31. 12. 85 Official Journal of the European Communities No C 344/25 
Opinion on the Commission's Annual Economic Report 1985 to 1986 
(85/C 344/12) 
On 25 October 1985 the Council decided to consult the Economic and Social Committee (in 
accordance with its Decision No 120 / 74 / EEC of 18 February 1974 on the attainment of a high degree 
of convergence of the economic policies of the Member States of the European Economic 
Community (*), as amended by Decision No 787/75/EEC (2), in particular Article 4 thereof) on the 
'Commission's Annual Economic Report 1985 to 1986'. 
The Section for Economic and Financial Questions which was responsible for preparing the 
Committee's work on the subject, adopted its opinion on 19 November 1985, in the light of the report 
by Mr Goris. 
At its 231st plenary session (meeting of 28 November 1985) the Economic and Social Committee 
adopted the following opinion by 84 votes to two, with five abstentions: 
1. Introduction 
1.1. The Committee is pleased to note that the Annual 
Economic Report 1985 to 1986 is largely in harmony with 
the views it expressed in its opinion and report on the 
economic situation in mid-1985. This applies particularly to 
the emphasis which the Commission places on the need to 
strive for the kind of growth that creates more employment 
and a policy geared not only to the supply side, but also — 
albeit differentiated according to Member State — to the 
demand side. Very important too is the recognition that the 
success of the proposed strategy in the medium term is largely 
dependent on dialogue and consensus between the two sides 
of industry and governments at national level and in 
institutions at European level. In this context, the 
step-by-step approach proposed by the Commission — 
continuous evaluation of all elements of the strategy — must 
be seen as realistic. 
1.2. The Committee would like to examine a number of 
chapters in the Commission's 1985 to 1986 Report in the 
light of its own ideas on the economic policy to be pursued 
and make detailed comments. 
1.3. The Committee is confining itself in this opinion to 
the major points. Although the arrangements for dealing 
with the Commission's Annual Report have been improved 
through prior consultation of the two sides of industry, the 
Committee considers that the time it is allowed for the 
preparation of its opinion is too short. This applies in 
particular to the present opinion in which the views of the 
two sides of industry play such an important role. The 
Committee thinks that permanent consultation of the two 
sides of industry (including the ESC) is desirable. 
1.4. The Committee considers that the success of the 
proposed cooperative growth strategy will depend also on 
(») OJ No L 63, 5. 3. 1974, p. 16. 
(2) OJ No L 330, 24. 12. 1975, p. 52. adequate publicity and support from public opinion and the 
democratic institutions of the Member States and the 
Community. 
2. General comments 
The Committee thinks that it is necessary to review very 
briefly the economic trends in the world and in the 
Community before tackling certain specific problems in this 
opinion. 
2.1. World economic trends 
World economic trends are influenced to a significant degree 
by the development of the economic situation in the United 
States, the growth in world trade, the price of raw materials, 
interest rates on the main capital markets and exchange 
rates. 
2.1.1. One of the principal features of the US economy in 
1985 has been the large budget deficit. There has also been a 
decline in exports, which has curbed expansion, resulting in a 
slightly sharper slowdown than anticipated. 
During this period the current account deficit has worsened 
and the exchange rate of the dollar has fluctuated. 
However, domestic demand remains dynamic, inflation is 
moderate, interest rates are falling and there is still unused 
production capacity. 
The real growth in the GDP of the United States this year 
should be around 2,3%, i.e. slightly less than initial 
forecasts. 
2.1.2. The growth in world trade will slow down this 
year to around 5 % after the exceptional figure of 9,3 % in 
1984. 
No C 344/26 Official Journal of the European Communities 31. 12. 85 
Unfortunately, this slowdown in the growth of world trade is 
accompanied by protectionist tendencies which are 
considerably hampering the process of trade liberalization. 
2.1.3. The slowdown in the expansion of the US 
economy has influenced oil and metal prices, which have 
dropped more than expected. 
Agricultural prices have followed the same pattern, 
influenced by what promises to be a bumper harvest in 1985 
and the high level of stocks. 
2.1.4. The policy pursued by the US Federal Reserve has 
led to a substantial fall in interest rates in the USA (at least in 
nominal terms). In the normal course of events this fall 
should be maintained and lead to a drop in real interest rates. 
The fall in interest rates in the USA was followed, and in 
some cases even anticipated, by other financial centres 
throughout the world. Both short-term and long-term rates 
are affected. 
2.1.5. The exchange rates of the main currencies have 
fluctuated, deviating from what might be regarded as their 
equilibrium level. Thus in 1985 the dollar rose during the 
first half of the year and then fell heavily in the second. This 
phenomenon has caused significant international trade shifts 
and capital movements. 
2.2. The economic situation of the Community and the 
prospects 
Against the international background described above, the 
Community economy entered its third year of recovery — a 
modest and fragile recovery whose future is highly 
uncertain. 
2.2.1. According to the Commission's forecasts, 
Community GDP should increase by 2,3% in 1985 
compared with 2,2% last year. 
Private consumption should rise slightly (1,7% compared 
with 1 % in 1984) and inflation should fall by about 1 %. 
Investments in fixed capital have risen sharply in 1985 
(7,9%) and falling interest rates should sustain or even 
accelerate this trend. 
2.2.2. In 1985 the employment situation in the 
Community will continue to improve slowly with the 
creation of 375 000 new jobs, though this will not be enough 
to meet the demand arising from the increase in the working 
population during the year. Under these circumstances unemployment is expected to 
worsen further (11,1 % compared with 10,5% in 1984). 
2.2.3. Community exports will be slightly down on last 
year because of the slowdown in world trade and the 
depreciation of the dollar. 
2.2.4. According to the Commission, the prospects for 
1986 are in general not very optimistic, although certain 
countries and sectors form exceptions. Real GDP should 
grow at the same rate as this year. 
Employment, although rising slightly in 1986, will not be 
sufficient to bring down the unemployment figures. The 
unemployment rate should stabilize at its 1985 level. 
If the dollar continues to depreciate, raw materials' prices 
will ease a little, which will certainly lead to an increase in 
imports, and inflation could fall below 4 % next year. 
On the other hand, still presuming that world trade loses 
momentum and the dollar depreciates, Community exports 
will fall off. 
Investment in capital goods will decline slightly, which could 
be offset by an increase in investment in construction. 
3. Specific comments 
The Committee will confine its specific comments to a 
comparison between certain views which it expressed in its 
opinion on the economic situation in mid-1985 and the 
proposals put forward in the Commission's 1985 to 1986 
Annual Economic Report. 
3.1. A cooperative growth strategy 
3.1.1. In the Annual Economic Report 1985 to 1986 the 
Commission outlines a policy designed to act on both the 
supply and the demand sides of the economy. 
The Commission notes that there is a shortage of jobs in the 
Community. As industry is new nearing full utilization of 
existing capacity, the economic and social evil of 
unemployment can only be combatted if production capacity 
is expanded. In other words a great deal of investment is 
needed. The Commission is mindful of the fact that such an 
increase in production capacity will have to be less 
labour-saving than has recently been the case in the countries 
of the Community. In this connection the Commission 
considers that there is a need for a shift in the factor cost 
relationship to make labour cheaper in relation to capital. 
31. 12. 85 Official Journal of the European Communities No C 344/27 
This implies moderate wage rises over a period of years with 
real labour costs increasing at a slower rate than labour 
productivity. In order to match up supply and demand on the 
labour market without unnecessary friction the Commission 
calls for greater labour market flexibility with more pay 
differentiation, including the incorporation into wages and 
salaries of profit-sharing and performance-related elements. 
The aim here is not to undermine the advances that have been 
achieved in the social sphere but to create more jobs. Wage 
moderation by itself is unlikely to produce the desired 
employment effects. Stimulation of demand alone entails the 
risk of inflation and/or runaway budget deficits without the 
desired impact on employment. A combination of these two 
approaches is therefore necessary. 
But the Commission has not restricted itself to the policy 
guidelines very briefly summarized above. It has also mapped 
out a strategy which, it feels, is the only one offering a chance 
of success. This strategy is based on step-by-step joint action 
by the two sides of industry, national governments and the 
Community. 
3.1.2. In its opinion on the economic situation in 
mid-1985 (*) the Committee observed that the expected 
2,3% growth in GDP in 1985 would still be insufficient 
to bring about a return to economic equilibrium. 
Unemployment in particular would not start to come down 
appreciably with such a level of growth. Therefore the 
Committee considered it necessary to achieve higher and 
more effective growth through measures to improve the 
supply-side situation in all the markets. These should go 
hand in hand with a policy designed to support the demand 
side of the economy. 
3.1.3. The Committee has several observations to make 
on the Commission's analysis summarized in point 3.1.1. 
First of all, it would point out that there is a certain 
incompatibility between the desired greater labour market 
flexibility and the social advances that have been achieved. It 
also considers the statement that the limits of capacity have 
been reached (and that production capacity should be 
expanded) to be too general. This should be qualified by 
adding that there must be a sufficient market for this greater 
production. Furthermore insufficient arguments are 
advanced in support of the claim that a change in the price 
relationship between capital and labour will lead to more 
employment and more investment, particularly capital-
widening investment. One cannot expect that the trade 
unions will make their wage policy dependent on the interest 
rate trend. 
3.1.4. The Committee endorses the Commission's dual 
strategy, under which points of emphasis may vary from one 
Member State to another. This comprises a policy that, by 
restraining costs, creates the conditions for expansion 
(!) OJ No C 218, 29. 8. 1985, p. 18. of production capacity in ways that will mean more 
employment, and parallel with this, a demand-supporting 
policy designed to prevent a decline in aggregate purchasing 
power and the danger of deflation. This support can be 
aimed both at private and public investment and at consumer 
demand. 
3.1.5. In the Committee's view these two policy tracks go 
together. The points of emphasis in policy must be evenly 
distributed. Restraining of costs and support for demand 
(both consumer demand and investment demand) must go 
hand in hand. 
3.1.6. The Committee also endorses a strategy for 
implementing such a policy which is based on a constructive 
dialogue between the two sides of industry on the one hand 
and the national governments and the Council of the 
European Community on the other. The Committee stressed 
the need for just such a dialogue in its opinion on the 
economic situation in mid-1985. 
3.1.7. In the Committee's view, action proposed by the 
Commission in specific areas must be dealt with in these 
discussions. This applies at all events to the reduction and 
adaptation of working time, greater labour market flexibility 
with due regard being had to the social advances that have 
been achieved, a say for workers in the introduction of new 
technologies, wage differentiation under collective labour 
agreements, continuation of an appropriate wage trend and 
a more job-creating expansion of1 private and public 
investment. These subjects and the consequences for growth 
and the fight against unemployment should be discussed at 
all levels. These discussions should result in conclusions 
leading to the attainment of the desired results by 1990. 
3.1.8. The Committee considers that quantified 
scenarios are a useful way of illustrating the consequences for 
economic growth and employment. The presentation of 
several scenarios makes it easier to weigh up various policy 
options. The results of these scenarios must not, however, be 
seen as the mandatory objective or certain outcome of the 
desired social dialogue. 
3.1.9. ' The Committee would also point out that under its 
cooperative growth strategy the Commission requires the 
following of the participants in the constructive dialogue 
mentioned above. The trade unions are required to cooperate 
on wage moderation and flexibility. The employers are 
required to implement investment and employment projects. 
National governments are required to guard against 
protectionism, to dismantle sector-specific subsidies, to 
expand public infrastructure and, if necessary, support 
nominal demand through monetary and fiscal policy. The 
Community is required to support the supply side of the 
economy, e.g. by completing the internal market, by 
No C 344/28 Official Journal of the European Communities 31. 12. 85 
implementing a European programme for infrastructure and 
environmental investment and by establishing a European 
technology community. The new GATT negotiations that 
are likely to start soon are also to be seen in this context. 
3.1.10. The Commission recognizes that there are risks 
associated with this strategy in that the intended effects of the 
growth strategy may be late in making themselves felt. And it 
is these risks which the Committee wishes to highlight. 
Continuing wage moderation and wage differentiation 
cannot be expected if job-creating expansion of capacity 
takes too long to materialize or if government policies to 
support demand are not given sufficient scope because of 
budgetary difficulties. The step-by-step approach under a 
medium-term strategy, which enables the brakes to be 
applied if necessary, attempts to circumvent this risk. A 
crucial factor, however, will be the extent to which wage 
moderation and the expansion of capacity and employment 
can be directly geared to each other. 
3.2. Labour market policy 
3.2.1. The Committee endorses the Commission's view 
expressed in the Annual Report that the European labour 
market will take a long time to adapt. The studies on this 
subject mentioned in the Annual Report are awaited with 
interest. A variety of measures are meanwhile being taken in 
the Member States to improve the labour market's flexibility 
and capacity to adapt. It would be interesting to know what 
effect these have on employment; the Commission could 
carry out a study on the subject. The Commission clearly 
shares the Committee's view that matters such as wage 
negotiations, the organization of work and the labour 
market are essentially the responsibility of the two sides pf 
industry. 
3.2.2. With regard to the specific short-term measures, 
the Report does no more than refer to previous 
communications and summarize the action taken in a 
number of Member States. The Commission observes that so 
far these measures have made relatively little contribution to 
combatting unemployment. The Commission nonetheless 
recommends that this policy be continued. The Committee 
would like the Commission to submit Community-level 
recommendations based on a survey of experience in the 
Member States, with provision for financial support from the 
European Social Fund. 
3.2.3. With reference to the Committee's views on the 
need for vocational training to take account of the 
development of new technologies, the Committee notes with 
satisfaction that in the new ESF guidelines the Commission 
gives priority to training programmes geared to the introduction of new technologies. The Committee considers 
it desirable that direct programmes be drawn up to provide a 
grounding in these new technologies. 
3.3. Investment 
3.3.1. In its opinion on the economic situation in 
mid-1985 the Committee urged speedy implementation of an 
investment programme. At all events, investment is needed in 
construction, housing, infrastructure, protection of the 
environment, welfare and health care. In this way it would 
also be possible to promote a pattern of growth that would be 
employment-creating as called for by the Commission. 
3.3.2. In its Economic Report 1985 to 1986 the 
Commission outlines a programme of infrastructure 
investment, the scale of which would be such as to add a 
probable 0,5—1,0% to GDP per year. In order to finance 
this programme the Commission is seeking a new formula 
which would enable the necessary capital to be drawn from 
various scoures. 
3.3.3. The Committee applauds the way in which the 
Commission has worked out an investment programme. 
Various instruments are available for the financing of an 
investment programme as advocated by the Commission. In 
its opinion of 4 July 1985 the Committee stated that the 
Community had sufficient borrowing capacity to finance 
infrastructure projects. This does not alter the fact that the 
present financing instruments are not satisfactory in all cases. 
The Committee recognizes that it could be very beneficial if 
the Community were to develop a new financing formula 
that would enable very promising projects to be adequately 
financed, notwithstanding their scale and/or the risks they 
entail, particularly in the initial stage. It is recommended that 
the Member States stimulate the supply of venture capital 
through tax measures. 
3.3.4. Important though infrastructure investments may 
be, the main thrust lies with private-sector investments, 
particularly investments in new firms and the expansion of 
existing firms. These investments are of the greatest 
importance for maintaining and increasing the 
competitiveness of European industry. With a view also to 
the creation of new jobs, the Commission and the Member 
States will have to continue their efforts to bring about a 
favourable climate for an expansion of such investment. An 
important requirement here will be sufficient profitability 
of such investments. The Committee endorses the 
Commission's recommendation that employers give more 
attention to drawing up and implementing investment and 
employment projects. 
31. 12. 85 Official Journal of the European Communities No C 344/29 
3.4. Budgetary policy 
3.4.1. It can be said that the trend for public expenditure 
and taxes and social security contributions to account for an 
ever greater proportion of GDP in a number of Member 
States has been reversed. This does not alter the fact that in 
many cases the level of public expenditure and taxes and 
social security contributions is still too high in relative terms, 
so that this downward movement should be taken further. 
The policy for bringing the growth of the public sector back 
under control must be continued. And deficits which 
threaten to disrupt the financing of the public sector through 
increasing interest burdens and public debts must be 
reduced. 
3.4.2. In this respect the situation varies not 
inconsiderably from one Member State to another, so that 
budget policy will have to be more stringent in one country 
than in another. 
3.4.3. Public expenditure must be critically examined to 
assess its contribution to a more desirable allocation of the 
factors of production with a view to promoting growth and 
employment to the maximum possible extent. In particular 
consideration should be given to whether a time-limitation 
could not be imposed on possibly obsolete subsidy 
arrangements in both the consumption and the investment 
spheres. The funds thus released could then be used within 
the framework of a more general demand-sustaining policy. 
Aggregate demand would not fall. On the contrary, the 
demand for goods and services would operate more 
efficiently through the much more direct link between 
deciding, paying and consuming. At the same time the gap 
between gross and net pay would be reduced. This could 
promote labour mobility. 
Such a programme for dismantling all kinds of obsolete 
subsidy schemes would have to be devised with great care in 
order to prevent undesirable effects on the distribution of 
income. 
3.4.4. The Commission is cautious in its approach to the 
question whether economic recovery in the Community 
could be promoted through coordinated stimulation by 
national governments of the demand side of the economy, as 
well as the supply side. The fact that the Commission's 
analysis assumes that aggregate demand follows growth 
rather than leading it is no doubt not without relevance here. 
The Commission considers that when, despite continuing 
wage moderation, investment fails to increase sufficiently,, 
nominal demand should be supported to prevent a shortfall 
in demand. Demand stimulation thus functions as a safety 
net. Without prejudice to what has been said above with 
regard to reorganization and greater efficiency and 
effectiveness in the area of public finances, the Committee 
considers that it must be asked whether public finances, the 
balance of payments and price trends are not now sufficiently 
healthy in some Member States to enable thought to be given 
to the possibility of adopting a more independent course in supporting economic recovery by coordinated action in the 
form of measures that will stimulate demand. 
3.5. Monetary policy 
3.5.1. Seen in an international perspective, a monetary 
policy is required that will restore order to disturbed 
exchange rate relationships, particularly between the US 
dollar and the Japanese yen, and to the balance of payments 
disequilibria between these same economic superpowers. 
Monetary policy needs to be backed up in this by other 
macro-economic policy. It is of the greatest importance that 
Europe should by its own efforts achieve a higher level of 
growth, so that the growth-inhibiting effect produced by a 
reduction in the value of the dollar and by the US budget and 
balance of payments deficits can as far as possible be 
compensated for. 
3.5.2. The Committee notes that positive results have 
been achieved in the area of European monetary 
cooperation. Particular mention should be made of the fact 
that the ECU is developing into a European currency and of 
the fact that the number of realignments within the European 
Monetary System has diminished. Continued strengthening 
and expansion of the EMS is desirable. For the rest reference 
should be made to the Committee's opinion on the economic 
situation in mid-1985 (*) and the Information Report on the 
European Monetary System that was produced last year. 
3.5.3. A contribution to European economic recovery 
could be made by lower interest rates, which Europe could 
bring about on its own as a fairly stable monetary bloc, and 
which would also be facilitated if internationally coordinated 
policy were to offer the prospect of more balanced monetary 
relationships. 
3. Final comments 
The Committee considers that a new GATT round and an 
international monetary conference are desirable with a view 
to improving external relations and in the interests of an 
orderly world monetary and trading system. 
In the Committee's view, an effective competition policy is 
also important for the success of the Community growth 
strategy. This applies both to policy on agreements between 
firms and to policy on government measures that distort 
competition (subsidies, aid for specific sectors, etc.). 
Reference is made to the recent opinion on the subject (2). In 
this connection attention is also drawn to the comments on 
protectionism at both European and world level made by the 
ESC in its latest Opinion (*). 
(>) OJ No C 218, 29. 8. 1985, p. 18. 
(2) OJ No C 330, 20. 12. 1985. 
No C 344/30 Official Journal of the European Communities 31. 12. 85 
Finally, the Committee considers implementation of the plan The Committee has produced a separate opinion on this 
to complete the internal market to be of crucial importance. subject. 
Done at Brussels, 28. November 1985. 
The Chairman 
of the- Economic and Social Committee 
Gerd MUHR 
APPENDIX 
to the opinion of the Economic and Social Committee 
Defeated amendment: 
The following amendments tabled in accordance with the Rules of Procedure were rejected by the committee in the 
course of the debates: 
Point 1.1, third sentence: 
Replace by the following: 
'The success of the proposed strategy in the medium term depends primarily on the operational nature of its 
content. At European level this must be the subject of consultation between the European institutions and of a 
dialogue between the two sides of industry and the Community's executive authority.' 
Reasons 
The success of a strategy does not depend on consensus or compromise. Under our democratic system, a number of 
important matters are carried by majority decisions in the face of strong opposition. 
Result of the vote 
For: 9. Against: 61. Abstentions: 16. 
Point 1.3: 
Replace the last two sentences with the following: 
'The Section therefore considers it desirable to establish a procedure for the consultation of the ESC and the two 
sides of industry, on the development of and possible changes to EC economic and social strategy.' 
Reasons 
There is no call for a permanent consultation procedure where the bodies concerned are rarely consulted and, in 
our democratic system, have no final decision-making power in certain areas. 
Result of the vote 
For: 41. Against: 43. Abstentions: 9.