COUNCIL RECOMMENDATION of 6 July 1998 on the broad guidelines of the economic policies of the Member States and of the Community (98/454/EC)

THE COUNCIL OF THE EUROPEAN UNION,

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

Having regard to the recommendation from the Commission,

Having regard to the conclusions of the European Council in Cardiff of 15 and 16 June 1998,

Whereas a resolution on the recommendation from the Commission was adopted by the European Parliament,

HEREBY RECOMMENDS:

1. MAIN PRIORITIES: A SUCCESSFUL EMU, PROSPERITY AND JOBS

The introduction of the euro on 1 January 1999 marks a new phase in the process of European integration and in the conduct of the economic policies of the Member States and of the Community.

The vigorous and credible implementation by the Member States, especially over the last two years, of policies aimed at achieving a high degree of sustainable economic convergence in the Community has yielded tangible results.

Firstly, reflecting these remarkable convergence efforts and results, the Council of the European Union, meeting in the composition of Heads of State or Government, decided on 3 May 1998 that eleven Member States fulfilled the necessary conditions for the adoption of the euro.

Secondly, these efforts are fostering the development of a macroeconomic policy mix conducive to growth and employment.

However, until now, insufficient progress has been made in reducing unemployment in many Member States.

Since the summer of 1997, when the previous Broad Economic Policy Guidelines were adopted, an increasingly robust and more broadly based economic recovery has taken hold in the Community, in a context of historically low inflation. With spare capacity currently available in most Member States and with prospects for subsequent healthy growth in investment, especially in equipment, solid growth should be able to take place without encountering capacity constraints or generating inflationary tensions, if, as expected, wage developments continue to be appropriate. In addition, the underlying economic fundamentals are sound and improving continuously, demand prospects are brightening and confidence is strengthening further. The impact on Community growth prospects from the financial and economic events in Asia appears limited, provided that the crisis neither deepens nor spreads to other countries in the region.

Against the background of a further strengthening recovery, employment could increase moderately, leading to a slight reduction in the unemployment rate up to 1999 in the Community as a whole. This would constitute a first, albeit modest, step in the direction of the objective of a high level of employment aimed for in Article 2 of the Treaty of Amsterdam.

The present level of employment in the Community is the result not only of high unemployment (about 18 million people in 1997) but also of poor employment prospects over long periods which have discouraged many people from seeking a job, many of whom are beneficiaries of other social security provisions. Thus, the creation of new jobs will have to absorb not only the unemployed but also a rising participation rate and still some demographic increase in the population of working age.

The increase in employment over the medium and longer term would greatly alleviate the burden on Member States' public finances and social security systems. Moreover, it would help to fight efficiently against poverty and social exclusion.

For economic policy, the tasks are to set the conditions for (i) a further strengthening of the recovery, and (ii) its extension into a self-sustaining, non-inflationary economic growth process over the medium and longer term - a pre-requisite for substantially and durably higher employment. This will require a strengthened programme of macroeconomic and structural policies and a determined implementation of the 1998 employment guidelines to address a number of key challenges while allowing the Community's economies to adapt better to changing circumstances in the years ahead.

The introduction of the euro will not in itself solve the Community's unemployment problem. But in fulfilling the abovementioned tasks, the stability framework of economic and monetary union (EMU) will contribute to the maintenance of a policy mix that is favourable to growth and employment.

In the macroeconomic area, governments and, in their respective field, the social partners should each make all the required efforts to support the stability objective of the single monetary policy.

Simultaneously, structural policies and reforms of the product, service and labour markets are required to facilitate a tension-free growth process, to reinforce competitiveness, to translate growth into employment and to make growth more respectful of the environment.

More generally, there is a need for a better functioning of the single market for which all Member States are responsible.

Only if this policy strategy is pursued with resolve by all actors and if its implementation is well coordinated in line with the Luxembourg European Council resolution, will EMU - as called for in Article 2 of the Treaty - reap its full benefits and contribute to achieving the overall objectives of the Community, including the promotion of sustained and non-inflationary growth respectful of the environment, a high level of employment and rising living standards.

2. GROWTH- AND STABILITY-ORIENTED MACROECONOMIC POLICY MIX

In order to achieve the objectives mentioned above, it is essential that, in the macroeconomic area, Member States remain committed to pursuing the growth- and stability-oriented strategy recommended in the previous guidelines, which has started to bear fruit.

The strategy contains three essential ingredients:

- a monetary policy oriented to price stability,

- sustained efforts to achieve and maintain sound budgetary positions consistent with the Stability and Growth Pact,

- nominal wage trends consistent with the price stability objective; at the same time, real wage developments should be consistent with increases in productivity and should take into account the need to strengthen the profitability of investment in order to create more jobs.

The more the task of monetary policy to maintain price stability is supported by appropriate budgetary policies and wage developments, the more likely it is that monetary conditions will be favourable to growth and employment.

The overall macroeconomic policy mix of the euro-area will result essentially from the interaction of the single monetary policy on the one hand and the specific budgetary developments and wage trends in the participating countries on the other. The latter will be subject to the closer surveillance and coordination of economic policies in order to achieve an appropriate policy mix in the whole euro area as well as in each participating country.

For the countries that do not initially adopt the single currency, the need for stability-oriented macroeconomic policies will be equally strong. The close and deep economic and monetary interdependence between the euro-area countries and the non-euro area Member States and the need to ensure further convergence and a smooth functioning of the single market will require that all Member States are included in the coordination of economic policies.

3. PRICE STABILITY

Price stability is an essential requirement for realising sustained medium-term economic growth. Following impressive progress in recent years, the Community as a whole has achieved a high degree of price stability. It is necessary that all policies aim at credibility and consistency with durable price stability.

In the prospective euro-area, where the average inflation rate, measured by the harmonised index of consumer prices, has fallen below 2 %, all participating Member States need to conduct their economic policies with a view to maintaining price stability, thereby allowing for monetary conditions favourable to growth. They also need to avoid too wide inflation differentials that would create competitiveness problems.

Average inflation has also fallen to below 2 % in Denmark, Sweden and the United Kingdom. The task is to maintain monetary and economic policies which continue to deliver price stability.

Greece has made substantial progress towards price stability in recent years. Together with the budgetary consolidation efforts implemented over recent years, this facilitated the entry of the drachma into the exchange rate mechanism (ERM) in March 1998. ERM membership will help to improve further its inflation performance. Reinforced efforts are needed, however, to contain the inflationary consequences of the devaluation of the drachma upon entry in the ERM and to achieve price stability as soon as possible.

4. THE TRANSITION TO THE EURO

A smooth transition to the euro on 1 January 1999 is required to ensure that EMU is launched in the most favourable circumstances. The primary objective of the monetary policies of the national central banks of participating Member States in the remaining months of 1998, during which they retain the responsibility for monetary policy, is to ensure that the current environment of a high degree of price stability is maintained at national level and thus for the euro area as a whole. Official interest rates will have converged to the common euro-area rate by the end of 1998. This will be consistent with a situation in which market exchange rates are equal to the pre-announced rates, i.e. the current ERM bilateral central rates.

From 1 January 1999, the single monetary policy in the euro area will be the responsibility of the independent European Central Bank (ECB) and European System of Central Banks (ESCB).

The Member States not adopting the single currency from the outset retain competence for their national monetary policies and are also committed to pursuing stability-oriented monetary policy. Under Article 109m of the Treaty, these Member States shall treat their exchange-rate policies as a matter of common interest. The ERM 2 will provide the framework for monetary relations between Member States participating in the mechanism and the euro area from 1999 onwards and will support their convergence efforts. While participation in the ERM 2 will be voluntary, it can be expected that Member States with a derogation will join.

5. SOUND PUBLIC FINANCES

5.1. General guidelines

Despite considerable consolidation efforts in virtually all Member States, additional progress is required in most countries in order to ensure compliance with the Stability and Growth Pact's medium-term objective of budgetary positions close to balance or in surplus. That will allow all Member States to deal with normal cyclical situations while keeping the government deficit within the reference value of 3 % of gross domestic product (GDP). In accordance with the Treaty, consolidation is also required in order to ensure that debt ratios above 60 % continue to diminish sufficiently and to approach the reference value at a satisfactory pace. These requirements hold for all Member States for the following reasons:

(i) sound budgetary policies, by fostering low and stable inflationary expectations, will facilitate the task of the single monetary policy and the monetary policies of the non-euro Member States in maintaining price stability. In the present conjuncture, a further scaling back of government deficits will contribute to the sustainability of the economic recovery and might allow for continued favourable monetary conditions, thereby supporting investment;

(ii) sound budgetary positions will help to keep long-term interest rates at a low level, thereby generating a crowding-in of private investment. If governments absorb a smaller part of private saving, or if they make a positive contribution to savings in the economy, an increase in the investment rate can - other things being equal - take place without pressures on the balance of payments and long-term interest rates;

(iii) in many countries, public finances have not yet regained the necessary room for manoeuvre to cope with adverse economic developments. Since, after the introduction of a single currency, the adjustment to adverse cyclical developments and country-specific disturbances will to an important extent rest with budgetary policy, it will be of paramount importance to ensure that the automatic stabilisers will be able fully to play their role. Furthermore, sound budgetary policies will in all likelihood also increase the effectiveness of those stabilisers. Proven budgetary discipline will strengthen the confidence of economic agents that a rising deficit during a recession will not permanently disrupt the public finances, thereby avoiding any adverse effects emanating from the financial markets;

(iv) finally, budgets close to balance or in surplus will allow a speedy reduction in the still relatively high public debt ratios in many countries. This will reduce the debt service burden and so facilitate the restructuring of government spending. It could also facilitate the lowering of the tax burden and make it possible to address all aspects of social security systems in view of ageing populations.

Against this background, it is essential that Member States provide assurances regarding the continuity of budgetary adjustment. To this end, Member States have committed themselves:

(i) to ensure that the national budget objectives set for 1998 are fully met, if necessary by taking timely corrective action;

(ii) if economic conditions develop better than expected, to use the opportunity to reinforce budgetary consolidation so as to reach the medium-term objective of government financial positions close to balance or in surplus, as embodied in the commitments of the Stability and Growth Pact;

(iii) to submit their stability and convergence programmes at the latest by the end of 1998 with a view to enabling the Commission and the Council to assess all these programmes, including the overall budgetary stance and the policy mix in the euro area, at the start of stage 3 of EMU;

(iv) to ensure, where appropriate, a further steady decline in public debt and an appropriate debt management strategy with a view to reducing the vulnerability of the public finances.

The timing, scale and composition of budgetary adjustments are important in determining whether they will be successful in having a durable impact on the government's budgetary position and in improving economic dynamism, competitiveness and employment. Although they will need to be tailored to country-specific conditions, previous guidelines exercises identified a number of general principles. The present guidelines reaffirm and build upon these principles while respecting the competence of the Member States for the conduct of their budgetary policies:

(i) budget deficit reductions in most Member States should be achieved through expenditure restraint rather than through tax increases;

(ii) in order to improve economic efficiency and to promote economic dynamism, a reduction in the overall tax burden is desirable in most Member States. Tax reforms also enable markets to function more efficiently and by strengthening investment promote lastingly competitive jobs;

(iii) in cases where government deficits or government debt-to-GDP ratios are still high, it is necessary that any tax reduction should not slow down the pace of deficit reduction;

(iv) budgetary consolidation should be implemented in a fair and just way. It must be directed towards increasing the effectiveness and efficiency of government spending, thereby also enhancing the supply side of the economy. In this respect, measures should focus on controlling better or on reforming public consumption, public pension provision, health care, labour market measures and subsidies. Furthermore, in recent years, there has been a tendency for government investment to be reduced relative to GDP, although part of this reflects a shift towards the private financing and operation of public infrastructure investment. To the extent possible, and without threatening the necessary further reduction in government deficits, spending on productive investment as well as on other productive activities such as on human capital and active labour market initiatives should be favoured. Such a restructuring is likely to lead, through its positive effects on growth and employability, to an increase in the employment rate and/or to a reduction in the number of people of working age receiving social transfers, thereby helping to improve budgetary positions over the medium term.

In just the same way as the Member States, the Community also is called upon to continue to maintain strict budgetary discipline. Strict budgetary discipline must be applied to all categories of the financial perspectives, while respecting the inter-institutional Agreement on budget discipline and the improvement of the budget procedure.

5.2. Country-specific guidelines

(i) Euro-area Member States

In Belgium, favourable economic growth conditions have contributed to bringing forward by one year the budgetary targets set in its convergence programme. It is important to ensure that the government's commitment to maintain the primary surplus at 6 % of GDP over the medium term is realised, thereby securing a fast decline in the debt ratio, which is still at a very high level. A tighter control needs to be exerted on transfers to households and especially on health care spending.

Germany needs to continue its government deficit reduction in the coming years. Subsidies, transfers to households and government consumption need to be restrained further. Continued efforts to restrict spending are also needed if the government's aim of reducing the expenditure ratio by the year 2000 to its pre-unification level of 46 % of GDP is to be realised. Germany needs to step up its budgetary adjustment to put its debt ratio firmly on a declining path and to bring it back swiftly below the 60 % of GDP reference value in the near future.

In Spain, maintaining the current budgetary stance would allow the deficit to come down in the coming years, partially due to the favourable economic growth conditions. Spain would, however, still need to undertake efforts to accelerate the achievement of the medium-term target of a budget close to balance or in surplus. Indeed, the present cyclical position of the Spanish economy and the sustainability of the present expansion would call for the quick attainment of this objective. Spending needs to be controlled further if the government's aim of reducing the expenditure-to-GDP ratio to just below 42 % of GDP by the year 2000 is to be realised.

In France, further budgetary adjustment efforts should be pursued in 1999 and in particular beyond 1999, in order to respect the obligations of the Stability and Growth Pact. These consolidation efforts are also needed to stabilise the debt ratio and to put it on a downward path. The control of transfers to households and government consumption should contribute to bringing about the deficit reduction.

In Ireland, the government budget is expected to show increasing surpluses in the coming years and the debt ratio is expected to fall below 60 % of GDP in 1998 and to continue declining thereafter. In view of the present strong growth of the economy and the possibility of overheating, any revenues received over and above those anticipated in the 1998 budget should be used to raise the budget surplus. Moreover, a tight fiscal stance is required in Ireland to reduce the risk of overheating. It is noted that the authorities are resolved to propose a budget for 1999 having as its primary objective the continuation of low inflation in Ireland.

After having successfully reduced its government deficit to below the 3 % of GDP reference value in 1997, Italy needs to step up further its budgetary consolidation efforts in order to respect the obligations of the Stability and Growth Pact. In order to secure a fast reduction in the debt ratio, it is important to ensure that high levels of primary surplus of 5,5 % of GDP should be kept, over the medium term as envisaged in the three-year plan approved by the Italian Parliament. This, reinforced by privatisation revenues, should secure a continued decline in the debt ratio.

Luxembourg is expected to keep a budget surplus in the coming years, while its debt ratio will remain at a very low level.

The Netherlands must not allow its present budgetary position to deteriorate. Given the favourable economic growth conditions expected in the coming years, the deficit should be brought down further in order to respect the obligations of the Stability and Growth Pact. The budgetary stance should therefore not be relaxed and the government deficit should not be allowed to start increasing again. Budgetary adjustment should be maintained to ensure a further continuous decline in the debt ratio.

Austria should continue its consolidation efforts in the coming years in order to achieve the target of a budgetary position close to balance or in surplus. Austria needs to exert a tight budget control and should obviate additional pressures on the budget. Due to the recent reform of family taxation, which originated from a ruling of the Constitutional Court, and within the context of the envisaged tax reform, substantial additional budgetary consolidation efforts will be required. It is also recalled that the debt ratio has to be kept on a downward path.

Portugal should seize the opportunity presented by the favourable economic growth conditions in the coming years to improve its budgetary position further in order to respect the obligations under the Stability and Growth Pact. This would also help to prevent any risk of overheating. Budgetary adjustment should increasingly focus on primary expenditure. The debt ratio is expected to fall to 60 per cent of GDP in 1998 and to continue declining in the coming years.

In Finland, the government budget is expected to turn into surplus in 1998 and increasing surpluses are aimed for in the coming years. Finland plans to introduce an income tax reduction in 1999. This measure should be implemented in such a way that the process of further budgetary adjustment is continued.

(ii) Member States not adopting the euro as of January 1999

Denmark is expected to tighten its budgetary stance further and to increase its budget surpluses in the coming years. Tax revenues will remain buoyant, while government investment will be reduced further. Given the increasing budget surpluses the debt ratio is expected to fall below 60 % of GDP in 1998 and to continue declining in the coming years.

Greece has made substantial progress in reducing the large imbalances in its public finances over recent years. Its deficit declined to 4,0 % of GDP in 1997 and is projected to decline to below the Treaty reference value in 1998, while the government debt ratio, after remaining practically stable since 1993, started to decline in 1997. Greece should continue its budgetary consolidation efforts, notably through the rigorous implementation of the measures announced by the government when the drachma joined the ERM, in order to secure its smooth and orderly participation and to realise the government's intention to join the euro area by 2001. These measures include a further reduction in primary expenditure, extended privatisation plans, the extensive rationalisation of the public sector, and the reform of the social security system in the medium term.

In Sweden the government budget is expected to turn into surplus in 1998 and increasing surpluses are expected thereafter. Sweden is aiming for a budget surplus of 2 % of GDP over the cycle. Government expenditure should continue to be controlled tightly.

In the United Kingdom, the budget is projected to reach a position that is close to balance by the end of the decade. To achieve this position, the United Kingdom should rigorously implement the announced budgetary measures. Government expenditure should continue to be controlled tightly. The conduct of budgetary policy in the United Kingdom should also take into account the need to bring about the envisaged overall stability conditions for the UK economy.

6. WAGE DEVELOPMENTS

The evolution of aggregate wages and wage differentials has substantial implications for inflation, growth, employment and the employment-content of growth. In EMU, with the single monetary regime, the link between wages and employment will become more evident and stringent. On the other hand, the credible and stability-oriented macroeconomic framework will foster adequate wage behaviour.

Wage setting will remain the responsibility of the social partners at the national, regional, sectoral or even at a more decentralised level following their respective traditions. As underlined in the Amsterdam resolution on growth and employment, the social partners are responsible for reconciling high employment with appropriate wage settlements and for setting up a suitable institutional framework for the wage formation process.

For wage developments to contribute to an employment-friendly policy mix, the social partners should continue to pursue a responsible policy course and conclude wage agreements in Member States in line with the following general rules:

(i) aggregate nominal wage increases must be consistent with price stability. Wage increases in the whole euro area that are incompatible with price stability will inevitably lead to a tightening of monetary conditions in the euro zone, with adverse effects on growth and employment. Excessive nominal wage increases in a country or region will not necessarily exert a significant impact on inflation in the entire monetary union but, through their effect on unit labour costs, they will worsen competitiveness and employment conditions in this country or region;

(ii) real wage increases with respect to labour productivity growth should take into account the need to strengthen, where necessary, and subsequently maintain, the profitability of capacity-enhancing and employment-creating investment. This implies that in countries where overall labour productivity growth is slowing down, the scope for real wage increases will be reduced. More specifically, a reduction in working time should not lead to an increase in real unit labour costs. For improved profitability to result in higher investment in the Community, it is essential to forge an investment-supportive environment in terms of demand developments, labour market conditions, taxation and the regulatory framework;

(iii) wage agreements should better take into account differentials in productivity levels according to qualifications, skills and geographical areas. In this context, and where appropriate, entry wage costs for the young, low-skilled or long-term unemployed should be such as to enhance their employability; the beneficial effects of lower entry wage costs could be enhanced further by measures to promote the adaptability of the labour force;

(iv) 'wage imitation effects` need to be avoided, implying that labour cost differences between Member States should continue to reflect discrepancies in labour productivity. Due to the existence of a single currency, differences in wage levels between Member States will become more transparent. This may lead to a certain increase in labour mobility but may also give rise to wage claims in lower-wage countries to close the gap with higher-wage countries. An increase in wages faster than warranted by productivity levels in a country would lead to a deterioration in competitiveness and investment profitability and therefore to reduced attractiveness as a production location. The country's trade performance would suffer, investment would be deterred and unemployment would increase.

Compliance with these requirements does not imply that wage developments should be uniform across the euro-area. There are likely to be differences in productivity growth and thus in the available room for real wage developments. Moreover, differences in labour market situations and economic conditions need to be taken into account. In EMU, wage adjustment will need to play a more important role in the adjustment to changing economic circumstances, especially in the case of country-specific disturbances, thereby requiring a higher degree of adaptability in the wage formation process.

Since, in general, the social partners are responsible for achieving wage developments compatible with the achievement and maintenance of high employment, thereby playing an important role in achieving an appropriate macroeconomic policy mix, it is essential to strengthen the social dialogue at all the appropriate levels. At the national level, governments may have to take a stronger interest in fostering dialogue and in promoting understanding of the policy strategy developed in the broad economic policy guidelines. At the Community level, the Commission will continue to develop the social dialogue, notably on macroeconomic policy issues. Furthermore, in the framework of the strengthened economic policy coordination, there is a need to establish credibility and a climate of confidence between the major policy actors which could be reinforced by a regular dialogue between the social partners on the one hand and the authorities responsible for economic policies on the other.

7. STRUCTURAL POLICIES FOR GROWTH AND EMPLOYMENT

Structural policies have a primary role to play in promoting economic welfare, improving productivity and raising employment levels. Their key role is to help ensure a tension-free macroeconomic growth process, to reinforce the Community's competitiveness, to increase the employment content of growth and to make growth more respectful of the environment. To reach their full effectiveness, structural policies must be coherent with the pursuit of sound macroeconomic policies.

Structural policies are about improving the functioning of markets; where they involve budgetary costs, it is essential that they are kept under control and do not jeopardise the achievement of sound budgetary positions. Their economic benefits also emerge only gradually over time.

Given insufficient progress in the implementation of structural reforms in product, service and, especially, labour markets in most Member States, continued and intensified efforts are required to remove often deeply seated structural deficiencies. Member States' adjustment to country-specific economic disturbances will have to rely to a considerable extent on the flexibility and adaptability of their markets for products, services and factors of production. EMU will also intensify competitive pressures on enterprises because of the elimination of exchange rate changes within the euro zone and of increased price transparency.

7.1. Product, service and capital markets

In order to safeguard and promote competitiveness, employment and living standards in a world of free trade and constant technological change, it is essential that Member States and the Community intensify their efforts to improve the efficiency of product, service and capital markets. These efforts should focus on four major areas:

(i) Reforms to perfect the Single Market

Improvement in the functioning of the Single Market is of paramount importance for a successful EMU. Despite considerable progress, a number of significant problems remain. The legislative framework of the Single Market remains incomplete, mainly due to the lack of full implementation of Community directives at national level. Efforts to reduce the degree of non-implementation of Single Market directives should be pursued forcefully in most Member States as identified by the Single Market scoreboard established by the Commission. Recognising this challenge, the Commission and the Member States agreed an action plan for the Single Market in June 1997 committing the Member States to clear away the most serious remaining legislative gaps by 1 January 1999. Among the areas requiring further action, public procurement and mutual recognition deserve particular attention.

Efforts should now focus on ensuring the prompt implementation of the Action Plan and on monitoring the progress towards an effective Single Market. To this end, the Single Market scoreboard is being developed for regular six-monthly publication. Furthermore, in its conclusions, the Luxembourg European Council stressed both the importance of paying full attention to those national economic developments and policies which may hinder the smooth functioning of the Single Market and the need for policy coordination to aim also at fostering tax reform in order to raise efficiency and to discourage harmful tax competition. In this area, the treatment of tax incentives should be consistent with Community rules for State aids and Member States compliance with principles of fair tax competition should be monitored. This is one of the main tasks of the follow-up group, which was established on 1 December 1997.

The Single Market and overall globalisation exert a strong pressure to improve competitiveness, but the latter is also linked to national or Community policies in the field of research and development and, notably, the information society. To this end, it is essential to implement swiftly those actions programmed in the action plan which promote innovation and a wide diffusion of new technologies. The environment of firms in terms of communications also calls for a strengthening of efforts in infrastructure projects, both in keeping an adequate level of public investment and by searching for joint ventures with the private sector where appropriate. Efforts should also focus on encouraging an enterprise culture and promoting entrepreneurship, a key factor in stimulating growth, employment and competitiveness in the Community.

(ii) Reforms to enhance competition

In the area of competition policy, the Commission has recognised the need to streamline and decentralise anti-trust enforcement in order to enhance its effectiveness and reduce the costs imposed on enterprises. Member States should also make an important contribution towards achieving the objective of a more efficient enforcement of anti-trust rules by revising their laws so that the national competition authorities can apply anti-trust policy effectively. For State aids, there is a need for the Commission to control them strictly and for the Member States to exercise rigorous self-discipline.

(iii) Regulatory reforms

An adequate regulatory framework is a pre-condition for boosting productivity growth and raising the competitiveness of European firms. Governments and the Commission therefore have the responsibility to review existing regulations continuously to assess their appropriateness and to reduce the costs of implementing and monitoring these regulations and to increase their transparency and enforceability. This also holds for environmental legislation and regulation, which should be incentive-based so as to allow economic agents to achieve well-defined environmental objectives in a cost-effective way. As there are still wide disparities in regulatory practices between countries, different benchmarking exercises have been initiated by international bodies to identify the best regulatory practices. Such exercises could lead to a significant improvement in the regulatory framework of enterprises. As regards the Community, the Commission could coordinate such initiatives on the basis of contributions from the Member States.

Administrative regulations and cumbersome procedures tend to weigh especially heavy on small and medium-sized enterprises, particularly during the start-up phase. Therefore, a first area where such benchmarking exercises could be launched is the administrative regulations for the start-up of business. Similarly, identifying and removing any remaining unjustified regulatory barriers to the development of venture capital and new financial products, particularly those that may assist in the financing of small and medium-sized enterprises (SMEs), should be a priority.

Special attention needs also to be paid to job creation at local level in the social economy and new activities linked to the needs not yet satisfied by the market, which have an important spillover effect both in terms of economic activity and social cohesion. To exploit fully the opportunities offered in these areas, a more favourable regulatory and fiscal framework needs to be developed.

(iv) Financial markets

EMU will bring important changes to European financial markets. They will result in large and highly liquid euro markets. It is important that the national authorities take the necessary measures to remove legal and financial obstacles to market integration. As segmentation between Member States' financial markets diminishes in EMU, any inefficiency will become more apparent amid intensified competition between euro-area financial institutions. Moreover, the new euro financial markets are likely to prove attractive to financial institutions from outside Europe. It is essential, therefore, that operators should be fully prepared for EMU if the potential of the new euro financial markets is to be fully realised.

To improve the efficiency of these reforms, they need to be closely monitored and, if appropriate, coordinated at the Community level through a regular multilateral surveillance, thereby complementing the ongoing macroeconomic multilateral surveillance. To ensure steady progress with economic reform, Member States and the Commission should submit short annual reports setting out their policies aimed at making their product, service and capital markets more efficient. These reports will provide a basis for monitoring these reform efforts at the Community level and will provide an input to the broad economic policy guidelines, starting from next year. The Commission will also elaborate an extended scoreboard with indicators of effective market integration, including price differentials, and implementation of Single Market measures.

7.2. Labour markets

A durable reduction in the presently high levels of unemployment and an increase in the employment rate in the Community is possible. It requires however a vigorous and unremitting use of a broad range of mutually reinforcing policies with success often emerging only over the medium to longer term. Macroeconomic policies, in interaction with structural policies, should ensure the realisation of a protracted period of strong, non-inflationary growth supported by capacity-enhancing investment. The required policies in this respect form the essence of the present and previous broad economic policy guidelines. But solving the Community's employment problems will require a simultaneous and comprehensive modernisation of the Community's labour markets with a view to increasing the employment-content of growth and ensuring the employability of the labour force. This second component of the Community's strategy for high employment was developed in the Luxembourg employment guidelines.

The employment guidelines - based on the four pillars of improving employability, developing entrepreneurship, encouraging adaptability of businesses and their employees and promoting equal opportunities - will be implemented via the national action plans (NAPs) for employment. Adapted to the specific national circumstances, these plans must integrate the employment measures in a strategy of sound macroeconomic policy including budgetary consolidation in conformity with the requirements of the Stability and Growth Pact. Furthermore, they must provide a vehicle for action aimed at both reducing mismatches in the labour market and at enhancing the responsiveness of firms to economic change. In this way, the NAPs will serve as an important policy tool directed towards reinforcing the Community's growth and employment potential and as such they will undoubtedly form an important ingredient of future broad economic policy guidelines.

Member States' actions should put the emphasis on a preventive strategy, which focuses on active policies to increase the supply of an adequate, educated and trained labour force. Such active measures need to be combined with efforts to increase incentives to seek and create jobs via a review of the structure and administration of tax and benefit systems.

(i) Active labour market policies

Over a five-year period, Member States must tackle youth unemployment and prevent long-term unemployment by offering every unemployed young person and adult a new start before they reach 6 and 12 months of unemployment respectively. This requires increased efforts for the employment services to perform efficient job searching and job matching services. Such measures should be combined with accompanying measures like training and, where appropriate, wage subsidies and reductions of social charges, especially for the low skilled. It will be important to concentrate the scarce resources of the employment services on those who most need help to find a job.

Long-term unemployment is particularly high in Belgium, Ireland, Italy and Spain, while youth unemployment is high in Finland, France, Greece, Italy and Spain. These Member States would have to make a special effort to respect the guidelines.

(ii) Taxes and social security contributions

For more than 15 years, the increase in the overall tax burden and the structural development of the taxation systems (tax and social security contributions) in the Member States has been unfavourable to employment. As a result of the increase in the overall burden of taxation and social security contributions, a growing wedge has developed between what workers receive and what firms pay. This larger wedge hampers economic efficiency, growth and, eventually, job creation. Its effects are especially harmful at the low end of the wage scale where it leads to the pricing-out of the market for low-skilled, low-pay jobs and an increase in 'black market` activities. In view of these harmful effects, it is important for the Member States to take the necessary action to reverse this trend, for example through reform of social security and taxation systems. Such measures should, however, not jeopardise budgetary consolidation. The employment effect of such measures would be increased if supported by active labour market measures in education, apprenticeship schemes, vocational training and retraining. In order to make the taxation system more employment-friendly, Member States should also examine, if appropriate, the desirability of introducing a tax on energy or on pollutant emissions or any other tax measure. Any such changes should take into account the impact on competition and any additional burdens on individual and corporate tax payers.

(iii) Welfare reform

Welfare systems need to be reformed with the aim of increasing incentives, opportunities and responsibilities to take up jobs and, more generally, improving the functioning of the labour market. This means moving from passive income maintenance systems to welfare support through work. However, in some countries, taking up a job compared to receiving benefits offers little advantage, especially for low-income earners experiencing long unemployment spells: combined benefits for unemployment, housing and childcare can in some circumstances result in net replacement rates of over 80 % in Belgium, Denmark, Finland, France, Germany, the Netherlands, Sweden and the United Kingdom.

Making work pay requires a double strategy. Firstly, implementing reforms which boost take home pay. The United Kingdom 'welfare-to-work` reforms open an interesting policy avenue. Secondly, acting on the benefit side, by adjusting carefully eligibility criteria, job search and training requirements and, in some cases, revising the time profile of benefits. Many countries have had positive results in this field. However, the interaction between different benefit systems should be reviewed to ensure that it would always pay to take up a job compared to receiving benefits. More generally, benefit and tax systems should be viewed in relation to labour market regulations. Member States, especially those combining relatively generous benefit systems and high employment protection, should review their relevant legislation with a view to reconciling security and flexibility while making their benefit systems more efficient.

(iv) Working time arrangements

It is important that where there are arrangements to reduce working time, they should be implemented in ways which do not undermine adaptability and which do not result in the reduction of labour supply and output. Where appropriate, employment could be favoured by a greater flexibility of working time at the microeconomic level. In this context, some initiatives suggest that agreements combining a reduction of working time with job creation could entail positive results, provided unit labour costs do not increase. Another approach for increasing the labour content of growth would be to encourage the maximum use of voluntary, part-time and new forms of employment. The possibilities in that field are obviously very different in Member States given the very large differences in the proportion of part-time workers that one may observe at present. In these areas, the exchange, at Community level, of experiences and best practices needs to be encouraged.

Done at Brussels, 6 July 1998.

For the Council

The President

R. EDLINGER