany ,themoneymarket
ratehasthusbeencutbyaround 1,6percentage pointssince
March1985andnowstandsat4,5%,itslowestlevelsince
theendof1978.Afavourable international contextwould
makeitpossibletomakeevenmoreuseofthismargin.In
countrieswherethereisstillamajorneedforstabilization ,
andwheremonetarypolicymustgooncontributing tothe
convergence process,nominalinterestratescould,however ,
continuetofallinlinewiththereduction intheinflationrate.
Totheextentthatthisdifference inmanaginginterestrates,
inlinewiththeinternalmonetary policyobjectives inthe
differentcountries ,leadstothemaintenance oftheright
interestratedifferential withintheEMS,italsoreinforces the
stabilityoftheexchangeratemechanism anditsinternal
cohesiveness inresponsetoexternalshocks,despitethe
divergences whichstillexistincertainfundamentals .Sincetheestablishment oftheEMSinMarch1979,the
objectiveofliberalizing capitalmovements hasbecomeeven
moreimportant .Totheextentthattherestrictions placedon
capitalmovements artificially increasetheautonomy of
monetarypolicies,theyreducethedisciplinary effectofthe
exchangeratemechanism andarethusliabletoholdbackthe
convergence process.Howevertheconvergence ofmonetary
policiesandthegradualfadingofmoneyillusionamong
economicagentsmeanthatthisroomformanoeuvre isnot
utilizedorevennon-existent —ascanbeseenfromthe
upwardequalization ofrealinterestratesintheCommunity .
Asandwhendivergences narrow,therestrictions onthe
freedomofcapitalmovements gradually losetheir
usefulness .Thisunderpins theargument foraprogressive
dismantling oftherestrictions placedoncapitalmovements
whilenotundermining thestabilityoftheexchangerate
mechanism duringtheadjustment phase.IntheCommunity countriesreallong-term interestrates,
measured asafirstapproximation bythedifferential between
nominalinterestratesandtherateofincreaseinconsumer
prices,rosebyanaverageof4,5percentage pointsbetween
1981and1984.Therisewasparticularly markedin
countrieswheretheyhadbeenclosetozeroorevennegative
atthestartofthe1980s,whiletherisewasonlysometwo
percentage pointsinthemorestablecountries .When
disinflation israpidorwhentheinflationrateishistorically
low,therealinterestrate,measured bythedifferential
betweenthenominalinterestrateandthecurrentrateofprice
increase,isprobablyoverestimated inrelationtoameasure
whichwouldtakeaccountoftheinflationrateexpectedin
themediumterm,whichisprobablythenhigherthancurrent
inflation .Conversely ,incountrieswheretheinflationrateis
stillhighbutwherethedisinflation processiswellunderway
andcredible,therealinterestrateexpectedinthemedium
termishigherthanthatmeasured bythecurrentinflation
rate.Inanyevent,inflationary expectations playakeyrolein
theformation ofnominalinterestrateswhichincreases the
importance whichshouldbeattachedtotheconductof
monetarypolicieswriththelastingandcredibleaimofprice
stability .Suchpolicieshelptobringthecurrentinflationrate
andtheexpectedinflationrateclosertooneanotherandto
stabilize thematthelowestlevelandthismakestheAclimatewhichfavoursthestrengthening oftheexchange
ratesystemhasgraduallygrownupsincethestartof1984.
Avarietyoffactorshavecontributed :thesatisfactory
convergence ofmonetarypolicies,thecredibility gainedby
thegeneralprocessofbringingdowninflation,amoreopen
andmoreevenlyspreadattitudeastotheadvisability of
resumingtheliberalization ofcapitalmovements inthe
interestsoftheEMSitselfand,thestrengthoftheparitygrid
agreedinMarch1983inwithstanding externalcurrency
movements .Thisstateofmindwasdemonstrated bythe
adoptionin1985,bytheCouncilandbytheCentralBanksof
theCommunity ,ofpreliminary technicalmeasureswhich
willslightlywidentheuseoftheECUintheeffective
operation oftheexchangeratesystem.Thepossibility has
evenbeenmentioned ofgivingthirdcountryholdersaccessto
theECUintheEuropeanMonetary Cooperation Fund.

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/35
1985,providesstrongsupportforthesuccessfulachievement
ofacooperative growthstrategyformoreemployment inso
farasitsupportsagrowthinsupply,whichisbothprofitable
andefficient .Awidermarketprovidestheopportunity for
firmstoexpandproduction andexploiteconomies ofscale.
Theresultingcostreductions leadtolowerpricesandhence
demandwillbestrengthened .Afastergrowthofboth
demandandoutputwillbereflectedinproductivity growth
andthisinturnwillfeedintotheexploitation ofnew
investment opportunities andemployment creation .The
benefitsofimproved efficiencyandcompetitivity willbe
affectedalsothroughanincreaseintheeconomy'slonger
termequilibrium exchangerateandmorebeneficialtermsof
trade.Alowertrendevolutionofbothdomesticandimport
priceswillinturnmeanthatagivenexpansionofnominal
demandwillresultinahigherrealdemand .Again,therewill
bebeneficialeffectsonoutputandemployment .Thus,the
economyenterswhatcanbecalledavirtuouscircleof
economicgrowthwhichisnotunlikeCommunity experience
inthe1960s.TheCommunity bodiesconcernedhaveagreedtokeepunder
reviewthepossibilities offreshprogressinthemonetary
area,andtheconditions forachievingthis.TheCouncilof
FinanceMinistershasconfirmed theultimateobjectiveof
Economic andMonetary Union.Thedevelopment ofthe
EMS,reinforcement ofwhichisdoubtlessanobjectivein
itself,mustalsobeseeninthisperspective .Ofspecialinterest
herearequestions relatingtotheexpansion ofthe
international roleoftheECU,bothinitspublicandprivate
uses,andtotheparticipation ,onanequalfooting,ofthe
component currencies intheexchangeratemechanism .
Thecreationofazoneofmonetarystabilityisanintegralpart
ofthestrategyforlastinggrowth,capableofcreatingmore
jobs.Byreducinguncertainties astothefuturerealvalueof
thecurrency,anenvironment iscreatedwhichencourages
thoseinvolvedintheeconomic processtocooperate with
eachother.Thestabilization ofinflationexpectations also
makesthedetermination ofinterestratesoncapitalmarkets,
whichhaveanessentialruleintheoptimalallocationofthe
scarceresourcesformedbysavings,morerational .As
regardsstability,achievements inrecentyearshavebeen
encouraging .Monetary policies,designedtoachievethe
commonobjectiveofstability,butframedaccordingly to
takeaccountoftheprogressstillnecessary ,aretheguarantee
thattheseachievements willbeconsolidated .Insome
countries monetary policymuststillunderpin the
stabilization process,byreducingtherateofmonetary
growthandbyloweringshort-term interestratesinlinewith
theprogressmadeinbringingdowninflation .Theinternal
cohesiveness oftheEuropean Monetary Systemshould,
however ,bestrengthened byadditional progressinallareas
ofeconomicpolicyinordertoreducethe,sometimes still
excessive,burdenbornebymonetary policyinthe
stabilization process.Inothercountries ,monetary policy
shouldcontinuetousethemarginavailableforbringing
downinterestratesand,whilepreserving whathasbeen
achievedintermsofstability,providetheliquiditynecessary
fortheestablishment ofagrowthrateinlinewiththe
medium-term improvement inproductive capacity .Hereitis
tobehopedthatrecentprogressininternational monetary
cooperation willfurtherrelaxtheexternalconstraints and
thusmakeafallinrealinterestratespossible .Thiswould
encourage investment infixedcapitalratherthaninfinancial
assets.WithinEuropetheadoptionoftheabovementioned
monetarypolicyguidelineswould,inadditiontoreinforcing
theCommunity 'sinternalmonetary cohesiveness ,increase
interestinfurtherprogressintheconstruction oftheEMS,
andinparticular inmeasurestoliberalizecapitalmovements
andtodeveloptheroleoftheECU.Atthesametimepromoting bettercompetition onmarkets
wouldbeineffective ifstructural andsocialinequalities
prevented thecompletion oftheinternalmarket.Ifthe
internalmarketisrealizedinthecontextofmoredynamic
andharmonious growth,imbalances attheregionaland
sectorallevelwillbemoreeasilyovercome .Thisisalsothe
bestwaytotakeaccountoftheCommunity 'social
dimension 'andstructural problems .Inaddition,this
requiresthedevelopment ofmorecoherentEuropean-wide
socialpoliciesandthestrengthening ofexistingnationaland
Community instruments ,theEuropean SocialFundandthe
European FundforRegionalDevelopment forexample .
Successinovercoming adjustment problemsandinachieving
thefullemployment andsocialbenefitsofimprovement of
theinternalmarketwillrequireconsiderable cooperation
betweenthesocialpartnersandGovernments inthe
development oftheseactionsandinencouraging the
attitudesconsistent withthegrowingintegration ofthe
European economy .
Consensus ontheimportance ofimproving theCommunity s
internalmarkethasstrengthened greatlyatthepoliticallevel
andamongstindustrialists andtradeunionists .Atitsmeeting
inBrusselsinMarch1985theEuropean Councilcalledfor
'actiontoachieveasinglelargemarketby1992thereby
creatingamorefavourable environment forstimulating
enterprise ,competition andtrade'.TheCommission
responded tothiscallwithpublication ofaWhitePaper
addressedtotheEuropeanCouncilmeetinginMilaninJune
1985,entitled'Completing theInternalMarket'^).The
WhitePapersetsoutadetailedprogramme ,callingforover
300legislative acts,mostofthembefore1990.III.3.Marketandsectoralpolicies
III.3.1.Improving theinternalmarket
Thecompletion ofalargeinternalmarket,ashasbeen
proposedbytheCommission initsWhitePaperofJune(')Commission oftheEC,'Completing theInternalMarket'
(Com(85 )310),June1985.

NoL377/36 OfficialJournaloftheEuropeanCommunities 31.12.85
Giventheextremely complexandextensivenatureofthe
proposals intotal,theCommission hasgivenparticular
attentiontowaystolightentheadministrative andlegislative
burdensofachievingtheobjective .Anintegrated and
balancedsetofproposals madetothisendare:(i)to
maximize useoftheprincipleofmutualrecognition of
nationaltechnical standards andminimize theamountof
harmonization legislation attheEClevel,(ii)tomaximizethe
off-loading oftechnicalmattersfromtheCouncil,bymaking
moreuseoftheinstitutional powersofdelegation that
exist,and(iii)toincreaserecoursetomajority-voting in
Community decision-making processes concerning the
internalmarket.Althoughthevariouselementsinteractand
shouldbeconsidered asawhole,someindividual examples
servetoillustratethesubstanceoftheproposals .
Asregardstechnicalstandards forindustrialgoods,food
productsandconstruction ,itisproposedthatlegislative
harmonization (CouncildirectivesbasesonArticle 100ofthe
TreatyofRome)willinfutureberestrictedtoessentialhealth
andsafetyrequirements .
Publicprocurement competition willbeenhancedforsectors
alreadycoveredbyECDirectives bymorepriorinformation
andpublication ofcontracts .Existingrestrictions onpublic
procurement ofservices,compared togoods,shouldbe
removed .Fourmajorsectors—energy,transport ,waterand
telecommunications —notyetcovered bypublic
procurement Directivesaretobemadethesubjectoffurther
proposals .betweentheMemberStatesandforthecreationofaunified
networkoffinancialservicesintheareasofcredit,insurance ,
andstockexchanges .
Suchintegration givesrisetodirectandindirectbenefits .The
directadvantages comethroughareductioninfinancialcosts
forborrowers andthroughhelpingassureaccessforsaversto
higheryieldinginvestments .Anincreaseintheeffectivesize
ofthemarketinducedbyfinancialintegration encourages
financialinstitutions tospecializemore,createsadditional
competition andeffectsamoreefficienttransferofsavings
intorealinvestment .
Asregardsindirectbenefits,thegreaterliberalization of
financialmarketsenhancesdiscipline intheconductof
economicpoliciesandthuscontributes topricestabilityand
tothestrengthening oftheEMS.Asecondindirectbenefit
wouldrelatetoreducingdependence ofEuropeaneconomies
ontheUSdollar,whichislikelytooccurifEuropeancapital
marketsbecomemoreintegrated .Thiswouldinsulate
Europetosomeextentfromexternalshocks.Thirdly,
controlsoncapitalflowsinterferetosomeextentwiththe
freemovement ofgoods,servicesandpersons,byincreasing
thecostofrelatedfinancialtransferswhoselegalityhastobe
checked .Fourthly ,theutilityofcapitalcontrolsintermsof
greaterindependence ofmonetarypolicyhasbeengreatly
reducedthroughcommitments tomonetary policy
coordination implicitinEMSmembership .
Financialintegration shouldbesoughtinabalancedwayon
fourfronts:(i)gradualremovaloftheremaining capital
controls ,(ii)freeflowoffinancial services,(iii)
rationalization ofdomesticfinancialmarkets,and(iv)the
promotion oftheECUinthecreditandcapitalmarkets .
AtpresenttwoCouncilDirectives classifycapitalflows
infourlists(AtoD).Member Statesareobliged
unconditionally tofreetransactions contained inlistA
(includingdirectandrealestateinvestment )andinlistB
(operations inlistedsecurities).Transactions inlistC
(includingothertypesofportfolioinvestments andlong-term
credits)areconditionally liberalized .Thereisnoobligation
tofreetransactions infistD(depositswithfinancial
intermediaries andothershort-term monetaryoperations ).
Theactualdegreeofcapitalfreedomvariesconsiderably
intheCommunity .AnumberofMemberStateshave
liberalized virtuallyalltransactions contained inlistsCand
D.Ontheotherhand,threeMemberStates(France,Italy
andIreland)havehadtomakeuseoftheprotective clauses
providedforintheTreatyinordertoapplyrestrictions
ontransactions whichareunconditionally liberalized .In
December 1984theCommission reviewedthesederogations
andrenewedthemforalimitedscopeandperiod(Official
JournaloftheEuropean Communities L8,10January
1985).Inaddition,theCommission isstudyingproposals
withtheMonetary Committee foranewDirectivewhich
wouldextendtheobligations ofMemberStatestoliberalize
certaintransactions contained atpresentinlistC.
Thecreationofanefficientnetworkoffinancialservicesin
theareasofcredit,non-lifeinsurance ,andstockexchangeInthetransport sectorimportant actionstoensurethe
freedomtoprovidetransportservicesareproposed .
Servicebranches ofthemoreconventional kindsuchas
bankingandinsurancetogetherwithnewerformssuchas
information anddataprocessing ,computerised marketing
anddistribution services ,audiovisual servicesincluding
broadcasting bysatelliteareundergoing unprecedented
technological development .Manyofthesefastestgrowing
branchesoftheeconomy havelittlechanceofbeing
internationally competitive withoutbeinggivenalargeopen
marketinwhichtodevelop .
Turningtofinancialmarket,theimprovement oftheinternal
marketforfinancialserviceslinksdirectlytothepolicy
objectivesofimproving thefunctioning ofdomesticfinancial
markets,theconvergence ofmacro-economic policiesand
strengthening oftheEuropean Monetary System .Inthis
context,inApril1983theCommission submitted tothe
Councilacommunication onfinancialintegration (*)which
stressedtheneedformorefreedomofcapitalmovements
(1}Commission oftheEC,'Communication of20April1983on
FinancialIntegration ',European EconomyNo18,November
1983.

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/37
industry,andnationaltelecommunications administrations .
Theworkandreflectioncarriedoutsofarhaveidentifiedthe
commonprospectsfortheevolutionoftelecommunications
networksandservicesandthestrategicobjectivesupon
whichaconsensusatCommunity levelcouldbereached,in
ordertodefineinfrastructure projectsofEuropeaninterestin
thisfield.
Thisisinparticular thecasefortheestablishment ofa
telecommunication transborder backbone network which
couldsetupthebaseoffutureintegratedbroadband (IBC)
communications tobeoperational by1995.
Accordingtoavailableestimates ,thetotalinvestment related
totheprojectcouldamounttosome3000millionECUs.
Currently ,studiesarecarriedouttospecifytheproject
further.Theprojectwill,however,dependonprior
agreement betweenthepublicauthorities andthe
telecommunications administrations concerned .servicescanbeaidedthroughassuringtherightof
establishment andtheprovisionoffinancialservicesona
non-discriminatory basisacrossfrontiers .
Therationalization ofdomesticfinancialmarketsshouldgo
inparallelwiththeremovalofcontrolsonthecirculation of
capitalandservices.Althoughtherehasbeensomeaction
towardsharmonizing nationalprovisions governing the
activitiesoffinancialintermediaries ,theregulatory and
allocativeaspectsofthedomesticfinancialmarketsshouldbe
givenmoreattention .
Community companies andinstitutions haveusedthe
Euromarkets inordertoavoidthedisadvantages ofnarrow
nationalmarkets .Morerecently,astheriskintheuseofthe
dollarhasbecomelarge,themarkethasincreasingly turned
totheuseoftheECUwhichexhibitssmallvariability
vis-a-vismembercurrencies andisfreeofpurelynational
controls .Itis,therefore ,wellplacedtobeavehicleforcapital
transferwithintheCommunity .
TheMilanEuropean CouncilinJune198Swelcomed the
Commission 'sWhitePaperforimproving theinternal
market,andchargedtheCounciltoelaborate awork
programme toachievethesinglemarketobjectiveby1992.
Waysofachieving thisobjective areidentified as(i)
suppression ofphysicalbarriers;(ii)theremovaloffiscal
frontiers;(Hi)suppression oftechnicalbarriers(especiallyfor
newtechnologies );(iv)creationofafreemarketinfinancial
andtransport services;(v)complete freedom of
establishment fortheprofessions and(vi)liberalization of
capitalmovements .Theintegration andmodernization of
European financialmarketsshouldbepursuedfurther
throughrationalization ofdomesticfinancialmarketsand
promotion oftheECUincreditandcapitalmarkets .This
processwillbefacilitated bythemoredynamicgrowth
fosteredbytheoveralleconomicstrategy,andthusenhance
withothermorespecificmeasuresthesocialdimension .TheCommission willmakeproposalsontheuseoftheERDF
tohelpimprovemodernization oftelecommunications
networks inthelessfavouredregionsoftheCommunity .
Intheareaoftransport,theCommission 'sproposedmedium
terminfrastructure programme alreadyprovides a
framework forthedevelopment ofthreelinkingnetworksof
Community interest:road,railandinlandwaterways .The
investment inquestionwouldexceed20000millionECU.
Thisprogramme containsarangeofsmallandmediumsized
projectssomeofwhichhavealreadybeenstartedandreceive
Community financefromtheERDFandtheEIBandspecific
creditsforthesupportoftransport infrastructure of
Community interest (line581);aswellassomemajor
projects .Thefinancingoftheseprojectswillnaturallydiffer
accordingtotheirrelativesizeandcharacter .Alargenumber
ofsmallerprojectswillhavebeenincludedalreadyin
nationalpublicinvestment programmes andwillhave
receivedCommunity financialsupport .However ,the
financingofthelargerprojectshasyettobearranged .III.3.2.Infrastructure projectsofEuropean interestand
infrastructure financing
Improving theinternalmarketneedsalsotheprovisionofan
adequateinfrastructure .Intheprogramme for1985,the
Commission identified thebenefitstobeobtained froma
coordinated infrastructure strategy .Suchanapproachwould
contribute significantly totheaimofunifyingtheinternal
market,strengthening industrial competitiveness ,
integration oftheperipheral regionsandstimulating new
technologies (J).Itcouldalsobecome,progressively ,an
important elementinthedevelopment ofdemandand
economic activity .
Intheareaoftelecommunication concertation mechanisms
havebeensetupbetweentheCommission ,MemberStates,Twomajorprojectsshouldbeadded,theParis—Cologne
highspeedraillink,thecostofwhichhasbeenputatsome
3000millionECU.An'intergovernmental group'hasbeen
setuptoworkoutthegeneralspecification ofrequirements ,
eachparty'sresponsibilities andthepossiblefinancial
package .ThefinalreportisexpectedinMarch1986.Also
thefixedChannellinkwhich,depending onthetypeoflink,
varieswidelyincostfrom3000to9000millionECU.In
April1985theFrenchandUnitedKingdomgovernments
publishedtheguidelinesenablingthosepromoters interested
toprepareby31October1985aproposalforfinancing ,
executingandexploiting theproject.Workcouldthusstart
bytheendof1986,completion beingplannedfor
1992/93.
(])Thenecessity forinvestment inemployment-creating
infrastructural projectsintransport ,telecommunications and
environmental protection wasstressed inparliamentary
resolutions (OJNoC122/59,20.5.1985,pointfandDoc.
B2-103/85,pointla).Inthelongertermotherprojectsareenvisagedintheareaof
roadandrailtransport ,inparticularthemotorway linkwith

NoL377/38OfficialJournaloftheEuropeanCommunities 31.12.85
guarantees requiredfromthepromoters ortobasethese
guarantees ontheassetsoftheprojectratherthanonthoseof
thepromoter (formulaoftheprojectfinancingtypeor
preferential claimonreceipts).Becausethefinancialpackage
requiredforthistypeofinvestment needstocombinein
variableproportions ,capitalformation ,bondmarket
flotationsandbankloans,Community intervention should
bringtogethernewandtraditional financingtechniques .
Thereexistsaconsiderable economicpotentialinanumber
oflargeinfrastructure projectsofCommunity interest,
notablyintheareasofcross-frontier transport ,
telecommunications andenvironmental protection .Atthe
macro-economic levelthesewouldmakeamodestbut
nevertheless usefulcontribution togrowth .TheCommunity
shouldfacilitatetheadvancement oftheprojects,interalia
throughtheeasingofadministrative andfiscalconditions ,
throughthedevelopment ofitsownfinancialinstruments ,
andthuscontribute overthenextfiveyearsausefuldynamic
elementintheCommunity 'seconomicdevelopment .theScandinavian countriesthroughDenmarkandtheBaltic
straits,theVenice-Munich linkwithitspassagesthroughthe
Alps,etc.
Intheareaofenvironmental protection ,aprogramme of
investment isnecessarytoimprovethequalityoflifeand
protectthebasisforfutureeconomicgrowth.Thedamage
causedbyairpollutioncanonlybereversedbyinvestment in
largecombustion installations ,whileinmanyMemberStates
investment ineffluenttreatment isessentialtoimprovewater
quality.Thetreatmentofwasteanditsrecyclingwouldboth
improveenvironmental qualityandreducetheCommunity 's
rawmaterialdependence .Suchinvestment ,leadingtothe
development ofnewproducts ,willnotonlyimprovethe
qualityoflifebutalsocreatemarketsfornewproductsin
thirdcountries .
Thusallinall,theinfrastructure programme whichcanbe
envisagedinthemediumtermwouldrepresentaninvestment
volumeof30to45000millionECUoveraperiodoffiveto
sevenyears.
Alltheseinfrastructure projectsarenot,ofcourse,atthe
samestageofdevelopment .TheCommunity canfacilitate
theadvancement ofthelargerprojectsinseveraldifferent
ways.Bygivingitssupporttotheproposalsalreadymade,
easingadministration andfiscalconditions ,takingthe
initiativeinbringingtogetherinterested parties,andby
financingthenecessaryfeasibility studies.
AtthesametimetheCommission hasundertaken tostudy
thescopeforusingoradaptingtherangeoffinancial
instruments atitsdisposalaswellaswaysinwhichthe
Community couldimproveandsimplifytheadministrative
andlegalframework inwhichinfrastructure projectscanbe
carriedout.
Apartfromcontinuing withthetraditional typesof
infrastructure financing ,theuseofnewfinancingformulae
1canbeenvisaged ,whichaiminparticular toreducetheIII.3.3.Adaptability ofthelabourmarket
Giventheurgentneedtoimprovetheconditions for
employment growthintheeconomy ,increasing attentionis
beinggivencurrentlybygovernments andthesocialpartners
tothetaskofmakingthelabourmarketworkmore
efficiently .Thisinvolvesimproving theadaptability ofthe
Europeanlabourmarkettostructuralchange,especiallyto
theintroduction ofnewtechnologies andtocompetition
fromtheUnitedStatesandJapanaswellasthenewly
industrialized countries .
InthelastAnnualEconomic Report,theCommission
identifiedexamplesoflabourmarketRegulations whichhad
turnedouttobedesignedinefficiently orinwaysthatserveto
deteremployment .Itcalledforare-examination oflabour
marketregulations inordertoensurebothgreaterequalityof
accesstoemployment andgreaterefficiencyintheuseof
labourwithinenterprises .

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/39
TABLE10
EuropeanCommunity investment financingthroughcapitalmarketborrowingandon-lending
(inmillionsofECU) I1983 1984(1985)
estimate
Lendingbyinstitution ormechanism :
European Investment Bank 4256 5013
Commission :
European CoalandSteelCommunity 778 825
Euratom 366 186
NewCommunity Instrument 1212 1181
Total 6612 7206 7400to7700
Lendingbysectororpolicyobjective :
Privateindustrial sector 1938 2850 2700to2900
ofwhich:globalloanstosmallandmedium
enterprises (1263)(1860)(1900to2100)
Infrastructure 2241 2344 2250to2300
Energy 2433 2012 2450to2500
Total 6612 7206 7400to7700
Source:Commission oftheEC,'ReportoftheCommission totheCouncilandtheEuropeanParliament
ontheborrowing andlendingactivitiesoftheCommunity in1984'(COM(85 )213final),May
1985.
TheEconomic PolicyCommittee isintheprocessof
examining thisquestioninrelationtolabourandother
markets .Inadditiontothequestionofwagesandnon-wage
labourcostsdiscussed above,theCommittee haspaid
attentionalsotothequestionoflabourmarketregulation ,
mobility,trainingandmoreflexibleuseofworkingtime.
Inconjunction withtheMemberStatesandthesocial
partners,theCommission iscurrently carryingouta
comprehensive reviewofthelegislation andcollective
agreements inthesefields.Agroupofexpertsisstudyingalso
theattitudesofsocialpartnersandgovernments tothe
problemoflabourmarketflexibility .Acommunication will
besenttotheCouncil .
Thesocialpartnersareprincipally responsible forthe
adaptability ofthelabourmarket .Wheregovernment
regulations areimportant ,anyspecificproposalstochange
them—particularly thoseconcerning jobtenureor
dismissals —shouldbefullydiscussed withthesocial
partners .Governments shouldalsoreviewtowhatextent
theythemselves areinhibiting theworkingsofthelabour
marketbythecomplexity ofadministrative regulations they
imposeonemployers .
SomeactionshaverecentlybeentakenbyMember
Governments withtheintention ofimproving the
adaptability ofthelabourmarket .Forexample,inGermany ,
newmeasuresallowlimitedtermemployment contractsandpromotepart-time employment .InFrance,regulations
governingfixed-term contractshavebeenrelaxedtopromote
therecruitment ofthelong-termunemployed ,andmeasures
havebeentakentopromotepart-timeemployment .InItaly,
rulesrestricting thechoiceofemployers onwhomtorecruit
havebeenrelaxed .
Anotherimportant factorinhibiting adaptability ofthe
labourmarketareweaknesses inemployment andtraining
servicesgearedtocurrentandfuturelabourmarketneeds.
Tomakegoodtheseweaknesses willrequirethecooperation
ofrepresentatives ofgovernments ,andsocialpartnersat
local,regionalandnationallevels.TheCommission is
currentlypursuingaprogramme ofconsultations designedto
promotethiskindofforward-looking labourmarket
management intheCommunity .
Fortheirpart,governments shouldcontinuetoexamine
whetherthestructureandorganization oftheiremployment
servicesareadequatetomeetthedemandsofarapidly
changingmarket.
Improving theadaptability ofthelabourmarketalso
encompasses theneedtoreorganize existingworkpatterns ,
andinparticularworkingtimebutinwayswhichwouldbe
broadlyneutralwithrespecttocosts.Thereorganization and
reductionofworkinghourscanbedesignedtomaximize
employment effectswhilemaintaining competitiveness and
thebasicsocialrightsoftheemployees .Collectively ,agreed

NoL377/40 OfficialJournaloftheEuropeanCommunities 31.12.85
Thus,inthemeantime ,specificemployment measureswill
stillberequired .Thehighlevelofunemployment is
particularly seriousinoldindustrialized areasofdeclining
employment andtheunder-developed areaswhichhadnever
achievedself-sustaining industrialization .Itseffectscanalso
beseenintheveryhighratesofyouthunemployment (three
timestheadultrate)andintheincreasing numberof
long-termunemployed (39%ofthetotalunemployed have
beenunemployed formorethanoneyear).workingtimereductions inFrance,Belgium,Netherlands
andtheFederalRepublicofGermany haveoftenbeen
accompanied byarearrangement ofworkinghours,sothat
productive equipment ,especiallyadvancedmachinery in
highgrowthmarkets,isutilizedmoreefficiently .Traditional
barriersbetweendailyfull-timework,shiftworkinits
variousforms,part-timeworkoverperiodsoftime,overtime
working ,etc.havebecomelesspronounced .Thetraditional
full-timeworkinastandardworkingweek,whichcontinues
toapplytothemajorityofthoseinwork,coexistswithan
increasing numberofmoredifferentiated workcontracts
whichcanmeetboththeaspirations oftheemployees andthe
requirements ofproduction .Suchmeasuresintheindustrial
sectorhavehelpedtosavejobswhichwouldotherwisehave
beenlost.Intheservicesectoranincreaseinemployment has
beenreinforced bythesemeasures .Insomebranches ,e.g.
retailtrade,thenumberofemployees mayrisedespitea
decliningvolumeofwork,duetothegrowingimportance of
part-timework.TheCommission proposedguidelines fortemporary work
measures alreadyinitsCommunication onLong-Term
Unemployment in1984(*).Atthattime,itstressedtheneed
fortemporary workprogrammes tobeprepared in
collaboration withlocalandregionalgovernments ,andsobe
suitablyadaptedtolocalneeds.Temporary workmeasures
ofthiskindneedtobepubliclyfundedbutofteninvolvethe
voluntarysectorornon-profit enterprises aswell.Thenet
financialcoststopublicbudgetsisgenerallysmallsincea
highproportion oftheunemployed whowouldbeengaged
ontemporary employment programmes arealreadyin
receiptofunemployment benefitorotherformsofsocial
support .Withintheframework ofthecollectiveagreement inthe
Germanmetal-working industrywhichreducedaverage
weeklyworkinghoursfrom40to38,5,about70%ofthe
companies havereachedagreements tomaintainoperation
time.Thecompanyagreements takevariousforms.InFrance
morethan500enterprises ,usuallyinthecontextofsolidarity
contract,havere-organized workingandproduction timein
agreement withtheunions.Thesehaveoftenledtoa
substantial increaseintheutilizationofcapitalequipment .In
BelgiumandtheNetherlands innovations inworking-time
arrangements havealsobeennumerous .Arecentsurvey
carriedoutfortheCommission indicatedthatalarge
proportion ofthelabourforcewouldbepreparedtoconsider
thepossibility ofnewworkingtimearrangements .ManyMemberStateshavebeendeveloping suchtemporary
workschemesspecifically aimedatparticular groupsof
unemployed .Forexample,inGermany ,thepublicinterest
jobs('ABM'—Arbeitsbeschaffungsmajinahmen )forupto
oneyearareaimedat'difficulttoplace'unemployed whoare
inreceiptofunemployment benefit.Thegovernment pays60
to100%ofthecost.InFrance,youngpeopleaged18—21
canbegivenjobsinthe'TUC'schemes(Travauxd'Utilite
Collective —jobsofbenefittotheCommunity )andthrough­
'solidarity contracts'between localauthorities and
non-profit organizations .Thejobsincludevocational
trainingandthegovernment contributes tothecost.Inthe
UnitedKingdom ,theCommunity Programme isaimedat
adultlong-termunemployed .Thegovernment paysawage
subsidy.Thesevariousschemesarein1985reachingaround
100000peopleineachofthethreecountriesmentioned .Improvedadaptability ofthelabourmarketisanimportant
component ofastrategyformoreemployment creating
growth .Thisbroadconcepthasinpracticemanydetailed
aspects,includingthevariousconditions ofemployment in
additiontopay,theorganization andreductionofworking
timeandtheadaptation ofworkingskillsandpatternstonew
technologies .These,however,shouldbeappraised within
thegeneralconstraint ofavoidingcostincreases .While
governments havetoconsiderwhetherlegalregulations
inhibittheworkings 'ofthelabourmarket,thesocialpartners
haveoftenthemajorroleinnegotiating togetherconditions
thatwillbehelpfulforanemployment creatinggrowth
strategy .Thegeneralobjectivemustbetoseekimprovements
tothefunctioning ofthelabourmarketthatreconciletothe
maximum degreetheobjectivesofeconomic efficiencyand
anenhancedemployment propensity withsocialvaluesof
equityandsecurity .Ingeneral,thesetypesofprogrammes haveseveral
advantages overalternative publicjobcreationschemes
(limitedsubstitution effects,moreprecisedemographic
andgeographical targeting ,lowerbudgetary costs).
Nevertheless ,asasolutiontotheproblemofunemployment ,
theycanonlyplayarelativelyminorrole.Theproductivity of
thesejobsmayberelativelylow,andtheslightamountof
associatedtrainingdoeslittletoenhancethelong-termjob
prospectsofparticipants .
AnotherspecificmeasureadoptedbyanumberofMember
Statesistheprovisionofassistancetohelptheunemployed
setuptheirownbusiness .Ingeneral,suchmeasuresallowthe
unemployed ,undercertainconditions ,tocapitalizetheirIII.3.4.Specificemployment programmes
Theprocessofreducingunemployment bymeansof
macro-economic policymeasures willtakeseveralyears.(J)Commission oftheEC,'Actiontocombatlong-term
unemployment ',(COM(84 )484final),1984.

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/41
TrainingSchemehasover300000participants atanyone
time;andinFrancethenumberoftrainingplacessupported
undertheGovernment 'sspecialmeasures isapproaching
500000.MemberStatesarealsomakingmajoreffortsto
ensurethatyoungpeopleacquireabasicunderstanding of
thenewinformation technologies beforetheyleaveschool,
andtoimprovethevocational relevanceofthecurriculum —
eveninnon-technical subjects .Policiesontheyouth
employment andtrainingproblems havebeenrecently
reviewedinaCommission Memorandum (2).unemployment benefitintoalumpsum,ortocontinue
receivingunemployment benefitatthesametimeastheyare
self-employed ,oracombination ofthetwo.InFrance,for
example,thegovernment givesasubsidytounemployed
peoplewhosetuptheirownbusiness .IntheUnitedKingdom
andIreland,aweeklyallowance isgrantedtounemployed
personswhocanalsoputupacertainamountoftheirown
resources .IntheNetherlands ,peoplecanreceivealoanand
anincomesupplement uptothelevelofsocialassistance
duringthestart-upperiod.Inmostcases,eligibilityforthe
allowance isconditional uponhavingbeenunemployed fora
certainperiodorislimitedtothemaximum periodof
qualification forunemployment benefit (usually12
months).
Through itsworkprogramme on'newinformation
technologies andtheschoolsystems'(3)theCommission is
offeringtechnicalsupportintheareasofnewinformation
technologies andtheschoolcurriculum ,thetrainingof
teachers,andeducational softwareandhardware .Theroleoflocalgovernment andnon-government
organizations inthedevelopment ofsmalllocal-level
enterprises iscrucial.InarecentCommunication (*)the
Commission highlights thekeyroleoflocalsupport
structures whichareabletoofferencouragement ,
information ,guidanceandassistance tothoseinvolvedin
enterprise andemployment creation . Aparallelprogramme isunderwayinthefieldofvocational
training (4).Underthenewguidelinesforthemanagement of
theEuropeanSocialFundissuedinApril,theCommission is
givingprioritytotrainingprogrammes linkedwiththe
introduction ofnewtechnologies .Whilefundamental solutionstotheunemployment problem
willtakemanyyears,quickersolutionshavetobefoundto
alleviatetheheaviestconcentrations ofunemployment ,for
exampleamongyoungpeopleanddepressesregions .Several
countries havedeveloped schemesforrelativelylow-cost
employment onactivitiesofpublicinterest,targetedonsuch
groupsandareas.Therearealsoexampleofincentive
schemesforunemployed personstosetuptheirown
businesses .Rapidexperimentation anddevelopment ofsuch
schemesiscalledfor,drawingonlocalorganization inpublic
andprivate(profitandnon-profit )sectors.
III.3.5.Education ,trainingandtechnologyInJuly1985theCommission publishedproposalsforanew
Community programme ineducation andtrainingfor
technology (COMETT )(5).Thisisdesignedtoencourage
university-industry cooperation ,withinaCommunity
framework ,onadvancedtraininginthenewtechnologies .It
willhelpensurethatthecompetitiveness oftheCommunity 's
industries isnotinhibitedbyshortages ofhighlyskilled
manpower ,andencourage economies ofscalebyfacilitating
jointtrainingprogrammes inspecialist skills.The
programme ,whichisduetostartin1986,includes :(i)
fundingforaCommunity networkofuniversity-industry
trainingpartnerships ;(ii)grantstoenablestudents ,
academics ,managers ,tradeunionistsandotherstobe
secondedtouniversities orenterprises inotherMember
States;(iii)jointtrainingprojectsinvolvingenterprises and
universities fromdifferentMemberStates,designedtomeet
specificmanpower shortages ;(iv)thefeasibility of
establishing aEuropean technological openuniversity
systemwillalsobeexamined .TheCommission intendsto
submitacommunication ,beforetheendof1985,proposing
Community actioninthefieldofeducation technology
(especiallythroughtheuseofinformation technology )in
ordertoimprovetheaccessandthecost/efficiency of
education andtraining .Thespeedandscaleoftechnological changeiscreatingnew
andurgentneeds,particularly forconsiderable numbersof
technicalspecialists ,andfortheretrainingofadultswhose
jobsareaffectedbytechnological change .Thesepressures ,
combined withthedemographic bulgeinthenumbersof
youngpeople,persistent highunemployment andthe
continuing restructuring ofindustryintheCommunity ,are
leadingalreadytomajorchangesintheeducation and
trainingpoliciesoftheMemberStates.
Forexample,astrikingdevelopment hasbeentherapid
expansion inyouthtrainingprovision inrecentyears.Some
700000apprentice placesarenowavailableannuallyunder
theGermandualsystem;theUnitedKingdom'sYouth(2)Commission oftheEC,'International YouthYear'(COM(85 )
247final),July1985.
(3)Commission oftheEC,'Newinformation technologies andthe
schoolsystemsintheEC'(COM(84 )722final),June1984.
(4)Commission oftheEC'Vocational trainingandthenew
information technology '(COM(85 )167final),April1985.
(5)Commission oftheEC,'Community programme ineducation
andtrainingfortechnology '(COM(85 )431final),July1985.(*)Commission oftheEC,'Community actiontocombat
unemployment —thecontribution oflocalemployment
initiatives :(COM(83 )662final),1983.

NoL377/42OfficialJournaloftheEuropeanCommunities 31.12.85
Steel,shipbuilding andenergypolicies:Community policy
forsteelandshipbuilding isaimedatrestructuring inline
withamoremarket-orientated approach ,togetherwith
concernforthesocialconsequences oftherapiddeclinein
sizethattheseindustrieshavebeenexperiencing .Thespeedandscaleoftechnological changeiscreatingnew
andurgentneedstodevelopatechnological awareness
amongtheworkingpopulation atalllevels.Combined with
theproblemofhighunemployment ,especiallyamongyoung
people,majorchangesarebeingmadeintheeducationand
trainingpoliciesoftheMemberStates.TheCommunity can
addtothisprocess,asillustrated byrecentCommission
proposals forgivingaCommunity dimension to
university-industry cooperation ontraining innew
technologies .TheCommission 'srecentdecisionsbearingonthesteel
industryclearlyillustratethisgeneralapproach (2).Their
aimistoachievefurthercutsincapacitywithinamuchmore
market-orientated framework whileincreasing theprovision
tohandlethesocialeffectsofrestructuring .Thusall
investment andoperatingaidsaretobesuspended afterthe
endof1985,thepresentminimum pricesystemforsteel
productswillbeended,andproduction quotaswillbephased
outoverathree-year period.Specialstatesubsidieswill
continuetobepermitted onlyforenvironmental protection
programmes ,research anddevelopment andplant
closures .III.3.6.Sectoralpolicies,technology andenterprise
Theadjustment andimprovement ofindustrialstructures ,
technological development andthecreationofnew
enterprises constitute someofthemainobjectives of
Community policies .Withregardtosectorssufferingfrom
excesscapacity,theCommission hasadoptedpolicy
proposals inseveralareas.Atthesametime,increasedandbettercoordinated spending
onregionalandsocialprogrammes inareasaffectedbythe
continuedrundownoftheindustryareenvisaged .
Agriculture :theproblemswhichoccurredinthemarketsof
certainagricultural products—especially theproblemof
surplusproduction —haveledtosubstantial changesofthe
mechanisms ofthecommonagricultural policy(CAP)in
recentyears.In1985theCommission published astudyofenergy
prospectstotheendofthecentury,andthenfollowedthisby
proposing newCommunity energyobjectives fortheyear
1995(3).Theseobjectives aredesignedtoensurethatthe
Community 'seconomicperformance isnotundermined by
renewedenergyproblems inthelongerterm.The
Commission alsopublishedananalysisofrestructuring inthe
Community 'soilrefiningsectorwhichpaidparticular
attentiontotheimpactofexportsofrefinedproductsfrom
theMiddleEastandNorthAfrica .'Guarantee thresholds 'wereintroduced formainagricultural
commodities togetherwithquotasinthemilksector,thereby
limitingthepreviously open-ended supportguarantees .Inso
farasthedecisionsonagriculture pricesfor1985to1986are
concerned ,theCommission proposed acontinuation ofits
restrictivepricepolicy;toalargeextenttheCouncildidnot
followtheseproposals ,inparticular forcerealsandrape
seed.TheCommission proposed areduction inpricesof
3,6%buttheCouncildidnotreachanagreement .Asa
resulttheCommission hasbeenobligedtot&kespecial
measuresforthisproductunderitsownauthority .Thenew
structuralpolicy,whichwasdecideduponin1984and1985,
avoidsencouraging theproduction ofsurplusproducts .In
linewiththesemeasurestoadjustsupplytodemandfor
agricultural goods,theCommission hasrecentlypublished a
GreenPaperontheperspectives fortheCAP(J)inwhichit
proposesvariousoptionsandinsistsontheneedforaprice
policywhichismorerelatedtomarketconditions .The
income-support functionwhichhassofarbeenensuredby
thepricepolicycouldinfuturebemetincreasingly by
production-neutral incomeaids.Technology :Europehastraditionally lookedto
knowledge-intensive ,highvalue-added industryasthebasis
foritseconomicprosperity .ButEurope'sleadership inmany
fieldsoftechnology hasbeenincreasingly erodedasnew
competitors havemanagedtodiffusemanysignificant
innovations faster.TheshareoftheCommunity ofTenin
totalindustrial world (OECD)high-tech manufactured
exportfellfrom58%in1963to43%in1983;thoseofthe
USfrom27%to21%,whilethoseinJapanrosefrom5%
to23%duringthisperiod.
Theorganization ofaEuropeanefforttoreversethesetrends
hasinthelastyearbeenprogressively takingshape,especially
throughthedefinition andimplementation ofCommunity
strategicR&Dprogrammes suchasESPRITorBRITE.In
thesectoroftelecommunications ,whichistoplayamajorTosupportthenecessary adaptation oftheEuropean
agricultural sector,theGreenPaperoptsformeasuresto
facilitatestructural adjustments ,tochangetoefficient
alternative productions andtocreateadditional income,or
alternative employment forfarmers .
(2)Commission oftheEC,'Theorganization ofthesteelmarket
after1985'(COM(85 )382final),July1985.
(3)Commission oftheEC,'Energypolicyobjectives for1995'
COM(85 )245,July1985.(')Commission oftheEC,'Perspectives fortheCommon
Agricultural Policy'(COM(85 )333final),July1985.

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/43
roleinthereinforcement ofthecompetitivity intheworld
economy ,theCouncilhasapproved inJuly1985the
definition phaseoftheprogramme RACE (Research in
AdvancedCommunication forEurope).
Theactionsundertaken inthetechnology fieldare
complemented bymeasuresaimedatcreatingtheEuropean
widemarketnecessarytorecouptheR&Dandproduction
investments requiredbythehightechnology productsand
services (common standards ,opening ofpublic
procurement ,etc.).
TheEuropeanCouncil,meetinginMilaninJune1985,gave
anewimpulsetotheseefforts,approving aCommunication
oftheCommission onthestrengthening oftechnological
cooperation (J)andsupporting theEUREKA initiative
proposed bytheFrenchGovernment .
TheCommission 'sCommunication totheEuropeanCouncil
'Towards aEuropean Technological Community 'sketches
outtherangeoforganizational techniques ,aswellasthe
possiblesubstantive domainsoftechnological advances ,that
theCommunity shouldnowpursue .Thegeneralobjectives
areto:(a)exploittothemaximum theCommunity
dimension ofacontinental marketandnetworkofresearch
institutesandfacilities ;(b)promotethegreatestpossible
synergetic effectsfromtheinteractions ofnationaland
Community efforts,possiblywithanadditional Community
contribution andparticipation ofnon-member countries .
Creationofnewenterprises andsimplification ofexisting
regulations :Anumberofmeasures haverecentlybeen
proposedoradoptedinseveralcountriesoftheCommunity
withtheintentionofreducingregulation andtherebythe
costsimposedonsmallcompanies ,particularly intheir
creation .Itistobenotedthatthebiggestincreases in
employment intheCommunity inrecentyearshaveoccurred
innewenterprises .Smallandmedium-sized enterprises are
thusseentobeanimportant sourceofnewemployment
creationforthefuture.
Theexamination ofexistingregulations doesnotmeanthat
allrulesshouldnecessarily becalledintoquestion .Itismore
aquestionofsimplifying existingregulations andensuringthatthemannerinwhichtheyareapplieddoesnotconstitute
ahandicapforemployment .
AtaCommunity level,theEconomic PolicyCommittee ,in
parallelwithitsworkonflexibilityinthelabourmarket,is
examining theflexibilityofproductmarketsincludingthe
impactofregulations oncompanies aswellasotheraspects
ofgovernment intervention .TheCommission intendsto
submitacommunication beforetheendof1985onthe
reformofbusinessregulation andthepromotion ofa
tdynamicsmallandmedium-sized enterprise sector.
Smallandmedium-sized enterprises aredependent toan
important extentonthegeneralconditions inwhichthey
operate,inparticular thoserelatingtotaxesandsocial
securitycontributions .Forsuchenterprises theaccessto
capitalmarketsisgenerallynarrowerthanforlargepublic
companies ;theirinvestment planstherefore depend
particularly ontheircapacityforself-financing .Inmost
member countries thecharacteristics ofsmalland
medium-sized enterprises arenotgivendueconsideration in
incometaxlegislation ,whichthustendstoimpedethesetting
upofnewenterprises andtoslowthegrowthofexisting
enterprises .Itisthereforeappropriate toexamineincometax
legislation intheMemberStatesforitseffectsonsmalland
medium-sized enterprises ,andifnecessary changethe
provisions relatingtothedefinitionoftaxableincomeand
thestructureoftaxratesinordertostrengthen the
employment potentialofsuchenterprises .
Asregardsthefrontiersbetweenprivateandpublicsectors,
oneoftheinteresting consequences oftechnological advance
isthat,insomesectors,traditional 'natural'monopolies may
nolongerexist.Oneexample isintelecommunications
networks ,whereprivatization andde-regulation havetaken
placeintheUnitedKingdom (withparallelorsimilar
developments intheUSAandJapan)andwherediscussion is
alsounderway ontheroleoftheBundespost inthe
telecommunications marketinGermany .
TheCommission hasadoptedspecificproposals eitherto
reduceproduction capacityinsectorssuchassteeland
shipbuilding ,ortoreinforcecontrolonproduction in
agriculture .Italsomadeproposalsfortheorganization ofa
'technological community '.Alliedtothesesectoralobjectives
arethemanydetailedinitiativeswhicharebeingundertaken
tomaketheEuropean businessenvironment moreconducive
tothecreationandexpansionofenterprises .0)Commission oftheEC,'Towards aEuropean Technological
Community '(COM(85 )350final),June1985.
IV.EUROPEAN INTERESTS INTHEINTERNATIONAL ECONOMY
IV.1.Theworldtradingsystem
Theprosperity oftheEuropean economydependsgreatly
uponanopenworldtradingsystem.Thereisstrong
evidence ,ineconomic theoryandpractice,toshowthatprotectionism doesnotpayasaninstrument ofgeneral
economicpolicy.Theprotection oflimitedproducerinterest
groupsdoesprovideincomeandemployment protection to
thosegroupsintheshort-run .Howeverotheradverseeffects
ofprotectionism arepresentevenintheshort-run ,whilethe

NoL377/44 OfficialJournaloftheEuropeanCommunities 31.12.85
protectionist measures (e.g.steelproducts )weretakenbythe
UnitedStatesaftertheWilliamsburg Summit .Inaddition,
somedisquieting protectionist trendshaveappearedin
Congress ,althoughthesehaveingeneralbeenopposedby
theAdministration .Japancouldbesupportive inhelpingto
alleviateprotectionist pressuresinboththeUSandtheECby
rapidlyandsubstantially givingeffecttoitsdeclared
objectiveoffacilitating accessforimports,especiallyof
manufactured goods.TheUSdeficitandJapanesesurplus
cannot,however ,besufficiently rectifiedbytradepolicy
measuresalone,whichiswhytheCommunity arguesin
favourofamoreconcertedapproachtoexchangerateand
macro-economic policyinternationally .Thispointofviewis
reinforced bytheoutcomeoftheSeptember 1985meetingof
theGroupofFiveministersoffinanceandcentralbank
governors whichunderlined theimportance ofmaintaining
anadequate levelofworlddemandandthejoint
responsibility toreduceworldcurrentaccountimbalances
andresistprotectionist pressures .negativelong-runeffectsareevenmoredisadvantageous .
Protection hastheeffectofincreasing consumerprices,
cuttingrealincomesandrealconsumerdemandandhence
outputandemployment intheeconomyasawhole.Where
theprotectedgoodsorservicesareinputsintotheproduction
ofotherbranchesoftheeconomy ,asisoftenthecase,then
thosebranchesthemselves loseincompetitiveness inworld
markets .Theythenloseordersandhavetocutemployment ,
unlesstheexchangerateisdevaluedtocompensate .With
devaluation ,standardsoflivingarereducedandtheproblem
ofinflationisworsened .Macro-economic policyhasto
becomemorerestrictive ,thusagainweakening realdemand
andoutput.Alternatively ,branchesofindustryfacedwith
uncompetitive inputsfromprotectedsectorsareforcedtotry
toevadethisdisadvantage bysubstituting theseinputswith
alternatives (e.g.plasticforsteelcomponents ),orby
relocating theirinvestments inothercountrieswherethe
inputsarecompetitive (e.g.someECbiotechnology firmsare
investingoutsidetheECtogainaccesstocheaperagriculture
inputs).Thesegeneralarguments havebeensetoutingreater
detailinofficialdocuments oftheEC(1),aswellaselsewhere
suchastheOECD (2). TheCommunity alsofavourstheparticipation inanew
GATTroundofthelargestpossiblenumberofnewly
industrialized countries .Severalofthesecountries have
achievedimpressive penetration ofexportmarketswhile
maintaining extremely highprotectivebarrierstotheirown
markets .Furtherliberalization bythesecountries isa
necessarycounterpart totheirexpressed desiretoseetheir
ownconditions ofaccesstoworldmarketsimprovedinanew
round.FinallytheEChasindicateditswillingness toinclude
tradeinservicesinanewround,andisactivelyseekinga
basisforagreement onthispointwithdeveloping countries ,
someofwhomremainscepticalorevenopposedto
negotiations inGATTonthissubject.ForthesereasonstheECisinfavourofanewroundof
multilateral tradenegotiations .Preliminary discussions have
beenunderwayinthecourseof1985,andthedecisionin
principletobeginthenegotiation processisexpectedtobe
takenshortly .
TheCommunity isstronglyinfavourofanewround
ofmultilateral tradenegotiations .This,togetherwith
improvements inthefunctioning oftheinternational
monetarysystem,willofferthemostappropriate framework
foraglobalreviewoftradepolicyoptionswhichmustbe
addressedifthethreatsconfronting themultilateral trading
systemaretobeaverted .Tradeliberalization andtheunwinding ofprotectionism can
ofcoursebeadifficultprocessfortheindustriesconcerned ,
andforworkingpeoplewhentheirexistingjobsmaybe
threatened intheabsenceofencouraging prospects of
alternative jobs.Therefore therehastobeagreement overa
balancedsetoftradeliberalizing measures ,otherwise the
adjustment costsmaybeunfairlydistributed acrosstheworld
tradingcommunity .
IV.2.Improving theinternational monetary system
TheCommunity 'sattitudetowards anewGATT
multilateral traderoundisexpressed intheCouncil's
declaration on19March1985;andithassubsequently set
outitsideasonthesubjectmatterofsuchanegotiation and
theCommunity 'sprincipalobjectives inawrittensubmission
toGATTon8July.Commitments undertaken intheOECD
andGATTtohaltprotectionism androllbackprotectionist
measuresshouldbeimplemented ,withoutwaitingforthe
newround.Inthisregarditisimportant tonotethatsomeTheinternational monetary scenehascontinued tobe
characterized byahighdegreeofexchangerateinstability .
BoththeUSdollarandthepoundsterlinghaverecordedvery
sharpfluctuations duringthefirsthalfofthisyearinboth
nominalandrealterms.However ,whatisprobablymore
damaging totheperformance oftheworldeconomyasa
wholeisthetendencyfortheexchange ratesofmajor
currencies tomoveprogressively furtheroutoflinefrom
whatmightbeconsidered their'equilibrium 'levelsoverlong
periodsoftime.Overthesixyearsfromthefirstquarterof
1979tothefirstquarterof1985theUSdollarappreciated in
realtermsonatradeweightedbasisby63%,admittedly
fromanundervalued startingposition .(0Economic PolicyCommittee oftheEC,'Opinion on
protectionism ',European EconomyNo19,March1984.
(2)OECD,'CostsofProtectionism ',1985.

31.12.85OfficialJournaloftheEuropeanCommunities NoL377/45
Theseprolongedshiftshaveproducedapatternofexchange
rateswhichisincompatible withastablestructureof
international tradeandcapitalflowsandthusisclearly
unsustainable overthemediumorlongerterm.Moreover ,
importpenetration intheUnitedStates,resultingfromthe
overvaluation ofthedollar,isproducing aformidable
accumulation ofprotectionist pressure ,whichnowthreatens
seriouslytoundermine theliberalsystemofinternational
tradethatwasestablished undertheGATTandpromoted
furtheroverthepost-warperiod.Community wouldwelcomemoreeffectivemultilateral
surveillance oftheexchangerateandofmonetary and
economic policiesofmajorcountriessuchastheUnited
StatesandJapan(aswellastheCommunity 'sownMember
States)withaviewtoachievingmorecompatible policies.As
noted,thereareseriousproblemscreatedfortheworld
tradingsystemduetoamajormisalignment ofexchange
rateswhichinturnresultfrompoorinternaland
international coordination ofmonetaryandfiscalpolicies.
International exchangerateinstabilityandmisalignment has
ledtoaclearlyunsustainable patternoftradeandcapital
flows.TheGroupofTenhassofaronlybeenabletoagreeon
modestprocedural proposals improving thesystem.Itis
extremely difficultfortradepolicyalonetoabsorbthe
problemscausedbyexchangeratedisorders .Thisiswhythe
Community ispressingforparallelprogressinimproving the
international monetary systemalongside thenewGATT
round.TheSeptember 1985meetingoftheGroupofFive
represents acertainadvanceintheapproachtoexchangerate
andmacro-economic policycoordination .Againstabackground suchasthisitisregrettable thatthe
GroupofTen(leadingindustrialized countries),which
receivedamandatefromtheWilliamsburg Summitin1983
toexaminewaysofimproving theworkingofthe
international monetary system,hasbeenunabletoreach
agreement onaconcrete andmorecomprehensive
programme ofactiondesignedeffectively totacklethe
problemofexchangerateinstability .However ,followingthe
agreement of22September betweentheGroupofFive
countries ,therenowappearstobesomemeasureofaccord
concerning boththedampening effectsofcurrency
misalignments andthescopeforconcerted actionto
influenceexchangeratesandotherkeyeconomicvariables
withaviewtocorrecting majorimbalance intheworld
economy . IV.3.European economic space
TheECexportsmoretotherestofWesternEurope(26%of
totalECexports,excludinginterECtrade)thanitdoesto
anyotherregionoftheworld.Atthebeginningof1984the
ECandEFTAcompleted theremovalofalltariffsand
quantitative restrictions betweenthetwoblocs.InAprilof
lastyeartheyfollowedthisupwithajointdeclaration
expressing thepoliticalwilltoextendCommunity-EFTA
cooperation 'withtheaimofcreatingadynamicEuropean
economic space'.In1985ajointcommunique ofthe
Commission andEFTAcountries setoutthedomains of
policywhichshouldinthefuturecontribute todeveloping
thisrelationship .TheCommission foritspartpublished a
Communication detailinghow,initsview,thismightbe
done(2).
Firstpriorityshouldbegiventoabolishing aseriesof
technicalandadministrative obstaclestodeepentrade
relationsthroughsimplification ofborderfacilitiesand
originrules,reciprocal cooperation intechnicalstandards
andrules,mutualrecognition oftestresultsand
certificates .ThemainfocusoftheGroupofTen'sreport,published in
April(J),hasbeenontheneedtoimprovemultilateral
surveillance procedures ,withaviewtoachievingbetter
coordination andmutualconsistency betweenthepoliciesof
themajorindustrial countries .Whethertheprocedural
changesrecommended intheGroup'sreportwillleadto
significant improvement inthisrespectremainstobeseen.
Thetimemaynotberipetoestablisharegimeoftargetzones
forexchangerates,entailinganobligation tointervenewhen
thelimitsofsuchzonesareattained .Itmightnevertheless be
fruitfultoexamine seriously thepossibility ofan
intermediate stage,involving indicative zones,whereby
consultation ,ratherthancentralbankintervention ,would
betriggeredwhenthelimitswerebreached .Themeetingof
theGroupofFiveinSeptember 1985markedacertain
advancewithagreement forthefirsttimeinrecentyearson
thedesirabledirectionofmovement ofthedollar'sexchange
rateandreadinesstocooperate tothisendwhenthiswould
behelpful .
TheCommunity foritsparthasfoundthattheexistenceofan
exchangerateconstraint ,asembodiedwithintheEMSrules,
hasundoubtedly contributed totheachievement ofmore
convergent policiesandperformance amongitsmembers .
Theinstitutions whichareappropriate andeffectivewithina
closelyintegrated economic regionsuchastheEuropean
Community arenotnecessarily applicable toawiderand
morediversified groupofcountries .However ,theOtherareaswherecooperation shouldbeenhancedarein
researchanddevelopment ,tradeinprocessed agricultural
products ,publicprocurement ,bordercontrolsontravellers ,
transportprojectsandpolicies,environmental policyand
economicandmonetaryconsultations .Onseveralofthese
topicstheCommunity hasrecentlytakeninitiatives .Ithas,
forexample ,beensuggestedthatnewprogrammes tocreatea
Europeantechnological community shouldbeopenforother
0)International MonetaryFund,Supplement ontheGroupofTen
DeputiesReport'TheFunctioning oftheInternational Monetary
System',IMFSurvey,July1985.(2)Commission oftheEC,'TheCommunity andEFTACountries '
(COM(85 )206final),May1985.

NoL377/46 OfficialJournaloftheEuropeanCommunities 31.12.85
casetherewouldalsobethequestionofwhethertheEC
wouldbeactingonitsownorinconcertwithalargernumber
ofcountries .WestEuropeancountriestoparticipate .TheCouncilisinthe
processofauthorizing theEuropeanMonetaryCooperation
Fundtodesignatecertainnon-Community centralbanksto
becomeholdersofofficialECUreserves,andthis
arrangement couldbeusedbysomeEFTAcountries .
Alreadysomeofthesecountrieshavebeguntoholdprivately
tradedECUassetsaspartoftheirforeignexchange
reserves .Inthehypothesis thattheEuropeanCommunity alonetried
tosustainitsgrowthtrajectory ,whileotherregionsinthe
worldpassivelyallowedaUSslow-down todepresstheir
growthrates,theECcouldmoveintosubstantial current
accountdeficit.ToacertainextenttheCommunity can
affordareductioninitssurplusandevenatemporary current
accountdeficit.Butitcannotaimtohaveadeficitonthescale
ofthatintheUnitedStates.TheUnitedStates'massive
externaldeficitisnotanexamplefortheECtocopy.Goodprogresshasbeenmadeinopeningtradebetweenthe
ECandEFTAcountries .Onbothsidesitisnowagreedto
buildfurtherontheseachievements .TheCommunity is
seeking,inthelightofitsowneffortstocompletetheinternal
marketanddeepeneconomic cooperation ,tomakeit
possibleforEFTAcountriestoparticipate closelyinthe
European economy 'sintegration process .Theseefforts
shouldofcoursecontinuetorespectthedistinctinstitutional
identitiesandobjectivesoftheECandEFTA.TheEFTA
countries couldbeinvited tocontribute tothe
implementation ofthecooperative growthstrategy .Current
negotiations toadapttheexistingfreetradearrangements
betweentheCommunity andEFTAcountries ,necessary
becauseoftheaccessionofSpainandPortugal,aimata
furtherconsolidation andextensionofthefreetradesystem
inWesternEurope .Therewould,ontheotherhand,beacasefortheECtourge
thatthelargestpossiblenumberofcountriesparticipate ina
worldeconomicadjustment .InthiscontextJapanisina
positionofparticularimportance .Ithasthelargestsingle
counterpart totheUnitedStatesdeficit,aswellasserious
problemsofanunbalanced tradestructureinrelationtothe
EC.Aninternational cooperative actiontosustaintheworld
businesscycleshouldseeanaboveaveragecontribution by
Japanasregardsbothexchangerateappreciation and
domesticdemandexpansion .Ifthiscontribution were
assured,thenitmightwellbepossibletoextendfurthera
worldcooperative action.TheEuropeanCommunity could
suggesttoEFTAcountriesthattheyjointheEC'sinitiative .
Japanandthenewlyindustrializing countriesofthePacific
regioncouldcontribute ausefulcounterpart tothereduction
oftheUSexternaldeficit .TheUnitedStatescouldmost
usefullyhelpbyactionstoloweritsinterestrates,whicharea
particularly heavyconstraint onthegrowthpossibilities of
theheavilyindebteddeveloping countries ,especiallyinLatin
America .IV.4.International cooperation forworldeconomic
adjustments
Asalreadynoted,inthemedium-term theUnitedStates
economymustmoveintoaphaseofmajorcorrection ofits
stillmountingexternalcurrentaccountdeficit.Whatisstill
uncertain isthetimingandamplitudeofthiscorrection ,and
howitwillbeinduced .Contributing totheadjustment
processtherewillnodoubtbeelementsofbothbudgetary
restriction andcyclicalslow-down andofdollarexchange
ratedepreciation .Avoiding asituationwheretheUSeconomicadjustment
processleadstoapronounced andgeneralized slow-down in
worldtradeisessentialtothecontinuation ofanorderly
adjustment processintheindebteddeveloping countries ,as
pointedoutbytheIBRDinitsrecentWorldDevelopment
Report(1).
Theprospectofsomeadjustment bytheUnitedStatesandits
possibleeffectsposesimportant issuesforinternational
economiccooperation .Theobjectivewouldclearlybeto
achievethenecessaryadjustments withthesmallestpossible
cyclicalreverseintheUnitedStatesitself(obviously the
UnitedStates'owninterest )and,equallyalso,inthegrowth
oftheworldeconomyasawhole.Adisorderly adjustment
entailingtraderestrictions would,ofcourse,bevery
damagingtotheworldeconomy .TheIBRDsetsoutinparticular 'High'and'Low'case
scenariosforthedeveloping andindustrialized countries
whicharequiteinlinewiththeconclusions drawnabove(in
SectionII.2)aboutthepotentialgainsfromacooperative
growthstrategy .Depending uponwhetherdeveloping
countries findthemselves operating infavourable or
unfavourable conditions asregardsthegrowthofworld
trade,thetermsoftradeandthelevelofinterestrates,their
capacitytoimportissubstantially affected .Fortheyears
1985to1990theannualaveragegrowthrateofdeveloping
countries'importsisprojectedtorangefrom9,3%inthe
highcaseto2,5%inthelowcase.Thedebtserviceburden
ofdeveloping countrieswouldriseinthelowcaseto28%;
thustherangehereisbetweenthedebtproblembeingFromtheUnitedStates'pointofviewagivenbalanceof
paymentscorrection canbeachievedatahigherlevelof
internaleconomicactivity,thehigherthelevelofactivityin
therestoftheworldeconomy .FortheCommunity itis
necessarytoachievemoredynamiceconomicgrowthandthe
questionarisesofhowtomaintainthisinthecaseofan
adjustment togrowthintheUnitedStates.Ifsuchwerethe (J)IBRD,'WorldDevelopment Report1985',July1985.

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/47
broughtundercontroltoitbeingaggravated toevenmore
acutecrisisproportions thansofarexperienced .Inthelatter
casethethreattoworldeconomic stabilitywouldbe
considerable .
Theprospectofanimportant internalandexternal
adjustment bytheUnitedStateseconomyforaperiodof
yearsaheadposesthequestionofhowtherestoftheworld's
economywillbekeptonanadequategrowthpath.TheEuropean Community shouldbepreparedtotakeupits
responsibilities asalargeeconomicregiontosustainitsown
internallygeneratedgrowthduringthisperiod.However ,it
isequallyimportant thatJapanlendsitssupporttoa
wide-scale international adjustment ofthiskind,without
whichtheECmightfaceunacceptable risksasregardsits
ownexternalaccount .Withoutanadequate global
cooperation therisksofupsettingthefragilerecoveryofthe
indebteddeveloping countrieswouldbeverygreat.
V.CONCLUSIONS :OBJECTIVE ,INSTRUMENTS ANDMETHOD
Inthepresentreport,theCommission offerstotheCouncil,
Parliament andSocialPartnerstheoutlineofacooperative
growthstrategywhichaimsatadecisiveimprovement inthe
Community 'seconomic performance betweennowand
1990.Theapplication ofthisstrategyisnecessary ifa
reduction inunemployment ,withoutarekindling of
inflation ,isdesired .Itwillproducepositiveresults
irrespective oftheinternational environment .Clearly,a
favourable environment willfacilitate asuccessful outcome .
However ,intheuncertainconditions whichexisttodayfor
theworldeconomy becauseofthepersistent financial
imbalances intheUnitedStatesandthecriticalproblemin
somelargeandhighlyindebteddeveloping countries ,the
signalwhichwouldemergefromtheCommunity embarking
onacooperative growthstrategywouldbefarreaching .The
proposalmaybesummarized asfollows :
Objective
TheCommunity shouldsetclearaimsforeconomicpolicy.
Inthisreport,theCommission proposes acooperative
strategydesignedtorealizeasustainable growthrateof
3,5%overtheperiod1986to1990.Thiswillmakepossible
agrowthofemployment risingto1,5%perannumandwill
providethemeansbywhichunemployment canbereduced
to7%bythefinalyear.Thepatternofgrowthwillthus
becomemoreemployment creatingandcantakeplacewithin
aframework consistentwithstabilityofnationalbudgetsand
thereductionofinflation .Suchresultswillonlybepossibleif
allparticipants furnishthecontribution requiredfromthem
bythestrategyandifinternational cooperation progresses
satisfactorily .
Instruments
Nosingleinstrument sufficestoachievethisobjective .
However ,anumberofrecentpolicyinitiatives fitwellinto
thecooperative growthstrategy,buttheirimplementation
needstobeaccelerated andaccompanied byafurther
dynamicelementinordertosecureasufficientchangeinthe
economy'sgrowthtrajectory .Themainelementsmaybe
itemized asfollows :
—monetary policyimplemented soastocontinuefurther
theprogressmadealreadyinreducinginflationbutalsoallowingroomforfasterrealgrowth.Fastergrowthwill
bepossiblealsobyexploiting opportunities whichare
likelytoariseasinternational monetaryconditions serve
toaccentuate thereductionofEuropean interestrates,
—budgetary policieswhich,atamicro-economic level,
favourmoreemployment-creating growth.Atthe
macro-economic levelafirstaimwouldbetocorrect
presentimbalances butatthesametimeexploiting ,
whereroomexists,opportunities forimproving supply
anddemandtogetherandmovingtheEuropeaneconomy
ontoa'virtuouscircle'ofinvestment ,outputgrowthand
newjobcreationandtherebytoabetterequilibrium of
publicfinance.Withintheframework ofthecooperative
growthstrategytaxcutsandincreasedinfrastructural
investment wouldbesomeoftheprincipalmeasures
envisaged ,
—amoderate increaseinrealwagestoincreasethe
profitability offixedcapital.Togetherwithdemand
support,thiswillcreateaclimateatthemacrolevel
favourable tofosteringanupsurgeininvestments which
atthesametimewillbemoreemployment-creating ,
—initiatives designed toimprove labourmarket
adaptability ,thereorganization andreduction of
workingtime,undercost-neutral conditions ,shouldalso
contribute tomakinggrowthricherintermsof
employment ,
—improved andintegrated marketpoliciesdesignedto
openuptheCommunity 'sinternalmarket;liberalize
domesticfinancialmarkets ,andtogiveabettermarket
orientation tointerventionist policiesoftheCommunity
withdueregardtothe'socialdimension',
—greaterinvestment inEurope'seconomicpotentialinthe
widestsense,rangingfrommajortransport and
communication projectsofCommunity interest,through
environmental investment ,tothebetteruseofEurope's
technological potential ,

NoL377/48 OfficialJournaloftheEuropeanCommunities 31.12.85
—international policieswherebytheCommunity strivesto
improvecontinually theGATTtradesystemand
international monetary system,and,withother
countries ,actingsoastosustainthegrowthofworld
tradeandtomitigatetheLDCdebtproblemwhile
inevitableadjustments occurintheUS.
Method
TheCommission considersthatitwouldbeappropriate to
adoptastep-by-step approach ,soastoassuresufficiently
clearinitialcommitments togiveacrediblelaunchtothe
strategyandestablishdialoguebetweenthepartiesinvolved ,
whileallowingforlaterstepstobeadaptedinviewofan
assessment oftheresults,theevolutionofeconomic events
andthevalidityofeachparties'contribution :
Step1—beforetheendof1985Community institutions and
thesocialpartnerswillseektoachieveconsensus onthe
objectivesoftheCooperative GrowthStrategyandinitiating
actionjudgedtobenecessary .
Step2—afirstsetofactionswillbeputintooperation
in1986,including inparticular macro-economic policymeasures ,pledgesbythesocialpartnersonincomesand
labourmarketadjustments ,expandedpublicinvestment at
nationalandEClevel,andproposals forinternational
coordinated actioninordertoreinforcethedynamicsofthe
movement .Inaddition ,significant progress inthe
implementation ofCommission proposals ,contained inits
WhitePaperontheinternalmarket,isnecessary .
Step3—afteranappraisaloftheresultsofStep2,asecond
setofactionswillbeimplemented in1987toconfirmand
deepentheemployment-creating growthmovement .Someof
theseactionswillbecontingent ,however,uponevolutionof
theECandinternational economy ,andtheadequacyof
contributions onthepartofallconcerned tothecooperative
growthstrategy .The1986/87AnnualEconomic Report
willcontainanevaluation ofprogressinthisrespect.
Thisoutlinehasbeendeliberately setoutinaveryschematic
formandmuchmustremainfordiscussion betweenthe
partiesinvolved .However ,theprincipalpointisthatthis
shouldprovideabasisforreflectionontheirownpositionsof
eachofthemajoractorsconcerned —governments ,
employers andtradeunions.Eachactoris,inparticular ,
invitedtoconsiderhowhisexistingpositionmightenvolvein
thedirectionofthecommoninterestifitwasevidentthatthe
otheractorswerepreparedalsotoadapttheirpositions .

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/49
PartIIofthisreportcontainsspecificguidelinesforeconomic
policyintheMemberStates.Asemphasized earlier,the
strategycannotbeimplemented atastrokebutshouldbe
introduced gradually .Toachievethis,closecooperation
betweengovernments ,unionsandemployers willbe
necessary .
Asfarasthedemand-side aspectofthestrategyisconcerned ,
theroom"formanoeuvre inthetwomainareasof
macro-economic policydiffersconsiderably .Thesituation
regardingmonetarypolicyisrelativelysatisfactory .Within
thecontextofamonetarypolicygearedtowardsstability,
whichislargelydetermined bytheEMS,significantpotential
existsforbringingdowninterestrates,particularly ifthe
dollarcontinuestoweakenagainsttheECU.
Asfarasapossibledemandsupportthroughgovernment
budgets isconcerned ,implementing thestrategyof
employment-creating growthpresentsspecificproblems in
individual MemberStates.Sincethestrategycannotbe
implemented atastroke,therecommendations addressedto
thevariouscountriesmustremainrealisticandcapableof
beingcoordinated .Simultaneously withthemoderate
increaseinwagesandthewideningroomformanoeuvre in
fiscalpolicy—moregrowthandemployment boostrevenue,
whileexpenditure causedbythecrisisisreduced—demand
supportshouldoccurstepbystep,untiltheprocessbecomes
self-sustaining through privateinvestment andan
appropriate development ofprivateconsumption .
InsomeCommunity countries (Italy,Belgium ,Irelandand
Greece),therelativelevel,orthegrowth,ofpublicdebtis
suchthattheconsolidation processmustbecontinued atallevents.Elsewhere ,theGermancaseisparticularly
interesting .Asisindicatedintheforecastpresentedbelowin
theGermanchapter,growthof3,5%andanincreasein
employment of1,3%areexpectedin1986.Theprice
outlookcontinuestobefavourable .Thesurplusonthe
balanceofpaymentscurrentaccountshouldremainvery
high(2%ofGDP).Thebudgetary deficitwilldeclinemore
stronglythanwasearlierexpected (from1,2%ofGDPin
1985to0,8%.ofGDPin1986).InGermany ,therefore ,a
positivechainreactionisdeveloping betweenpricestability,
moregrowthandemployment andexpansion ofroomfor
manoeuvre inthefiscalandexternalfields.Thisroomfor
manoeuvre shouldbeexploited inordertoensurebeyond
1986thesteadygrowth (annualaverageincreaseofsome
3,5%)necessary foracontinuing reduction in
unemployment .Suchadevelopment isintheinterestsbothof
Germany andtheCommunity .Byactinginthisway,
Germany wouldnotrepeatthe'locomotive policy'
experience of1978.Monetarypolicywouldremaingearedto
stability ;thecooperative dimension ofthestrategybetween
governments andsocialpartners,appliedintheCommunity ,
wouldfacilitatethetransposition ofthepositivechain
reactiontootherMember States.
IntheotherMemberStatesbudgetary and/orexternalroom
formanoeuvre hasnotyetbeenre-established .Insomeof
thesecountries (Denmark ,France,theNetherlands andthe
UnitedKingdom )itispossiblethatasimilarpositivechain
reactiontothatbeingexperienced inGermanywillarisein
thenearfuture.Suchaprogresswillappearallthemore
rapidlyinsofarasthereisapositivecontribution fromthe
socialpartnerstotherealization ofthestrategyandas
developments proceedfavourably inGermany .

NoL377/50 OfficialJournaloftheEuropeanCommunities 31.12.85
PARTII
ECONOMIC POLICY INTHEMEMBER STATES
BELGIUM
Aferassessingthestatutorynormforthefirsttimeearlyin
July,thegovernment concludedthatitwasbeingrespectedin
1985.
Althoughthemeritofsettinganormforthemaintenance of
competitiveness isthataneconomicpolicypriorityisclearly
defined,thefactshouldnotbeoverlooked thatthisreduces
theproblemofcompetitiveness toasinglemeasurewithallits
limitations andimperfections .Otherapproaches ,which
placegreateremphasisonthe1985to1986collective
agreements oronotherindicators ,tendtosuggestthatthe
competitive advantage achievedin1982and1983beganto
beerodedin1984.Whenthestatutorynormisassessedfor
thesecondtimeearlyin1986,thesituationoughttobe
reexamined withalltherequisitecaution,andtakingaccount
oftheprogressrelatingtoelementsotherthanthetrendof
compensation peremployee achievedorplannedby
competing countries ,suchastheevolution oflabour
productivity andeffectiveexchangerates.InBelgium,despitethefairlyweakprivateconsumption ,
economicactivityaccelerated slightlyin1985becauseofthe
vigorousgrowthofinvestment andthegreatercontribution
offoreigntradetogrowth .Inflationcontinued toslacken.
Theunemployment ratefellsomewhat inthecourseofthe
yearandthegeneralgovernment borrowing requirement was
cutbyslightlyoveronepercentage pointofgrossdomestic
product .TheBelgianfrancremainedfirmeventhough
interestratesfellmoresharplythanintheotherEMS
countries .
In1986,growthisagainlikelytobemodest .Thecurrent
accountsurpluswillprobablygrowrapidly,mainlybecause
oftheimprovement inthetermsoftradebutthegainin
competitivity experienced afterthe1982devaluation will
continuetodiminish .Consumer priceriseswillagainslow
downunderthemoderating effectofworldprices.Inviewof
theseprospects ,animprovement inunemployment willbe
difficulttoachieve .
Althoughexpansion remainsmoderatein1985and1986,it
isencouraging tonotethatitisbasedprimarilyonexports
andinvestment :thisprovesthatthetwopriorityobjectives
attainedafterthefirstphaseoftheeconomicrecoverypolicy
(therestoration oftheeconomy'scompetitiveness andof
companyfinances )arebearingfruitintermsofgrowth.
Nevertheless ,giventhescaleoftheimbalances whichwere
createdinthe1970s,therecoveryremainsincomplete and
fragile;effortscannotberelaxedifexistentachievements are
tobeconsolidated .
Inthe1970s,agapbetweenthegrowthrateoflabourcosts
andproductivity wasaccompanied byanimportant
destruction ofjobsinmanufacturing industry .Attheendof
theperiod,in1981,therateofreturnhadplummeted from
theearly1970slevel,theremuneration ofcapitalin
comparison withthatoflabourhaddeteriorated appreciably
andinvestment activityhaddropped .Sincethencertain
profitability indicators pointtoarecovery ,butthe
remuneration ofcapitalrelativetolabourhasscarcely
improved ,apartfromarevivalin1982and1983.
Therefore theconditions underlying alastingexpansion of
capital-widening investment arenotsufficiently satisfied,
whereasthecapacityutilization rateisapproaching the
maximum valueofthepreviouscycle.Thisisthebackground
againstwhichgovernment effortstoincreasecompetitive
capacityshouldbeassessed .Inthesocialrecoverylawof
22January1985,theGovernment setanorm,validfor1985
and1986,designedtomaintaincompetitiveness atthe1982
to1984averagelevel.Thisnormisbasedonthe
remuneration perheadinacommoncurrencyrelativetothe
weightedaverageforBelgium'ssevenmaintradingpartners .Itisespecially important tosafeguard competitiveness
becausetheimprovement ofemployment andpublicfinance
hingesonthisintheimmediate future.Thenewcollective
wageagreements covering1985and1986weresignedinthe
spring.Becausethesocialrecoverylaw,byprohibiting all
newadvantages ,hasobligedmanagement andlabourto
translateproductivity gainsintoworksharing,these
agreements openuptheprospectthatjobswillbecreated
equivalent tosome1,5%ofthenumberofwageandsalary
earnersconcerned bytheagreements .Thescopewithinthe
countryforunderpinning activityislimitedbytheconstraints
imposedbythestillprecarious publicfinancesituationand
currenteffortstoimproveitarecloselyboundupwiththe
measures designed tomaintain competitiveness .The
decisionsofMarch1984,imposingathree-yearmoderation
ofdisposable incomesbyrequiringa2%sliceofwagestobe
paidtotheTreasury ,introduce awidersplitbetweenthe
growthofwagesascostsandwagesasincomewithout
alleviating theformer.Acorrection ofindirectlabourcosts,
whichislikelytoprovenecessary inordertorestore
competitiveness ,wouldimmediately interferewiththe
programme ofimproving thepublicfinancesituationor
wouldhaveamoderation effectondomesticdemandbecause
ofthebudgetspendingcutsnecessarytopreventawidening
ofthedeficit.Yet,eventhoughthegeneralgovernment net
borrowing hasalreadybeenprunedbyalmostfour
percentage pointsofgrossdomesticproduct,from12,8%of
grossdomesticproductin1981to8,9%in1985,itisstilltoo
high.Tomeasurethefragilityofwhathasbeenachieved ,
sufficeittosaythatalthoughnon-interest expenditure was
markedlyreduced,itwasbarelypossibletostabilizetotal
expenditure becauseofthedebtinterestburdenwhich
climbedfrom7,3%to10,9%ofgrossdomesticproductin
thesameperiod.Itshouldbestressedthattheincreasein

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/51
revenueincludesagreateryieldfromcompanytaxation ,
althoughfrom1982on,companies benefitedfromavariety
oftaxcuts(thetoprateoftaxoncompanyprofitswas
broughtdownfrom48%to45%,theadditional 'solidarity '
taxwasabolished ,taxexemptions wereintroduced in
exchangeforinvestment ).
Despitetheeffortsmade,theviciouscircleofdeficit-interest
payments-larger deficitmeansthattheborrowing
requirement isstilltoohigh.Therefore for1986thelast
sectionofthe15March1984programme mustbe
implemented infullandalloverspending andanyfallin
revenue,notablyasaresultoftheprogramme forcutting
taxationfrom1986to1989whichwasvotedinJuly,mustbe
offsetwithinthebudgetary ceiling.Ifalltheseconditions are
met,andgiventheautomaticgrowthofrevenue,thecentral
government Treasury financing requirement shouldbe
limitedto9,6%ofgrossdomesticproductin1986compared
with10,4%in1985.Becauseofthetaxcutsvoted,from
whichdisposable incomewill,from1989,benefitbythe
equivalent of1,5%,eventightermanagement ofpublic
financewillberequired .However ,thestructureofrevenue,
andnotablythehighlevelofsocialsecuritycharges
compared withanaveragelevelofindirecttaxation,gives
somemarginforcuttingthecostoflabour,providedthatthe
effectofthischangeinstructure isnotwipedoutbytheindexation mechanism .Ontheexpenditure side,virtually
theonlystimuluswhichthepublicsectorcanprovideinthe
short-term istoshiftexpenditure morefirmlyintoareas
whichfavouremployment .
Untilnow,thechiefweaponinthefightagainst
unemployment hasbeenwagemoderation asameansof
improving theeconomy'scompetitiveness andcompany
profitability andfinancial structure .Ithasbeen
supplemented byarevival,from1984on,ofpublic-sector
programmes toabsorbunemployment -programmes which
employ2,1%ofthelabourforcein1985compared with
1,4%in1983-andbymeasurestohelppeopletobetaken
onintheirfirstjob,toencourage theunemployed tostart
theirownbusinesses ,andtopromoteworksharing.
Giventheexistingmeasurestoreducetaxationandto
supportemployment directly,andtheneedtogoon
trimmingthepublicdeficit,externaltrademustprovidemost
opportunities forraisingthegrowthrateandexpanding the
volumeofemployment .Here,theeconomicpolicypriority
mustcontinuetobethemaintenance oftherightlevelof
competitiveness .Cooperative actionatCommunity level
wouldalsohelptocutthepublic-sector deficitmorequickly
andwouldallowthemorerapidcreationoftheroomfor
manoeuvre whichisnowmissing .
TABLE 11
Belgium :Maineconomicaggregates 1961to1986
GDP
current
pricesGDP
real
termsGDP
deflatorPrivate
consump­
tion
deflatorCompen­
sation
per
employeeCurrent
trans­
actions
accountGeneral
govern­
mentnet
lending
or
borrowingMoney
supply
(M2)(3)Unemployment
inlabour
force(4)Employ­
ment
%change %GDP%
change%%
change
1961to1970 8,5 4,9 3,4 3,1 7,8 0,6"1,5 8,6 2,2 0,6
1971to1980 10,5 3,1 7,1 7,1 11,9-0,2-5,010,3 5,5 0,3
1981 4,2-1,2 5,4 8,6 7,7"4,5-12,8 5,8 11,2(10,3)-2,0
1982 8,3 1,1 7,1 7,6 7,9-3,4-11,0 5,7 13,1(12,1)-1,3
1983 6,3 0,4 5,9 7,5 6,7-0,7-11,7 7,014,4(13,3)-1,6
1984(!) 7,0 1,7 5,3 6,2 6,2-0,3-9,9 6,1 14,5(13,3)0,4
1985(2) 6,7 1,9 4,7 4,9 5,7 0,6-8,6 6,0 13,8(12,4)0,4
1986(2) 6,2 1,7 4,4 3,2 4,2 2,0-7,4 5,513,4(12,2)0,3
(*)Estimates oftheCommission services,October1985.
(2)ForecastoftheCommission services,October1985,onthebasisofpresentpolicies .
(3)Endoftheyear.
(4)Eurostatconcept;betweenparenthesis :nationalconcept.
DENMARK
InDenmarkeconomicactivitycontinued toexpandduring
1985;estimatedrealGDPgrowthwascloseto2,5%,down
fromthealmost4%recorded theyearbefore,butcorresponding totheaverageannualmedium-term trend.
Whereastheexcellentharvestbolsteredtotaloutputin1984
anumberoffactorscombined toslowtherateofincrease

NoL377/52 OfficialJournaloftheEuropeanCommunities 31.12.85
withacutinindirectlabourcostsequivalent to1,5%ofthe
wagebillasfromOctober1985andlimitations onother
formsofincomeincreasethisshouldbringaboutaslowdown
ininflationandimproveprofitability .Therewillalsobea
favourable impactonemployment notonlyasresultof
greaterpotentialoutputduetohigherindustrialinvestment ,
butalsoduetoanimprovedmixofcapitalandlabourinputs.
However ,relativelyrapidchangesintheproductmixand
marketconditions requireahighdegreeofadaptability inthe
labourmarket.Ithasbecomeincreasingly important to
updateskillsacquired inthepastinviewofcurrent
technological progressandtoreviewlabourmarket
regulations inordertoremovepossibleobstaclestothe
potentialoftheeconomytogeneratejobs.Variousmeasures
havebeentakentoreintegrate long-term unemployed and
othergroupshitbyunemployment .during1985.Inparticular ,domesticdemandwasless
buoyantwiththesluggishdevelopment ofprivate
consumption andresidential construction offsetting the
continuedrapidriseinprivatebusinessinvestment .Imports
ofcapitalinvestment goodsaswellasspecificconsumeritems
remained strong.Despitethereinforced industrial
competitiveness resulting fromtightincomespolicies,
exports,whichtriggeredthepresentphaseofeconomic
expansion ,performed lessstronglyagainstthebackground
ofslowergrowthinthecountry'smarkets.Consequently ,the
deficitonthecurrentbalanceofpayments ,whichincludesa
largeamountofinterestpaymentsabroad,remainedlarge.
Morepositively ,however ,inflationcontinued toleveloffas
domesticcostsdeclined ,whileprivatesectoremployment
rosefasterthantotallabourforcegrowthsothatthe
unemployment ratefellbyalmostonepercentage point.In
addition,thegeneralgovernment deficitnarrowedtosome
3%ofGDPasrealexpenditure remainedunchanged with
currentreceiptsgrowinginlinewithGDP.Thepressingneedforfurtherimprovement inthebalanceof
payments remainsadecisiveelementforthestanceof
monetary andbudgetary policy.Adjustments mightbe
necessary ifdomestic demand,particularly private
consumption ,shoulddeviatefromthetrendcompatible with
improved externalequilibrium .Restoration ofexternal
equilibrium mustremainanessentialpolicy-objective butthe
authorities roomformanoeuvre inthisrespectwouldbe
enlarged ifforeigndemandwassupported through
cooperative Community action.In1986,grossdomesticproductisexpectedtogrowbymore
than3%.Althoughdomesticdemandisduetoriseatarate
closetothatfor1985,changesinthestructureofdemand
reinforced byimportsubstitution arelikelytoproducea
smallerincreaseinimports .Privateconsumption should
grow,underpinned particularly byariseinemployment ,but
publicconsumption willreflectthetightbudgetary stance
pursuedbytheauthorities .Thecyclically sensitive
investment categories shouldbenefitfromlowerfinancial
costsandimproved profitability ,whilediscretionary
components ,particularly intheenergyarea,areexpectedto
begintowinddown.Therelativefallindomesticcosts,
reflectedinlowerinflation ,shouldcontribute toafurther
gaininmarketsharesformanufactured goods.
Unemployment shouldshowafurtherimprovement
compared withtheyearbefore.Thegrowthinmoneysupplyfellduring1984andcontinued
toleveloffin1985asdidbanklending .Interestrates
declinedconsiderably inresponsebothtotheanticipated
slowdown ininflationandtoariseinprivatecapitalinflows.
Thedifferential betweendomesticandforeigninterestrates
narrowedconsequently ;thisshouldreducethepropensity of
industrytocontractforeigndebt.Inordertoallowamore
market-orientated controlofdomestic liquidity,the
NationalBankmodifiedatmidyearthedomesticcredit
monitoring systembyestablishing anewsystemofmarginal
reserverequirement .Amoreflexiblemanagement of
liquidityandshort-term interestratesbasedonshort-term
depositcertificates issuedbytheNationalBankandtraded
onlyamongbankswasimplemented inAugustreplacingthe
existingtranchedivisionofbanks'borrowing facilitieswith
theNational Bank.Externalconstraints andtightbudgetary management may
meanthatrealizedgrowthintheperiod1984to1986will
emergeatslightlybelowpotential .Theeconomic policy
pursuedbytheauthorities since1982aimsatareturnto
externalbalanceandequilibrium onthecentralgovernment
budgetby1988and1990respectively ,and,thoughthe
achievement oftheseobjectives alsodependstoa
considerable extentonthecontinuation ofsufficiently
vigorousgrowthinworlddemand,appreciable progresshas
beenmade.Thewagerestraintpursuedinrecentyearshas
alteredtherelativecostsoflabourandcapitaland
strengthened profitability .Atthesametime,tightbudgetary
controlhasreducedthegeneralgovernment borrowing
requirement .Lowerinflationary expectations helpedto
bringdownnominalinterestrates.Againstthisbackground ,
improvedbusinessconfidence favouredariseinthestockof
productive capitalwithprivateemployment growing
simultaneously .Theresulthasbeentheachievement ofa
muchimproved equilibrium indomesticmacro-economic
conditions withtheexternalbalancestilllagginghowever
behindthedesiredobjective .Alowershareofpublicexpenditure ingrossdomestic
productwouldhelpalleviatemonetary constraints and
stimulatethegrowthpotentialoftheeconomy .Thedraft
budgetfor1986remainsinlinewiththemediumterm
strategyadoptedbythegovernment andcorresponds towhat
appearstobeanappropriate guidelinefromtheCommunity
pointofview.Thelevelofexpenditure willstabilizeatthe
ceilingfixedfor1985,wherebyitdeclinesaspercentage of
GDP,whereastaxationshouldgrowmoreorlessin
proportion tonominalGDP.Theoutcomewillthereforebea
furtherreduction inthecentralgovernment deficittosome
3%ofGDPand1%forgeneralgovernment .Therelative
cutbackintotalexpenditure ,intermsofGDP,necessitates a
continuous reappraisal ofexistingschemeswithaviewto
reallocating resourcesonaprioritybasisamongvarious
expenditure categories .Totaltaxation willremainTheincomespolicymeasuresadoptedinMarchimplyarise
innominalwagesoftheorderof2%perannum .Together

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/53
approximately unchanged inrelativetermsasthecutin
indirectlabourcostsisfinancedbyariseincorporatetaxes,
which,duetoimproved competitiveness ,shouldleave
profitability unaffected .Inaddition ,areformofincometax
isplannedfor1987.Itsaimistodiscourage taxinduceddiseconomies asmarginalratesarereducedandthefiscal
disincentives tosavearediminished .Inbudgetary termsthe
envisagedchangesintaxationshouldbalance,buttheymay
verywellhaveanexpansionary impactondomesticdemand .
Itwillbenecessarynottolosesightofsuchlikelyeffects.
TABLE 12
Denmark :Maineconomic aggregates 1961to1986
GDP
current
pricesGDP
real
termsGDP
deflatorPrivate
consump­
tion
deflatorCompen­
sation
per
employeeCurrent
trans­
actions
accountGeneral
govern­
mentnet
lending
or
borrowingMoney
supply
(M2)HUnemployment
inlabour
force(3)Employ­
ment
%change %GDP%
change%%
change
1961to1970
1971to1980
1981
1982
1983
1984
19850)
19860)11,2
12,2
9,1
14,6
10,3.
9,9
6,4
5,44,5
2,3
-0,9
3,0
2,0
3,9
2,3
3,26,4
9,6
10,1
11,3
8,1
5.8
3.9
2,25,8
10,1
12,0
11,0
7.1
6,6
4.2
1,710,6
11,5
9,2
11,5
6,4
4,9
3,7
2,4-2,2
-2,9
-3,0
-4,1
-2,2
-3,2
-3,4
-2,71,3
0,9
-6,9
-9,3
-7,4
-4,6
-2,9
-0,710,2
11,3
9,6
11,8
25,5
17,0
11,0
7,51,1
3,8
9,2
9,8
10,4
10,0
9,1
8,61,1
0,7
-1,3
0,3
0,5
2,2
2,0
1,6
(')ForecastoftheCommission services,October1985,onthebasisofpresentpolicies .
(2)Endoftheyear.
(3)Nationalconcept .
FEDERAL REPUBLIC OFGERMANY
Economic conditions intheFederalRepublicofGermany
haveimprovedsignificantly during1985:economicgrowth
strengthened throughtheyear,theriseinconsumer prices
slowedfurtherandemployment rosemorestronglythanwas
generally expected .Therewasanotherconsiderable
reduction inthefinancial deficitoftheterritorial authorities
whilethesurplusonthecurrentaccountofthebalanceof
payments ,however ,hasreachedanewrecordlevel.
Therateofgrowthofgrossdomesticproductin1985islikely
tobeonly2,25%,remaining thereforeslightlybelowthe
rateofgrowrthforecastbytheGovernment initslatestannual
economicreport(2,5%).Thismustbeseenhoweverinthe
lightofthefallinoutputinthefirstquarter,mainlyduetothe
effectofextremelyharshweatherconditions onconstruction
activity.Fromthesecondquarteronwards ,realGDPhas
risenappreciably .Externaldemandhascontinuedtoprovide
expansionary pressurebutdomesticdemand,especiallyfor
capitalgoods,hasincreasingly contributed togrowth .The
expansion intheeconomyhasbeenreflectedinthelabour
market.According tothelatestemployment data,which
incorporate substantial upwardrevisions ,aggregateemployment roseintheyeartomid-1985 byabout155000.
Thereductions inworkingtimecontributed somewhat to
thisrise.Theincreaseinemployment inindustryandservices
hasthusmorethancompensated forredundancies inthe
construction sector.Unemployment ,however ,roseoverthe
sameperiodby55000,reflectingdemographic factorsand,
aboveall,arenewedriseinparticipation rates;the
unemployment ratein1985isthusatthesamehighlevelasin
1984(8,4%).
Theslowdown ininflationwasduetocompetition and,toa
considerable extent,toafavourable development ofunit
labourcosts;themoderate increasemorethanoffsetthe
inflationary pressureresultingfromhigherimportpricesin
theopeningmonthsoftheyear.Theriseinconsumerprices
in1985(annualaverage)isexpectedtomeasuresome2%,
compared to2,5%in1984.
Thesurplusonthecurrentaccountofthebalanceof
payments in1985isestimatedat2,1%ofGDP,morethan
twiceashighasin1984,reflecting amuchhighertrade

NoL377/54 OfficialJournaloftheEuropeanCommunities 31.12.85
0,5%ofGDP,isthustobewelcomed .Despitethesetaxcuts,
theincreaseintaxrevenuein1986isexpectedtobeonly
marginally slowerthanin1985.Totalrevenueofgeneral
government willgrowevensomewhat fasterthanin1985
becauseofasignificant riseinsocialsecuritycontributions
resultingmainlyfromtheincreaseinemployment .The
government deficitisthusfallingmorequicklythanwas
earlierexpected .IntheCommission 'scurrentforecastthe
budgetdeficitisestimatedtonarrow,despitethetaxreform,
from1,2%ofGDPin1985to0,8%in1986.Intheabsence
ofadditional expenditure ,theout-turnforthecentral
government (Federation andLander)deficitin1986islikely
tobeseveralthousand millionDMbelowthelevelofsome
DM40000millionconsidered tobeappropriate bythe
Commission .surplusandabroadlyunchanged deficitonservicesand
transfers .
In1986themomentum ofeconomic expansion should
continueandrealGDPgrowthisexpectedtoreach3,5%.
Thisyear-on-year growthrate—relativelyhighbyEuropean
standards—is,however ,stronglyinfluenced bytheexpected
rapidrecoveryinactivityduringthesecondhalfof1985.
Indeed,GDPgrowthbetweenthefourthquartersof1985
and1986isnotexpectedtobemorethan2,5%.
Growthin1986willresultmainlyfromtheincreasein
domesticdemand,whereprivateconsumption willplayan
essentialrole.Realdisposable incomeisexpectedtorise
appreciably in1986inviewofafurtherreductionininflation
dueprincipally tofallingDMimportprices.Moreover ,the
introduction on1January1986ofthefirststageofthetax
cuts,whichshouldbenefitfamilieswithchildren in
particular ,willcontribute substantially toimproving the
financialpositionofhouseholds .Finally,disposable income
isexpectedtobeboostedbyariseinemployment in1986,
estimatedat330000persons,comparedwiththeaveragefor
1985.Nevertheless ,theunemployment ratewillfallonly
slightly,from8,4%to8,0%.
Investment inequipment in1986islikelytoloseonlyalittle
ofitsmomentum (growingbyalmost9%,ascompared to
11%inF985).Afterthedownturn inhousingin1985,
investment inconstruction shouldagainshowaslightreal
increasein1986.Totalfixedinvestment isthusexpectedto
risebyalmost5%,following adeclinebymorethan1%in
1985.
Thegrowthofexportsisexpectedtoslowdownin1986.On
accountofthepresentfavourable competitive position,in
termsofpricesandtechnology ,thevolumeofGerman
exportsisnevertheless expectedtocontinuerisingsomewhat
fasterthantheincreaseinworldtrade.Imports,however ,are
likelytorisemuchmorestrongly .Thefastereconomic
growthrateexpectedintheFederalRepublicindicatesthat
thereisawideningdifference intherelativecyclicalposition
ascompared tootherMemberStates,andtotheUSA.
Experience fromearliercyclessuggeststhat,witharelatively
shortlag,thiswillleadtoastrongupturninGermanimports .
TheFederalRepublicwouldthusalsoprovideanappreciable
contribution togrowthinothercountries .Nevertheless ,the
currentaccountsurpluswillremainalmostunchanged ,at
around2%ofGDP.
Duringthelastthreeyears,considerable progresshasbeen
madeintheconsolidation ofthepublicfinances .Thedeficit
oftheterritorial authorities ,whichamounted toaboutDM
60000millionin1982(onnationalaccountsdefinitions ),
willprobablybelessthanhalfthatfigurein1985.Itistrue
that,initially,consolidation hadanegativeimpacton
demand;expectations werestabilized ,however,andthe
positiveeffectsofthestrategyhavesubsequently cometothe
fore.Restraintonpublicexpenditure andborrowing has
openedupwiderscopeforreducingtaxesandinterestrates
thanwouldotherwise havebeenthecase.Thisroomfor
manoeuvre shouldnowbeused.Theintroduction in1986of
thefirststageofthetaxreductions ,corresponding toaboutThestrongergrowthandrisingemployment areopeningup
roomformanoeuvre atthelevelofgeneralgovernment
whichin1986shouldbeusedessentially toraisepublic
investment .Theimproved depreciation provisions for
industrialbuildingsalreadydecideduponbythegovernment
represents aninitialstepinthisdirection .
Inaddition,theurbanrenewalprogramme ,forwhichfederal
assistancehasalreadybeenincreasedfromDM300million
toDM1000millioninboth1986and1987,mustbe
supplemented byaproportional increaseinthefinancial
contributions oftheLanderandlocalauthorities .In
addition,theurbanrenewalprogramme ,forwhichfederal
assistancehasalreadybeenincreasedfromDM300million
toDM1000millioninboth1986and1987,mustbe
supplemented byaproportional increaseinthefinancial
contributions oftheLanderandthelocalauthorities .There
isevidencethatthereisalargenumberofworthwhile
projectsinthefieldofenvironmental improvement and
urbanrenewalonwhichdecisions couldnowbetaken.As
suchfundsareprovidedintheformofpartialgrants,their
overalleffectisconsiderably greater.Thereisalsoscopefor
graduating thegrantsfromthepointofviewofstructuraland
regionalpolicy(e.g.accordingtoregionalunemployment
rates)soastoachievegreateremployment effectsinproblem
areas.AfurtherincreaseinERPfundsinordertoencourage
investment inenvironmental protection (e.g.sewageworks)
alsoseemsadvisable in1987.Thesespecificmeasuresto
createemployment andtosupportthebuildingindustryseem
appropriate inawidermacro-economic context,sincethey
wouldhelptomeetneedswhichhavebeenneglectedinrecent
years,butwhichareimportantbothforthepresentandfor
thefuture.Becauseofexistingsparecapacityinthebuilding
industry,thereisnodangerthatsuchmeasureswould
impedetheprocessofstructuraladjustment inthisindustry .
Arestructuring ofresourcesawayfromthedecliningsector
ofnewhousebuildingintothedirectionindicatedabove
therefore alsoappearsjustifiedfromamedium-term
viewpoint .
Inaddition,supplyconditions shouldbeimprovedassoonas
possiblethroughchangesinthetaxsystemdirectedtowards
specificobjectives .Thisshouldalsocovertaxeswhich,while
contributing insignificantly tototalgovernment revenue,
restricttheefficiencyofthecapitalmarket,suchastaxes
relatingtosharetransactions andissues(Borsenumsatzsteuer

31.12.85 OfticialJournaloftheEuropeanCommunities NoL377/55
andGesellschaftssteuer -togethercontributing barely
0,5%oftheFederation 'stotaltaxrevenue).The
Commission hasalreadysubmitted proposals inthis
respect .
Aftertheentryintoforceofthelawonthealleviation of
taxation(Steuerentlastungsgesetz )providingforatwo-stage
(1986and1988)reductionintaxation ,itisimportantforthe
broadoutlinesofthetaxreformenvisaged overandabove
thistobeproposedassoonaspossible .Inthisregard,further
stepsthatshouldbetakenareanincreaseinthefiscalroom
formanoeuvre andfurtherimprovement ofsupply
conditions throughacompulsory andspecificreduction in
subsidies .Suchaprospectcouldhelptounderpinthe
expectations ofenterprises andconsumers andtoboostthe
rateofinvestment .If,contrarytoallexpectations ,the
economic situationweretodeteriorate appreciably ,the
conditions withinwhichsupplyanddemandoperatewould
havetobeimprovedaccordingtotherequirements ofthe
situation .
Thedevelopment ofthepublicfinancesisanimpressive
exampleofapositivechainreactionresultingfrommore
growthandemployment .Theinterlocking effectsoffaster
growthandgreaterroomformanoeuvre forfinancialpolicy
providethebasisforavirtuouscirclewhichwilleventually
bringtheeconomyontoasteadygrowthpathwithrising
employment .
Overthelastthreeyearsmonetary policyhasmanagedto
achieveamarkedreduction intheinflationrateand-what
isequallyimportant-ininflationary expectations .The
confidence whichthishascreatedintheGermanmarkhas
madeitpossibletodecoupleinterestratestoaconsiderable
extentfromUSlevels.Sincethespringof1985,theroomfor
manoeuvre inmonetarypolicyhasgrownevenfurther,since
thedollarhasbeenfallingsincethen,albeitirregularly .
Monetary policyshouldcontinuetoexploitfullythe
developing potential forinterestratereductions inthe
framework ofthepricestabilityobjective .Totheextentthat
growthpotentialrisesasaresultofhigherinvestment and
moreflexibleuseofthecapitalstock,additional scopewill
developformonetarygrowthwhichisstillconsistent with
pricestability .
Thedynamicrecoveryininvestment mustcontinue .Asthe
capitalstockinmanyareasisobsolete,grossfixed
investment mustexpandappreciably inrealtermsfora
numberofyearsinordertopermitbothadequate
modernization andtheextension ofthecapitalstock
necessarytogenerateadditional jobs.Thegrowingneedfor
capital-widening investment isdemonstrated bythehigh
levelofcapacityutilization recordedinmid-1985;thelevelof
utilization inindustrywasonlyonepercentage pointlower
thanatthepreviouscyclicalpeakatthebeginning of
1980.
Inrecentyearswagemoderation hasmadeaconsiderable
contribution totherecoveryofcompanies 'financial
situation .Whiletheprofitshareinvalueaddedhasagain
reachedtheleveloftheearly1970s,theyieldonphysicalcapitalinmanyareasis,however,stilltoolow.This
underlines theneedtousethecapitalstockmoreefficiently
andinsuchawayastogeneratemoreemployment .
Nowthatproductivity isagainrisingmorestrongly,real
wageincreasesareclearlypossiblein1986.Theincreasein
realpercapitaincomesshouldhowevercontinuetoliebelow
overallproductivity growth.Thankstothefirststageofthe
taxreformandtothefurthersuccessincombating inflation
(achievedmainlythroughafallinimportpricesin1985),
therewillbeafurtherappreciable improvement inreal
incomesdespiteamoderatewageround.Giventheeconomic
situationin1986,ariseinrealpercapitaincomeisnotonly
possiblebutwithinlimitsalsodesirable ,sinceprivate
consumption shouldcompensate fortheslowgrowthof
exportsinordertosupporttheoveralllevelofactivity,as
longasitdoesnotimpedeinvestment growth .
Innegotiations betweenemployers andunionsin1986it
mightbeconsidered whether,asadirectcounterpart to
continuedmoderation ofwagesettlements ,additional jobs
couldbecreated.Thisformofarrangement couldsignalan
increaseinemployment .
Moreemployment-creating growthcouldalsobepromoted
ifworkinghoursweremademoreflexiblethaniscurrently
thecaseinmostfirms.Thiswouldalsofacilitatereductions
inworkinghours.Theexperience gainedsofarinthemetal
andprintingindustries ,whereemployers andunionslast
yearsagreedonacutinworkingtimecombinedwithmore
flexiblearrangement ofthehoursworked,iscertainly
encouraging .Arecentsurveycarriedoutonbehalfofthe
Commission amongarepresentative cross-section of
Europeanemployees hasshownthatthereisahighdegreeof
readinessintheFederalRepublicofGermany (andinmost
othermembercountries )toacceptnewworkingtime
arrangements .Forexample,athirdoftheemployees
surveyedfavourworkingirregularand,insomecases,
inconvenient hours(e.g.intheeveninguntil22.00andoncea
monthonaSaturday )ifthisismatchedbyareductionof
some5%inannualworking hours.Furthermore ,
approximately oneineverysixofthosecurrentlyemployed
onafulltimebasiswouldwelcomeaworkingweekreduced
tosome30hoursonthesamehourlywage.These
preferences regarding workinghourscangenerally be
reconciled withbusinessrealityonlyifthewholepatternof
workingismademoreflexible.Onlyinthiswaycould
shorterworkinghoursfortheindividual beconsistent with
thecurrentlength,orevenanextension ,ofoperatinghours,
whileatthesametimecreatingadditional employment
opportunities .Thenewlegislation governinglimited-period
contracts andpart-time workingshouldbeusedmore
activelybyemployers andworkerssothattheevidentlarge
potentialforflexibility amongworkerscanbebetter
exploitedforthebenefitofbothsides.Intheservicessectorin
particular ,aconsiderable increaseinemployment mightbe
achievedifmoreflexibleworkinghourswereaccompanied
bychangesinoperatinghours.Suchmeasuresarenoless
appropriate forthefactthatmoreattractiveworkinghours
havetheeffectofbringingpersonsfromoutsidethelabour
forceontothelabourmarketandthatthenumberof
registeredunemployed fallslesssharplyasaresult.

NoL377/56 OfficialJournaloftheEuropeanCommunities 31.12.85
Aparticularly important taskinthenextfewyearsisto
furtherimprovethevocational trainingopportunities for
schoolleaversandtoguaranteethememployment aftertheir
training,evenifthisinitiallyhastobeinsomeformof
part-timeworking .Onewayofdoingthisistomakeearly
retirement moreattractivefinancially —atleastforalimited
periodupto1988—inordertoboostthenumbersoptingfor
earlyretirement duringthenextfewyears,whichwillstillsee
anappreciable increaseinthepotentiallabourforce.
Theeconomicoutlookfor1986isgenerallyfavourable .
Nevertheless ,therearestilltwoappreciable imbalances ,thecurrentaccountsurplusand,aboveall,unemployment .The
regainedroomformanoeuvre forfinancialpolicyshouldbe
fullyused,notonlytocounteract intimeapossiblecyclical
weakening oftheeconomyin1987,butalsotomaintainthe
momentum ofthepositivechainreactionbetweengrowth,
employment andtheroomformanoeuvre .Amedium-term
growthratesimilartothatexpectedfor1986andanincrease
inemployment ofabout1,5%peryeararepre-conditions
forasignificant reduction inunemployment .Becauseofthe
resultinghigherimportrequirement ,theFederalRepublic
wouldalsohelptoeasetheemployment probleminits
partnercountries .
TABLE13
FederalRepublicofGermany :Maineconomicaggregates 1961to1986
GDP
real
termsGDP
deflatorGDP
current
prices
%changePrivate
consump­
tion
deflatorCompen­
sation
per
employeeCurrent
balanceGeneral
govern­
mentnet
lending
or
borrowingMoney
supply
(M.3)nUnemployment
inlabour
forceEmploy­
ment
%GDP%
change%%
change
2.7
5.1
6.2
4.8
3,2
2,5
2,1
1,58,5
8,5
5,2
4,2
3,9
3,2
3,2
3,80,7
0,6
-1,0
0,5
0,7
1,0
2,1
2,00,4
2,0
-3,7
-3,3
-2,5
-1,9
-1,2
-0,810,4
9,8
5.0
7.1
5,3
4.7
5,0
4.80,8
2,7
4.7
6.8
8,4
8,4
8,4
8,00,2
-0,1
-0,7
-1,7
-1,5
0,0
0,6
1,31961to1970
1971to1980
1981
1982
1983
1984
1985(M
1986(2)8.4
8,2
4,2
3,7
4,6
4.5
4,4
5,44.5
2,7
0,2
-0,6
1,2
2.6
2,3
3,53,7
5.3
4.0
4.4
3,3
1,9
2.1
1,9
(*)EstimatesoftheCommission services,October1985.
(2)ForecastoftheCommission services,October1985,onthebasisofpresentpolicies .
(')Endoftheyear.
GREECE
InGreecedomestic demand in1985hascontinued tobe
substained bythestillvigorousexpansion ofpublic
expenditure andbyafurtherincreaseinthenumberof
tourists .However ,thecontribution oftherealforeigntrade
balancehasdeteriorated sharplyduetothecombined effects
ofamarkedslowdown intherateofgrowthofexports
(exceptionally highin1984)andanappreciable upturnin
imports .Thegrowthratefor1985isthuslikelytofallto
around2%.Moreover ,majordisequilibria havecontinued
toaffecttheeconomy .Theriseinconsumerpriceshasslowed
downonlytemporarily and,onayear-on-year basis,could
climbto19%again.Businessinvestment hascontinued ata
verylowlevel,showingnotendencytorecover .Lastly,the
sharpincreaseinthetourismsurplushasnotbeensufficient
tooffsetthedeterioration inothercurrentaccountitems;the
deficitoncurrentaccount (onBankofGreecedefinitions )
couldbeasmuchas8,5%ofgrossdomesticproduct .Facedbythesedevelopments ,whichrepresented alasting
changeinthecompetitiveness oftheeconomy ,theauthorities
decidedon11October1985todevaluethedrachmaby15%
andtointroduce acompulsory depositonalargeproportion
ofimports .Atthesametimeaseriesofcomplementary
measureswasannounced ,whichdemonstrates awilltoget
theeconomyontotheadjustment pathnecessary forthe
recoveryofgrowthonasounderbasis.Thefactthatexternal
indebtedness wascontinuing toincreaserapidly,whereasthe
shareofbusiness investment indomestic demand was
decliningsteadily,wasamongotherfactorsparticularly
disturbing .Theeconomywasineffecttendingtobecome
trappedinaviciouscircle,sothatitwasliabletobecome
increasingly difficulttorestoreexternalequilibrium asa
resultofinadequate investment toincreaseproduction
capacityandtoimprovecompetitiveness .Thepriorityaimof
economicpolicyhadthereforetobetobreakthiscircleas

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/57
soonaspossible .Thismeansnotonlygraduallyadjusting
domesticdemandasawholetotheexternalconstraint ,but
alsoincreasing asrapidlyaspossibletheshareofproductive
investment indomesticdemand ,inordertobringittothe
levelrequiredtoensuregrowthinthefuture.
Theprecondition forattainingtheseresultswastobring
aboutasquicklyaspossibleadisinflation oftheeconomy .
Thelastingre-establishment ofcompetitiveness dependson
this,andsodoesthereturntonormalofinvestment and
savingsbehaviour .Fulfillingthisobjectiveimpliedmajor
efforts-onwhichtheauthorities havenowdecidedas
shownbythemeasuresannounced-tocurbspirallingcosts
andthepublicdeficit,thetwoessentialfactorswhich
perpetuate inflation .
Thefirststepwastoseektoobtainasubstantial moderation
inthenominalincreaseinearnings ,ascompared withthe
rateof20%orsostillevidentin1985.Thisaimwasnot
compatible withthecontinuation oftheoldsystemof
indexation ,whichhadthedisadvantages notonlyoffeeding
automatically intocosts,whetherdirectlyorindirectly ,a
largeproportion ofearlierpricerisesandofthuspermitting
onlyveryslowdisinflation ,butalsoofmakingwage
adjustment tooindependent ofchangesinproductivity inthe
varioussectorsoftheeconomy .Ithasbeendecidedtomakea
fundamental changetothissystem,bylinkingwageincreases
fromnowontothetargeted ,ratherthantheobserved ,rateof
inflation ,excludingtheimpactofimportpricerises.Ithas
alsobeendecidedtofreezeincomesaboveacertainlevelfora
periodoffourmonths.Thesedecisionsshouldmakepossible
afasterdeceleration ofprices,aswellasastartintheprocess
ofimproving thesubstantially deteriorated financialposition
ofenterprises .Thereductionininflationandtherecoveryof
businessprofitability aimedforbythesemeasuresarean
essential condition forthere-establishment ofbalanced
growth .
Astartshouldalsobemadeonreducingthepublicdeficit,
which,partlybecauseoftheinsufficient yieldfromthetax
system,willin1985againhaveovershottheveryhighlevelof
previousyears.Theefforttobemadeshouldhelp,in1986,
toreducepublicsectornetborrowing by4%ofGDPandto
bringthecentralgovernment budgetdeficitdownto9%of
GDP.Giventhemomentum ofinterestcharges-whichwill
howeverbeheldbackbythedeclineininflation-andthe
needtomaintainadequateinvestment inthepublicsector,
theseaimsimplyveryrigorous management of
administrative expenditure ,including wages,anda
considerable reduction intheburdenofsubsidies .This
reduction ,amongotherthings,willrequireanappropriateadjustment ofpublicutilitychargesandotheradministered
prices,whichhavebeenkeptatartificiallylowlevelsrelative
totheriseinthegeneralpricelevel.Tothisend,aninitial
seriesofmeasureshasalreadybeentaken.Itwillbenoless
necessary ,asforeseeninthegovernment programme ,to
increasethepressureoftaxationnotonlybymeansofthe
stepstakentointensifythefightagainstevasion,butalsoby
deliberatetaxincreases ,whichappearunavoidable .
Thistwo-pronged efforttoreduceinflation should
considerably reducethepaceatwhichthedemandforcredit
increases ;yet,monetary policywillstillhavetoexercise
restrictive action,confirming thecurrenttrendforpositive
realinterestrates,withaviewtoencouraging the
development ofastablepatternofsavingand,inparticular ,
toextendthepublicplacement ofgovernment securities
whichwasstartedin1985.
Thesemeasuresshouldmakeitpossibletopointtheeconomy
moreresolutely inthedirectionofsoundermanagement
whichisessentialforitssubsequent recovery .Itwill
nevertheless benecessary tosupplement thembynew
measures designedtohastentherecoveryofbusiness
investment .Interalia,pricespolicywillhavetocontribute by
becomingmoreflexible,providedthatthereisnodangerof
vigilancebeingrelaxedwithregardtodominantpositions .
Asearlyas1986,thepolicydescribedabovecouldbeginto
bearfruit.Domestic demandshouldslowdowntothe
advantageoftheexternalaccountbut,onbalance,itwillnot
bepossibletoavoidanappreciable checkoningrowth.
Privateinvestment shouldalsopickup;thisislikelytobe
reflectedinagradualclimbintheshareofinvestment in
domesticdemand .Theyear-on-year increaseinconsumer
pricescouldbearound21%,whichwouldmeanarate
throughtheyearmuchlowerthanthisfigure.Lastly,given
favourable prospectsfortheinternational environment ,the
balanceofpayments oncurrentaccount,expressed asa
percentage ofgrossdomesticproduct,shouldshowamarked
recovery .Theseresultshoweverwillbemerelyafirststep
towardsthenecessary adjustments .Theywillimplythe
maintenance ofapolicyofconsolidation forseveralyears,
whichshouldcontribute afteranunavoidable phaseof
slowergrowthtomorerapidexpansion .
Thisoutlookdoesnotholdoutanyhopeofarapid
improvement intheemployment situation .Long-term
recoveryonthisfrontwilldependonthegradual
strengthening oftheupturnininvestment ,theprimary
condition forwhichisthemaintenance ofthepolicyof
consolidation .

NoL377/58 OfficialJournaloftheEuropeanCommunities 31.12.85
TABLE14
Greece:Maineconomicaggregates 1961to1986
GDP
current
pricesGDP
real
termsGDP
deflatorPrivate
consump­
tion
deflatorCompen­
sation
per
employeeCurrent
balanceGeneral
govern­
mentnet
lending
or
borrowingMoney
supply
(M2)(3)Unemployment
inlabour
forceEmploy
ment
%change %GDP%;
change%%
change
1961to1970
1971to1980
1981
1982
1983
1984
1985(»)
1986(2)11,0
19.1
18,9
24,4
20.2
23.0
20,9
18.17.6
4.7
-0,3
-0,1
0,3
2,6
1,7
0,13,1
13,8
19,3
24,6
19.8
19.9
18,9
18,02,5
13,6
23.4
20.5
19,5
18,1
19,1
21,59,8
18,3
21,8
26,8
19.7
21,3
20,0
13.8-3,1
-2,7
-0,2
-3,9
-4,7
-4,0
—6,6
-4,5-11,1
-8,5
-8,9
-9,9
-13,4
-11,017,6
23,8
34,3
29,1
20.3
29.4
27,0
20,04,1
5.8
7.9
8,1
8,3
9,3-0,7
0,6
4,8
-1,0
-1,0
-0,2
0,8
-0,1
(!)Estimates oftheCommission services,October1985.
(2)ForecastoftheCommission services,October1985,onthebasisofpresentpolicies .
(3)Endoftheyear.
FRANCE
InFrance,domesticdemandhasbeenkeptunderstrict
controlin1985;eventhoughithasaccelerated slightly
duringtheyear,itwillhavegrownnearlyasslowlyasin
1984.Privateconsumption hasbeenslightlymorebuoyant
overall,whiletherehasbeenevidenceofavigorousupturnin
industrial investment ,whichafterseveralyearsof
uninterrupted decline,hasbeensufficienttobringabouta
positive,thoughtiny,changeinaggregate investment .
Exportgrowthhasbeendistinctly slowerthanin1984
becauseoftheweakerexpansion ofworldtrade,while
importsremainonamoderateupwardtrend.Thishas
produced afurtherslightimprovement intherealforeign
tradebalanceandgrossdomesticproductgrowthinthe
regionof1%,despiteazero,orevenslightlynegative,
contribution fromagricultural production .Thetradedeficit
islikelytonarrowfurtherhelpedbytheweaknessofenergy
andimportedrawmaterialpricesandthereversalofthe
upwardtrendofthedollarfromthesecondquarteron.The
currentaccountshouldthusberoughlyinbalance,despite
thesmallersurplusoninvisibletransactions .Lastly,therise
inconsumer priceshasstartedtoslowagainafteran
interruption intheearlypartoftheyear,andtheannualdrift
shouldbeunder5%.
Thankstothepursuitsince1983ofeffortstoachieve
soundereconomic management ,theeconomyhasmade
furtherprogressinreturningtobalance .Thisprogress ,
however,stillrequirestobeconsolidated .Itisindeed
necessarytogofurtherthansimplyeliminating theinflation
differential betweenFranceandtheaverageofitstrading
partners,whichisabouttobeachieved,andtoobtaina
lastingsignificant currentaccountsurpluswhichallowthegradualreductionofexternalindebtedness .Moreover ,inthe
caseofmanufactures ,therapidriseinimportpenetration
andtherenewedcontraction inexportmarketshares,after
theimprovement of1983to1984,areindeedclearsignsthat
theeconomy'scompetitive positionisstillweak.Restraint
musttherefore continuetobethewatchword ofeconomic
policy.Itisalsotheprerequisite forareturntothemore
sustainedgrowthratewhichistheaimoftheCommunity
strategy,sincetheeffortnowbeingmadetoimprovethe
healthoftheeconomy isalsodirectedtowardsthelasting
improvement ofitscompetitiveness bystimulating the
recoveryofinvestment throughareturntoprofitability .This
isalong-termstrategy,inwhicheconomicpolicyhasbeen
involvedsince1983.Itimpliesnotonlyappropriate wage
developments ,butalsosometimes majoradjustments in
manninglevels.Nevertheless ,astherateofcapitalformation
gradually becomesmoresustained again,thetimeis
probablyapproaching whenareversalofthedownward
trendofemployment willbegin.Thestrategyhasinanycase
alreadybroughtsomeresultsinthatasignificant recoveryin
thetrendofinvestment hasoccuredrightinthecrucialareaof
competitive industry .Underthestrategy,anystimulation of
privateconsumerdemandisofcourseoutofthequestionso
longasproduction capacityhasnotbeenreinforced tothe
pointofbeingabletocopewiththisacceleration without
damagingthebalanceofpayments .Cautionisallthemore
essentialherebecausetheupturninindustrialinvestment is
liabletoboostimportpenetration ,atleasttemporarily .
Persistence withapaypolicybasedbothoneconomic
stabilityandonemployment creationisthereforethefirst
requirement ofthecontinued emphasisonrestraint .This

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/59
meansthattheincreaseinpercapitaearningsmuststillnot
exceedthetargetinflationratebytheendoftheyear,and
mustthereforebewellbelow1%aquarter .Basedonthe
experience ofthelasttwoyears,thisnormwillprobablybe
respected inboththepublicandprivatesectors.Such
moderation seemsallthemorereasonable becausepricerises
willhavedecelerated sharplybythetimethe1986payround
opensattheendof1985.Asthepressureofcosts,andwithit
inflationary expectations ,graduallyslackens,itshouldalso
bepossibletocontemplate furtherrelaxation oftheprice
code,butwithoutjeopardizing theobjectiveofreducing
inflation .Relaxation couldgoatleastasfarasthecomplete
de-control ofindustrial prices,whicharesufficiently
constrained byexternalcompetition forthemtobeinno
dangerofmovingoutofline.
Publicfinancewillhavetobekeptwithinthestrict
framework laiddownin1983inordertoavoidexcess
pressurefromthedeficitonthefinancialmarkets .As
providedinthedraftbudgetfor1986,adoptedon18
September L985,thenetbalancetobefinancedinthecentral
government budgetandthegeneralgovernment net
borrowing muststillbekeptverycloseto3%ofgross
domesticproduct .Thedangeris,however ,thattherewillbe
somedifficulty incombining thisconstraint ofkeeping
borrowing stablewiththereduction ,howeverlimited,inthe
leveloftaxandsocialsecuritydeductions impliedbythe
newlyannounced cutsinpersonalincometax.Thereisan
essentialneedforbalanceinthesocialsecuritysystem,in
whichcertainschemes,particularly forretirement and
unemployment insurance ,areaffectedbytheprogressive
changeintheratioofbeneficiaries tocontributors .Itis
thereforenotcertainthatsocialsecuritycontributions will
nothavetobeincreasedsoonerorlatertopreventthese
schemesfromagainmovingintodeficit.Inanyevent,
extremelytightcontrolofexpenditure mustbecontinued at
alllevelsinordertokeepthevolumeincreaseoftotal
expenditure slightlybelowtherealgrowthrate,eventhough
interestchargesandthecostofsocialtransferpaymentsare
boundtoincreasemuchmoresharply.Consequently ,the
management ofcentralgovernment spendingmustleaveno
roomforarealincreaseinexpenditure exclusiveofdebt
interest.Thismeansthatthegrowthmarginrequiredinorder
topressaheadwiththeprioritymeasures inthefieldsof
security,employment ,trainingandresearchmustbe
obtainedbydiminishing therealburdenoftheother
spendingareas.Italsomeansthatoverallpublicservice
manninglevelsshouldstoprisingandthat,takingallthe
components ofincreases together ,payrisescannot
accomodate anyimprovement inpurchasing power.
Lastly,iftheriseinearningsandthepublicsectordeficitare
keptwithintheprojected limits,monetary policycancontinue toreinforce thereduction ofinflation inthe
economybyloweringinterestratesasprogressisachieved
andbyaimingatanincreaseinthemoneysupplyM2in1986
belowthatof1985.
Inthesecircumstances ,domesticdemandmightwellbeable
togrowslightlymore,pushingthegrowthofgrossdomestic
producttoabout2%,despitetheexpected smaller
contribution oftherealforeignbalanceresultingfromthe
probableacceleration ofimports .Thetermsoftradeshould,
however ,movefavourably ,sothatthetradebalanceislikely
toreturntoequilibrium andthecurrentaccountshould
remainroughlyinbalance .Atthesametime,consumerprice
increasesareagainlikelytoslowdown,helpedbythe
weakening ofthedollarexchangerate,andshouldaverage
under4%fortheyear.
Theinevitablecounterpart ofthisefforttoachievesounder
economic management isthetemporary persistence ofa
downward trendinemployment andofanaccompanying
slightincreaseinunemployment .Thisproblemcould,
however ,starttoeasein1986withthecompletion ofthe
principalindustrialrestructuring operations ,theprogress
achievedinrealwageadjustment ,theupturnininvestment
andthesimultaneous slowdown intheincreaseinthelabour
force.Infact,therateofincreaseinunemployment has
alreadyfallensignificantly in1985,forreasonsduepartly,it
istrue,tothesuccessencountered bythepart-timework
programme mountedbythelocalauthorities andother
publicagencies ,aspartofthepublicauthoritydriveto
promoteemployment ,notablyamongyoungpeople.The
introduction ofcommunity workschemesmarksthelast
stageinthisdriveandmightalsobethestartingpointfora
moregeneraltrendtowardstheeasingofconditions for
integrating theyoungintoworkinglife.Moregenerallystill,
employment asawholeshouldbenefitfromthenew
initiatives agreedintheareaoftrainingaswellasfrom
certainproposedchangesinlabourlegislation andworking
hours.
Economic policymustcontinuetogiveprioritytorestoring
theconditions makingforbalancedgrowth,andendeavour
tomitigate,byspecificmeasures ,thetemporarily adverse
consequences foremployment ofthisnecessaryapproach ;in
sodoingitwillbestbeabletofulfiltheobjectives ofthe
cooperative strategyforgrowthdevisedfortheCommunity
asawhole.Iftheinternational environment continues to
developfavourably domesticdemandshouldagainbegivena
largermarginforgrowthfrom1987on.Nevertheless the
bulkofthismarginshouldbeutilizedbycorporate
investment ,whichstillhasmuchgroundtomakeup.

NoL377/60 OfficialJournaloftheEuropeanCommunities 31.12.85
TABLE15
France:Mameconomicaggregates 1961to1986
GDP
current
pricesGDP
real
termsGDP
deflatorPrivate
consump­
tion
deflatorCompen­
sation
per
employeeCurrent
trans­
actions
accountGeneral
govern­
mentnet
lending
or
borrowingMoney
supply
(M2)(3)Unemployment
inlabour
force(4)Employ
ment
%change %GDP%
change%%
change
1961to1970 10,2 5,6 4,4 4,3 9,4 0,2 0,412,7 0,9 0,6
1971to1980 13,4 3,6 9,5 9,5 13,8-0,4-0,114,8 3,8 0,4
1981 12,1 0,2 11,9 12,9 14,5-1,4-1,811,4 7,8--0,7
1982 14,8 1,8 12,8 10,9 14,5-2,9-2,710,8 8,7(8,8)-0,8
1983 10,9 1,0 9,8 9,4 10,9-1,7-3,111,2 8,8(9,0)-0,6
1984 8,7 1,6 7,0 7,3 8,1-0,7-2,8 8,3 9,9(9,9)-1,0
1985(]) 7,0 1,2 5,7 5,8 5,9-0,5-3,2 5,810,7(10,7)-1,0
1986(2) 5,8 1,9 3,9 4,0 4,5-0,3-3,3 4,9 11,0(10,9)-0,7
(')Estimates oftheCommission services,October1,985.
(2)ForecastoftheCommission services,October1985,onthebasisofpresentpolicies .
HEndoftheyear.Upto1980:M2.
(4)Eurostatdefinition inparenthesis .
IRELAND
InIrelandthepatternofvividcontrasts ,whichhas
characterized macro-economic performance sincerecovery
beganin1983,remainedmarkedin1985.Exportscontinued
toexpandvigorously despiteslowergrowthinexternal
markets ;domesticdemand ,ontheotherhand,remainedata
lowlevel,reflectingfactorswhosecumulative influence is
likelytodampenaggregateactivityforsometimetocome—
inparticular ,astillrelativelymodestamountofdomestic
sourcingforimportantexportcategories ,theimplications of
furtherfiscaladjustment ,andtheimpactonglobal
investment asworkonmajorprojectsinthepublicsector
comestoanend,offsettingthestrongresurgence inprivate
investment incapitalgoods.Thebenefitsofrapidexport
expansion arealsoweakened bythehighlevelofnetfactor
incomeoutflows ,11%ofGDPin1985,mainlyattributable
tointerestchargesontheexternalpublicdebtandprofit
repatriations byIrishbranchesofforeignownedfirms.Asa
consequence ,growthinrealGNP,theappropriate measure
oftheresourcesactuallyavailabletotheeconomy ,isafull
percentage pointbelowthecomparative GDPfigure,
estimated atabout2,5%.Againstthisbackground ,
unemployment continued toriseduringtheyeartothe
unprecedented rateof17%.Inotherrespectshowever ,
adjustment hasproceeded muchfaster.Asignificant degree
ofwagemoderation hasbeenachieved .Therateofinflation
(CPI),ashighas20%in1981,isexpectedtocomedownto
almost5%in1985.Thedeficitonthecurrentaccountofthe
balanceofpayments asapercentage ofGDPhasalsobeen
reduceddramatically byanestimated 11percentage pointsin
thesameperiod.Indeed,thetradebalancehasmovedintomodestsurplusforthefirsttimeinmanyyears.Thesmall
overrunexpectedontheplannedbudgetarytargetof11,5%
ofGDPfortheExchequer Borrowing Requirement (EBR)
shouldbeseeninthelightoftheapproximately equivalent
savingrecorded inthepreviousyear.However ,fiscal
adjustment haseffectivelymarkedtimeforthepasttwoyears
sothatthesizeofthenationaldebtcontinues togrowby
furthersubstantial annualincrements andmayindeed
approach120%ofGDPbyend-yearofwhichclosetohalf
willbeowedabroad.Moreover ,thedeficitonthecurrent
balanceofpayments isstillratherhighinviewofthe
relativelylowlevelofdomesticdemand .
Growthprospectsfor1986,withrealGDPexpectedtorise
bynearly2,5%ontheassumption thatprogressinfiscal
adjustment willresumeasprovidedforintheGovernment 's
medium-term economic plan'BuildingonRealitiy',are
similartothoseinthecurrentyearalthoughthebalanceof
growthshouldshiftsomewhat towardsstrongerdomestic
demand .Nonetheless ,somefurtherreduction islikelyinthe
deficitonthecurrentbalanceofpayments whilethe
underlying rateofinflationshouldcontinuetoimprove .
Employment islikelytogrowatamodestpacebut
unemployment willprobablyremainataround17%during
theyear.
Theconsiderable successachievedbytheauthorities insome
areasoftheeconomythrowsintosharperfocustherelatively
slowprogressbeingmadeinimproving labourmarket

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/61
conditions .InIreland,particular demographic influences
havebeensuperimposed onmorecommonly experienced
cyclicalandstructuralfactors.Thelaboursupplyislikelyto
increasebyabout1%perannuminthenextfewyearseven
allowingforsignificant netemigration .Theproblem
therefore ,ifanyinroadintothelevelofunemployment isto
bemade,istoraiseemployment byamuchfasterrateeach
year.Tothiseffect,theauthorities shouldendeavour to
makesimultaneous progressinthreeareas,namely,restoring
ordertothepublicfinances,improving labourmarket
management andmakingindustrialpolicymoreeffectivein
termsofretainingmorevalueaddedintheeconomyand
generating moreemployment .improvement intheexternalcurrentaccountdeficitis
reducingtheroleplayedbyexternalfinancingofthepublic
sector.Despitesubdueddemandforprivatesectorcredit,
whichhasfacilitated therecentreduction intheroleof
quantitative creditcontrols ,thecontinuance ofExchequer
externalborrowing atthehighlevelof1985couldcontribute
toexcessively fastgrowthinthemoneysupply.Inregardto
interestratepolicy,theauthorities muststrikeabalance
betweenensuringthattheeconomybenefitsproportionately
fromtheeasingininternational ratesandmaintaining a
strongflowofsavingsfromthenon-bank publictothe
Exchequer .Avoidance ofshort-runvolatilityindomestic
interestratesisobviouslyessential .
Thepersistence ofhighpublicdeficitsentailednotonlya
rapidaccumulation ofexternaldebt(almost50%ofGDPat
end1984)andresultantinterestcharges (1981,2%ofGDP;
1985,4,5%)butalso,bearinginmindtherelativelynarrow
taxbase,exceptionally highlevelsofpersonaltaxation .Over
40%ofincometaxpayersfallintothetwohighertaxbands
(48%and60%).'BuildingonReality'proposestoreduce
theEBRandCurrentBudgetDeficit (CBD)to9,8%and
5%ofGNPrespectively by1987(thatis,areductionofover
3percentage pointsineachrelativeto1985)whileholding
taxationconstantasapercentage ofGNP,atthe1984level.
Substantial imbalances willthuspersistintheperiodafter
1987.Theprospectofhighlevelsofunemployment overthe
medium-term hasbeenthemainstimulusbehindinitiatives
takenbytheauthorities inlabourmarketmanagement .
Trainingschemes,particularly foryoungpeople,arenow
beinggreatlyexpanded .Asocialemployment schemehas
beenintroduced ,offering10000longer-term unemployed
part-timeworkforoneyearmainlyonLocalAuthority
projects .Thescopeforthistypeofschemeislimited
however ,bothbythecost,andbytheratherslowtakeupof
jobopportunities linkedpartlytolimitedtradeuni.n
acceptance .However ,theEnterprise Allowance Scheme,
designedtohelpunemployed personsstarttheirown
business ,hasbeenmuchmoresuccessful intermsofdemand
fortheschemecombined witharelativelylowdegreeof
initialfailure.TheEmployment IncentiveScheme,which
subsidizes incremental employment ,isalsoattracting
growingdemand,butto"evaluateitssuccessismoredifficult
becausesomeemployers mayhavehiredmorelabour
anyway .Overall,thereisnowneedforgreatercoordination
inadministering manpower policy,giventherecentrapid
expansion ofschemesandthenumberofbodiesinvolved .Thesetargetsmustberegarded asaminimum .
Consequently ,theauthorities shouldin1986aimtomakeas
muchprogressaspossibleinthedirectionofthe1987targets.
Ahalf-waysteptowardsthosetargetswouldentaila
reduction intheEBRoftheorderof1,5percentage pointsof
GDFonthe1985out-turn ,whichisanambitious target
giventhesluggishrevenuebuoyancy .Whiletheexpected
moderation ofinternational interestratesandthedollar
exchangeratewilleasethedebtinterestburdensomewhat in
1986,asignificant reduction intheEBR,giventaxrevenue
constraints ,willbefeasibleonlyiftherearesubstantial
volumereductions innon-interest expenditure includingthe
maintenance ofstrictlimitsontheriseinpublicservicepay
andthesecondandfinalphaseoftheabolitionofconsumer
subsidies .Itwouldbeappropriate tocontinuethereformof
thetaxsysteminitiatedintheJanuary1985Budgetwitha
viewtopromoteincentiveandenterprise .Whilemore
emphasisonreducingtheincometaxburdenwouldappear
desirable ,progressinthisdirectionmustdependonhowfar
expenditure canbereduced .Resources couldbefreedby
restructuring thesystemoftransferstohouseholds soasto
reflectprioritiesanddirectexpenditure toareasofrealneed.
Itisquestionable ,inthecontextofoverallbudgetary targets,
whethertherealvalueofsocialtransferscanbemaintained
—thesehaverisenbyasmuchas4percentage pointssince
1981toanestimated 19%ofGNPin1985.Animportant development todateinpromoting labour
marketadaptability hasbeentheincreasing dispersion ,in
termsoftimingandsize,ofwagesettlements .Inregardtothe
replacement ratio(levelofunemployment benefitrelativeto
netincomeaftertax),amoreemphaticstressonreducing
personaltaxation ,particularly forthoseonlowerincomes ,
couldencourage agreatertake-upoflesswellpaidjob
opportunities especially sincethereislittlescopefor
increasing thevalueofsocialtransfers .Thecorrection ofthe
longertermtrendtowardsexcessivecapitaldeepening is
moreproblematic butthereisevidencethatgenerouslevelsof
investment incentives ,whichhaveattractedmanycapital
intensiveproduction operations ,havehadanimportant
effect.SinceIrelandislikelytorequireforeigninward
investment forsometimetocome,itmaybedifficultto
reducetheleveloftheseincentives ,but,inlinewiththeWhite
PaperonIndustrialPolicy,theycanbeusedmoreselectively
toensurethecreationofmorejobs.Atpresent,itmakessense
toputastrongemphasisinindustrialpolicyonimproving
supplylinkagesbetweentheforeignanddomesticsectorsin
manufacturing .Ultimately however ,thebestprospectsfora
widerbasisofoutputandemployment growthin
manufacturing liewiththerecoveryandexpansion of
domestic firms:thiswillnotcomeaboutintheabsenceofMonetarypolicywillhavetomitigatethestrainsarisingfrom
thepressures exertedbylargepublicdeficits .The

NoL377/62 OfficialJournaloftheEuropeanCommunities 31.12.85
sustained wagemoderation ,togenerateprofitsand
investment andprotectcompetitiveness ,andofan
appropriate businessclimateintermsoftaxationandinterest
ratelevels.Wagemoderation ,incombination withbudgetaryrestraint,isnotonlyimperative solelyfromthe
pointofviewofIreland,butwouldbeinharmonywitha
consistent ,moreemployment intensive ,growthstrategyin
theCommunity asawhole.
TABLE16
Ireland:Maineconomicaggregates 1961to1986
GDP
current
pricesGDP
real
termsGDP
deflatorPrivate
consump­
tion
deflatorCompen­
sation
per
employeeCurrent
balanceGeneral
govern­
mentnet
lending
or
borrowingMoney
supply
(M3)(3)Unemployment
inlabour
forceEmploy­
ment
%change %GDP%
change%%
change
1961to1970 9,9 4,2 5,5 4,6 9,9-2,3-2,710,4 4,5 0,0
1971to1980 19,5 4,6 14,2 13,8 18,0-4,6-8,118,5 7,4 1,0
1981 21,2 1,8 18,2 21,2 19,6-14,1-13,2 21,5 10,6 -0,9
1982 16,9 0,8 15,9 15,9 15,7-9,9-13,8 13,5 12,8 0,2
1983 10,4 0,8 10,4 8,3 9,3-6,3-11,8 5,6 14,6 -2,0
1984 11,34,4 6,6 8,5 9,6-5,1-10,1 10,1 16,1 -0,9
1985 8,7 2,5 6,1 5,7 7,0-3,3-11,5 6,6 17,1 -0,3
L986(2) 7,5 2,3 5,0 5,3 5,7-2,0-10,4 9,8 17,4 0,6
(')Estimates oftheCommission services,October1985.
(2)ForecastoftheCommission services,October1985,onthebasisofpresentpolicies .
(3)Endoftheyear.
ITALY
InItaly,theabsenceofarrangements forcontaining the
in-builtmomentum ofearnings ,theinsufficient controlof
thepublicdeficitandtheconsequent accelerated growthin
themonetary aggregates haveprovided afurtherboostto
privateconsumerdemandinthefirstquarterof1985while
businessdemandwasstillstimulated bythefavourable trend
ofprofits.Allthesefactorsincreasedtheextenttowhichthe
economicsituationwasoutofstepwiththatintherestofthe
Community .Themomentum ofdomesticdemand,coupled
withworsened competitiveness ,hastendedtopullin
appreciably moreimportsandtocurbtheriseinexports,
whichhasnevertheless remainedstrong.Despitethestrongly
negativeinfluenceoftherealbalanceofforeigntrade,the
growthofgrossdomesticproductwill,however ,besimilar
tothatin1984.Butthemaintenance ofdemand ata
relativelyhighlevelandtheriseinthedollarinthefirsthalfof
theyeartemporarily interrupted theslowdown inthe
inflationrate,whichshouldsettleatabout9%insteadofthe
7%aimedatonaveragein1985.Aboveall,nofavourable
factorreducedtheimpactonthecurrentaccountofthe
deterioration intherealexternalbalance :thecurrentaccount
deficitfortheyearisthereforelikelytoreach1,7%ofgross
domesticproduct .Following twosuccessive slidesinthe
exchangerateofthelira,inFebruary/March,andagainin
July,thenewdownward adjustment ofitscentralratewithintheEuropean Monetary Systemon20Julywasthe
consequence ofthesemajorimbalances .
Italy'simprovedcompetitiveness vis-a-visthecountriesof
theEuropean Monetary System,andthesimultaneous
improvement inhertermsoftradelinkedwiththedeclineof
boththedollarandtheoilpricebroughtaboutsomerecovery
inthebalanceofpaymentsinthesecondquarter.Itwillnot,
however ,bepossibletoconfirmthisrecoveryunlessthe
causesofthepresentdisequilibrium arecorrectedrapidly.
Thereiseventhedangerthatthepersistence ofrelativelyhigh
inflationwillwipeouttheexchangerateadvantageobtained
beforeitcanbefullyexploited inrespectofrealflows.
Fundamental measuresmustthereforebetakennotonlyto
curbdomesticdemandtotheappropriate extentbutalsoto
breaktheinflationary spiralitself,whichtendstoperpetuate
economicinstabilityand,bysodoing,impedetheexpansion
ofproductive capacity .Overandabovethechronic
precariousness ofexternalequilibrium ,themostserious
medium-term consequence ofthissituationhasbeenthe
declineintherateofformation ofproductive capital
connected withthefallinitsprofitability andtheresultant
severecrowdingoutoflabourinthesectorsexposedto
competition whichcontinued duringthe1984to1985

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/63
receiptsasapercentage ofGDPaswellastherealshareof
currentexpenditure ,excludingdebtinterest,atlevelsvery
closetotheirpresentones.Ifthesetwoobjectives were
achieved ,andassumingthatgrowthaveragescloseon3%a
yearuntiltheendofthedecade,andthatinflationtends
rapidlytowardsanannualrateof4%,thegovernment
deficit,expressed asaproportion ofgrossdomesticproduct,
couldbecutfrom15,7%in1985to7to8%in1990andthe
currentdeficittobealmostcompletely eliminated .investment recoveryphase.Itisthereforeessentialfor
economicpolicytoattacktheveryrootsofthisproblemby
callingintoquestion certainautomatic institutional
procedures whichdeprivelabourcostsandpublic
expenditure oftheflexibility neededtorestorethekey
equilibriaonalastingbasis.Unlessthereisresoluteaction
alongtheselines,themonetaryauthorities willinevitably be
facedwithcontradictory policyoptions,permitting neither
thenecessaryprogresstowardsre-establishing equilibrium ,
noralastingreturnofproductive investment toalevel
compatible withagradualreduction inunemployment .
Inthiscontext,therevisionofwageadjustment procedures is
ofkeyimportance :onitdependsthecontrolnotonlyofthe
evolutionofcostsinthecompetitive sectorbutalsotoalarge
extentthatofpublicexpenditure .Evenwhenitwas
alleviated downin1983,theundifferentiated indexation
systemintroduced in1975retained mostofits
disadvantages :itimpedesdisinflation byautomatically
feedingintothewagebillmuchoftheimpactofanypastrise
inprices;itseffectsofsqueezingwagedifferentials isbound
tobeoffsetbydifferentiated payincreases ,theadditionof
whichisincompatible withthedesirableslowingdownof
nominalpayrises;andintheenditimpliesatrendofreal
wageincreaseswhichuntil1983washigherthanthatof
productivity growth .Themajordifficultyofthisstrategyisthestabilization ofthe
growthinrealtermsofcurrentexpenditure excludingdebt
interest,especially sincemuchofthisexpenditure is
controlled bydecentralized departments .Theobjective
meansthatthevolumeoftotalpublicservicepaymustbe
lastinglystabilized ,i.e.thatthemechanism foritsadjustment
—notablyindexation andautomatic careerincreases—be
amendedaccordingly ,andthatthenumbersemployed in
government andpublicdepartments shouldonlybeincreased
whenstrictlynecessary .Italsomeansthatinorderto
compensate fortheinevitable increaseintherealcostof
pensions ,thecoststothebudgetofpublicservicesmustbe
reducedbyanappropriate increaseintheusercontribution
totheiroperatingcosts.Lastlyitrequirestheintroduction of
provisions designedtolimittheincreaseintheburdenof
pensionsasmuchaspossible .The1986budgetproposal ,
presentedtotheParliament on30September 1985,includes
acollectionoffundamental changeswhichalreadyseemto
meetsomeoftheserequirements andmakeitpossibleto
movetowardsthegoalofstabilizing realnon-interest
expenditure .Management andunionsseemtobeworkingoutan
agreement toabandonthismechanism ,alreadyrejectedby
privateindustryemployers ,witheffectfromthestartof
1986,althoughthereisnoquestionofabandoning allideaof
automatically protecting wagesagainstthedeclineinthe
valueofmoney.Itmightthusbepossibletomovetowardsa
methodofwage-fixing whichwouldretainsomeindexation ,
butinthedilutedformofahalf-yearly adjustment ofan
amountofsalarylimitedtoalevelfarlowerthanthecurrent
rateofcoverage ,withtheotherelementsoftheincreasebeing
nolongerdetermined atbranchandcompany levelthree
yearsatatime,butforshorterperiods.Generalization of
suchasystemmightgoalongwaytowardsreducingthe
rigiditiesoftheformersystemandshoulddoawaywithmost
ofitsdisadvantages .Asaresult,itshouldbepossibletomake
muchfasterprogressinreducinginflationandalsotoreduce,
byleavingmoreroomfornegotiation ,theriskofrisesinreal
wagesbeyondtheincreaseofproductivity andeven,where
necessary ,tomakeappropriate corrections tothedistortions
whichoccurredinthepast.Therevenuemeasuresadoptedinthebudgetproposal
provideforareductioninpersonalincometax,adjustingthe
taxbandssoastoneutralize inflationeffects,forthe
abolitionwithaffectfrom1987ofthetaxoninvestedprofits,
andalsoareduction inthetaxationofinheritances .They
alsocomprise ,ontheotherhand,substantial increasesin
socialsecuritycontributions .Intotal,revenueasa
percentage ofGDPshouldbebroadlymaintained atits1985
level,whichmightnotbesufficienttokeeptheTreasury
deficitfor1986withinthelimitsetearlierof110millionLit
(14,8%ofGDP).Thistargetfigure,whichshowsan
improvement ofonepercentage pointcompared tothe
probable1985out-turn,shouldbeconsidered asaceiling,
takingintoaccounttheabsoluteneedtostabilizetherelative
levelofthedebtby1990.Itisessential ,inthese
circumstances ,toensurethatitisnotexceeded ,bymaking
additional cutsinspendingunlessthereisaspontaneous rise
intaxyields.Buttheexpectedresultswillnotbeachievedunlesstheshiftin
thesystemofwageformation ismatchedbyanextremely
energeticefforttoreduce,andnotjustcontain,theenormous
inflationary pressureemanating frompublicfinance.
Contrarytotheinitialforecasts ,theTreasurydeficitshows
nosignoffallingin1985.Itsunderlying trendiseventending
torisefromlevelswhichalreadyimplyarapidincreaseinthe
burdenofindebtedness ,alreadycloseto100%ofgross
nationalproduct .Thestrategynecessaryhasbeenoutlinedin
aplanforthereformofpublicfinancein1990,theaimof
whichisthegradualreductionofthepublicfinanceburden
ontheproductive system,bystabilizing overallgovernmentTheseguidelineswithrespecttopayandfiscalpolicyshould
becoupledwithamonetary policywhichcontinues the
presenteffortstoslowdownthegrowthinthemoneysupply
inordertostabilizetheeconomy'sM2liquidityratiobythe
endof1986,afteritsrisein1985.Thismeasurewould
producesomeslowdown indomesticdemand ,whichshould
bearmoreheavilyonconsumption thanoninvestment .The
realexternalbalancewouldagainmakeapositive
contribution togrowthpermitting grossdomesticproduct

NoL377/64 OfficialJournaloftheEuropeanCommunities 31.12.85
growthfortheyearoftheorderof2,5%,andthecurrent
accountcouldbegintoimprovehelpedbythefavourable
movement ofthetermsoftrade.Atthesametime,therisein
consumerpricesshouldslowdownverysharplytosettleatan
annualaverageofaround6,5%,approaching the
Community averagebytheendoftheyear.
Ifpursuedwithsufficientvigour,thetwofolddrivetocontrol
costsandthepublicdeficit,onwhichsubstantially depends
theulitmatereturntomorestablegrowth,leadingtoan
expansion ofproductive capacitywhichwouldallow
employment toincrease,islikelytobefullyinkeepingwitha
cooperative strategyforgrowth .Inordertofulfilits
objectivescompletely ,thisdrivemustnevertheless ,andasfaraspossible,besupplemented bydirectandimmediate
measurestobringdownunemployment .Eveniftheproblem
istodaynolongergrowingappreciably worse,becausethe
increaseinthelabourforceistendingtoslowdown,itis
sufficiently worryingtorequireintensification inscaleofthe
specificeffortsundertaken toreduceit,betheytoincrease
labourmarketadaptability ,toadjustvocational trainingand
re-training schemes,ortopromotedirectlyjobsinthe
southernregions .Asfarasbudgetary constraints permit,
theseeffortsmustalsobeextended toincludemeasures to
stimulate research,technological advance andthe
redeployment ofenergysoastoimproveproduction
structures andconsequently growthandemployment
prospectsinthemediumterm.
TABLE17
Italy:Maineconomic aggregates 1961to1986
GDP
current
pricesGDP
real
termsGDP
deflatorPrivate
consump­
tion
deflatorCompen­
sation
per
employeeCurrent
balanceGeneral
govern­
mentnet
lending
or
borrowingMoney
supply
(M2)(3)Unemployment
inlabour
force(4)Employ­
ment
%change %GDP%
change%%
change
1961to1970 10,5 5,7 4,5 3,8 10,7 1,8-2,313,3 5,2 -0,4
1971to1980 18,3 3,114,7 14,6 18,4-0,2-8,019,5 6,0 0,5
1981 18,5 0,218,3 19,2 21,9-2,3-11,7 10,0 8,8 0,5
1982 17,2-0,5 17,8 17,1 17,3-1,6-12,7 18,0 8,7(10,5)-0,2
1983 13,6-1,2 15,0 14,9 16,0 0,2-12,4 12,3 9,9(10,8)0,1
1984 13,6 2,610,7 11,1 12,1-0,9-13,5 12,1 10,4(12,0)0,4
1985i1) 11,0 2,7 8,1 8,6 10,2-1,7-13,6 12,1 10,9(12,6)0,2
1986(2) 9,5 2,7 6,6 6,5 .7,6-1,1-12,8 8,5 11,2(13,1)0,3
i1)Estimates oftheCommission services,October1985.
(2)ForecastoftheCommission services,October1985,onthebasisofpresentpolicies .
(')Endoftheyear.
f4)Eurostatdefinition .

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/65
LUXEMBOURG
InLuxembourg ,economic activitycontracted in1985,
becauseoftheslowdown ofsteelproduction afterthevery
sharpincreaserecordedlastyear.Nevertheless ,because
demandforotherproductsremainedbuoyant,totalexports
againadvanced slightly .Domestic demandimproved
markedlyasaresultoftheupturninprivateconsumption
andbusinessinvestment ,butinvestment bythepublicsector
andinhousingfellinrealterms.Overall,grossdomestic
productwillgrowbyaround1,7%.Theriseinconsumer
prices(of3,2%onaverage )weakened perceptibly .
In1986,thegrowthofgrossdomesticproductislikelyto
remainfairlymodestandshouldnotgomuchabove1,5%.A
stabilization ofactivityinthesteelindustryislikelytobe
morethanoffsetbythecontinuing vigorousadvanceinthe
othersectors.Thegreaterdynamism ofprivateconsumption
andthecontinuing buoyancy ofinvestment ,mainlyby
companies ,islikelytounderpindomesticdemandsothatits
growthratewillcomparewiththisyear's.Therateof
increaseofconsumerpricesislikelytoweakenfurtherduring
theyear.
Thefinancialpositionofsteelenterprises hasimprovedat
theendofthreeyearsofconsiderable efforts.Consolidation
ofprofitability inthissectorislikelytoinvolvefurther
substantial costsforthecentralgovernment budgetin1986,
butthisisnotlikelytoholdbackeffortstodiversifythe
Luxembourg economy bydeveloping andmodernizing
existingenterprises andintroducing newindustries .
Restructuring musttakeplaceinaneconomicclimatewhich
favoursinvestment ,andthisimpliesadequatecorporate
profitability .Inthiscontext,thewagestrendplaysakeyrole.
Theendingofspecificmeasurestoholddownwagesinthe
steelindustry,therestoration ofindexation andthegranting
ofbenefitsoutsidethecollectiveagreements couldhavean
effectinothersectorsverysensitivetointernationalcompetition ,reducingthecountry'sattractiveness fornew
enterprises andimpeding industrial diversification ,
especially sincewagemoderation willcontinue inthe
neighbouring countries .Iftheeffortsmadesofarinthe
GrandDuchywererelaxed,thecompetitive positionof
companies wouldsuffer.Participation inacooperative
strategyforgrowthandincomemoderation would,by
contrast,havefavourable effectsonexportprospects .
Incomparison withtheotherCommunity countries ,
unemployment hasremainedrelativelylimitedowingamong
otherthingstospecificprogrammes toprovideemployment
forworkersinthesteelindustry .However ,imbalances
persistinrelationtothequalifications ofmanualworkers ,
andthesecouldberemediedbylookingforsuitablemethods
ofyouthguidanceandvocational training .Byincreasing the
attractiveness ofvarioustrainingarrangements inindustry
andbymakingworkinghoursmoreflexible,company
requirements couldalsobebetterserved.
Asaresultofthespontaneous increaseinrevenue,combined
withacontinuing strictholdoncentralgovernment
expenditure ,itshouldbepossibletokeepthe1986net
budgetsurplusatthe1985level(2%ofGDP).Ifthisbudget
guidelineisrespectedin1986,itwillagaingivesomeroom
formanoeuvre whichwouldpermittherebuilding of
investment fundreservesand,overthenextfewyears,a
furtherreduction intheburdenoftaxationandparafiscal
chargesontopofthoseproposedinthedraftbudgetfor
1986.Itwouldalsoimmediately givetheauthorities the
financeneededfortheplannedcapitalexpenditure ,notably
onroadsandtelecommunications infrastructure .Apartfrom
theintrinsicadvantages ofsuchinvestment ,inparticularfor
theindustrial restructuring policy,execution ofthese
programmes wouldgiveappreciable supporttothe
construction industrywhichisnowfacingacontraction in
demand .

NoL377/66 OfficialJournaloftheEuropeanCommunities 31.12.85
TABLE 18
Luxembourg :Maineconomicaggregates 1961to1986
GDP
current
pricesGDP
real
termsGDP
deflatorPrivate
consump­
tion
deflatorCompen­
sation
per
employeeCurrent
trans­
actions
accountGeneral
govern­
mentnet
lending
or
borrowingMoney
supply
(M2)(3)Unemployment
inlabour
force(4)Employ
ment
%change %GDP%
change%%
change
1961to1970
1971to1980
1981
1982
1983
1984(J)
1985(2)
1986(2)7,6
9,6
4,2
9,9
6,1
9,2
6,0
6,43.6
3.1
-2,6
0,3
-2,2
3.2
1.7
1.33,8
6,3
7,0
9,6
8,5
5,8
4,2
5,02,5
6.7
7.8
10,5
9,1
6,7
3,7
3,56,7
10,5
9,0
6,0
6,6
4,2
4,9
5,67,4
21,5
32,0
40,8
31.0
33,2
32.1
30,81,8
2,2
-2,3
-1,4
0,0
1,5
2,1
1,90,1
0,3
1,0
1,2
1.5
1,7
1,7
1.60,6
1,3
-0,6
0,6
-0,3
0,5
0,6
0,4
i1)Estimates oftheCommission services,October1985.
(2)ForecastoftheCommission services,October1985,onthebasisofpresentpolicies .
(')Endoftheyear.
(4)Eurostatconcept .
THENETHERLANDS
IntheNetherlands ,therateofincreaseofeconomicactivity
in1985wascomparable withthatin1984.Realgross
domesticproductgrewbyaround2%,mainlyduetothe
fairlybuoyantexpansion ofexports .However ,despitethe
upturninprivateconsumption ,domesticdemandgrewless
sharply,mainlybecauseoftheweaknessofdemandfor
housingandthedeclineinpublic-sector investment .The
moderation oflabourcostsinearlieryearsmadeitpossibleto
improvethelevelofcorporateprofits.Thiswasafavourable
influenceonthesharpupturnincorporate investment in
plantandmachinery ,whichstartedearlyin1984;butthe
increaseinbuildinginvestment isstillsmall.Overall,
corporate investment remainsbelowthelate1970slevel,
expressed asapercentage ofgrossdomesticproduct (10,0%
from1983to1985compared with11,3%from1977to
1979).Thenumberofunemployed fell,asanannual
average,andtheunemployment ratedeclinedfrom14,2%
ofthelabourforcein1984to13,5%.Consumer pricerises
remained verymoderate .Thecurrentaccountsurplus
increasedfurther,to4,4%ofgrossdomesticproduct .The
resultantincreaseintheliquidityratiohasnotbeenentirely
offsetbymonetarypolicy,giventhelowinflationrate,and
thestillhighgeneralgovernment borrowing requirement -
8%ofnetnationalincome .
In1986,therateofincreaseofgrossdomesticproductisnot
likelytoaccelerate greatlyandwillprobablyreachalmost
2%.Exportswillgoonexpanding butatasomewhat lower
rate.Domestic demandwill,onthewhole,becomemore
buoyant .Privateconsumption willbeboostedslightlybythe
riseinwagesresultingfromthenewcollectiveagreements
andtheincreaseinemployment .Theimprovement in
companyprofitability andthehighercapacityutilizationarelikelytofavourtheexpansion ofcapital-widening
investment ,particularly bycompanies intheexporting
industries .Butresidential construction andpublic
investment willagaindipslightly.Inflationwillfalltoavery
lowrate,withlowerimportpriceslargelyoffsettingtheeffect
ofthesomewhat fasterriseinunitlabourcosts.The
favourable movement ofthetermsoftradewillproducea
sharpriseinthecurrentaccountsurpluswhichcouldexceed
5%ofgrossdomesticproductin1986.Employment in
manufacturing industrycouldwellincreaseslightlyforthe
secondyearinsuccession .
Inrecentyears,economicpolicyhaschieflyconcentrated on
reducingthebudgetdeficitandtheleveloftaxationand
socialsecurity contributions ,improving company
profitability andmakingchangesinworkinghoursand
employment opportunities ;buttheresultsobtainedsofarare
stillinsufficient inviewoftheseriousness ofthe
problems .
Industrial companies havebeenabletoincreasetheir
profitability appreciably ,andsubsequently ,their
investment .Company financesandcompetitiveness were
improvedbyholdingdowntheriseinlabourcosts,partlyasa
resultofacutinsocialsecuritycontributions .However ,the
levelofprofitability nowreachedisstillanargument in
favourofamoderateincreaseinrealwages.
Theprospectsfor1986arefairlyencouraging inthisrespect.
The1982agreements betweenlabourandmanagement
severlylimitedtheriseinearnings,butthecurrent
decentralized negotiations atindustryandcompanylevelwill
bringaboutamoresubstantial riseinwagesoverall.A

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/67
generalconsensus shouldbesoughtandmaintained onthe
prioritiesofcollectiveagreements ,inordertopreventthem
fromdeviatingtoosharplyfromproductivity gainsand
sobecoming incompatible withthemaintenance of
competitiveness .
Theresultofdecentralizing wagenegotiations islikelytobe
greaterpaydifferentiation betweensectors,andthiscould
promotegreaterlabourmobility ,whichwouldfavoureven
morethewagesstructureandwouldcurbthetendencyfor
excessiverationalization investment .Inthe1980s,many
selectivemeasures havebeentakenwiththeviewtohold
backtheriseinunemployment :lowerminimum wages,
reducedparafiscal pressure ,restricted unemployment
compensation ,morepart-timejobs,shorterworkinghours,
andcompensatory recruitment withnoincreaseinlabour
costs.Thegreaterflexibility ofdemandonthelabour
market,andthewagedifferentiation whichmaybecome
possibleundernegotiations atindustryandcompanylevel,
arefurtherimproving thefavourable recruitment climate.
Untilrecentlythispolicyhadnothadtheexpectedeffects
onthelevelofemployment ,buttherearesignsofan
improvement in1985.Becauseoftheupturninactivity
andallthemeasuresmentioned ,employment hasrisen
sufficiently toreduceunemployment in1985somewhat .
However ,programmes toprovideemployment foryoung
peopleshouldbeexpanded soastogivethemeasieraccessto
thelabourmarketfromwhichtheyareoftendebarredby
inadequate vocational training .
Progresshasbeenmadeinachieving ahealthierpublic
financesituation :thesizeofthepublicsectorhasbeenreducedmarkedlybetween1982and1985andthegeneral
government netcashdeficitwascutfrom10to8%ofnet
nationalincome .Inthesameperiodtheburdenoftaxesand
socialsecuritycontributions wasreducedbysome1%ofnet
nationalincome.Thereductionofthedeficitisnotonlydue
tothemajoreffortincontrolling expenditure ,partly
nullified ,moreover ,byovershoots onsocialsecuritycosts
anddebtinterestchargesbutitstemsalsofromtherisein
naturalgasrevenue .Themarkeddropforecastingasrevenue
from1986islikelytomakeitevenmoredifficulttotrimthe
budgetdeficit.Soevenbymakingthesavingsprovidedforby
thegovernment agreement ,thereislimitedroominthedraft
1986budgetforanyfurtherappreciable reduction inthe
borrowing requirement ,although ,careshouldbetakento
bringthegeneralgovernment cashdeficitdowntounder8%
ofnetnationalincomein1986.Nevertheless ,atemporary
slowdown intherateofreducingthegeneralgovernment
borrowing requirement ,isinpresentcircumstances
advisableinordertoavoidthenecessityofdeliberateincrease
inthetaxburdenortheintroduction ofadditional measures
whichmighthampertherecoveryofcorporate investment
andprivateconsumption .Fastergrowthstemmingfromthe
improvedinvestment andexportperformance appearstobe
anecessarycondition tocreatethefinancialroomfor
manoeuvre sothatpurchasing poweroftheprivate
households couldbeincreased ,notablybyreducingsocial
securitycontributions ordirecttaxes,withoutinthelongrun
jeopardizing thedesirable stabilization oftherapidly
increasing debtinterestcharges.Thiscouldprovidea
solutiontotheexternalsurplusdilemmawhichcannotbe
solvedinthepresentcircumstances bysimplyrelaxingthe
management ofpublicfinance.
TABLE19
TheNetherlands :Maineconomicaggregates 1961to1986
GDP
current
pricesGDP
real
termsGDP
deflatorPrivate
consump­
tion
deflatorCompen­
sation
per
employeeCurrent
trans­
actions
accountGeneral
govern­
mentnet
lending
or
borrowingMoney
supply
(M2)(*)Unemployment
inlabour
force(4)Employ­
ment
%change %GDP%
change%%
change
1961to1970 10,6 5,2 5,2 4,1 10,6 0,0-0,8 9,1 1,0 1,2
1971to1980 10,8 2,9 7,7 7,8 10,7 1,3-1,510,8 4,5 0,2
1981 4,8-0,6 5,4 6,3 3,6 2,1-5,5 5,3 8,8 -1,5
1982 4,5-1,8 6,5 5,3 5,6 2,8-7,1 7,6 11,7 -2,5
1983 2,5 0,6 1,9 2,8 3,4 2,9-6,510,5 14,0 -2,0
1984t1) 4,3 1,7 2,6 2,6 0,6 4,1-6,3 7,7 14,2 -0,5
1985(2) 4,5 2,1 2,3 2,4 1,4 4,5-5,9 8,0 13,2 0,4
1986(2) 3,0 2,0 1,0 1,1 2,5 4,5-6,5 6,5 13,0 0,6
(')Estimates oftheCommission services,October1985.
(2)ForecastoftheCommission services,October1985,onthebasisofpresentpolicies .
(3)Endoftheyear.
(4)Eurostatconcept .

NoL377/68 OfficialJournaloftheEuropeanCommunities 31.12.85
UNITED KINGDOM
possiblefallinthesavingratio,willleadtofastergrowthof
privateconsumers 'expenditure inrealterms.Thiscouldbe
furtherreinforced byacutinpersonaltaxation,asthe
outlookforthepublicfinancessuggeststhat,onthebasisof
thelastestversionofthemedium-term financialstrategy
(MTFS),therewillbesomeroomforeasingoftaxationor
increaseinpublicexpenditure ('fiscaladjustment ').Stronger
consumerdemandislikelytobeoffset,however ,byweak
publicconsumption andslowergrowthofexportsresulting
fromthelossofcompetitiveness .OverallrealGDPgrowthis
expectedtoslowtoarateofabout2%.Theremaybesome
slightimprovement intheoutlookfortheunemployment
count,particularly inviewofmeasuresalreadyannounced in
the1985Budgettoextendyouthtrainingandcommunity
workforthelong-term unemployed .TheupturnintheUnitedKingdomeconomy ,whichstarted
in1981,haslastedlongerandbeensomewhat strongerthan
intherestoftheCommunity .Economicexpansion hasbeen
accompanied sinceearly1983byariseinemployment ,but
thishasnotbeensufficienttoallowanydeclineinthenumber
ofunemployed .Theannualinflationrateappearedtohave
stabilizedataround5%in1983and1984,butinflation
performance wasthreatened atthebeginningof1985bya
steepdepreciation inthesterlingexchangerate(caused
mainlybyworriesabouttheminers'strike,aboutoilprices
andabouttheGovernment 'sresolvetocontainpublic
spendingandborrowing ).Theauthorities reactedbyraising
interestratessharplyandbyreaffirming atightbudgetary
stance.Sterlingsubsequently strengthened ,andtheoutlook
forinflationoverthenextyearisnowimproved .Thehigher
sterlingexchangerate,however ,especially againstother
European currencies ,togetherwithunitwagecostsrising
noticeably fasterintheUnitedKingdomthaninthemain
competitor countries ,hasledtoadeterioration inthe
international competitiveness ofUKmanufacturers ,
worsening prospects forexportsin1986.Thisfactor
contributes totheslowergrowthinrealGDPexpectedfor
1986,whenthepatternofgrowthislikelytobestrongly
weightedtowardsprivateconsumption .Budgetary policyisaimingtobringgeneralgovernment
expenditure andthepublicsectorborrowing requirement
(PSBR)backontodecliningpathsinrelationtoGDP,after
theovershooting in1984/85mainlycausedbytheextra
costsassociated withtheminers'strike.Therearecertain
riskstotheMTFSobjectives intheformofupwardpressure
onspendingfrompublicsectorpayawardsandfrom
increasesinsocialsecuritybenefitsandofapossibleshortfall
onrevenueassociated withNorthSeaoiloutput.Theserisks
appearatpresent,however,tobelargelycoveredforthe
currentandnextfinancialyearsbythecontingency reserves,
thelevelofwhichwasincreased inthe1985Budget.On
balanceitisstillexpectedthattheofficialprojection forthe
PSBRof£7500millionin1986/87willallowsomeroom
forafiscaladjustment tobeintroduced intheBudgetnext
spring,thoughthesizeofthisadjustment isuncertainand
couldbebelowthelatestofficialestimate of£3500
million .AriseinrealGDPofalmost3,5%islikelytoberecordedfor
1985,butadjustedforthedistortions causedbythecoal
strike,whichendedinMarchofthisyear,thegrowthrateis
between2,5%and3%.Fuelimportshavefallenbacksince
theendofthestrikeandotherimportshavealsogrownata
slowerratethanin1984,whileexportshavegainedamarket
shareinbuoyantworldtrade,sothattheexternalbalancehas
contributed stronglytoGDPgrowth .Whilerealdisposable
incomeshavebeengrowingfairlyfast,asaresultofa
sustainedincreaseinaverageearningsandboostedbytax
cutsintheMarch1985Budgetandtherecoveryofminers'
earnings ,growthofprivateconsumption hasbeen
moderated byahighersavingratioprobablyinducedby
somewhat fasterinflationandhigherinterestrates.Inspiteof
continued strengthininvestment bytheenterprise sector
(particularly inthefirstquarter,-assomeexpenditure was
broughtforwardtotakeadvantage oftaxarrangements ),
lowercapitalexpenditure bythepublicsectorandfor
residential purposes islikelytoresultintheslowest
expansion oftotalfixedinvestment sincethe1980to1981
recession .Employment hascontinuedtorise.Untilrecently,
thisledonlytoaslowingintheincreaseofunemployment
becausemanyofthoseenteringnewjobswerenotpreviously
recordedasunemployed ,butsincethesummerthelevelof
unemployment appearstohavestoppedrising.Inviewoftheemergingweakerexportandinvestment
trends,whichmaywellbeprolonged ,particularly if
expansion oftheworldeconomyslowsdown,thereisa
dangerthatslowergrowthcouldpersistintheUnited
Kingdomfortwoorthreeyears,makinganysignificant
reductionofunemployment unlikely .Inthesecircumstances ,
anymarginofmanoeuvre forsupporting theeconomyvia
fiscalandinterestratepolicyshouldbefullyused.Inthis
respectitisimportanttonotethattheoverallbudgetaryand
publicdebtpositionoftheUnitedKingdomnowappearsto
becomparatively robust.Flowever ,theextenttowhichfiscal
policycanbeusedtostrengthen activitydependsalsoon
inflationperformance .Theacceleration ofretailpricesinthe
earlymonthsofthisyearwasatemporary movement ,
resultingfromaweakening oftheexchangerateandthe
associated riseofinterestrates,andhassincebeenclearly
reversed .Althoughtheoutlookisforanimprovedinflation
performance in1986,helpedbyfallingimportprices,
domesticcostpressuresaresuchthat,intheabsenceofwage
moderation bringingtheincreaseinaverageearningsdown
fromitspresentrateof7to8%,itwillbedifficulttobring
theannualinflationratebelow5%(theaverageratesince
1983)onalastingbasis.In1986thereislikelytobeasignificant shiftinthepatternof
demandfromnetexportstowardsprivateconsumption .
Withaverageearningsinnominaltermslikelytocontinue
risingappreciably (bysome7%),theslowingexpectedin
consumer prices,mainlyasaresultofweakimportprices
followingtheappreciation thisyearofthesterlingexchange
rate,willboostrealhousehold incomesand,togetherwitha

31.12.85 OfficialJournaloftheEuropeanCommunities NoL377/69
resourceallocation andgenerateuncertainties .Inboththe
previous andcurrentfinancial years,thishasbeen
particularly evidentwithrespecttotheleveloftaxrevenue
linkedtooiloutput,whichdependsuponboththedollar
priceofoilandthesterling-dollar exchangerate.Such
experience illustrates thepotentialbenefitsofavoiding
exchangerateovershooting thatmightbegainedfromfull
participation intheEMS.Giventhegreaterconvergence now
existingintheeconomicpoliciesofmembercountries ,sucha
stepshouldbegivenrenewedconsideration .
1985and1986arethoughttobetheyearsofpeakoutputof
NorthSeaoilandgas,thissectoraccounting forsome6to
7%oftotalGDPandmorethan20%ofvisibleexports.
Eventhoughthedeclineofoiloutputwilloccuratamuch
slowerpacethanitsexpansion (tenyearsago,outputwas
negligible),theeconomywillhavetoadapttothisimportant
change.Themostdirectimpactoneconomicpolicymaybe
withrespecttotaxrevenueassociated withoil,whichis
estimatedtoaccountfor9%ofgeneralgovernment receipts
inthepresentfinancialyear.Officialprojections indicatethat
thissharewillberoughlyhalvedby1988/89.Thedeclineof
theoilsurplusinthebalanceofpaymentswillalsoneedtobe
offsetbyimprovements inotherareas.Thecontinuing
strengthening oftheinvisibleaccountwillcontribute
towardsthis,butanyfurtherworsening ofthenon-oiltrade
account (whichhasmovedfromsmallsurplusin1981to
sizeabledeficitin1985,estimated atalmost3%ofGDP)
couldleadtoconsiderable imbalance .Itistherefore essential
thattheperformance ofthenon-oileconomy ,whichhasbeen
growingsincetherecoverybeganin1981bylessthan2,5%
perannumonaverage,shouldstrengthen .Inusingtheavailableroomformanoeuvre affordedforfiscal
policy,priorityshouldbegiventothosemeasureswhichare
mostbeneficialtothesupplysideoftheeconomyandthe
creationofemployment .Themainemphasisofthepresent
government inrespectoffiscalchangeshasbeentolowerthe
burdenofpersonalincometaxinordertoincreaseincentives
toworkandforenterprise .Whilereflecting along-term
approach ,thismayalreadybeinpartresponsible forthe
increaseinemployment since1983,muchofwhichhasbeen
accounted forbypeoplenewlyenteringorre-entering the
labourforce.Afurthereasingofincometaxwouldbe
welcome ,particularly ifitwereagainusedtoraise
substantially thetaxthreshold ,sincetheprovisions ofthetax
andsocialsecuritysystemsstillcombine insome
circumstances tosethigheffectivemarginaltaxratesfor
thoseonlowincomes .Itistobehopedthatsuchanomalies
willbeeliminated inthereformofthesocialsecuritysystem
whichisunderdiscussion .Proposals forwide-ranging
reform,published inaGreenPaperinJunethisyear,
emphasized theneedtointegratethedifferentsocialbenefits
andtoconcentrate benefitsonthosemostinneed.
In1986,whenprivateconsumption isinanycaselikelytobe
growingatarapidrate(3to4%),itwouldasusualbe
appropriate toconsiderotherways,inadditiontoincometax
reduction ,ofusingthefiscalroomformanoeuvre .For
instance,therewouldalsobedirectbenefitstoemployment
andinflationfromreducingthecostofemployment to
enterprises ,byloweringsocialcontributions .Thereisalso
increasing evidencetosupporttheargumentthatsomeofthe
roomformanoeuvre shouldbeusedtofinancepublicsector
infrastructure investment ,someofwhichisrelatively
labour-intensive .Thestateofsomeoftheinfrastructure was
describedearlierthisyearinaseriesofreportssubmitted by
government departments fordiscussion intheframework of
theNationalEconomic Development Council .Inviewof
theseapparentdeficiencies thesituationshouldbecarefully
reviewedwhenspendingplansarereformulated .
Monetarydevelopments overthelastyearhavebeenasource
ofsomeconcern .Thevariousindicators ofmonetary
conditions ,inparticular themonetary aggregates andthe
exchangeratehaveoftenprovideddivergentinformation .In
January,atatimewhenmonetary growthwaslargely
satisfactory ,thesterlingexchange ratecameunder
considerable pressureandbankbaserateswhichhadfallento
below10%inlate1984wereraisedto14%.Inrecent
months,however ,despitehigh(nominalandreal)interest
rates,therateofgrowthofthebroadmeasureofmoney
supply,sterlingM3,hasbeenwellabovethe5to9%target
rangefor1985/86setoutinthelatestMTFS.SinceMarch
interestrateshavedeclinedslightly,butitistobehopedthat
furtherreductions consistent withthemaintenance of
monetary conditions conducive tolessinflationcanbe
achieved .
Inspiteofthedownward movement ininterestratesduring
1985,differentials withothercountrieshaveremainedhigh
andmovements insterlinghaveattimesbeenvolatile .Within
aperiodof12monthsfromJuly1984,thecomposite sterling
exchangerateindexfirstfellbymorethan10%and
subsequently appreciated bymorethan15%.Such
movements canhaveundesirable effectsonpricesandTheseriesofsupply-side measurestakeninrecentyears,such
asthechangesrelatingtopersonaltaxationhave,together
withtheimprovedgrowthperformance ,contributed tothe
substantial increaseintheemployedlabourforce(bymore
than600000,oralmost3%,fromthefirstquarterof1983
tothefirstquarterof1985).Furthermeasureswithregardto
thelabourmarketarebeingprepared .Itistobehopedthat,if
employment growthcanbemaintained ,jobswillbefilled
increasingly fromthepoolofunemployed andtoalesser
extentthanhassofarbeenthecasefromnewentrantstothe
labourforce.Thesubstantial productivity gainsoftheearly
1980'shavenowsloweddown,leadingtoanacceleration of
unitlabourcosts,whichisweakening theinternational
competitive positionofenterprises andthreatening toreverse
theimproving trendofcompanyprofitability .Inorderto
sustainthegrowthofinvestment andthusexpandthe
capacityoftheeconomy (particularly astheroleofoil
declines),andhencepotentialemployment ,afurthershiftin
relativefactorremuneration towardsreturnsoncapitalis
needed.Inconsequence ,thegrowthofrealwages,whichfor
severalyearshasbeennotablystrongerthaninotherMember
States,nowneedstobecomemuchslower.Indeed,abetter
understanding betweenbothsidesofindustryonthisand
othermattersandbetterfunctioning ofthelabourmarket
wouldgreatlyfacilitatetheimplementation ofanoverall
strategy conducive toasignificant reduction on
unemployment inthemediumterm.

NoL377/70 31.12.85 OfficialJournaloftheEuropeanCommunities
TABLE20
UnitedKingdom :Maineconomicaggregates 1961to1986
Money
supplyUnemployment
inlabour
force(5)Employ­
ment4
%
change%
change%GDP
current
prices
(3)GDP
real
terms
(3)GDP
deflatorPrivate
consump­
tion
deflatorCompen­
sation
per
employeeCurrent
balanceGeneral
govern­
mentnet
lending
or
borrowing
%change %GDP
1961to1970 7,1.2,8 4,2 3,9 7,1 0,0-0,6
1971to1980 16,2 1,914,0 13,3 16,0-0,6-3,1
1981 10,4-1,111,7 11,2 13,5 2,7-3,1
1982 9,1 1,9 7,1 8,3 8,8 1,7-2,3
1983 8,6 3,3 5,1 5,1 8,8 1,1-3,6
1984 6,2 1,8 4,4 5,1 5,5 0,3-3,8
1985H 9,1 3,4 5,5 5,3 7,7 1,1-3,3
1986(2) 7,0 2,0 4,8 4,3 7,1 0,9-2,85,9
14.5
14.6
10,6
10,3
9,6
11,3
8,61,9
4,0
9,2
10,6
11,6
11,8
12,0
11,70,2
0,2
-3,9
-1,4
-0,8
1,5
1,1
0,9
(x)EstimatesoftheCommission services,October1985.
(2)ForecastoftheCommission services,October1985,onthebasisofpresentpolicies.
(3)Expenditure measureatmarketprices.
(4)SterlingM3,endoftheyear.
(s)Eurostatdefinition .