COMMISSION OF THE EUROPEAN COMMUNITIES 
COM (89)497 final 
Brussels, 19 October 1989 
FACING THE CHALLENGES OF THE EARLY 1990s 
Annual economic report 1989-1990 
(presented by the Commission) 
COM (89) 497 
FACING THE CHALLENGES OF THE EARLY 1990s 
Annual economic report 1969-1990 
The Commission's proposed "Annual Economic Report1* Is submitted to 
Community Institutions In accordance with the Council's 1974 Decision 
for attainment of a high degree of convergence of economic policies of 
Member States. 
FACING THE CHALLENGES OF THE EARLY 1990s 
Annual economic report 1989-1990 
Contents: 
Introduction Page 1 
I. The short-term outlook 
II. A much-Improved economy 
III. Improving convergence towards stability 10 
IV. To ensure favourable prospects for the 1990s 
IV.1 Common polIcies 
IV.2 Co-ordination of national macroeconomIc policies 17 
20 
COM (89) 497 
page 1 
"FACING THE CHALLENGES OF THE EARLY 1990s" 
INTRODUCTION 
The state of the Community economy at the outset of the new decade is 
quite promising. Important steps are being taken towards economic, 
financial, monetary and social Integration. Fundamental improvements 
which have been achieved during the 1980s are resulting in a 
significantly better growth and employment performance. 
Unemployment is still very high, however, and levels of GDP per head 
are still very different throughout the Community. In addition, there 
is a risk that the persistence or indeed the worsening of certain 
negative features which have characterized the Community economy over 
recent years - inflation, current account imbalances and budgetary 
disequlIibria - could endanger the continuation of the present 
expansion and of further progress towards monetary stability In the 
Community. 
Economic policy in the Community faces two major challenges: 
I ) to strengthen further the determinants of growth, 
II) to Improve convergence towards stability. 
The first arises out of the need to reduce unemployment further and to 
ensure that the less prosperous regions continue catching-up. 
The second results from a double necessity; on the one hand, that of 
preventing a resurgence of inflationary expectations from endangering 
the continuation of growth; on the other, that of improving the 
conditions for exchange rate stability - and for the success of stage 
one of EMU - by reducing divergences in inflation, in current account 
balances and In budgetary positions. 
COM (89) 497 
page 2 
THE SHORT-TERM OUTLOOK 
In the Community, economic growth is continuing strongly and presents, 
In most countries, the same healthy features of the past two years. 
Investment and exports remain the most dynamic components of demand 
while the determinants of growth continue to improve, even if more 
slowly than in 1988. Measures aimed at preventing overheating or at 
curbing excessive current account deficits, however, are dampening 
somewhat demand and output growth In some countries. 
Table 1 : 
THE EC ECONOMY - USE AND SUPPLY OF GOOOS AND SERVICES 
(annual percentage change) 
Private consumption 
Government consumption 
Gross fixed capital formation 
Domestic demand (Including stocks) 
Exports of goods and services * 
Total demand 
Imports of goods and services * 
GROSS DOMESTIC PRODUCT 
* Extro-CooMun 1 ty trod* only Average 
1982-84 
1.2 
1.6 
- 0.1 
1.3 
2.6 
1.4 
0.4 
1.6 Average 
1985-87 
3.4 
2.2 
3.6 
3.4 
1.8 
3.2 
7.9 
2.6 1988 
3.8 
2.0 
8.4 
4.8 
4.9 
4.8 
11.9 
3.8 
•• •• 
1989 
3 
1 1/2 
7 
3 3/4 
7 1/4 
4 1/4 
9 1/2 
3 1/2 
Foroeooi *• 
1990 
3 
1 3/4 
4 3/4 
3 
6 
3 1/4 
5 1/4 
3 
to 
Real output will expand in 1990 by about 3 X. This Is lower than the 
3.8 X achieved In 1988 and the 3 1/2 X likely to be recorded In 1989, 
but It Is still higher than any of the first six years of the present 
period of expansion. Investment also Is not expected to Increase as 
fast as In 1988 and 1989 In response to the deceleration of demand, to 
COM (89) 497 
page 3 
the tightening of policies and to the coming on stream of the 
capacities created over recent years. It should, however, still grow 
at an average rate of almost 5 X. Exports of goods and services to the 
rest of the world should continue to grow strongly (more than 6 X in 
real terms), In line with the expected increase In world trade. 
Inflation (private consumption deflator) has accelerated between mid-
1988 and mid-1989 under the combined Impact of higher import prices, 
higher wages In some countries and higher taxes and public service 
charges in others. Thanks to a swift reaction by monetary 
policy-makers and to a softening of import prices in the course of 
1989, this trend now appears to have been nalted. In 1990, average 
Inflation In the Community could be reduced to about 4 1/2 X from 5 X 
In 1989. This compares with a rate of just 3.6 X In 1988. The average 
masks the fact that rates within the Community differ widely, with 
certain Member States still experiencing double digit Inflation. 
Some of the best news keeps coming from the labour market. After the 
record increases of 1988 and 1989, another 1 fc million Jobs should be 
added in 19901. As a result, unemployment in the Community will 
continue to decrease and might fail below 9 X, a level still much 
higher than that prevailing at the beginning of the 1980s2. 
Also reassuring is the news on the current account of the Community 
which should remain In broad equilibrium. The divergence In the 
external positions of the Member States, however, Is expected to go on 
increasing. 
1 The "employment in Europe" Report published in June 1989 gives additional 
information on employment trends in the Community. 
2 Unemployed according to the EC labour force survey, which provides comparable 
unemployment rates for the member countries. The corresponding figure using the 
registered unemployment data which were used in previous Annual Economic Reports 
would be about 10 X. 
COM (89) 497 
page 4 
The outlook for the rest of the OECD is also positive and broadly 
similar to that for the Community, though the deceleration of growth is 
likely to be more pronounced. Output is forecast to expand next year 
by just over 2 Yz % against 3 He X In 1989 and 4.6 X in 1988. This 
reflects essentially a marked slowdown In the USA and Canada (about 2 X 
in 1990 in both countries against 4.4 X and S X respectively in 1988). 
Elsewhere growth should continue more or less at the same rate as in 
1989 and with the same regional differences. The Asian Newly 
Industrialized Economies should again experience growth rates of about 
6 X, significantly faster than In the OPEC and in Eastern Europe. 
Growth In the most indebted LDCs continues to be seriously constrained 
by the debt burden. As for the payments imbalances of the world's 
largest economies, the US deficit and the Japanese surplus have been 
reduced somewhat In 1989, but they are forecast to increase again in 
1990. 
COM (89) 497 
page 5 
I I. A MUCH IMPROVED ECONOMY 
The 1989 performance confirms that the Community economy is now 
functioning distinctly better than during most of the previous two 
decades. It is useful to examine what has taken place In two related 
areas: the expansion of Investment and the creation of new Jobs. The 
results achieved are Impressive, but not yet sufficient to ensure the 
reduction of unemployment to more acceptable levels. 
Table 2 : 
THE IMPROVEMENT OF THE EC ECONOMY THROUGH THE 1980s 
(annual percentage change, 
unless otherwise indicated) 
GDP growth 
Employment 
Inflation (private consump. deflator) 
Investment 
- of which equipment 
Capital stock 
Real unit labour costs (1961-73-100) 
Profitability (1961-73-100) Average 
1982-84 
1.6 
- 0.5 
8.7 
- 0.1 
1.1 
2.3 
101.7 
68.0 Average 
1985-87 
2.6 
0.8 
4.4 
3.6 
6.9 
2.3 
98.3 
78.0 1988 
3.8 
1.6 
3.6 
8.4 
10.6 
2.7 
96.8 
84.1 * 
1989 
3 1/2 
1 1/2 
4 3/4 
7 
9 1/4 
3 
96.1 
86.2 • 
1990 
3 
1 
4 1/2 
4 3/4 
6 
3 
95.7 
87.6 
* Forecasts 
Growth has become Investment-ted ... 
In the second half of the 1980s the Community moved to investment-led 
growth. The amount of investment In equipment by Community firms In 
1989 will exceed the 1986 figure by one third. This impressive 
investment performance became possible because, in the Community as a 
16.10.89 
COM (89) 497 
page 6 
Chart 1 : Investment and 
some of its determinants whole, the profitability of the 
capital stock has recovered steadily 
since 1981. The moderate Increases 
in real wages compared with 
productivity growth have been the 
major reason for the recovery of the 
rate of return on productive capital, 
but declining energy prices and a 
recovering capital productivity have 
also helped. When, In the second 
half of the 1980s, final demand began 
to strengthen and Community 
policies- the Internal market 
programme - began delivering 
additional impulses, firms were In a 
position to exploit fully the 
opportunities available. 
Among the less prosperous countries, 
Spain, Portugal and, more recently, 
Ireland have experienced a rapid 
growth of Investment. This has been 
made possible by a substantial wage 
adjustment and the consequent 
Increase In profitability. The 
resulting significant Increase In the 
share of Investment In GDP (financed 
largely by Imports of capital In 
Spain and Portugal) has contributed 
to faster growth of GDP per head than In the rest of the Community. In 
the case of Spain and Portugal, joining the Community has provided an 
additional and substant la I Impulse. Fundamental structural adjustments lOOr 
* -
m 
m 
m 
fi '• 
TO i-
« 
to — rannniiTY 
• tmavt iffuranot 
• i • » t • i i • i • * i i i i i i i—i_i 
n * 
COM (89) 497 
page 7 
are still required in Greece, if it is to catch up on the rest of the 
Community. In particular, the necessary Increase in Investment will 
require a substantial adjustment of real unit labour costs. 
The sustainablIity of the investment performance in the Community has 
also been facilitated by the simultaneous rise in the national savings 
ratio. This has permitted investment to accelerate while overall 
external equilibrium has been maintained. The rise in the national 
savings ratio has been largely due to a reduction in government 
dissaving: In 1989 government saving has become positive again after 
declining to - 1.3 X of GDP in 1981 from + 5 X in 1970. 
Despite the remarkable improvement over the 1980s, however, the 
profitability of fixed capital and the share of investment in GDP are 
still below the levels of the quasi-full employment 1960s. 
... and more employment-creating. 
With faster economic growth, job creation has speeded up. At the same 
time the employment content of growth has increased substantially. In 
the 1960s, annual GDP growth of 4.8 X barely created 0.3 X of new 
employment. Today, a GDP growth trend of slightly above 3 X Is 
accompanied by net annual employment expansion of more than 1 X. This 
result is due to various factors : the change in the trend of relative 
factor costs, the greater flexibility of working practices, the 
reduction of working hours per person employed, the extension of 
part-time employment, the steady expansion of the service sector and 
measures to improve the adaptability of the labour market. 
Notwithstanding the favourable employment trend, unemployment has 
declined only slowly. In 1990, the Community average will still be 
about 9 X with significant differences among Member States. Youth 
COM (89) 497 
page 8 
unemployment Is still particularly high, although it has improved 
considerably In recent years. The increase in long-term unemployment 
appears to have been halted. With employment now increasing rapidly, a 
more determined use of specific measures (vocational education and 
training) would be most effective in reducing this type of 
unemployment. 
... but more Is necessary. 
A significant reduction In unemployment over an acceptable time span 
requires yearly Increases In employment of at least 1 fc X. On present 
trends, such increases could be attained with rates of economic growth 
of about 3 fc X. This was the pattern aimed at in the "Cooperative 
Growth Strategy for more Employment1*. Developments In 1988 and 1989 
have corresponded almost exactly to such a pattern. To repeat fully 
these very good performances In the immediate future will be difficult, 
however, because of the need to curb the growing macroeconomic 
disequiIibrla before they begin to affect adversely the determinants of 
growth. 
Thus, a further Improvement in the determinants of growth and In the 
functioning of the economy is needed to place the Community economy on 
the sustainable medium-term growth path that can produce the required 
employment increases and make possible a lasting catching up by the 
less prosperous countries. To this end the Community has since 1985 
developed a coherent policy approach. 
The completion of the internal market, which is creating a new 
dynamism, is becoming an important engine of growth and a greater 
potential. To realize fully this potential, growth and employment 
policies along the lines indicated in the Annual Economic Reports of 
recent years must be continued In all Member States and especially in 
those where GDP per head Is lowest and the long-term growth potential 
COM (89) 497 
page 9 
Is highest; In these countries Community aid and regional and social 
policies will support the catching up process. The full Implementation 
throughout the Community of the social dimension principles would 
considerably strengthen Its economic and social cohesion. Such a 
comprehensive policy approach would facilitate progress towards EMU. 
The stronger and more balanced growth that could become possible in the 
next decade must be made compatible with increased environmental 
protection. The extra resources generated by stronger growth could 
moreover provide the means for an active policy to tackle the 
environmental problems. 
COM (89) 497 
page 10 
III. ^PROVING CONVERGENCE TOnfVROS STABILITY 
The present favourable trends (faster growth, higher employment and the 
real convergence resulting from the catching up process) can be 
maintained only if Inflationary expectations are controlled and balance 
of payments and budgetary divergences are reduced. In addition, the 
first stage of Economic and Monetary Union, starting next year, will 
require greater nominal convergence. This means convergence towards 
the best results In terms of price and cost developments, which Is 
possible only if current account and budgetary balances are compatible 
with internai and external stability. 
Convergence of economic performances In the Community still needs to be 
substantially Improved even If It Is now much better than at the 
beginning of the 1980s. The narrow band countries of the EMS1 form a 
group in which the present degree of price convergence and monetary 
cohesion, despite the recent acceleration of inflation, Is broadly 
satisfactory. In these countries, the priority during the first stage 
of EMU should be to win back the ground lost and subsequently to 
maintain this result. In the other countries, economic convergence 
towards the better performing Member States still appears a distant 
objective, and determined efforts will be required. In these countries 
inflation is still very high and large budget deficits and/or high 
nominal wage Increases are Interfering with stability-oriented monetary 
po11cles. 
Resume progress towards price stability 
Between mid-1988 and m Id-1989, the Community lost some of the ground It 
had won during the 1980s In the fight against Inflation. It Is 
Important that this loss be made good before Inflationary expectations 
1 Belgian. Denmark, Frone*, G*nnany, Ireland. Lux«*bourg. Tb» N«th«rlands. 
COM (89) 497 
page 11 
Chart 2 : 
EC price convergence 
EMS WWtC* BAND COUNTK1ES 
20r 
L Sw-^^ build up once more. The sooner this Is 
done, the lower wl 11 be the price paid 
In terms of lost growth and employment. 
The Community has shown that It can 
successfully reduce Inflation even when 
the external environment seems to be 
unfavourable: the halving of Inflation 
between 1980 (13 X) and 1985 (6 X) 
occurred despite depreciating European 
currencies and consequently higher 
Import prices. 
It Is particularly urgent to reduce 
Inflation where It Is widely out of 
line with the rest of the Community. 
In Portugal, Greece and, to a lesser 
extent, In the United Kingdom, Spain 
and Italy Inflation Is still too high 
for the long term objective of stable 
exchange rates. 
so 62 64 06 06 
TI0N DEFLATOR 90 
Monetary policies are responding, but 
the other policies are not contributing 
enough. The October 1989 increase In 
official lending rates In many Community countries underlines the 
dilemma monetary policy faces In a situation where developments In 
other policy areas are not adequate. 
If the convergence of costs and prices towards stability is not 
achieved quickly enough, the cumulative losses of competitiveness and 
the resulting current account dlsequlIIbrla will continue to Increase. 
This would lead to either a widening of Interest rate differentials or 
exchange rate pressures. The former would be painful In terms of 
foregone Investment and growth; the latter would create risks for 
exchange rate stability. 
COM (89) 497 
page 12 
In the United Kingdom the economy Is undergoing an adjustment aimed at 
curbing Inflation which should also reduce the country's external 
deficit. There are signs that in Spain and Italy the conflict between 
the need to keep inflation under control via monetary policy and wage 
increases which are too high is already taking Its toll on the current 
account balance. 
Achieving a better pattern of current account positions 
The growing financial and monetary Integration of the Community makes 
it possible to finance higher current account imbalances than in the 
past. Indeed, one would expect that the movement of capital towards 
the most productive uses would result in an intra-Communlty pattern of 
substantial current account Imbalances. To the extent that the 
surpluses find their counterpart in the deficit of the less favoured 
countries, the imbalances can be seen as contributing to the catch Ing-
up process of the latter where there Is a need for Increasing 
Investment. 
The sum of the current account deficits of Spain, Portugal and Greece 
(Ireland Is experiencing a surplus)In 1989, however, is equivalent to 
about 1 \k X of the GDP of Germany, I. e. the combined deficits of these 
countries "explain" less than one quarter of the German surplus. 
Therefore, the present level of the dlsequlIibrla goes beyond what 
could be Justified by these considerations. Excessive imbalances, via 
the Inevitable real adjustment, could become a danger for the 
continuation of growth, Investment and Job creation. 
The exceptionally high level of the German eurplus, which may reach In 
1990 a level approaching 6 X of GNP, constitutes a danger for exchange 
rate stability In the Community. In addition, it produces unwelcome 
COM (89) 497 
page 13 
structural distortions and threatens economic stability within Germany 
Itself. Long-term capital flows have until recently easily offset this 
surplus, but the situation has now become more fragile. 
Chert 3 : 
Current account balances 
80 
70 
60 
50 
40 
Mr 
30 
10 
0 
'10 
-20r 
"30-
"46 
50 
"60 
-70 1 
1 | 1 
— 
• WW 
DEFICIT COUNTRIES IRL 
SUP,US COUNTRIES 
D 
B • • » 
i 
1 
! 1 
1 
i 
i 
i i— •• The counterpart of the German 
surplus Is found largely within 
the Community: in the United 
Kingdom, Italy, Greece, Spain and 
Portugal, where domestic demand 
has grown faster than supply for 
some time. The below-potential 
growth expected In the United 
Kingdom next year should help to 
reduce somewhat the current 
account deficit from Its 1989 
level. An important negative 
element for the overall 
competitiveness of the UK economy 
is the too rapid Increase - about 
8 X - in unit labour costs which, 
for the whole economy, are rising 
at a rate double the average of 
the rest of the Community. In 
addition, the 
longer it takes to reduce wage Increases, the greater will be the 
effect on profits and the risk of thwarting future Investment, growth 
and employment. 
The deficit of Greece Is worrying both for the speed of Its 
deterioration and for Its origin, which lies essentially In a lack 
of competitiveness of the exporting sectors. This results from wage 
Increases which are too high relative to productivity and to excessive 
public finance deficits. The deficits of Spain and Portugal, to the 
COM (89) 497 
page 14 
extent that they are due to a rapid Increase In Imports of investment 
goods and are financed by long-term capital, are in line with the 
development pattern expected in countries that are catching-up. They 
have reached a point, however, where additional deterioration would 
force the authorities to intervene further to correct them. If the 
deficit is not reduced by raising exports or lowering imports of 
consumption goods, the continued expansion of investment that these 
countries need might be impeded. 
Denmark is already experiencing a period of slow growth necessary to 
bring the current account to a position which will make the substantial 
external debt accumulated over many years more manageable. A 
continuation of the wage moderation of the last few years Is necessary 
to Improve the price competitiveness of Danish exports. 
Budgetary policies should contribute more to growth and stability 
In many countries budgetary policies are not helping sufficiently to 
create conditions favourable to economic growth. Budget deficits and 
public debt to GDP ratios are still very high and increasing in Greece, 
Italy and Portugal. In Belgium and, to a lesser extent, in the 
Netherlands budget consolidation needs to be continued. These 
countries should exploit better the present strength of economic growth 
to reduce their budgetary imbalances. 
The situation Is particularly serious In Greece, Italy and Portugal. 
In these countries excessive public expenditure is one of the main 
explanations of the still high levels of inflation and of the balance 
of payments problems. 
The stronger co-ordination in the Community that will be required for 
the first stage of economic and monetary union could help reorient 
COM (89) 497 
page 15 
budgetary policies towards supporting growth and contributing to 
greater nominal convergence. Such co-ordination Is also necessary to 
take into account the Implications of policies defined at the Community 
level. Since they have to match Community funding, the recipient 
countries must free the resources needed to keep pace with rapidly 
increasing payments from the structural funos. Strengthened 
co-ordination cou id evolve around two complementary approaches. 
Cha^t 4 : Trend of gross public debt, as X of GDP 
a) Countries with public debt below 
or very close to the Community 
average in 1988 b) Countries with high public 
debt in 1988 
First, budgetary policy has to be conducted In a medium-term 
perspective and must create conditions favourable to growth as well as 
facilitating the task of stability-oriented monetary policy. This 
Imp!les the application of four medium-term rules of behaviour leading 
COM (89) 497 
page 16 
to sound public finances and on which a certain consensus has emerged 
in the Community : 
- the non-monetary financing of public deficits, 
- the stabilization and reduction of public debt, 
- the avoidance of the negative effects on economic conditions of an 
increase in public expenditure and 
- the search for an expenditure and receipts structure more favourable 
to supply conditions. 
Second, in the framework of the overall economic policy mix, budgetary 
policy must contribute, as far as possible, to the reduction of 
existing or to the avoidance of future fundamental disequiIibria which 
could eventually lead to exchange rate changes and create difficulties 
for the process of EMU. 
COM (89) 497 
page 17 
IV. ENSURE FAVOURABLE PROSPECTS FOR THE 1990s 
The two economic policy challenges facing the Community - strengthening 
further the determinants of growth and improving convergence towards 
stab!Iity - require a determined effort. 
The reinforcement of the determinants of growth requires above all that 
the structural policies which have been Implemented over the last 
decade must continue to be applied. In this area there Is a marked 
complementarity between national and Community policies. Efforts 
undertaken at the national level are receiving and will continue to 
receive considerable support from the rapid Implementation of the 
Community policies. 
Control of the growing macroeconomlc dlsequlIibrla is essentially, but 
not uniquely, a task for macroeconomlc policies implemented by each 
individual Member State. Their effectiveness will be greatly enhanced 
by strengthened co-ordination at the Community level. 
IV.1 Common po11cIes 
The suppression of all frontiers for products and factors of production 
aimed at in the White Paper and the broader Community policies are 
increasingly being integrated with a set of structural reforms at the 
level of the Member States. The opening of frontiers will increase 
competition and the ability to achieve economic gains through greater 
efficiency and specialization In production and increases in consumer 
choice. This process will result In an improvement In productivity 
which wouid allow Investment, output and employment to expand 
substantially without giving rise to Inflationary pressures. 
COM (89) 497 
page 18 
The Single European Act embodies the political decision to develop the 
different policy functions (Internal market, competition policy, R&D 
and technology, social policy, structural funds and cohesion, 
environmental policy etc.) in an integrated manner. The sum of these 
national and Community actions will secure a lasting improvement in the 
macroeconomlc performance. 
The completion of the Internal market Is proceeding rapidly. High 
expectations have been created which must not be disappointed. The 
Commission has drafted more than 90 X of the planned proposals and by 
the end of 1989 almost all will have been tabled at the Council. 
In finally approving some 130 directives and regulations and agreeing 
on 15 partial approvals or common positions, the Council has completed 
more than 50 X of the programme. Governments must step up the 
introduction of these decisions into their national legislation if the 
decision-making process is not to be perceived as losing momentum. 
Otherwise the expectations created would be disappointed and this would 
adversely affect investment, growth and employment. 
The 1992 programme Is being bolstered and in some cases anticipated by 
measures taken at national level (see box on page 19). This interacts 
with structural adjustment measures which Member States have been 
implementing for years. This process of complex structural reforms is 
self reinforcing as competition is not limited to the market place, but 
also extends to the services provided by governments and the 
environment offered to firms. 
There Is growing evidence (the latest comes from an ad hoc survey 
organized by the Commission) to show that firms expect the completion 
of the internal market to have profound consequences for their activity 
In the run up to 1992 and beyond. Firms are already incorporating new 
COM (89) 497 
page 19 
market-enlarging horizons Into their business strategies, and a 
sizeable share of the faster rate of growth of investment may be 
attributed to their adaptation to an Increasingly competitive 
environment. 
The dynamism resulting from the progressive opening of the internal 
market implies an acceleration of the normal economic adjustment 
process. This could be slowed down, or Indeed prevented from taking 
place, by various measures and practices aimed either at directly 
reducing competition or at avoiding its effects (agreements sharing 
NATIONAL STRUCTURAL ADJUSTMENT INITIATIVES 
TAX CHANGES 
Tax reforas have been adopted or announced by ail Meaber States. All involve 
simplifying the existing systea and aost entail reducing personal and corporate 
taxation. 
Several Meaber States have taken steps towards harmonisation. France Is progressively 
lowering VAT, Italy has raised Its lowest rates, and the Netherlands has reduced the 
higher rate and abandoned plans to raise the lower rates. Increases in excise duties 
have been Implemented or are planned in Belgiumand Italy and reductions are envisaged 
in Denmark. France's 1990 budget includes measures to reduce the incidence of tax on 
investment income, bringing it nearer to the EC average. 
REGULATORY REFORM 
Goods and Services : Administered prices have been eliminated in France and are being 
phased out in those countries that still retain them (Greece, Spain, Portugal). 
In Germany the federal government has adopted a law to restructure the post office 
which will break up the federal post's monopoly In the market for telecommunication 
hardware for final users. 
Financial markets : In Greece and Portugal the process of shifting away from interest 
rates administered by the central bank and towards market-determined rates is underway. 
Spain is proceeding with modernisation of financial markets. In Belgium and Ireland 
changes are envisaged that will bring the regulatory framework andd the structure of 
markets and Institutions more into line with those of other European financial centres. 
Exchange controls : In France and Italy the final stages of removing controls will be 
completed by July 1990. Ireland substantially relaxed controls at the end of 1988. 
Greece, Spain and Portugal, whose deadlines for liberalising capital movements are 
later than for the rest of the Community, are all moving to dismantle exchange controls 
COM (89) 497 
page 20 
markets among companies, increased state subsidies, etc.). To achieve 
the alms of the Internal market programme it is Important that an 
effective couper/1Ion pot Icy accompanies the progressive removal of 
barr iers. 
The accelerated adjustment, however, might be particularly painful and 
involve job losses In certain sensitive sectors. At the macroeconomic 
level, the positive employment effects of the completion of the 
internal market might be delayed. The stronger is overall economic 
growth, however, the greater are the chances that the Job losses in 
certain sectors will be more than offset by simultaneous job creation 
elsewhere. Nevertheless, sectoral adjustments will have to be closely 
monitored and, if necessary, their social impact will have to be 
cushioned. 
IV.2 Co-ordination of national macroeconomic policies 
The creation of the internal market is increasing the economic 
interdependence between the Member States and progressively reducing 
the scope for independent policy action. The liberalization of capital 
movement and the approximation of indirect taxes, to mention Just two 
of the internal market measures, will exert a profound influence on 
policy-making at the national level. 
The greater convergence towards stability needed to ensure the 
continuation of growth and progress towards Economic and Monetary Union 
requires a determined action from individual Member states and a more 
effective coordination between them. Coordination of economic policies 
within the Community has never been an easy task. Since the early 
1980s, however, progress has been made in this area as well and 
coordination has become much more effective. 
COM (89) 497 
page 21 
Economic policy co-ordination cannot be successfully achieved through a 
centralised decision making procedure with obligations imposed on 
Member States. Instead a system of multilateral surveillance should be 
developed in which objectives are progressively set in common and 
Member States recognise mutual commitments with consequences for their 
own po11c i es. 
The recent increase in official lending rates In many Community 
countries Is a clear example of the level of economic and monetary 
interdependence, not only between EMS narrow band Member States, but 
throughout the Community. In a learnlng-by-doing process. Member 
States should reach a broad consensus on the fundamental policy 
approach to achieve the main objectives of economic and monetary policy 
indicated in the Treaty such as growth, stability and a high level of 
employment. 
[ : I . ïl 
COM (89) 497 
(I) 
MAIN ECONOMIC INDICATORS 1986-1990 
Community, USA and Japan 
(a) GOP at constant pr 
(% changs on prsvi 
B 
OK 
0 
GR 
E 
F 
IRL 
I 
L 
NL 
P 
UK 
EC 
USA 
JAP 1986 
1.9 
3.3 
2.3 
1.2 
3.3 
2.1 
-0.4 
2.9 
4.7 
2.1 
4.3 
3.1 
2.6 
3.0 
2.4 1987 
2.0 
-1.0 
1.9 
-0.4 
5.5 
2.2 
4.1 
3.1 
2.5 
1.3 
4.7 
3.8 
2.8 
3.6 
4.3 icss 
ous ysa 
1988 
4.0 
-0.4 
3.7 
4.0 
5.0 
3.4 
3.7 
3.» 
5.2 
2.8 
3.9 
4.2 
3.8 
4.4 
5.8 r1) 
1989* 
4 1/4 
1 3/4 
3 3/4 
2 1/2 
4 3/4 
3 1/4 
5 
3 1/2 
3 3/4 
3 3/4 
4 3/4 
2 1/4 
3 1/2 
2 3/4 
4 3/4 1990* 
3 1/4 
2 
3 1/2 
2 1/4 
4 
3 1/4 
4 1/2 
3 
3 1/4 
3 
4 1/2 
2 
3 
2 
4 1/4 (b) Ocmsstic demand at 
(X changs on prsvi 
8 
OK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
P 
UK 
EC 
USA 
JAP 1986 
3.0 
5.4 
3.5 
-1.8 
6.1 
3.9 
1.4 
3.6 
2.3 
3.5 
8.4 
3.8 
3.9 
3.7 
4.0 1987 
3.4 
-3.2 
3.2 
-1.8 
8.5 
3.3 
-1.5 
4.8 
2.5 
2.1 
10.6 
4.3 
4.0 
3.0 
5.1 constant pricss 
ous ysar) 
1988 
4.0 
-2.2 
3.8 
3.5 
6.7 
3.8 
0.2 
4.3 
4.6 
2.3 
8.3 
7.3 
4.8 
3.3 
7.8 1989* 
4 1/2 
3/4 
2 3/4 
3 1/2 
6 3/4 
3 1/4 
5 
4 
3 1/4 
4 1/4 
5 1/2 
3 3/4 
3 3/4 
2 1/4 
5 1/2 1990* 
3 1/4 
1 
3 
2 3/4 
5 1/4 
3 1/4 
4 1/4 
3 3/4 
3 
2 3/4 
5 
3/4 
3 
1 3/4 
4 1/4 
(c) Dsfiator of priva 
(% Changs on prsv 
1986 
B 
OK 
0 
GR 
E 
F 
IRL 
I 
L 
NL 
P 
UK 
EC 
USA 
JAP 0.4 
3.4 
-0.2 
22.0 
8.7 
2.7 
3.9 
5.8 
0.8 
0.6 
13.5 
4.4 
3.8 
2.2 
0.5 1987 
2.2 
4.1 
0.7 
15.7 
5.4 
3.1 
3.1 
4.8 
2.9 
-0.3 
10.2 
3.9 
3.4 
4.2 
-0.1 :s consumption 
ous ysar) 
1988 
1.2 
4.9 
1.1 
13.9 
5.1 
2.7 
2.5 
4.9 
1.5 
0.8 
9.6 
5.0 
3.6 
4.0 
0 1989* 
3 1/4 
4 3/4 
3 
14 1/4 
6 3/4 
3 1/2 
4 1/4 
6 1/4 
3 1/4 
1 1/2 
13 
5 1/4 
4 3/4 
4 3/4 
2 1990* 
3 1/2 
3 
2 3/4 
15 
6 1/4 
2 3/4 
4 
6 
3 
2 1/4 
11 1/4 
5 1/2 
4 1/2 
4 3/4 
2 3/4 (d) Balanes on 
(as a % of 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
P 
UK 
EC 
USA 
JAP 1986 
2.0 
-5.2 
4.4 
-5.2 
1.7 
0.5 
-2.9 
0.5 
39.4 
2.8 
3.9 
-0.9 
1.4 
-3.4 
4.3 current 
GOP1) 
1987 
1.2 
-3.0 
3.9 
-2.5 
0.1 
-0.4 
1.4 
-0.1 
33.0 
1.6 
1.8 
-1.6 
0.8 
-3.6 
3.7 transactions 
1988 
1.0 
-1.8 
4.1 
-1.5 
-1.1 
-0.4 
2.0 
-0.6 
16.4 
2.4 
-1.4 
-3.2 
0.3 
-2.4 
2.8 1989* 
3/4 
-2 
5 1/4 
-3 1/2 
-3 
- 1/2 
2 
-1 1/4 
15 
2 1/4 
-2 3/4 
-4 
0 
-1 3/4 
2 1/4 1990* 
3/4 
-1 
5 3/4 
-3 1/2 
-4 
- 1/2 
1 3/4 
-1 1/2 
14 1/2 
2 
-3 1/2 
-3 1/4 
1/4 
-1 3/4 
2 1/2 
* Forscasts September/October 1989. 
1 GNP for USA and Japan from 1987 onwards; 
COM (89) 497 
(II) 
(s) Numbsr of unemploysd as 
civilian labour fores 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
P 
UK 
EC 
USA 
JAP 1986 
11.9 
5.8 
6.5 
8.2 
21.2 
10.4 
18.3 
10.6 
2.7 
10.3 
8.3 
11.5 
10.8 
6.9 
2.8 1987 
11.5 
5.8 
6.4 
8.0 
20.5 
10.5 
18.0 
10.1 
2.7 
10.2 
6.8 
10.6 
10.4 
6.1 
2.8 1988 
10.4 
6.4 
6.4 
8.5 
19.6 
10.2 
17.8 
10.6 
2.2 
10.3 
5.6 
8.7 
10.0 
5.4 
2.5 X of ths 
1989* 
9 1/4 
7 1/2 
5 1/2 
8 1/2 
17 1/2 
9 1/2 
16 3/4 
10 1/2 
1 3/4 
10 
5 1/4 
6 3/4 
9 
5 
2 1/2 1990* 
8 3/4 
7 1/2 
5 1/4 
8 1/2 
16 1/2 
9 
16 1/4 
10 1/2 
1 3/4 
9 1/2 
5 1/4 
6 1/2 
8 3/4 
5 1/4 
2 1/2 (f) Gsnsral government 
borrowing (as a X 
B 
DK 
0 
GR 
E 
F 
IRL 
I 
L 
NL 
P 
UK 
EC 
USA 
JAP 1986 
-8.8 
3.5 
-1.3 
-11.6 
-6.1 
-2.9 
-11.0 
-11.7 
2.5 
-5.9 
-7.8 
-2.4 
-4.8 
-4.4 
-1.1 1987 
-7.0 
1.8 
-1.8 
-9.9 
-3.6 
-2.5 
-8.9 
-11.2 
2.7 
-6.2 
-7.0 
-1.5 
-4.3 
-2.3 
-0.3 Isnding and 
of GOP) 
1988 
-6.5 
0.2 
-2.1 
-14.9 
-3.2 
-1.4 
-3.7 
-10.6 
2.5 
-4.9 
-6.5 
0.8 
-3.6 
-2.0 
1.2 1989* 
-6 
1/4 
0 
-20 
-2 1/2 
-1 1/4 
-3 3/4 
-10 1/4 
2 1/2 
-4 1/2 
-6 
1 1/2 
-3 
-1 3/4 
1 3/4 1990* 
-5 3/4 
3/4 
-1/4 
-20 
-2 1/2 
-1 
-1 1/2 
-9 3/4 
2 3/4 
-4 1/4 
-6 
1 
-3 
-1 1/2 
2 
(g) Total empl 
(annual ps 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
P 
UK 
EC 
USA 
JAP 1986 
1.0 
2.3 
1.0 
0.3 
2.3 
0.2 
0.2 
0.9 
2.6 
1.9 
-2.7 
0.4 
0.8 
1.7 
0.9 oyment 
rcentage 
1987 
0.4 
1.1 
0.7 
-0.1 
5.4 
0.1 
0 
0.2 
2.7 
1.2 
2.7 
1.9 
1.2 
2.9 
1.0 change) 
1988 
1.4 
-0.3 
0.6 
1.1 
2.9 
0.6 
1.0 
1.3 
2.9 
1.3 
2.6 
3.1 
1.6 
2.2 
1.7 1989* 1990* 
1 1/2 
-1/2 1/2 
1 1/2 1 1/4 
3/4 3/4 
3 1/2 2 1/2 
1 1/2 1 1/4 
1 1/4 1 1/4 
1 1/2 
1 3/4 1 1/4 
1 1/2 1 
1 1/2 3/4 
1 3/4 3/4 
1 1/2 1 
2 1/4 1 1/2 
1 1/2 1 1/4 (h) Rsal compsn 
head (annua 
B 
DK 
0 
GR 
E 
F 
IRL 
I 
L 
NL 
P 
UK 
EC 
USA 
JAP 1986 
3.7 
1.2 
4.1 
-7.2 
0.7 
1.4 
1.1 
1.6 
4.4 
1.3 
6.0 
2.8 
2.3 
1.1 
2.7 sat ion of smp 
1 X changs2) 
1987 
-1.3 
4.0 
2.2 
-3.4 
0.9 
0.6 
2.8 
4.0 
0.9 
1.6 
3.1 
3.0 
2.0 
-0.3 
3.0 1988 
1.2 
-0.6 
2.0 
4.0 
1.2 
1.1 
-0.2 
3.8 
2.5 
0.6 
0.9 
2.3 
1.9 
1.8 
3.4 oyses psr 
1989* 
2 
-1 
0 
5 1/2 
3/4 
1/2 
1/2 
2 3/4 
3 
-1/4 
-3/4 
2 3/4 
1 1/4 
1 
3 3/4 1990* 
2 1/4 
1/4 
3/4 
1 
3/4 
1 1/4 
1 
2 
3 
1 1/4 
1 1/2 
3 
1 1/2 
1 1/4 
2 1/2 
* Forscasts September/October 1989. 
2 Deflated by the deflator of private consumption. 
COM (89) 497 
(iii) 
(i) Invsstmsnt in construction 
(annual X changs; constant priess) 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
P 
UK 
EC 1986 
2.0 
17.5 
2.7 
0.2 
6.5 
2.5 
- 3.6 
0.7 
6.0 
4.8 
8.7 
3.7 
3.2 1987 
5.5 
- 0.9 
0.2 
- 4.9 
10.0 
3.3 
- 6.5 
- 1.3 
4.6 
2.8 
10.5 
3.9 
2.4 1988 
12.0 
- 6.1 
4.7 
7.7 
13.5 
4.3 
- 6.8 
3.7 
5.4 
12.6 
12.3 
6.5 
6.3 1989* 
9 
-3 
4 3/4 
7 1/2 
14 1/2 
3 3/4 
6 
4 
4 1/4 
4 1/4 
11 1/2 
-1 1/2 
4 3/4 1990* 
3 3/4 
1 1/2 
3 1/4 
6 
11 
3 1/2 
10 1/4 
3 
3 1/2 
1/2 
11 
-1 
3 1/2 (j) Invsstmsnt 
(annual X < 
1986 
B 
OK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
P 
UK 
EC 4.8 
15.4 
4.3 
-12.6 
15.8 
2.5 
5.3 
2.0 
39.1 
11.3 
13.7 
-1.8 
3.5 in squ 
shangs; 
1987 
8.6 
-14.5 
4.1 
-1.0 
24.2 
4.7 
3.6 
15.0 
6.1 
1.1 
31.0 
7.2 
8.5 ipmsnt 
constant priess) 
1988 
14.0 
- 7.0 
7.5 
10.7 
14.7 
9.7 
2.8 
6.0 
3.0 
6.3 
19.5 
20.4 
10.6 1989* 
16 
4 
11 1/4 
5 1/2 
12 3/4 
7 
10 1/2 
6 1/4 
4 1/2 
9 3/4 
11 3/4 
10 1/4 
9 1/4 1990* 
8 
3 
7 1/2 
7 
8 3/4 
7 
10 
4 3/4 
5 
2 3/4 
9 
4 
6 
(k) Total invsstmsnt 
(annual X changs; 
1986 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
P 
UK 
EC 
USA 
JAP 3.7 
17.3 
3.3 
-5.7 
10.0 
2.9 
- 0.3 
1.4 
15.8 
8.2 
9.5 
0.9 
3.4 
0.9 
6.0 1987 
7.6 
- 9.0 
1.8 
-3.2 
14.6 
3.7 
0.0 
5.2 
5.3 
1.6 
19.5 
5.5 
4.8 
3.1 
10.3 constant priess) 
1988 
12.9 
- 6.5 
5.9 
9.0 
14.0 
7.3 
- 1.7 
4.9 
4.5 
9.7 
15.8 
13.1 
8.4 
5.8 
13.6 1989* 
12 1/4 
0 
7 3/4 
6 1/2 
14 
5 1/2 
8 1/2 
5 1/4 
4 1/4 
6 3/4 
11 1/2 
4 1/2 
7 
2 1/4 
9 3/4 1990* 
5 3/4 
2 1/4 
5 
6 1/2 
10 
5 1/2 
10 
4 
4 
1 1/2 
10 
1 3/4 
4 3/4 
4 
5 1/2 (1) GOP psr hsad (EC 
priess and purchai 
B 
OK 
0 
GR 
E 
F 
IRL 
I 
L 
NL 
P 
UK 
EC 
USA 
JAP 1960 
94.5 
118.6 
117.2 
38.4 
59.2 
104.3 
61.4 
91.2 
134.5 
117.8 
37.3 
127.6 
100.0 
188.7 
55.5 1973 
100.6 
113.1 
110.1 
56.3 
77.4 
109.3 
59.9 
98.8 
123.9 
112.1 
54.2 
107.2 
100.0 
160.4 
95.4 » 100 ; currsnt 
ling powsr standards) 
1986 
101.1 
118.0 
114.4 
56.0 
72.2 
110.0 
63.4 
104.0 
126.3 
106.4 
52.8 
104.2 
100.0 
156.1 
111.0 1989* 
102.4 
108.0 
113.3 
54.0 
75.7 
108.5 
66.0 
105.1 
128.0 
103.5 
54.5 
104.6 
100.0 
154.5 
115.8 1990* 
103.0 
107.2 
113.4 
53.6 
76.3 
108.6 
67.3 
105.2 
128.7 
103.1 
55.4 
103.7 
100.0 
152.1 
116.9 
* Forecasts September/October 1989. 

ISSN 0254-1475 
COM(89) 497 final 
DOCUMENTS 
EN 01 
Catalogue number : CB-CO-89-479-EN-C 
ISBN 92-77-53978-X 
Office for Official Publications of the European Communities 
Lr2985 Luxembourg